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100 STAT. 2339

ing the alternative minimum taxable income of the taxpayer for the taxable year— "(1) with the adjustments of section 56, and "(2) by not taking into account any deduction to the extent such deduction is an item of tax preference under section 57(a). "(i) SPECIAL RULE FOR INTEREST TREATED AS TAX PREFERENCE.—

For purposes of this subtitle, interest shall not fail to be treated as wholly exempt from tax imposed by this title solely by reason of being included in alternative minimum taxable income." (b) CREDIT AGAINST REGULAR TAX FOR PRIOR YEAR MINIMUM TAX

LIABILITY.—Part IV of subchapter A of chapter 1 (relating to credits allowable) is amended by adding at the end thereof the following new subpart: "Subpart G—Credit Against Regular Tax for Prior Year Minimum Tax Liability "Sec. 53. Credit for prior year minimum tax liability. "SEC. 53. CREDIT FOR PRIOR YEAR MINIMUM TAX LIABILITY.

"(a) ALLOWANCE OF CREDIT.—There shall be allowed as a credit against the tax imposed by this chapter for any taxable year an amount equal to the minimum tax credit for such taxable year. "(b) MINIMUM TAX CREDIT.—For purposes of subsection (a), the minimum tax credit for any taxable year is the excess (if any) of^ "(1) the adjusted net minimum tax imposed for all prior taxable years beginning after 1986, over "(2) the amount allowable as a credit under subsection (a) for such prior taxable years. "(c) LIMITATION.—The credit allowable under subsection (a) for any taxable year shall not exceed the excess (if any) of— "(1) the regular tax liability of the taxpayer for such taxable year reduced by the sum of the credits allowable under subparts A, B, D, E, and F of this part, over "(2) the tentative minimum tax for the taxable year. "(d) DEFINITIONS.—For purposes of this section— "(1) NET MINIMUM TAX.—

"(A) IN GENERAL.—The term 'net minimum tax' means the tax imposed by section 55. "(B) CREDIT NOT ALLOWED FOR EXCLUSION PREFERENCES.— "(i) ADJUSTED NET MINIMUM TAX.—The adjusted net

minimum tax for any taxable year is— "(I) the amount of the net minimum tax for such taxable year, reduced by "(II) the amount which would be the net minimum tax for such taxable year if the only adjustments and items of tax preference taken into account were those specified in clause (ii). "(ii) SPECIFIED ITEMS.—The following are specified in

this clause— "(I) the adjustments provided for in subsections (b)(1) and (c)(3) of section 56, and "(II) the items of tax preference described in paragraphs (1), (5), and (6) of section 57(a). In the case of taxable years beginning after 1989, the adjustments provided in section 56(g) shall be treated as specified in this clause to the extent attributable to

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 100 STAT. 2340

PUBLIC LAW 99-514—OCT. 22, 1986 items which are excluded from gross income for any taxable year for purposes of the regular tax, or are not deductible for any taxable year under the adjusted earnings and profits method of section 56(g). "(2) TENTATIVE MINIMUM TAX.—The term 'tentative minimum tax' has the meaning given to such term by section 55(b)." (c) CREDITS NOT ALLOWABLE AGAINST MINIMUM TAX.— (1) PERSONAL CREDITS.—

(A) IN GENERAL.—Subsection (a) of section 26 (relating to limitation based on amount of tax) is amended to read as follows: "(a) LIMITATION BASED ON AMOUNT OF TAX.—The aggregate

amount of credits allowed by this subpart for the taxable year shall not exceed the excess (if any) of— "(1) the taxpayer's regular tax liability for the taxable year, over "(2) the tentative minimum tax for the taxable year (determined without regard to the alternative minimum tax foreign tax credit)." (B) REGULAR TAX LIABILITY.—Subsection (b) of section 26

(as amended by title II) is amended— (i) by striking out "this section" in the matter preceding paragraph (1) and inserting in lieu thereof "this part", (ii) by striking out "tax liability" in paragraph (1) and inserting in lieu thereof "regular tax liability", (iii) by striking out subparagraph (A) of paragraph (2) and inserting in lieu thereof the following: "(A) section 55 (relating to minimum tax),", (iv) by striking out "and" at the end of paragraph (2)(H), by striking out the period at the end of paragraph (2)(I) and inserting in lieu thereof ", and", and by adding at the end of paragraph (2) the following new subparagraph: "(J) sections 871(a) and 881 (relating to certain income of nonresident aliens and foreign corporations,", and (v) by striking out "TAX LIABILITY" in the subsection heading and inserting in lieu thereof "REGULAR TAX LIABILITY". (C) TENTATIVE MINIMUM TAX.—Subsection (c) of section 26

is amended to read as follows: "(c) TENTATIVE MINIMUM TAX.—For purposes of this part, the term 'tentative minimum tax' means the amount determined under section 55(b)(1)." (2) CREDIT FOR CLINICAL TESTING EXPENSES.—Paragraph (2) of

section 28(d) is amended to read as follows: "(2) LIMITATION BASED ON AMOUNT OF TAX.—The credit al-

lowed by this section for any taxable year shall not exceed the excess (if any) of— "(A) the regular tax (reduced by the sum of the credits allowable under subpart A and section 27), over "(B) the tentative minimum tax for the taxable year." (3) CREDIT FOR PRODUCTION OF FUEL FROM NONCONVENTIONAL

SOURCES.—Paragraph (5) of section 29(b) is amended to read as follows:

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"(5) APPLICATION WITH OTHER CREDITS.—The credit allowed by

subsection (a) for any taxable year shall not exceed the excess (if any) of— "(A) the regular tax for the taxable year reduced by the sum of the credits allowable under subpart A and sections 27 and 28, over "(B) the tentative minimum tax for the taxable year." (4) GENERAL BUSINESS CREDIT.—Subsection (c) of section 38 (relating to limitation based on amount of tax), as amended by section 631(a), is amended by redesignating paragraph (3) as paragraph (4), and by striking out paragraphs (1) and (2) and inserting in lieu thereof the following: "(1) IN GENERAL.—The credit allowed under subsection (a) for any taxable year shall not exceed the lesser of— "(A) the allowable portion of the taxpayer's net regular tax liability for the taxable year, or "(B) the excess (if any) of the taxpayer's net regular tax liability for the taxable year over the tentative minimum tax for the taxable year. "(2) ALLOWABLE PORTION OF NET REGULAR TAX LIABILITY.—For

purposes of this subsection, the allowable portion of the taxpayer's net regular tax liability for the taxable year is the sum of"(A) so much of the taxpayer's net regular tax liability for the taxable year as does not exceed $25,000, plus "(B) 75 percent of so much of the taxpayer's net regular tax liability for the taxable year as exceeds $25,000. For purposes of the preceding sentence, the term 'net regular tax liability' means the regular tax liability reduced by the sum of the credits allowable under subparts A and B of this part. "(3) REGULAR INVESTMENT TAX CREDIT MAY OFFSET 25 PERCENT

OF MINIMUM TAX.—In the case of any C corporation, to the extent the credit under subsection (a) is attributable to the application of the regular percentage under section 46, the limitation of paragraph (1) shall be the greater of— "(A) the lesser of— "(i) the allowable portion of the taxpayer's net regular tax liability for the taxable year, or "(ii) the excess (if any) of the taxpayer's net regular tax liability for the taxable year over 75 percent of the tentative minimum tax for the taxable year, or "(B) 25 percent of the taxpayer's tentative minimum tax for the year." In no event shall this paragraph permit the allowance of a credit which (in combination with the alternative tax net operating loss deduction and the alternative minimum tax foreign tax credit) would reduce the tax payable under section 55 below an amount equal to 10 percent of the amount which would be determined under section 55(b) without regard to the alternative tax net operating loss deduction and the alternative minimum tax foreign tax credit." (d) ESTIMATED TAX PROVISIONS TO APPLY TO CORPORATE MINIMUM TAX.—

(1) Paragraph (1) of section 6154(c) is amended to read as follows: "(1) The amount which the corporation estimates as the sum of—

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Page:United States Statutes at Large Volume 100 Part 3.djvu/534

 100 STAT. 2342

PUBLIC LAW 99-514—OCT. 22, 1986 "(A) the income tax imposed by section 11 or 1201(a), or subchapter L of chapter 1, whichever applies, and "(B) the minimum tax imposed by section 55, over" (2) Subparagraph (A) of section 6425(c)(1) is amended to read as follows: "(A) The sum of— "(i) the tax imposed by section 11 or 1201(a), or subchapter L of chapter 1, whichever is applicable, plus "(ii) the tax imposed by section 55, over". (3) Paragraph (1) of section 6655(f) is amended to read as follows: "(1) the sum of— "(A) the tax imposed by section 11 or 1201(a), or subchapter L of chapter 1, whichever is applicable, plus "(B) the tax imposed by section 55, over". (e) TECHNICAL AMENDMENTS.—

(1) APPLICATION OF SECTION 381.—Subsection (c) of section 381

is amended by adding at the end thereof the following new paragraph: "(27) CREDIT UNDER SECTION 53.—The acquiring corporation shall take into account (to the extent proper to carry out the purposes of this section and section 53, and under such regulations as may be prescribed by the Secretary) the items required to be taken into account for purposes of section 53 in respect of the distributor or transferor corporation." (2)

LIMITATION

IN CASE OF CONTROLLED CORPORATIONS.—

Subsection (a) of section 1561 (relating to limitations on certain multiple tax benefits in the case of certain controlled corporations) is amended— (A) by striking out "and" at the end of paragraph (1), by striking out the period at the end of paragraph (2) and inserting in lieu thereof ", and" and by inserting after paragraph (2) the following new paragraph: "(3) one $40,000 exemption amount for purposes of computing the amount of the minimum tax.", (B) by striking out "amounts specified in paragraph (1)" and inserting in lieu thereof "amounts specified in paragraph (1) (and the amount specified in paragraph (3))", and (C) by adding at the end thereof the following new sentence: "In applying section 55(d)(3), the alternative minimum taxable income of all component members shall be taken into account and any decrease in the exemption amount shall be allocated to the component members in the same manner as under paragraph (3)." (3) TREATMENT OF SHORT TAXABLE YEARS.—Subsection (d) of

section 443 (relating to adjustment in computing minimum tax for tax preference) is amended to read as follows: "(d) ADJUSTMENT IN COMPUTING MINIMUM TAX AND TAX PREF-

ERENCES.—If a return is made for a short period by reason of subsection (a)— "(1) the alternative minimum taxable income for the short period shall be placed on an annual basis by multiplying such amount by 12 and dividing the result by the number of months in the short period, and "(2) the amount computed under paragraph (1) of section 55(a) shall bear the same relation to the tax computed on the annual basis as the number of months in the short period bears to 12."

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(4) CONFORMING AMENDMENTS.—

(A) Paragraph (4) of section 5(a) is amended to read as follows: "(4) For alternative minimum tax, see section 55."

(B) Paragraph (7) of section 12 is amended to read as follows: "(7) For alternative minimum tax, see section 55."

(C) Subparagraph (D) of section 48(d)(4) is amended by striking out "section 57(c)(1)(B)" and inserting in lieu thereof "section 57(c)(1)(B) (as in effect on the day before the date of the enactment of the Tax Reform Act of 1986)". (D) Section 173(b), 174(e)(2), 263(c), and 1016(a)(24) (as redesignated by section 634(b)(2)) are each amended by striking out "section 58(i)" and inserting in lieu thereof "section 59(d)". (E) Subsection (b) of section 703 (relating to elections of the partnership), as amended by title V, is amended by striking out paragraph (1) and by redesignating paragraphs (2) through (4) as paragraphs (1) through (3), respectively. (F) Paragraph (1) of section 882(a) (relating to imposition of tax on income of foreign corporations connected with United States business) is amended by striking out "or 1201(a)" and inserting in lieu thereof ", 55, or 1201(a)". (G) So much of section 897(a)(2) as precedes subparagraph (B) thereof is amended to read as follows: "(2) 21-PERCENT MINIMUM TAX ON NONRESIDENT ALIEN INDIVIDUALS.—

"(A) IN GENERAL.—In the case of any nonresident alien individual, the amount determined under section 55(b)(1)(A) shall not be less than 21 percent of the lesser of— "(i) the individual's alternative minimum taxable income (as defined in section 55(b)(2)) for the taxable year, or "(ii) the individual's net United States real property gain for the taxable year." (H) Paragraph (2) of section 904(i) (relating to cross references) is amended by striking out "by an individual" and all that follows and inserting in lieu thereof "against the alternative minimum tax, see section 59(a)." (I) Paragraph (3) of section 936(a) is amended by striking out subparagraph (A) and by redesignating subparagraphs (B), (C), and (E) as subparagraphs (A), (B), and (C), respectively. (J) Subsection (a) of section 1363 is amended by striking out "and in section 58(d)". (K) Paragraph (2) of section 1366(f) (relating to reduction in pass-thru for tax imposed on capital gain) is amended by striking out "56 or", (f) EFFECTIVE DATES.—

(1) IN GENERAL.—Except as otherwise provided in this subsection, the amendments made by this section shall apply to taxable years beginning after December 31, 1986. (2) ADJUSTMENT OF NET OPERATING LOSS.—

(A) INDIVIDUALS.—In the case of a net operating loss of an individual for a taxable year beginning after December 31,

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 100 STAT. 2344

PUBLIC LAW 99-514—OCT. 22, 1986 1982, and before January 1, 1987, for purposes of determining the amount of such loss which may be carried to a taxable year beginning after December 31, 1986, for purposes of the minimum tax, such loss shall be adjusted in the manner provided in section 55(d)(2) of the Internal Revenue Code of 1954 as in effect on the day before the date of the enactment of this Act. (B) CORPORATIONS.—If the minimum tax of a corporation was deferred under section 56(b) of the Internal Revenue Code of 1954 (as in effect on the day before the date of the enactment of this Act) for any taxable year beginning before January 1, 1987, and the amount of such tax has not been paid for any taxable year beginning before January 1, 1987, the amount of the net operating loss carryovers of such corporation which may be carried to taxable years beginning after December 31, 1986, for purposes of the minimum tax shall be reduced by the amount of tax preferences a tax on which was so deferred. (3) INSTALLMENT SALES.—Section 56(a)(6) of the Internal Revenue Code of 1986 (as amended by this section) shall not apply to any disposition to which the amendments made by section 811 of this Act (relating to allocation of dealer's indebtedness to installment obligations) do not apply by reason of section 811(c)(2) of this Act. (4)

EXCEPTION

FOR

CHARITABLE

CONTRIBUTIONS

BEFORE

AUGUST 16, 1986.—Section 57(a)(6) of the Internal Revenue Code of 1986 (as amended by this section) shall not apply to any deduction attributable to contributions made before August 16, 1986. (5) BOOK INCOME.—

(A) IN GENERAL.—In the case of a corporation to which this paragraph applies, the amount of any increase for any taxable year under section 56(c)(1)(A) of the Internal Revenue Code of 1986 (as added by this section) shall be reduced (but not below zero) by the excess (if any) of— (i) 50 percent of the excess of taxable income for the 5-taxable year period ending with the taxable year preceding the 1st taxable year to which such section applies over the adjusted net book income for such period, over (ii) the aggregate amounts taken into account under this paragraph for preceding taxable years. (B) TAXPAYER TO WHOM PARAGRAPH APPLIES.—This paragraph applies to a taxpayer which was incorporated in Delaware on May 31, 1912. (C) TERMS.—Any term used in this paragraph which is used in section 56 of such Code (as so added) shall have the same meaning as when used in such section. (6) CERTAIN PUBLIC UTILITY.—

(A) In the case of investment tax credits described in subparagraph (B) or (C), subsection 38(c)(3)(A)(ii) of the Internal Revenue Code of 1986 shall be applied by substituting "25 percent" for "75 percent", and section 38(c)(3)(B) of the Internal Revenue Code of 1986 shall be applied by substituting "75 percent" for "25 percent". (B) If, on September 25, 1985, a regulated electric utility owned an undivided interest, within the range of 1,111 and 1,149, in the "maximum dependable capacity, net,

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100 STAT. 2345

megawatts electric" of an electric generating unit located in Illinois or Mississippi for which a binding written contract was in effect on December 31, 1980, then any investment tax credit with respect to such unit shall be described in this subparagraph. The aggregate amount of investment tax credits with respect to such unit shall be described in this subparagraph. (C) If, on September 25, 1985, a regulated electric utility owned an undivided interest, within the range of 1,104 and 1,111, in the "maximum dependable capacity, net, megawatts electric" of an electric generating unit located in Louisiana for which a binding written contract was in effect on December 31, 1980, then any investment tax credit of such electric utility shall be described in this subparagraph. The aggregate amount of investment tax credits allowed solely by reason of being described by this subparagraph shall not exceed $20,000,000. SEC. 702. STUDY OF BOOK AND EARNINGS AND PROFITS ADJUSTMENTS.

The Secretary of the Treasury or his delegate shall conduct a study of the operation and effect of the provisions of sections 56(f) and 56(g) of the Internal Revenue Code of 1986.

TITLE VIII—ACCOUNTING PROVISIONS Subtitle A—General Provisions SEC. 801. LIMITATION ON USE OF CASH METHOD OF ACCOUNTING.

(a) GENERAL RULE.—Subpart A of part II of subchapter E of chapter 1 (relating to methods of accounting) is amended by adding at the end thereof the following new section: "SEC. 448. LIMITATION ON USE OF CASH METHOD OF ACCOUNTING.

"(a) GENERAL RULE.—Except as otherwise provided in this section, in the case of a— "(1) C corporation, "(2) partnership which has a C corporation as a partner, or "(3) tax shelter, taxable income shall not be computed under the cash receipts and disbursements method of accounting. "(b) EXCEPTIONS.— "(1) FARMING BUSINESS.—Paragraphs (1) and (2) of subsection

(a) shall not apply to any farming business. "(2) QUALIFIED PERSONAL SERVICE CORPORATIONS.—Paragraphs

(1) and (2) of subsection (a) shall not apply to a qualified personal service corporation, and such a corporation shall be treated as an individual for purposes of determining whether paragraph (2) of subsection (a) applies to any partnership. "(3)

ENTITIES WITH

GROSS RECEIPTS OF NOT MORE THAN

$5,000,000.—Paragraphs (1) and (2) of subsection (a) shall not apply to any corporation or partnership for any taxable year if, for all prior taxable years beginning after December 31, 1985, such entity (or any predecessor) met the $5,000,000 gross receipts test of subsection (c). "(c) $5,000,000 GROSS RECEIPTS TEST.—For purposes of this section—

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 100 STAT. 2346

PUBLIC LAW 99-514—OCT. 22, 1986 "(1) IN GENERAL.—A corporation or partnership meets the $5,000,000 gross receipts test of this subsection for any prior taxable year if the average annual gross receipts of such entity for the 3-taxable-year period ending with such prior taxable year does not exceed $5,000,000. "(2) AGGREGATION RULES.—All persons treated as a single employer under subsection (a) or (b) of section 52 or subsection (m) or (o) of section 414 shall be treated as one person for purposes of paragraph (1). "(3) SPECIAL RULES.—For purposes of this subsection— "(A) NOT IN EXISTENCE FOR ENTIRE 3-YEAR PERIOD.—If the

entity was not in existence for the entire 3-year period referred to in paragraph (1), such paragraph shall be applied on the basis of the period during which such entity (or trade or business) was in existence. "(B) SHORT TAXABLE YEARS.—Gross receipts for any taxable year of less than 12 months shall be annualized by multiplying the gross receipts for the short period by 12 and dividing the result by the number of months in the short period. "(C) GROSS RECEIPTS.—Gross receipts for any taxable year shall be reduced by returns and allowances made during such year. "(d) DEFINITIONS AND SPECIAL RULES.—For purposes of this section— "(1) FARMING BUSINESS.—

"(A) IN GENERAL.—The term 'farming business' means the trade or business of farming (within the meaning of section 263A(e)(4)). "(B) TIMBER AND ORNAMENTAL TREES.—The term 'farming business' includes the raising, harvesting, or growing of trees to which section 263A(c)(5) applies. "(2) QUALIFIED PERSONAL SERVICE CORPORATION.—The term 'qualified personal service corporation' means any corporation— "(A) substantially all of the activities of which involve the performance of services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, or consulting, and "(B) substantially all of the stock of which Qyy value) is held directly or indirectly by— "(i) employees performing services for such corporation in connection with the activities involving a field referred to in subparagraph (A), "(ii) retired employees who had performed such services for such corporation, "(iii) the estate of any individual described in clause (i) or (ii), or "(iv) any other person who acquired such stock by reason of the death of an individual described in clause (i) or (ii) (but only for the 2-year period beginning on the date of the death of such individual). "(3) TAX SHELTER DEFINED.—The term 'tax shelter' has the meaning given such term by section 461(i)(3) (determined after application of paragraph (4) thereof). "(4) SPECIAL RULES FOR APPLICATION OF PARAGRAPH (2).—For purposes of paragraph (2)—

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100 STAT. 2347 /

"(A) community property laws shall be disregarded, "(B) stock held by a plan described in section 401(a) which is exempt from tax under section 501(a) shall be treated as held by an employee described in paragraph (2)(B)(i), and "(C) at the election of the common parent of an affiliated group (within the meaning of section 1504(a)), all members of such group may be treated as 1 taxpayer for purposes of paragraph (2)(B) if substantially all of the activities of all such members involve the performance of services in the same field described in paragraph (2)(A). "(5) SPECIAL RULE FOR SERVICES.—In the case of any person using an accrual method of accounting with respect to amounts to be received for the performance of services by such person, such person shall not be required to accrue any portion of such amounts which (on the basis of experience) will not be collected. This paragraph shall not apply to any amount if interest is required to be paid on such amount or there is any penalty for failure to timely pay such amount. "(6) TREATMENT OF CERTAIN TRUSTS SUBJECT TO TAX ON UNRELATED BUSINESS INCOME.—For purposes of this section, a trust

subject to tax under section 511(b) shall be treated as a C corporation with respect to its activities constituting an unrelated trade or business. "(7) COORDINATION WITH SECTION 481.—In the case of any taxpayer required 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 made with the consent of the Secretary, and "(C) the period for taking into account the adjustments under section 481 by reason of such change— "(i) except as provided in clause (ii), shall not exceed 4 years, and "(ii) in the case of a hospital, shall be 10 years." (b) COORDINATION WITH APPLICATION OF ECONOMIC PERFORMANCE RULES TO TAX SHELTERS.—

(1) IN GENERAL.—So much of section 461(i) as precedes paragraph (3) thereof is amended to read as follows: "(i) SPECIAL RULES FOR TAX SHELTERS.— "(1) RECURRING ITEM EXCEPTION NOT TO APPLY.—In

the case of a tax shelter, economic performance shall be determined without regard to paragraph (3) of subsection (h). "(2) SPECIAL RULE FOR SPUDDING OF OIL OR GAS WELLS.—In the

case of a tax shelter, economic performance with respect to the act of drilling an oil or gas well shall be treated as having occurred within a taxable year if drilling of the well commences before the close of the 90th day after the close of the taxable year." (2) CONFORMING AMENDMENT.—Paragraph (4) of section 461(i)

is amended to read as follows: "(4) SPECIAL RULES FOR FARMING.—In the case of the trade or business of farming (as defined in section 464(e)), in determining whether an entity is a tax shelter, the definition of farming syndicate in section 464(c) shall be substituted for subparagraphs (A) and (B) of paragraph (3)."

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 100 STAT. 2348

PUBLIC LAW 99-514—OCT. 22, 1986

(c) CLERICAL AMENDMENT.—The table of sections for subpart A of part II of subchapter E of chapter 1 is amended by adding at the end thereof the following new item: "Sec. 448. Limitation on use of cash method of accounting." (d) EFFECTIVE DATE.—

(1) IN GENERAL.—Except as provided in paragraph (2), the amendments made by this section shall apply to taxable years beginning after December 31, 1986. (2) ELECTION TO RETAIN CASH METHOD FOR CERTAIN TRANS-

ACTIONS.—A taxpayer may elect not to have the amendments made by this section apply to any loan or lease, or any transaction with a related party (within the meaning of section 267(b) of the Internal Revenue Code of 1954, as in effect before the enactment of this Act), entered into on or before September 25, 1985. Any election under the preceding sentence may be made separately with respect to each transaction. (3) CERTAIN CONTRACTS.—The amendments made by this section shall not apply to— (A) contracts for the acquisition or transfer of real property, and (B) contracts for services related to the acquisition or development of real property, but only if such contracts were entered into before September 25, 1985, and the sole element of the contract which has not been performed as of September 25, 1985, is payment for such property or services. (4) TREATMENT OF AFFILIATED GROUP PROVIDING ENGINEERING

SERVICES.—Each member of an affiliated group of corporations (within the meaning of section 1504(a) of the Internal Revenue Code of 1986) shall be allowed to use the cash receipts and disbursements method of accounting for any trade or business of providing engineering services with respect to taxable years ending after December 31, 1986, if the common parent of such group— (A) was incorporated in the State of Delaware in 1970, (B) was the successor to a corporation that was incorporated in the State of Illinois in 1949, and (C) used the completed contract method of accounting for a substantial part of its income from the performance of engineering services. SEC. 802. SIMPLIFIED DOLLAR-VALUE LIFO METHOD FOR CERTAIN SMALL BUSINESSES.

(a) GENERAL RULE.—Section 474 (relating to election by certain small businesses to use one inventory pool) is amended to read as follows: "SEC. 474. SIMPLIFIED DOLLAR-VALUE LIFO METHOD FOR CERTAIN SMALL BUSINESSES.

"(a) GENERAL RULE.—An eligible small business may elect to use the simplified dollar-value method of pricing inventories for purposes of the LIFO method. "(b)

SIMPLIFIED

DOLLAR-VALUE

METHOD

TORIES.—For purposes of this section—

OF PRICING

INVEN-

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100 STAT. 2349

"(1) IN GENERAL.—The simplified dollar-value method of pricing inventories is a dollar-value method of pricing inventories under which— "(A) the taxpayer maintains a separate inventory pool for items in each major category in the applicable Government price index, and "(B) the adjustment for each such separate pool is based on the change from the preceding taxable year in the component of such index for the major category. "(2) APPLICABLE GOVERNMENT PRICE INDEX.—The term 'applicable Government price index' means— "(A) except as provided in subparagraph (B), the Producer Price Index published by the Bureau of Labor Statistics, or "(B) in the case of a retailer using the retail method, the Consumer Price Index published by the Bureau of Labor Statistics. "(3) MAJOR CATEGORY.—The term 'major category' means— "(A) in the case of the Producer Price Index, any of the 2digit standard industrial classifications in the Producer Prices Data Report, or "(B) in the case of the Consumer Price Index, any of the general expenditure categories in the Consumer Price Index Detailed Report. "(c) ELIGIBLE SMALL BUSINESS.—For purposes of this section, a taxpayer is an eligible small business for any taxable year if the average annual gross receipts of the taxpayer for the 3 preceding taxable years do not exceed $5,000,000. For purposes of the preceding sentence, rules similar to the rules of section 448(c)(3) shall apply. "(d) SPECIAL RULES.—For purposes of this section— "(1) CONTROLLED GROUPS.—

"(A) IN GENERAL.—In the case of a taxpayer which is a member of a controlled group, all persons which are component members of such group shall be treated as 1 taxpayer for purposes of determining the gross receipts of the taxpayer. "(B)

CONTROLLED GROUP

DEFINED.—For

purposes

of

subparagraph (A), persons shall be treated as being component members of a controlled group if such persons would be treated as a single employer under section 52. "(2) ELECTION.—

"(A) IN GENERAL.—The election under this section may be made without the consent of the Secretary. "(B) PERIOD TO WHICH ELECTION APPLIES.—The election

under this section shall apply— "(i) to the taxable year for which it is made, and "(ii) to all subsequent taxable years for which the taxpayer is an eligible small business, unless the taxpayer secures the consent of the Secretary to the revocation of such election. "(3) LIFO METHOD.—The term 'LIFO method' means the method provided by section 472(b). "(4) TRANSITIONAL RULES.—

"(A) IN GENERAL.—In the case of a year of change under this section— "(i) the inventory pools shall—

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 100 STAT. 2350

PUBLIC LAW 99-514—OCT. 22, 1986

"(I) in the case of the 1st taxable year to which such an election applies, be established in accordance with the major categories in the applicable Government price index, or "(ID in the case of the 1st taxable year after such election ceases to apply, be established in the manner provided by regulations under section 472; "(ii) the aggregate dollar amount of the taxpayer's inventory as of the beginning of the year of change shall be the same as the aggregate dollar value as of the close of the taxable year preceding the year of change, and "(iii) the year of change shall be treated as a new base year in accordance with procedures provided by regulations under section 472. "(B) YEAR OF CHANGE.—For purposes of this paragraph, the year of change under this section is— "(i) the 1st taxable year to which an election under this section applies, or "(ii) in the case of a cessation of such an election, the 1st taxable year after such election ceases to apply." (b) CLERICAL AMENDMENT.—The table of sections for subpart D of part II of subchapter E of chapter 1 is amended by striking out the item relating to section 474 and inserting in lieu thereof the following: "Sec. 474. Simplified dollar-value LIFO method for certain small businesses." (c) EFFECTIVE DATES.—

(1) IN GENERAL.—The amendments made by this section shall apply to taxable years beginning after December 31, 1986. (2) TREATMENT OF TAXPAYERS WHO MADE ELECTIONS UNDER EXISTING SECTION 474.—The amendments made by this section

shall not apply to any taxpayer who made an election under section 474 of the Internal Revenue Code of 1954 (as in effect on the day before the date of the enactment of this Act) for any period during which such election is in effect. Notwithstanding any provision of such section 474 (as so in effect), an election under such section may be revoked without the consent of the Secretary. SEC. 803. CAPITALIZATION AND INCLUSION IN INVENTORY COSTS OF CERTAIN EXPENSES.

(a) GENERAL RULE.—Part IX of subchapter B of chapter 1 (relating to items not deductible) is amended by inserting after section 263 the following new section: "SEC. 263A. CAPITALIZATION AND INCLUSION IN INVENTORY COSTS OF CERTAIN EXPENSES. "<a) NONDEDUCTIBILITY OF CERTAIN DIRECT AND INDIRECT COSTS.—

"(1) IN GENERAL.—In the case of any property to which this section applies, any costs described in paragraph (2)— "(A) in the case of property which is inventory in the hands of the taxpayer, shall be included in inventory costs, and "(B) in the case of any other property, shall be capitalized.

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100 STAT. 2351

"(2) ALLOCABLE COSTS.—The costs described in this paragraph with respect to any property are— "(A) the direct costs of such property, and "(B) such property's proper s h a r e of those indirect costs (including taxes) part or all of which a r e allocable to such property. "(b) PROPERTY TO W H I C H SECTION A P P U E S. — E x c e p t a s other w i s e

provided in this section, this section shall apply to— "(1) PROPERTY PRODUCED BY TAXPAYER.—Real or t a n g i b l e per-

sonal property produced by the taxpayer. "(2) PROPERTY ACQUIRED FOR RESALE.—

"(A) IN GENERAL.—Real or personal property described in section 1221(1) which is acquired by the tax p a y e r for resale. "(B) EXCEPTION FOR TAXPAYER WITH GROSS RECEIPTS O F

$10,000,000 OR LESS.—Subparagraph (A) shall not apply to any personal property acquired during any taxable year by the tax p a y e r for resale if the average annual gross receipts of the tax p a y e r (or any predecessor) for the 3-taxable year period ending with the tax a b l e year preceding such taxable year do not exceed $10,000,000. "(C) AGGREGATION RULES, ETC.—For purposes of s u b p a r a -

g r a p h (B), r u l e s similar to the rules of paragraph s (2) and (3) of section 448(c) shall apply. For purposes of paragraph (1), the term 'tangible personal property' shall include a film, sound recording, video tape, book, or similar property. "(c) GENERAL EXCEPTIONS. — "(1) PERSONAL USE PROPERTY.—This section s h a l l not a p p l y to

any property produced by the tax p a y e r for u s e by the tax p a y e r other than in a trade or business or a n activity conducted for profit. "(2) RESEARCH A N D EXPERIMENTAL EXPENDITURES.—This sec-

tion shall not apply to any a m o u n t allowable a s a deduction under section 174. "(3) CERTAIN DEVELOPMENT AND OTHER COSTS O F OIL AND GAS

WELLS OR OTHER MINERAL PROPERTY.—This section shall not apply to any cost allowable a s a deduction under section 263(c), 616(a), or 617(a). "(4) COORDINATION WITH LONG-TERM CONTRACT RULES.—This

section shall not apply to any property produced by the taxp a y e r pursuant to a long-term contract. "(5) T I M B E R A N D CERTAIN ORNAMENTAL TREES.—This section

shall not apply to— "(A) trees raised, harvested, or grown by the tax p a y e r other than t r e e s described in clause (ii) of subsection (e)(4)(B) (after application of the last sentence thereof), and "(B) any real property underlying such trees. "(d) EXCEPTION FOR F A R M I N G BUSINESSES.— "(1) SECTION TO APPLY ONLY I F PREPRODUCTIVE PERIOD IS MORE T H A N 2 YEARS.—

"(A) IN GENERAL.—This section shall not apply to any p l a n t or a n i m a l which is produced by the tax p a y e r in a farming business and which has a preproductive period of 2 year s or less. "(B) EXCEPTION FOR TAXPAYERS REQUIRED TO USE ACCRUAL

METHOD.—Subparagraph (A) shall not apply to any corpora-

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Page:United States Statutes at Large Volume 100 Part 3.djvu/544

 100 STAT. 2352

PUBLIC LAW 99-514—OCT. 22, 1986 tion, partnership, or tax shelter required to use an accrual method of accounting under section 447 or 448(a)(3). "(2) TREATMENT OF CERTAIN PLANTS LOST BY REASON OF CASUALTY.—

"(A) IN GENERAL.—If plants bearing an edible crop for human consumption were lost or damaged (while in the hands of the taxpayer) by reason of freezing temperatures, disease, drought, pests, or casualty, this section shall not apply to any costs of the taxpayer of replanting plants bearing the same type of crop (whether on the same parcel of land on which such lost or damaged plants were located or any other parcel of land of the same acreage in the United States). "(B) SPECIAL RULE FOR PERSON WITH MINORITY INTEREST WHO MATERIALLY PARTICIPATES.—Subparagraph (A) shall

apply to amounts paid or incurred by a person (other than the taxpayer described in subparagraph (A)) if— "(i) the taxpayer described in subparagraph (A) has an equity interest of more than 50 percent in such grove, orchard, or vineyard, and "(ii) such other person holds any part of the remaining equity interest and materially participates in the planting, maintenance, cultivation, or development of such grove, orchard, or vineyard during the 4-taxable year period beginning with the taxable year in which the grove, orchard or vineyard was lost or damaged. The determination of whether an individual materially participates in any activity shall be made in a manner similar to the manner in which such determination is made under section 2032A(e)(6). "(3) ELECTION TO HAVE THIS SECTION NOT APPLY.—

"(A) IN GENERAL.—If a taxpayer makes an election under this paragraph, this section shall not apply to any plant or animal produced in any farming business carried on by such taxpayer. "(B) CERTAIN PERSONS NOT ELIGIBLE.—No election may

be

made under this paragraph— "(i) by a corporation, partnership, or tax shelter, if such corporation, partnership, or tax shelter is required to use an accrual method of accounting under section 447 or 448(a)(3), or "(ii) with respect to the planting, cultivation, maintenance, or development of pistachio trees. "(C) SPECIAL RULE FOR CITRUS AND ALMOND GROWERS.—An

election under this paragraph shall not apply with respect to any item which is attributable to the planting, cultivation, maintenance, or development of any citrus or almond grove (or part thereof) and which is incurred before the close of the 4th taxable year beginning with the taxable year in which the trees were planted. For purposes of the preceding sentence, the portion of a citrus or almond grove planted in 1 taxable year shall be treated separately from the portion of such grove planted in another taxable year. "(D) ELECTION.—Unless the Secretary otherwise consents, an election under this paragraph may be made only for the taxpayer's 1st taxable year which begins after December 31, 1986, and during which the taxpayer engages in a farming

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Page:United States Statutes at Large Volume 100 Part 3.djvu/545

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100 STAT. 2353

business. Any such election, once made, may be revoked only with the consent of the Secretary. "(e) DEFINITIONS AND SPECIAL RULES FOR PURPOSES OF SUBSECTION

(d)."(1) RECAPTURE OF EXPENSED AMOUNTS ON DISPOSITION.—

"(A) IN GENERAL.—In the case of any plant or animal with respect to which amounts would have been capitalized under subsection (a) but for an election under subsection (d)(3)"(i) such plant or animal (if not otherwise section 1245 property) shall be treated as section 1245 property, and "(ii) for purposes of section 1245, the recapture amount shall be treated as a deduction allowed for depreciation with respect to such property. "(B) RECAPTURE AMOUNT.—For purposes of subparagraph (A), the term 'recapture amount' means any amount allowable as a deduction to the taxpayer which, but for an election under subsection (d)(3), would have been capitalized with respect to the plant or animal. "(2) EFFECTS OF ELECTION ON DEPRECIATION.—

"(A) IN GENERAL.—If the taxpayer (or any related person) makes an election under subsection (d)(3), the provisions of section 168(g)(2) (relating to alternative depreciation) shall apply to all property of the taxpayer used predominantly in the farming business and placed in service in any taxable year during which any such election is in effect. "(B) RELATED PERSON.—For purposes of subparagraph (A), the term 'related person' means— "(i) the taxpayer and members of the taxpayer's family, "(ii) any corporation (including an S corporation) if 50 percent or more (in value) of the stock of such corporation is owned (directly or through the application of section 318) by the taxpayer or members of the taxpayer's family, "(iii) a corporation and any other corporation which is a member of the same controlled group described in section 1563(a)(1), and "(iv) any partnership if 50 percent or more (in value) of the interests in such partnership is owned directly or indirectly by the taxpayer or members of the taxpayer's family. "(C) MEMBERS OF FAMILY.—For purposes of this paragraph, the term 'family' means the taxpayer, the spouse of the taxpayer, and any of their children who have not attained age 18 before the close of the taxable year. "(3) PREPRODUCTIVE PERIOD.—

"(A) IN GENERAL.—For purposes of this section, the term 'preproductive period' means— "(i) in the case of a plant or animal which will have more than 1 crop or yield, the period before the 1st marketable crop or yield from such plant or animal, or "(ii) in the case of any other plant or animal, the period before such plant or animal is reasonably expected to be disposed of.

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Page:United States Statutes at Large Volume 100 Part 3.djvu/546

 100 STAT. 2354

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

For purposes of this subparagraph, use by the taxpayer in a farming business of any supply produced in such business shall be treated as a disposition, "(B) RULE FOR DETERMINING PERIOD.—In the case of a plant grown in commercial quantities in the United States, the preproductive period for such plant if grown in the United States shall be based on the nationwide weighted average preproductive period for such plant. "(4) FARMING BUSINESS.—For purposes of this section— "(A) IN GENERAL.—The term 'farming business' means the trade or business of farming. "(B)

CERTAIN TRADES AND BUSINESSES INCLUDED.—The

term 'farming business' shall include the trade or business of"(i) operating a nursery or sod farm, or "(ii) the raising or harvesting of trees bearing fruit, nuts, or other crops, or ornamental trees. For purposes of clause (ii), an evergreen tree which is more than 6 years old at the time severed from the roots shall not be treated as an ornamental tree. "(5) CERTAIN INVENTORY VALUATION METHODS PERMITTED.—

The Secretary shall by regulations permit the taxpayer to use reasonable inventory valuation methods to compute the amount required to be capitalized under subsection (a) in the case of any plant or animal. "(0 SPECIAL RULES FOR ALLOCATION OF INTEREST TO PROPERTY PRODUCED BY THE TAXPAYER.— "(1) INTEREST CAPITAUZED ONLY IN CERTAIN CASES.—Subsec-

tion (a) shall only apply to interest costs which are— "(A) paid or incurred during the production period, and "(B) allocable to property which is described in subsection (b)(1) and which has— "(i) a long useful life, "(ii) an estimated production period exceeding 2 years, or "(iii) an estimated production period exceeding 1 year and a cost exceeding $1,000,000. "(2) ALLOCATION RULES.—

"(A) IN GENERAL.—In determining the amount of interest required to be capitalized under subsection (a) with respect to any property— "(i) interest on any indebtedness directly attributable to production expenditures with respect to such property shall be assigned to such property, and "(ii) interest on any other indebtedness shall be assigned to such property to the extent that the taxpayer's interest costs could have been reduced if production expenditures (not attributable to indebtedness described in clause (i)) had not been incurred. "(B)

EXCEPTION FOR QUALIFIED RESIDENCE INTEREST.—

Subparagraph (A) shall not apply to any qualified residence interest (within the meaning of section 163(h)). "(C) SPECIAL RULE FOR FLOW-THROUGH ENTITIES.—Except

as provided in regulations, in the case of any flow-through entity, this paragraph shall be applied first at the entity level and then at the beneficiary level.

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Page:United States Statutes at Large Volume 100 Part 3.djvu/547

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100 STAT. 2355

"(3) INTEREST RELATING TO PROPERTY USED TO PRODUCE PROP-

ERTY.—This subsection shall apply to any interest on indebtedness incurred or continued in connection with property used to produce property to which this subsection applies to the extent such interest is allocable to the produced property. "(4) DEFINITIONS.—For purposes of this subsection— "(A) LONG USEFUL LIFE.—Property has a long useful life if "(i) real property, or "(ii) property with a class life of 20 years or more (as determined under section 168). "(B) PRODUCTION PERIOD.—The term 'production period' means, when used with respect to any property, the period— "(i) beginning on the date on which production of the property begins, and "(ii) ending on the date on which the property is ready to be placed in service or is ready to be held for sale. "(C) PRODUCTION EXPENDITURES.—The term 'production expenditures' means the costs (whether or not incurred during the production period) required to be capitalized under subsection (a) with respect to the property. "(g) PRODUCTION.—For purposes of this section— "(1) IN GENERAL.—The term 'produce' includes construct, build, install, manufacture, develop, or improve. "(2) TREATMENT OF PROPERTY PRODUCED UNDER CONTRACT FOR
 * V., such property is—

THE TAXPAYER.—The taxpayer shall be treated as producing any property produced for the taxpayer under a contract with the taxpayer; except that only costs paid or incurred by the taxpayer (whether under such contract or otherwise) shall be taken into account in applying subsection (a) to the taxpayer. "(h) REGULATIONS.—The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section, including— "(1) regulations to prevent the use of related parties, passthru entities, or intermediaries to avoid the application of this section, and "(2) regulations providing for simplified procedures for the application of this section in the case of property described in subsection (b)(2)." (b) TECHNICAL AMENDMENTS.—

(1) Section 189 is hereby repealed. (2)(A) Section 280 is hereby repealed. (B) Paragraph (5) of section 48(r) (defining sound recording) is amended to read as follows: "(5) SOUND RECORDING.—For purposes of this subsection, the term 'sound recording' means works which result from the fixation of a series of musical, spoken, or other sounds, regardless of the nature of the material objects (such as discs, tapes, or other phonorecordings) in which such sounds are embodied." (3) Section 312(n)(l) is amended— (A) by striking out "(determined without regard to section 189) in subparagraph (B)", and (B) by striking out subparagraph (C) and inserting in lieu thereof:

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Page:United States Statutes at Large Volume 100 Part 3.djvu/548

 100 STAT. 2356

PUBLIC LAW 99-514—OCT. 22, 1986 "(C) CONSTRUCTION PERIOD.—The term 'construction period' has the meaning given the term production period under section 263A(f)(4)(B)." (4) Section 471 (relating to general rule for inventories) is amended— (A) by striking out "Whenever" and inserting in lieu thereof "(a) GENERAL RULE.—Whenever", and

(B) by adding at the end thereof the following new subsection: "(b) CROSS REFERENCE.— "For rules relating to capitalization of direct and indirect costs of property, see section 263A."

(5) Section 267(e)(5)(D) is amended— (A) by striking out "low-income housing (as defined in paragraph (5) of section 189(e))" and inserting "property described in clause (i), (ii), (iii), or (iv) of section 1250(a)(l)(B)", and (B) by striking out "low-income housing (as so defined)" and inserting "such property". (6) Section 278 is hereby repealed. (7)(A) Subsection (b) of section 447 is amended to read as follows: "(b) PREPRODUCTIVE PERIOD OF EXPENSES.— "For rules requiring capitalization of certain preproductive period of expenses, see section 263A."

(B) Subsection (a) of section 447 is amended by striking out "and with the capitalization of preproductive period of expenses described in subsection (b)". (C) Section 447(g)(l) is amended by striking out " I f and inserting in lieu thereof "Notwithstanding subsection (a) or section 263A, i f. (8) Subsection (d) of section 464 is amended to read as follows: "(d) EXCEPTION.—Subsection (a) shall not apply to any amount paid for supplies which are on hand at the close of the taxable year on account of fire, storm, or other casualty, or on account of disease or drought." (c) CLERICAL AMENDMENTS.—

(1) The table of sections for part IX of subchapter B of chapter 1 is amended by striking out the item relating to section 278 and by inserting after the item relating to section 263 the following: "Sec. 263A. Capitalization and inclusion in inventory costs of certain expenses."

(2) The table of sections for part VI of subchapter B of chapter 1 is amended by striking out the item relating to section 189. (3) The table of sections for part IX of subchapter B of chapter 1 is amended by striking out the item relating to section 280. (d) EFFECTIVE DATE.—

(1) IN GENERAL.—Except as provided in this subsection, the amendments made by this section shall apply to costs incurred after December 31, 1986, in taxable years ending after such date. (2) SPECIAL RULE FOR INVENTORY PROPERTY.—In the case of any property which is inventory in the hands of the taxpayer— (A) IN GENERAL.—The amendments made by this section shall apply to taxable years beginning after December 31, 1986.

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(B) CHANGE IN METHOD OF ACCOUNTING.—If the taxpayer

is required by the amendments made by this section to change its method of accounting with respect to such property for any taxable year— (i) such change shall be treated as initiated by the taxpayer, (ii) such change shall be treated as made with the consent of the Secretary, and (iii) the period for taking into account the adjustments under section 481 by reason of such change shall not exceed 4 years. (3)

SPECIAL RULE FOR SELF-CONSTRUCTED PROPERTY.—The

amendments made by this section shall not apply to any property which is produced by the taxpayer for use by the taxpayer if substantial construction had occurred before March 1, 1986. (4) TRANSITIONAL RULE FOR CAPITALIZATION OF INTEREST AND TAXES.— (A) TRANSITION PROPERTY EXEMPTED FROM INTEREST

CAPiTAUZATiON.—Section 263A(f) of the Internal Revenue Code of 1986 (as added by this section) and the amendment made by subsection OaXl) shall not apply to any property— (i) to which the amendments made by section 201 do not apply by reason of sections 203(a)(l)(D) and (E) and 203(a)(5)(A), and (ii) to which the amendments made by section 251 do not apply by reason of section 251(d)(3)(M). (B) INTEREST AND TAXES.—Section 263A of such Code shall not apply to property described in the matter following subparagraph (B) of section 207(e)(2) of the Tax Equity and Fiscal Responsibility Act of 1982 to the extent it would require the capitalization of interest and taxes paid or incurred in connection with such property which are not required to be capitalized under section 189 of such Clode (as in effect before the amendment made by subsection (b)(D). (5) TRANSITION RULE CONCERNING CAPITAUZATION OF INVENTORY RULES.—In the case of a corporation which on the date of

the enactment of this Act was a member of an affiliated group of corporations (within the meaning of section 1504(a) of the Internal Revenue Code of 1986), the parent of which— (A) was incorporated in California on April 15, 1925, (B) adopted LIFO accounting as of the close of the taxable year ended December 31, 1950, and (C) was, on May 22, 1986, merged into a Delaware corporation incorporated on March 12, 1986, the amendments made by this section shall apply under a cutoff method whereby the uniform capitalization rules are applied only in costing layers of inventory acquired during taxable years beginning on or after January 1, 1987. (6) TREATMENT OF CERTAIN REHABIUTATION PROJECT.—The

amendments made by this section shall not apply to interest and taxes paid or incurred with respect to the rehabilitation and conversion of a certified historic building which was formerly a factory into an apartment project with 155 units, 39 units of which are for low-income families, if the project was approved for annual interest assistance on June 10, 1986, by the housing authority of the State in which the project is located.

71-19A 0 - 89 - 19: CL. 3 Part3

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Page:United States Statutes at Large Volume 100 Part 3.djvu/550

 100 STAT. 2358

PUBLIC LAW 99-514—OCT. 22, 1986 (7) SPECIAL RULE FOR CASUALTY LOSSES.—Section 263A(d)(2) of the Internal Revenue Code of 1986 (as added by this section) shall apply to expenses incurred on or after the date of the enactment of this Act.

SEC. 804. MODIFICATIONS OF METHOD OF ACCOUNTING FOR LONG-TERM CONTRACT.

(a) GENERAL RULE.—Subpart B of part II of subchapter E of chapter 1 is amended by adding at the end thereof the following new section: "SEC. 460. SPECIAL RULES FOR LONG-TERM CONTRACTS. "(a) PERCENTAGE OF COMPLETION-CAPITALIZED COST METHOD.—

"(1) IN GENERAL.—In the case of any long-term contract— "(A) 40 percent of the items with respect to such contract shall be taken into account under the percentage of completion method (as modified by subsection (b)), and "(B) 60 percent of the items with respect to such contract shall be taken into account under the taxpayer's normal method of accounting. "(2) 40 PERCENT LOOK-BACK METHOD TO APPLY.—Upon completion of any long-term contract, the taxpayer shall pay (or shall be entitled to receive) interest determined by applying the lookback method of subsection (b)(3) to 40 percent of the items with respect to the contract. "(b) PERCENTAGE OF COMPLETION METHOD.— "(1) SUBSECTION (a) NOT TO APPLY WHERE PERCENTAGE OF COMPLETION METHOD USED.—Subsection (a) shall not apply to

any long-term contract with respect to which amounts includible in gross income are determined under the percentage of completion method. "(2) REQUIREMENTS OF PERCENTAGE OF COMPLETION METHOD.—

In the case of any long-term contract with respect to which the percentage of completion method is used— "(A) the percentage of completion shall be determined by comparing costs allocated to the contract under subsection (c) and incurred before the close of the taxable year with the estimated total contract costs, and "(B) upon completion of the contract, the taxpayer shall pay (or shall be entitled to receive) interest computed under the look-back method of paragraph (3). "(3) LOOK-BACK METHOD.—The interest computed under the look-back method of this subparagraph shall be determined by"(A) first allocating income under the contract among taxable years before the year in which the contract is completed on the basis of the actual contract price and costs instead of the estimated contract price and costs, "(B) second, determining (solely for purposes of computing such interest) the overpayment or underpayment of tax for each taxable year referred to in paragraph (1) which would result solely from the application of paragraph (1), and "(C) then using the overpayment rate established by section 6621, compounded daily, on the overpayment or underpayment determined under paragraph (1). "(c) ALLOCATION OF COSTS TO CONTRACT.—

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100 STAT. 2359

"(1) DIRECT AND CERTAIN INDIRECT COSTS.—In the case of a long-term contract, all costs (including research and experimental costs) which directly benefit, or are incurred by reason of, the long-term contract activities of the taxpayer shall be allocated to such contract in the same manner as costs are allocated to extended period long-term contracts under section 451 and the regulations thereunder. "(2) COSTS IDENTIFIED UNDER COST-PLUS AND CERTAIN FEDERAL

CONTRACTS.—In the case of a cost-plus long-term contract or a Federal long-term contract, any cost not allocated to such contract under paragraph (1) shall be allocated to such contract if such cost is identified by the taxpayer (or a related person), pursuant to the contract or Federal, State, or local law or regulation, as being attributable to such contract. "(3) ALLOCATION OF PRODUCTION PERIOD INTEREST TO CONTRACT.—

"(A) IN GENERAL.—Except as provided in subparagraphs (B) and (C), in the case of a long-term contract, interest costs shall be allocated to the contract in the same manner as interest costs are allocated to property produced by the taxpayer under section 263A(f). "(B) PRODUCTION PERIOD.—In applying section 263A(f) for purposes of subparagraph (A), the production period shall be the period— "(i) beginning on the later of— "(I) the contract commencement date, or "(II) in the case of a taxpayer who uses an accrual method with respect to long-term contracts, the date by which at least 5 percent of the total estimated costs (including design and planning costs) under the contract have been incurred, and "(ii) ending on the contract completion date. "(C) APPLICATION OF DE MINIMIS RULE.—In applying section 263A(f) for purposes of subparagraph (A), paragraph (l)(B)(iii) of such section shall be applied on a contract-bycontract basis; except that, in the case of a taxpayer described in subparagraph (B)(i)(II) of this paragraph, paragraph (l)(B)(iii) of section 263A(f) shall be applied on a property-by-property basis. "(4) CERTAIN COSTS NOT INCLUDED.—This subsection shall not apply to any— "(A) independent research and development expenses, "(B) expenses for unsuccessful bids and proposals, and "(C) marketing, selling, and advertising expenses. "(5) INDEPENDENT RESEARCH AND DEVELOPMENT EXPENSES.—

For purposes of paragraph (4), the term 'independent research and development expenses' means any expenses incurred in the performance of research or development, except that such term shall not include— "(A) any expenses which are directly attributable to a long-term contract in existence when such expenses are incurred, or "(B) any expenses under an agreement to perform research or development. "(d) FEDERAL LONG-TERM CONTRACT.—For purposes of this section—

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Page:United States Statutes at Large Volume 100 Part 3.djvu/552

 100 STAT. 2360

PUBLIC LAW 99-514—OCT. 22, 1986 "(1) IN GENERAL.—The term 'Federal long-term contract' means any long-term contract— "(A) to which the United States (or any agency or instrumentality thereof) is a party, or "(B) which is a subcontract under a contract described in subparagraph (A). "(2) SPECIAL RULES FOR CERTAIN TAXABLE ENTITIES.—For purposes of paragraph (1), the rules of section 168(h)(2)(D) (relating to certain taxable entities not treated as instrumentalities) shall apply. "(e) EXCEPTION FOR CERTAIN CONSTRUCTION (IJONTRACTS.—

"(1) IN GENERAL.—Subsections (a), (b), and (c)(1) and (2) shall not apply to any construction contract entered into by a taxpayer— "(A) who estimates (at the time such contract is entered into) that such contract will be completed within the 2-year period beginning on the contract commencement date of such contract, and "(B) whose average annual gross receipts for the 3 taxable years preceding the taxable year in which such contract is entered into do not exceed $10,000,000. "(2) DETERMINATION OF TAXPAYER'S GROSS RECEIPTS.—For purposes of paragraph (1), the gross receipts of— "(A) all trades or businesses (whether or not incorporated) which are under common control with the taxpaver (within the meaning of section 52(b)), and (B) all members of any controlled group of corporations of which the taxpayer is a member, for the 3 taxable years of such persons preceding the taxable year in which the contract described in paragraph (1) is entered into shall be included in the gross receipts of the taxpayer for the period described in paragraph (I)(B). The Secretary shall prescribe regulations which provide attribution rules that take into account, in addition to the persons and entities described in the preceding sentence, taxpayers who engage in construction contracts through partnerships, joint ventures, and corporations. "(3) CONTROLLED GROUP OF CORPORATIONS.—For purposes of

this subsection, the term 'controlled group of corporations' has the meaning given to such term by section 1563(a), except that— "(A) more than 50 percent' shall be substituted for 'at leeist 80 percent' each place it appears in section 1563(a)(l), and "(B) the determination shall be made without regard to subsections (a)(4) and (e)(3)(C) of section 1563. "(4) (CONSTRUCTION CONTRACT,—For purposes of this subsection, the term 'construction contract' means any contract for the building, construction, reconstruction, or rehabilitation of, or the installation of any integral component to, or improvements of, real property. "(f) LONG-TERM CONTRACT.—For purposes of this section— "(1) IN GENERAL.—The term 'long-term contract' means any contract for the manufacture, building, installation, or construction of property if such contract is not completed within the taxable year in which such contract is entered into. "(2) SPECIAL RULE FOR MANUFACTURING CONTRACTS.—A contract for the manufacture of property shall not be treated as a

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100 STAT. 2361

long-term contract unless such contract involves the manufacture of— "(A) any unique item of a type which is not normally included in the finished goods inventory of the taxpayer, or "(B) any item which normally requires more than 12 calendar months to complete (without regard to the period of the contract). "(3) AGGREGATION, ETC.—For purposes of this subsection, under regulations prescribed by the Secretary— "(A) 2 or more contracts which are interdependent (by reason of pricing or otherwise) may be treated as 1 contract, and "(B) a contract which is properly treated as an aggregation of separate contracts may be so treated. "(g) CONTRACT COMMENCEMENT DATE.—For purposes of this section, the term 'contract commencement date' means, with respect to any contract, the first date on which any costs (other than bidding expenses or expenses incurred in connection with negotiating the contract) allocablie to such contract are incurred." (b) CHANGE IN REGULATIONS.—The Secretary of the Treasury or

his delegate shall modify the income tax regulations relating to accounting for long-term contracts to carry out the provisions of section 460 of the Internal Revenue Code of 1986 (as added by subsection (a)). (c) CONFORMING AMENDMENT.—The table of sections for subpart B of part II of subchapter E of chapter 1 is amended by adding at the end thereof the following new item: "Sec. 460. Special rules for long-term contracts." (d) EFFECTIVE DATE.—

(1) IN GENERAL.—The amendments made by this section shall apply to any contract entered into after February 28, 1986. (2) CLARIFICATION OF TREATMENT OF INDEPENDENT RESEARCH AND DEVELOPMENT EXPENSES.—

(A) IN GENERAL.—For periods before, on, or after the date of enactment of this Act— (i) any independent research and development expenses taken into account in determining the total contract price shall not be severable from the contract, and (ii) any independent research and development expenses shall not be treated as amounts chargeable to capital account. (B)

INDEPENDENT

RESEARCH

AND DEVELOPMENT

EX-

PENSES.—For purposes of subparagraph (A), the term "independent research and development expenses" has the meaning given to such term by section 263A(c)(5) of the Internal Revenue Code of 1986, as added by this section. SEC. 805. REPEAL OF RESERVE FOR BAD DEBTS OF TAXPAYERS OTHER THAN FINANCIAL INSTITUTIONS.

(a) GENERAL RULE.—Subsection (c) of section 166 (relating to reserve for bad debts) is hereby repealed. (b) REPEAL OF RESERVE FOR CERTAIN GUARANTEED DEBT OBLIGA-

TIONS.—Section 166 is amended by striking out subsection (f) and by redesignating subsection (g) as subsection (f). (c) TECHNICAL AMENDMENTS.—

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Page:United States Statutes at Large Volume 100 Part 3.djvu/554

 100 STAT. 2362

PUBLIC LAW 99-514—OCT. 22, 1986 (1)(A) Section 81 (relating to certain increases in suspense accounts) is amended to read as follows:

"SEC. 81. INCREASE IN VACATION PAY SUSPENSE ACCOUNT.

"There shall be included in gross income for the taxable year the amount of any increase in any suspense account for such taxable year required by paragraph (2)(B) of section 463(c) (relating to accrual of vacation pay)." (B) The table of sections for part II of subchapter B of chapter 1 is amended by striking out the item relating to section 81 and inserting in lieu thereof the following: "Sec. 81. Increase in vacation pay suspense account."

(2) Clause (ii) of section 108(e)(7)(A) is amended by striking out "subsection (a), (b), or (c) of section 166" and inserting in lieu thereof "subsection (a) or (b) of section 166". (3) Paragraph (7) of section 108(e) is amended by striking out subparagraph (B) and by redesignating subparagraphs (C), (D), (E), and (F) as subparagraphs (B), (C), (D), and (E), respectively. (4) Subparagraph (E) of section 108(e)(7) (as so redesignated) is amended by striking out "subparagraphs (A), (B), (C), (D), and (E)" and inserting in lieu thereof "the foregoing subparagraphs". (5) Paragraph (5) of section 461(h) is amended by striking out subparagraph (A) and by redesignating subparagraphs (B), (C), and (D) as subparagraphs (A), (B), and (C), respectively. (6) Subsection (h) of section 805 is amended by striking out paragraph (2) and by redesignating paragraphs (3), (4), (5), and (6) as paragraphs (2), (3), (4), and (5), respectively. (d) 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 maintained a reserve for bad debts for such taxpayer's last taxable year beginning before January 1, 1987, and who 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 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) in the case of a taxpayer maintaining a reserve under section 166(f), be reduced by the balance in the suspense account under section 166(f)(4) of such Code as of the close of such last taxable year, and (ii) be taken into account ratably in each of the first 4 taxable years beginning after December 31, 1986. SEC. 806. TAXABLE YEARS OF CERTAIN ENTITIES. (a) PARTNERSHIPS.—

(1) IN GENERAL.—Paragraph (1) of section 7060t)) (relating to partnership's taxable year) is amended to read as follows: "(1) PARTNERSHIP'S TAXABLE YEAR.—

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100 STAT. 2363

"(A) PARTNERSHIP TREATED AS TAXPAYER.—The taxable

year of a partnership shall be determined as though the partnership were a taxpayer. "(B) TAXABLE YEAR DETERMINED BY REFERENCE TO PART-

NERS.—Except as provided in subparagraph (C), a partnership shall not have a taxable year other than— "(i) the taxable year of 1 or more of its partners who have an aggregate interest in partnership profits and capital of greater than 50 percent, "(ii) if there is no taxable year described in clause (i), the taxable year of all the principal partners of the partnership, or "(iii) if there is no taxable year described in clause (i) or (ii), the calendar year or such other period as the Secretary may prescribe in regulations. "(C) BUSINESS PURPOSE.—A partnership may have a taxable year not described in subparagraph (B) if it establishes, to the satisfaction of the Secretary, a business purpose therefor. For purposes of this subparagraph, any deferral of income to partners shall not be treated as a business purpose." (2) DETERMINATION OF MAJORITY INTEREST.—Section 706(b) is amended by adding at the end thereof the following new paragraph: "(4) APPLICATION OF MAJORITY INTEREST RULE.—Clause (i) of

paragraph (I)(B) shall not apply to any taxable year of a partnership unless the period which constitutes the taxable year of 1 or more of its partners who have an aggregate interest in partnership profits and capital of greater than 50 percent has been the same for— "(A) the 3-taxable year period of such partner or partners ending on or before the beginning of such taxable year of the partnership, or "(B) if the partnership has not been in existence during all of such 3-taxable year period, the taxable years of such partner or partners ending with or within the period of existence. This paragraph shall apply without regard to whether the same partners or interests are taken into account in determining the 50 percent interest during any period." (3) CONFORMING AMENDMENT.—The heading for section 706(b) is amended by striking out "ADOPTION OF". 01)) S CORPORATION.—

(1) IN GENERAL.—Section 1378(a) (relating to taxable year of S corporation) is amended to read as follows: "(a) GENERAL RULE.—For purposes of this subtitle, the taxable year of an S corporation shall be a permitted year." (2) BUSINESS PURPOSE.—Section 1378(b) (defining permitted year) is amended by adding at the end thereof the following new flush sentence: "For purposes of paragraph (2), any deferral of income to shareholders shall not be treated as a business purpose." (3) CONFORMING AMENDMENT.—Section 1378 is amended by

striking out subsection (c). (c) PERSONAL SERVICE CORPORATION.—

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Page:United States Statutes at Large Volume 100 Part 3.djvu/556

 100 STAT. 2364

PUBLIC LAW 99-514—OCT. 22, 1986 (1) IN GENERAL.—Section 441 (relating to period for computation of taxable income) is amended by adding at the end thereof the following new subsection: "(i) TAXABLE YEAR OF PERSONAL SERVICE CORPORATIONS.—

"(1) IN GENERAL.—For purposes of this subtitle, the taxable year of any personal service corporation shall be the calendar year unless the corporation establishes, to the satisfaction of the Secretary, a business purpose for having a different period for its taxable year. For purposes of this paragraph, any deferral of income to shareholders shall not be treated as a business purpose. "(2) PERSONAL SERVICE CORPORATION.—For purposes of this subsection, the term 'personal service corporation' has the meaning given such term by section 269A03)(1), except that section 269A(b)(2) shall be applied— "(A) by substituting 'any' for 'more than 10 percent', and "(B) by substituting 'any' for '50 percent or more in value' in section 318(a)(2)(C)." (2) CONFORMING

AMENDMENT.—Section 267(a) (relating to

matching of deduction and payee income in the case of expenses and interest) is amended by adding at the end thereof the following new sentence: "For purposes of this paragraph, in the case of a personal service corporation (within the meaning of section 441(i)(2)), such corporation and any employee-owner (within the meaning of section 269A0t))(2), as modified by section 441(i)(2)) shall be treated as persons specified in subsection (b)." (d) COORDINATION WITH 52-53 WEEK PERIOD.—Section 441(f) (relating to election of year consisting of 52-53 weeks) is amended by redesignating paragraph (3) as paragraph (4) and by inserting after paragraph (2) the following new paragraph: "(3) SPECIAL RULE FOR PARTNERSHIPS, S CORPORATIONS, AND PERSONAL SERVICE CORPORATIONS.—The Secretary may by regu-

lation provide terms and conditions for the application of this subsection to a partnership, S corporation, or personal service corporation (within the meaning of section 441(i)(2))." (e) EFFECTIVE DATE.—

(1) IN GENERAL.—The amendments made by this section shall apply to taxable years beginning after December 31, 1986. (2) CHANGE IN ACCOUNTING PERIOD.—In the case of any taxpayer required by the amendments made by this section to change its accounting period 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) with respect to any partner or shareholder of an S corporation which is required to include the items from more than 1 taxable year of the partnership or S corporation in any 1 taxable year, income in excess of expenses of such partnership or corporation for the short taxable year required by such amendments shall be taken into account ratably in each of the first 4 taxable years (including such short taxable year) beginning after December 31, 1986, unless such partner or shareholder elects to include all such income in the short taxable year.

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100 STAT. 2365

Subparagraph (C) shall apply to a shareholder of an S corporation only if such corporation was an S corporation for a taxable year beginning in 1986.

Subtitle B—Treatment of Installment Obligations SEC. 811. ALLOCATION OF INDEBTEDNESS AS PAYMENT ON INSTALLMENT OBLIGATION.

(a) IN GENERAL.—Subpart B of part II of subchapter E of chapter 1 (relating to taxable year for which item of gross income included) is amended by inserting after section 453B the following new section: "SEC. 453C. CERTAIN INDEBTEDNESS TREATED INSTALLMENT OBLIGATIONS.

AS

PAYMENT

ON

"(a) GENERAL RULE.—For purposes of sections 453 and 453A, if a taxpayer has allocable installment indebtedness for any taxable year, such indebtedness— "(1) shall be allocated on a pro rata basis to any applicable installment obligation of the taxpayer which— "(A) arises in such taxable year, and "(B) is outstanding as of the close of such taxable year, and "(2) shall be treated as a payment received on such obligation as of the close of such taxable year. "(b) ALLOCABLE INSTALLMENT INDEBTEDNESS.—For purposes of this section— "(1) IN GENERAL.—The term 'allocable installment indebtedness' means, with respect to any taxable year, the excess (if any) of— "(A) the installment percentage of the taxpayer's average quarterly indebtedness for such taxable year, over "(B) the aggregate amount treated as allocable installment indebtedness with respect to applicable installment obligations which— "(i) are outstanding as of the close of such taxable year, but "(ii) did not arise during such taxable year. "(2) INSTALLMENT PERCENTAGE.—The term 'installment percentage' means the percentage (not in excess of 100 percent) determined by dividing— "(A) the face amount of all applicable installment obligations of the taxpayer outstanding as of the close of the taxable year, by "(B) the sum of— "(i) the aggregate adjusted bases of all assets not described in clause (ii) held as of the close of the taxable year, and "(ii) the face amount of all installment obligations outstanding as of such time. For purposes of subparagraph (B)(i), a taxpayer may elect to compute the aggregate adjusted bases of all assets using the deduction for depreciation which is used in computing earnings and orofits under section 312(k).

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Page:United States Statutes at Large Volume 100 Part 3.djvu/558

 100 STAT. 2366

PUBLIC LAW 99-514—OCT. 22, 1986 "(3) SPECIAL RULES FOR PERSONAL USE PROPERTY.—For purposes of this subsection— "(A) for purposes of paragraph (2)(B), there shall not be taken into account any personal use property (within the meaning of section 1275(b)(3)) held by an individual or any installment obligation arising from the sale of such property, and "(B) for purposes of computing the taxpayer's average quarterly indebtedness under paragraph (1)(A), there shall not be taken into account any indebtedness with respect to which substantially all of the property securing such indebtedness is property described in subparagraph (A). "(4) SPECIAL RULE FOR CASUAL SALES.—If the taxpayer has

no

applicable installment obligations described in subclause (I) or (II) of subsection (e)(l)(A)(i) outstanding at any time during the taxable year, then the taxpayer's allocable installment indebtedness for such taxable year shall be computed by using the taxpayer's indebtedness as of the close of such taxable year in lieu of the taxpayer's average quarterly indebtedness. "(c) TREATMENT OF SUBSEQUENT PAYMENTS.— "(1) PAYMENTS TREATED AS RECEIPT OF TAX PAID AMOUNTS.—If

any amount is treated as received under subsection (a) (after application of subsection (d)(2)) with respect to any applicable installment obligation, subsequent payments received on such obligation shall not be taken into account for purposes of sections 453 and 453A to the extent that the aggregate amount of such subsequent payments does not exceed the aggregate amount treated as received on such obligation under subsection (a). "(2) REDUCTION OF ALLOCABLE INSTALLMENT INDEBTEDNESS.—

For purposes of applying subsection (b)(l)(B) for the taxable year in which any payment to which paragraph (1) of this subsection applies was received (and for any subsequent taxable year), the allocable installment indebtedness with respect to the applicable installment obligation shall be reduced (but not below zero) by the amount of such payment not taken into account by reason of paragraph (1). "(d) LIMITATION BASED ON TOTAL CONTRACT PRICE.—

"(1) IN GENERAL.—The amount treated as received under subsection (a) (after application of paragraph (2)) with respect to any applicable installment obligation for any taxable year shall not exceed the excess (if any) of— "(A) the total contract price, over "(B) any portion of the total contract price received under the contract before the close of such taxable year— "(i) including amounts so treated under subsection (a) for all preceding taxable years (after application of paragraph (2)), but "(ii) not including amounts not taken into account by reason of subsection (c). "(2) EXCESS ALLOCABLE INSTALLMENT INDEBTEDNESS.—If, after application of paragraph (1), the allocable installment indebtedness for any taxable year exceeds the amount which may be allocated to applicable installment obligations arising in (and outstanding as of the close of) such taxable year, such excess shall—

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Page:United States Statutes at Large Volume 100 Part 3.djvu/559

 PUBLIC LAW 99-514—OCT. 22, 1986

100 STAT. 2367

"(A) subject to the limitations of paragraph (1), be allocated to applicable installment obligations outstanding as of the close of such taxable year which arose in preceding taxable years, beginning with applicable installment obligations arising in the earliest preceding taxable year, and "(B) be treated as a payment under subsection (a)(2). "(e) DEFINITIONS AND SPECIAL RULES.—For purposes of this section— "(1) APPLICABLE INSTALLMENT OBLIGATION.—

"(A) IN GENERAL.—The term 'applicable installment obligation' means any obligation— "(i) which arises from the disposition— "(I) after February 28, 1986, of personal property under the installment method by a person who regularly sells or otherwise disposes of personal property of the same type on the installment plan, "(II) after February 28, 1986, of real property under the installment method which is held by the taxpayer for sale to customers in the ordinary course of the taxpayer's trade or business, or "(III) after August 16, 1986, of real property under the installment method which is property used in the taxpayer's trade or business or property held for the production of rental income, but only if the sales price of such property exceeds $150,000 (determined after application of the rule under the last sentence of section 1274(c)(3)(A)(ii)), and "(ii) which is held by the seller or a member of the same affiliated group (within the meaning of section 1504(a), but without regard to section 15O40t>)) as the seller. "(B) EXCEPTION FOR PERSONAL USE AND FARM PROPERTY.—

The term 'applicable installment obligation' shall not include any obligation which arises from the disposition— "(i) by an individual of personal use property (within the meaning of section 12750t)X3)), or "(ii) of any property used or produced in the trade or business of farming (within the meaning of section 2032A(e)(4) or (5)). "(2) AGGREGATION RULES.—For purposes of this section, all persons treated as a single employer under section 52 shall be treated as 1 taxpayer. The Secretary shall prescribe regulations for the treatment under this section of transactions between such persons. "(3) AGGREGATION OF OBLIGATIONS.—The Secretary may

by

regulations provide that all (or any portion of) applicable installment obligations of a taxpayer may be treated as 1 obligation. "(4) EXCEPTION FOR SALES OF TIMESHARES AND RESIDENTIAL LOTS.—

"(A) IN GENERAL.—If a taxpayer elects the application of this paragraph, this section shall not apply to any installment obligation which— "(i) arises from a sale in the ordinary course of the taxpayer's trade or business to an individual of—

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Page:United States Statutes at Large Volume 100 Part 3.djvu/560

 100 STAT. 2368

PUBLIC LAW 99-514—OCT. 22, 1986

« i

"(I) a timeshare right to use or a timeshare ownership interest in residential real property for not more than 6 weeks, or a right to use specified campgrounds for recreational purposes, or "(II) any residential lot but only if the taxpayer (or any related person) is not to make any improvements with respect to such lot, and "(ii) which is not guaranteed by any person other than an individual. For purposes of clause (i)(I), a timeshare right to use (or timeshare ownership interest in) property held by the spouse, children, grandchildren, or parents of an individual shall be treated as held by such individual. "(B) INTEREST ON DEFERRED TAX.—If subparagraph (A) applies to any installment obligation, interest shall be paid on the portion of any tax for any taxable year (determined without regard to any deduction allowable for such interest) which is attributable to the receipt of payments on such obligation in such year (other than payments received in the taxable year of the sale). Such interest shall be computed for the period from the date of the sale to the date on which the payment is received using the applicable Federal rate under section 1274 (without regard to subsection (d)(2) or (3) thereof) in effect at the time of the sale, compounded semiannually. "(C) TIME FOR PAYMENT.—Any interest payable under this paragraph with respect to a payment shall be treated as an addition to tax for the taxable year in which the payment is received, except that the amount of such interest shall be taken into account in computing the amount of any deduction allowable to the taxpayer for interest paid or accrued during such taxable year. "(5) REGULATIONS.—The Secretary shall prescribe regulations as may be necessary to carry out the purposes of this section, including regulations— "(A) disallowing the use of the installment method in whole or in part for transactions in which the rules of this section otherwise would be avoided through the use of related parties, pass-through entities, or intermediaries, "(B) providing for the proper treatment of reserves (including consistent treatment with assets held in the reserves), and "(C) providing that subsection (b)(4) shall not apply where necessary to prevent the avoidance of the application of this section." (b) CLERICAL AMENDMENT.—The table of sections for subpart B of part II of subchapter E of chapter 1 is amended by inserting after the item relating to section 453B the following new item: "Sec. 453C. Certain indebtedness treated as payments on installment obligations." (c) EFFECTIVE DATES.—

'

'

(1) IN GENERAL.—Except as otherwise provided in this section, the amendments made by this section shall apply to taxable years ending after December 31, 1986, with respect to dispositions after February 28, 1986.

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Page:United States Statutes at Large Volume 100 Part 3.djvu/561

 PUBLIC LAW 99-514—OCT. 22, 1986

100 STAT. 2369

(2) EXCEPTION FOR CERTAIN SALES OF PROPERTY BY A MANUFACTURER TO A DEALER.—

(A) IN GENERAL.—The amendments made by this section shall not apply to any installment obligation arising from the disposition of tangible personal property by a manufacturer (or any affiliate) to a dealer if— (i) the dealer is obligated to pay on such obligation only when the dealer resells (or rents) the property, (ii) the manufacturer has the right to repurchase the property at a fixed (or siscertainable) price after no later than the 9-month period beginning with the date of the sale, and (iii) such disposition is in a taxable year with respect to which the requirements of subparagraph (B) are met. (B) RECEIVABLES MUST BE AT LEAST 50 PERCENT OF TOTAL

SALES.— (i) IN GENERAL.—The requirements of this subparagraph are met with respect to any taxable year if for such taxable year and the preceding taxable year the aggregate face amount of installment obligations described in subparagraph (A) is at least 50 percent of the total sales to dealers giving rise to such obligations. (ii) TAXPAYER MUST FAIL FOR 2 CONSECUTIVE YEARS.—

A taxpayer shall be treated as failing to meet the requirements of clause (i) only if the taxpayer fails to meet the 50-percent test for both the tsixable year and the preceding taxable year. (C) TRANSITION RULE.—An obligation issued before the date of the enactment of this Act shall be treated as described in subparagraph (A) if, within 60 days after such date, the taxpayer modifies the terms of such obligation to conform to the requirements of subparagraph (A). (D) APPLICATION WITH OTHER OBLIGATIONS.—In applying

section 453C of the Internal Revenue Code of 1986 to any installment obligations to which the amendments made by this section apply, obligations described in subparagraph (A) shall not be treated as applicable installment obligations (within the meaning of section 453C(e)(l) of such Code). (E) OTHER REQUIREMENTS.—This paragraph shall apply only if the taxpayer meets the requirements of subparagraphs (A) and (B) for its first taxable year beginning after the date of the enactment of this Act. (3) EXCEPTION FOR CERTAIN OBLIGATIONS.—In applying the amendments made by this section to any installment obligation of a corporation incorporated on January 13, 1928, the following indebtedness shall not be taken into account in determining the allocable installment indebtedness of such corporation under section 453C of the Internal Revenue Code of 1986 (as added by this section): (A) 12% percent subordinated debentures with a total face amount of $175,000,000 issued pursuant to a trust indenture dated as of September 1, 1985. (B) A revolving credit term loan in the maximum amount of $130,000,000 made pursuant to a revolving credit and security agreement dated as of September 6, 1985, payable

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Page:United States Statutes at Large Volume 100 Part 3.djvu/562

 100 STAT. 2370

PUBLIC LAW 99-514—OCT. 22, 1986 in various stages with final payment due on August 31, 1992. This paragraph shall also apply to indebtedness which replaces indebtedness described in this paragraph if such indebtedness does not exceed the amount and maturity of the indebtedness it replaces. (4) SPECIAL RULE FOR RESIDENTIAL CONDOMINIUM PROJECT.—

For purposes of applying the amendments made by this section, the term applicable installment obligation (within the meaning of section 453C(e)(l) of the Internal Revenue Code of 1986) shall not include any obligation arising in connection with sales from a residential condominium project— (A) for which a contract to purchase land for the project was entered into at least 5 years before the date of the enactment of this Act, (B) with respect to which land for the project was purchased before September 26, 1985, (C) with respect to which building permits for the project were obtained, and construction commenced, before September 26, 1985, (D) in conjunction with which not less than 80 units of low-income housing are deeded to a tax-exempt organization designated by a local government, and (E) with respect to which at legist $1,000,000 of expenses were incurred before September 26, 1985. (D) the portion of the net adjustment taken into account in the 1st taxable year of the taxpayer ending after December 31, 1986, shall not exceed 15 percent of such adjustment, and (E) the remaining portion of such adjustment shall be taken into account ratably in the 2nd, 3rd, and 4th years ending after December 31, 1986. (5) SPECIAL RULE FOR QUALIFIED BUYOUT.—The amendments made by this section shall apply for taxable years ending after December 31, 1991, to a corporation if— (A) such corporation was incorporated on May 25, 1984, for the purpose of acquiring all of the stock of another corporation, (B) such acquisition took place on October 23, 1985, (C) in connection with such acquisition, the corporation incurred indebtedness of approximately $151,000,000, and (D) substantially all of the stock of the corporation is owned directly or indirectly by employees of the corporation the stock of which was acquired on October 23, 1985. (6) SPECIAL RULE FOR SALES OF REAL PROPERTY BY DEALERS.—In

the case of installment obligations arising from the sale of real property in the ordinary course of the trade or business of the taxpayer, any gain attributable to allocable installment indebtedness allocated to any such installment obligations which arise (or are deemed to arise)— (A) in the 1st taxable year of the taxpayer ending after December 31, 1986, shall be taken into account ratably over the 3 taxable years beginning with such 1st taxable year, and (B) in the 2nd taxable year of the taxpayer ending after December 31, 1986, shall be taken into account ratably over the 2 taxable years beginning with such 2nd taxable year.

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Page:United States Statutes at Large Volume 100 Part 3.djvu/563

 PUBLIC LAW 99-514—OCT. 22, 1986 (7)

100 STAT. 2371

SPECIAL RULE FOR SALES OF PERSONAL PROPERTY BY

DEALERS.—In the case of installment obligations arising from the sale of personal property in the ordinary course of the trade or business of the taxpayer, solely for purposes of determining the time for payment of tax and interest payable with respect to such tax— (A) any increase in tax imposed by chapter 1 of the Internal Revenue Code of 1986 for the 1st taxable year of the taxpayer ending after December 31, 1986, by reason of the amendments made by this section shall be treated as imposed ratably over the 3 taxable years beginning with such 1st taxable year, and (B) any increase in tax imposed by such chapter 1 for the 2nd taxable year of the taxpayer ending after December 31, 1986 (determined without regard to subparagraph (A)), by reason of the amendments made by this section shall be treated as imposed ratably over the 2 taxable years beginning with such 2nd taxable year. (8) TREATMENT OF CERTAIN INSTALLMENT OBLIGATIONS.—Not-

withstanding the amendments made by subtitle B of title III, gain with respect to installment payments received pursuant to notes issued in accordance with a note agreement dated as of August 29, 1980, where— (A) such note agreement was executed pursuant to an agreement of purchsise and sale dated April 25, 1980, (B) more than V of the installment payments of the a aggregate principal of such notes have been received by August 29, 1986, and (C) the last installment payment of the principal of such notes is due August 29, 1989, shall be taxed at a rate of 28 percent, SEC. 812. DISALLOWANCE OF USE OF INSTALLMENT METHOD FOR CERTAIN OBLIGATIONS.

(a) IN GENERAL.—Section 453 (relating to installment method) is amended by adding at the end thereof the following new subsection: "(j) CURRENT INCLUSION IN CASE OF REVOLVING CREDIT PLANS,

ETC.—In the case of— "(1) any disposition of personal property under a revolving credit plan, or "(2) any installment obligation arising out of a sale of— "(A) stock or securities which are traded on an established securities market, or "(B) to the extent provided in regulations, property (other than stock or securities) of a kind regularly traded on an established market, subsection (a) and section 453A shall not apply, and, for purposes of this title, all payments to be received shall be treated as received in the year of disposition. The Secretary may provide for the application of this subsection in whole or in part for transactions in which the rules of this subsection otherwise would be avoided through the use of related parties, pass-thru entities, or intermediaries." (b) CONFORMING AMENDMENTS.—

(1) Section 453A(a)(2) (relating to installment method for dealers in personal property) is amended by striking out the last sentence thereof.

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Page:United States Statutes at Large Volume 100 Part 3.djvu/564

 100 STAT. 2372

PUBLIC LAW 99-514—OCT. 22, 1986 (2) Section 453A is amended by adding at the end thereof the following new subsection: "(c) CROSS REFERENCE.— "For disallowance of use of installment method for certain obligations, see section 453(j)." (c) EFFECTIVE DATE.—

(1) IN GENERAL,—Except as provided in paragraph (2), the amendment made by subsection (a) shall apply to taxable years beginning after December 31, 1986. (2) CHANGE IN METHOD OF ACCOUNTING.—In the case of any taxpayer who made sales under a revolving credit plan and was on the installment method under section 453 or 453A of the Internal Revenue Code of 1986 for such taxpayer's last taxable year beginning before January 1, 1987, the amendments made by this section shall be treated as a change in method of accounting for its 1st taxable year beginning after December 31, 1986, and— (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 period for taking into account adjustments under section 481 of such Code by reason of such change shall not ' exceed 4 years.

Subtitle C—Other Provisions SEC. 821. INCOME ATTRIBUTABLE TO UTILITY SERVICES.

(a) IN GENERAL.—Section 451 (relating to general rule for taxable year of inclusion) is amended by adding at the end thereof the following new subsection: "(0 SPECIAL RULE FOR UTILITY SERVICES.—

"(1) IN GENERAL.—In the case of a taxpayer the taxable income of which is computed under an accrual method of accounting, any income attributable to the sale or furnishing of utility services to customers shall be included in gross income not later than the taxable year in which such services are provided to such customers. "(2) DEFINITION AND SPECIAL RULE.—For purposes of this subsection— "(A) UTIUTY SERVICES.—The term 'utility services' includes— "(i) the providing of electrical energy, water, or sewage disposal, "(ii) the furnishing of gas or steam through a local distribution system, "(iii) telephone or other communication services, and "(iv) the transporting of gas or steam by pipeline. "(B) YEAR IN WHICH SERVICES PROVIDED.—The taxable year in which services are treated as provided to customers shall not, in any manner, be determined by reference to— "(i) the period in which the customers' meters are read, or "(ii) the period in which the taxpayer bills (or may bill) the customers for such service.'

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