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

100 STAT. 2237

"(B) any losses to the extent of the excess described in subparagraph (A) shall not be allowed as a deduction for any taxable year. "(3) INSTALLMENT SALE OF ENTIRE INTEREST.—In the case of an installment sale of an entire interest in an activity to which section 453 applies, paragraph (1) shall apply to the portion of such losses for each taxable year which bears the same ratio to all such losses as the gain recognized on such sale during such taxable year bears to the gross profit from such sale realized (or to be realized) when payment is completed. "(h) MATERIAL PARTICIPATION DEFINED.—For purposes of this section— "(1) IN GENERAL.—A taxpayer shall be treated as materially participating in an activity only if the taxpayer is involved in the operations of the activity on a basis which is— "(A) regular, "(B) continuous, and "(C) substantial. "(2) INTERESTS IN LIMITED PARTNERSHIPS.—Except as provided in regulations, no interest in a limited partnership as a limited partner shall be treated as an interest with respect to which a taxpayer materially participates. "(3) TREATMENT OF CERTAIN RETIRED INDIVIDUALS AND SURVIV-

ING SPOUSES.—A taxpayer shall be treated as materially participating in any farming activity for a taxable year if paragraph (4) or (5) of section 2032A(b) would cause the requirements of section 2032A(b)(l)(C)(ii) to be met with respect to real property used in such activity if such taxpayer had died during the taxable year. "(4) CERTAIN CLOSELY HELD CORPORATIONS AND PERSONAL SERVICE CORPORATIONS.—A closely held C corporation or per-

sonal service corporation shall be treated as materially participating in an activity if— "(A) 1 or more shareholders holding stock representing more than 50 percent (by value) of the outstanding stock of such corporation materially participate in such activity, or "(B) in the case of a closely held C corporation (other than a personal service corporation), the requirements of section 465(c)(7)(C) (without regard to clause (iv)) are met with respect to such activity. "(5) PARTICIPATION BY SPOUSE.—In determining whether a taxpayer materially participates, the participation of the spouse of the taxpayer shall be taken into account, "(i) $25,000 OFFSET FOR RENTAL REAL ESTATE ACTIVITIES.—

"(1) IN GENERAL.—In the case of any natural person, subsection (a) shall not apply to that portion of the passive activity loss or the deduction equivalent (within the meaning of subsection (j)(5)) of the passive activity credit for any taxable year which is attributable to all rental real estate activities with respect to which such individual actively participated in the taxable year in which such portion of such loss or credit arose. "(2) DOLLAR LIMITATION.—The aggregate amount to which paragraph (1) applies for any taxable year shall not exceed $25,000. "(3) PHASE-OUT OF EXEMPTION.—

"(A) IN GENERAL.—In the case of any taxpayer, the $25,000 amount under paragraph (2) shall be reduced (but

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 100 STAT. 2238

PUBLIC LAW 99-514—OCT. 22, 1986

'. '*'

- \ not below zero) by 50 percent of the amount by which the r adjusted gross income of the taxpayer for the taxable year exceeds $100,000. "(B) SPECIAL PHASE-OUT OF LOW-INCOME HOUSING AND REHABILITATION CREDITS.—In the case of any portion of the

passive activity credit for any taxable year which is attributable to any credit to which paragraph (6)(B) applies, subparagraph (A) shall be applied by substituting '$200,000' for '$100,000'. "(C) ORDERING RULE TO REFLECT SEPARATE PHASE-OUTS.—If

"'^"- ^

^'^^ ^ '• {

subparagraph (B) applies for any taxable year, paragraph (1) shall be applied— "(i) first to the passive activity loss, "(ii) second to the portion of the passive activity credit to which subparagraph (B) does not apply, and "(iii) then to the portion of such credit to which subparagraph (B) applies. "(D) ADJUSTED GROSS INCOME.—For purposes of this paragraph, adjusted gross income shall be determined without regard to— "(i) any amount includible in gross income under section 86, "(ii) any amount allowable as a deduction under ' section 219, and "(iii) any passive activity loss. >: -, "(4) SPECIAL RULE FOR ESTATES.—

X!' ' '

"(A) IN GENERAL.—In the case of taxable years of an estate ending less than 2 years after the date of the death of the decedent, this subsection shall apply to all rental real estate activities with respect to which such decedent actively participated before his death. "(B) REDUCTION FOR SURVIVING SPOUSE'S EXEMPTION.—For

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^ ^ t^;^ „*^ ''il-^

purposes of subparagraph (A), the $25,000 amount under paragraph (2) shall be reduced by the amount of the exemption under paragraph (1) (without regard to paragraph (3)) allowable to the surviving spouse of the decedent for the taxable year ending with or within the taxable year of the estate. "(5) MARRIED INDIVIDUALS FILING SEPARATELY.—

.\ ., „,,

"(A) IN GENERAL.—Except as provided in subparagraph (B), in the case of any married individual filing a separate return, this subsection shall be applied by substituting— "(i) '$12,500' for '$25,000' each place it appears, "(ii) '$50,000' for '$100,000' in paragraph (3)(A), and "(iii)'$100,000'for'$200,000'in paragraph (3)(B). "(B) TAXPAYERS NOT LIVING APART.—This subsection shall not apply to a taxpayer who— "(i) is a married individual filing a separate return for any taxable year, and "(ii) does not live apart from his spouse at all times during such taxable year. ,.; j i t t m "(6) ACTIVE PARTICIPATION.—

^j|^ ticd?

"(A) IN GENERAL.—An individual shall not be treated as actively participating with respect to any interest in any rental real estate activity for any period if, at any time during such period, such interest (including any interest of

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


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 PUBLIC LAW 99-514—OCT. 22, 1986

lu

100 STAT. 2239

the spouse of the individual) is less than 10 percent (by value) of all interests in such activity. "(B) No PARTICIPATION REQUIREMENT FOR LOW-INCOME HOUSING OR REHABILITATION CREDIT.—Paragraphs (1) and (4)(A) shall be applied without regard to the active participation requirement in the case of— "(i) any credit determined under section 42 for any taxable year, or "(ii) any rehabilitation investment credit (within the meaning of section 48(o)). "(C) INTEREST AS A LIMITED PARTNER.—No interest as a

limited partner in a limited partnership shall be treated as an interest with respect to which the taxpayer actively participates. "(D) PARTICIPATION BY SPOUSE.—In determining whether a taxpayer actively participates, the participation of the spouse of the taxpayer shall be taken into account. "(j) OTHER DEFINITIONS AND SPECIAL RULES.—For purposes of this section— "(1) CLOSELY HELD CORPORATION.—The term 'closely held C corporation' means any C corporation described in section 465(a)(1)(B). "(2) PERSONAL SERVICE CORPORATION.—The term 'personal service corporation' has the meaning given such term by section 269A(b)(l), except that section 269A(b)(2) shall be applied— "(A) by substituting 'any' for 'more than 10 percent', and y' "(B) by substituting'any'for'50 percent or more in value' in section 318(a)(2)(C). A corporation shall not be treated as a personal service corporation unless more than 10 percent of the stock (by value) in such corporation is held by employee-owners (within the meaning of section 269A(b)(2), as modified by the preceding sentence). "(3) REGULAR TAX LIABILITY.—The term 'regular tax liability' has the meaning given such term by section 260t)). "(4) ALLOCATION OF PASSIVE ACTIVITY LOSS AND CREDIT.—The

passive activity loss and the passive activity credit (and the $25,000 amount under subsection (i)) shall be allocated to activities, and within activities, on a pro rata basis in such manner as the Secretary may prescribe. "(5) DEDUCTION EQUIVALENT.—The deduction equivalent of credits from a passive activity for any taxable year is the amount which (if allowed as a deduction) would reduce the regular tax liability for such taxable year by an amount equal to such credits. "(6) SPECIAL RULE FOR GIFTS.—In the case of a disposition of any interest in a passive activity by gift— "(A) the basis of such interest immediately before the transfer shall be increased by the amount of any passive activity losses allocable to such interest, and "(B) such losses shall not be allowable as a deduction for any taxable year. "(7) QUALIFIED RESIDENCE INTEREST.—The passive activity loss of a taxpayer shall be computed without regard to qualified residence interest (within the meaning of section 163(h)(3)). "(8) RENTAL ACTIVITY.—The term 'rental activity' means any activity where payments are principally for the use of tangible property.

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Page:United States Statutes at Large Volume 100 Part 3.djvu/432

 100 STAT. 2240
 * -v

PUBLIC LAW 99-514—OCT. 22, 1986 "(9) ELECTION TO INCREASE BASIS OF PROPERTY BY AMOUNT OF

DISALLOWED CREDIT.—For purposes of determining gain or loss from a disposition of any property to which subsection (g)(1) applies, the transferor may elect to increase the basis of such property immediately before the transfer by an amount equal to the portion of any unused credit allowable under this chapter which reduced the basis of such property for the taxable year in which such credit arose. If the taxpayer elects the application of this paragraph, such portion of the passive activity credit of such taxpayer shall not be allowed for any taxable year, "(k) REGULATIONS.—The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out provisions of this section, including regulations— "(1) which specify what constitutes an activity, material participation, or active participation for purposes of this section, "(2) which provide that certain items of gross income will not be taken into account in determining income or loss from any activity (and the treatment of expenses allocable to such income), "(3) requiring net income or gain from a limited partnership or other passive activity to be treated as not from a passive activity, "(4) which provide for the determination of the allocation of interest expense for purposes of this section, and "(5) which deal with changes in marital status and changes between joint returns and separate returns. "(1) PHASE-IN OF DISALLOWANCE OF LOSSES AND CREDITS FOR INTERESTS HELD BEFORE DATE OF ENACTMENT.—

"(1) IN GENERAL.—In the case of any passive activity loss or credit for any taxable year beginning in calendar years 1987 through 1990 which— "(A) is attributable to a pre-enactment interest, but \"(B) is not attributable to a carryforward to such taxable year of any loss or credit which was disallowed under this section for a preceding taxable year, there shall be disallowed under subsection (a) only the applicable percentage of the amount which (but for this subsection) would have been disallowed under subsection (a) for such taxable year. "(2) APPLICABLE PERCENTAGE.—For purposes of this subsection, the applicable percentage shall be determined in accordance with the following table: '^^ i

"In the case of taxable years beginning in:

1987 \\m 1989 1990

The applicable percentage is:

35 60 80 90.

"(3) PORTION OF LOSS OR CREDIT ATTRIBUTABLE TO PRE-ENACTMENT INTERESTS.—For purposes of this subsection—

f,,

"(A) IN GENERAL.—The portion of the passive activity loss for any taxable year which is attributable to pre-enactment interests shall be equal to the lesser of— "(i) the passive activity loss for such taxable year, or "(ii) the passive activity loss for such taxable year determined by taking into account only pre-enactment interests.

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 PUBLIC LAW 99-514—OCT. 22, 1986

100 STAT. 2241

For purposes of this subparagraph, the deduction equivalent (within the meaning of subsection (j)(5)) of a passive activity credit shall be taken into account. "(B) PRE-ENACTMENT INTEREST.—

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"(i) IN GENERAL.—The term 'pre-enactment interest' means any interest in a passive activity held by a taxpayer on the date of the enactment of the Tax Reform Act of 1986, and at all times thereafter. "(ii) BINDING CONTRACT EXCEPTION.—For purposes of

'^

clause (i), any interest acquired after such date of enactment pursuant to a written binding contract in effect on such date, and at all times thereafter, shall be treated as held on such date. "(iii) INTEREST IN ACTIVITIES.—The term 'pre-enactment interest' shall not include an interest in a passive activity unless such activity was being conducted on such date of enactment. The preceding sentence shall not apply to an activity commencing after such date if— "(I) the property used in such activity is acquired pursuant to a written binding contract in effect on % August 16, 1986, and at all times thereafter, or "(II) construction of property used in such activity began on or before August 16, 1986." (b) CONFORMING AMENDMENT.—The table of sections for subpart C of part II of subchapter E of chapter 1 is amended by adding at the end thereof the following new item: "Sec. 469. Passive activity losses and credits limited." (c) EFFECTIVE DATE.—

(1) IN GENERAL.—The amendments made by this section shall apply to taxable years beginning after December 31, 1986. (2) SPECIAL RULE FOR CARRYOVERS.—The amendments made by this section shall not apply to any loss, deduction, or credit carried to a taxable year beginning after December 31, 1986, from a taxable year beginning before January 1, 1987. (3) SPECIAL RULE FOR LOW-INCOME HOUSING.—

t t.

(A) IN GENERAL.—Except as provided in subparagraph (B), section 469(i)(6)(B)(i) of the Internal Revenue Code of 1986 (as added by this section) shall not apply to any property placed in service after December 31, 1989. (B) EXCEPTION WHERE AT LEAST lO PERCENT OF COSTS IN-

i

CURRED.—In the case of property placed in service after December 31, 1989, and before January 1, 1991, section 469(i)(6)(B)(i) of such Code shall apply to such property if at least 10 percent of the costs of such property were incurred before January 1, 1989.

SEC. 502. TRANSITIONAL RULE FOR LOW-INCOME HOUSING.

(a) GENERAL RULE.—Any loss sustained by a qualified investor with respect to an interest in a qualified low-income housing project for any taxable year in the relief period shall not be treated as a loss from a psissive activity for purposes of section 469 of the Internal Revenue Code of 1986. (b) R E U E F PERIOD.—For purposes of subsection (a), the term "relief period" means the period beginning with the taxable year in which the investor made his initial investment in the qualified low-income

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 100 STAT. 2242

PUBLIC LAW 99-514—OCT. 22, 1986

housing project and ending with whichever of the following is the earliest— (1) the 6th taxable year after the taxable year in which the investor made his initial investment, (2) the 1st taxable year after the taxable year in which the investor is obligated to make his last investment, or (3) the taxable year preceding the 1st taxable year for which such project ceased to be a qualified low-income housing project. (c) QUALIFIED LOW-INCOME HOUSING PROJECT.—For purposes of this section, the term "qualified low-income housing project" means any project if— (1) such project meets the requirements of clause (i), (ii), (iii), or (iv) of section 1250(a)(1)(B) as of the date placed in service and which a passive loss may be allowable with respect to such project, (2) the operator certifies to the Secretary of the Treasury or his delegate that such project met the requirements of paras', graph (1) on the date of the enactment of this Act (or, if later, when placed in service) and annually thereafter, (3) such project is constructed or acquired pursuant to a binding written contract entered into on or before August 16, (4) such project is placed in service before January 1, 1989. (d) QUALIFIED INVESTOR.—For purposes of this section— ' (1) IN GENERAL.—The term "qualified investor" means any natural person who holds (directly or through 1 or more entities) an interest in a qualified low-income housing project— (A) i f iif.iiH;t (i) in the case of a project placed in service before August 16, 1986, such person held an interest in such project on August 16, 1986, and the taxpayer made his .f> initial investment after December 31, 1983, or ,dS^I.i (ii) in the case of a project not described in subparagraph (A), such investor held an interest in such project on December 31, 1986, and (B) if such investor is required to make payments after December 31, 1986, of 50 percent or more of the total t original obligated investment for such interest. For purposes of subparagraph (A), a person shall be treated as holding an interest on August 16, 1986, or December 31, 1986, if on such date such person had a binding contract to acquire such interest. (2) TREATMENT OF ESTATES.—The estate of a decedent shall a-^' succeed to the treatment under this section of the decedent but only with respect to the 1st 2 taxable years of such estate ending after the date of the decedent's death, (d) SPECIAL RULES.— (1) WHERE MORE THAN
 * '^' for each taxable year thereafter which begins after 1986 and for
 * ^ 1986, and

^

i BUILDING IN PROJECT.—If there is more than 1 building in any project, the determination of when such project is placed in service shall be based on when the 1st building in such project is placed in service. (2) ONLY CASH AND OTHER PROPERTY TAKEN INTO ACCOUNT.—In

determining the amount any person invests in (or is obligated to invest in) any interest, only cash and other property shall be taken into account.

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100 STAT. 2243

(3) COORDINATION WITH CREDIT.—No low-income housing credit shall be determined under section 42 of the Internal Revenue Code of 1986 with respect to any project with respect to which any person has been allowed any benefit under this section. SEC. 503. EXTENSION OF AT RISK LIMITATIONS TO REAL PROPERTY.

(a) IN GENERAL.—Paragraph (3) of section 465(c) (relating to activities to which section applies) is amended by striking out subparagraph (D) and by redesignating subparagraph (E) as subparagraph (D). (b) QUALIFIED NONRECOURSE FINANCING TREATED AS AN AMOUNT

AT RISK.—Section 465(b) (relating to amounts considered at risk) is amended by adding at the end thereof the following new paragraph: "(6) QUALIFIED NONRECOURSE FINANCING TREATED AS AMOUNT

AT RISK.—For purposes of this section— "(A) IN GENERAL.—Notwithstanding any other provision of this subsection, in the case of an activity of holding real ^ property, a taxpayer shall be considered at risk with I respect to the taxpayer's share of any qualified nonrecourse financing which is secured by real property used in such ,, activity. "'' "(B) QUALIFIED NONRECOURSE FINANCING.—For purposes of this paragraph, the term 'qualified nonrecourse financing' means any financing— "(i) which is borrowed by the taxpayer with respect to the activity of holding real property, "(ii) which is borrowed by the taxpayer from a qualified person or represents a loan from any Federal, State, or local government or instrumentality thereof, or is guaranteed by any Federal, State, or local government, "(iii) except to the extent provided in regulations, with respect to which no person is personally liable for repayment, and "(iv) which is not convertible debt. "(C) SPECIAL RULE FOR PARTNERSHIPS.—In the case of a ,, partnership, a partner's share of any qualified nonrecourse financing of such partnership shall be determined on the basis of the partner's share of liabilities of such partnership incurred in connection with such financing (within the meaning of section 752). ^ "(D) QUALIFIED PERSON DEFINED.—For purposes of this [^ paragraph— rl "(i) IN GENERAL.—The term 'qualified person'has the meaning given such term by section 46(c)(8)(D)(iv). "

'

lly r, '" ,;.

"(ii) CERTAIN COMMERCIALLY REASONABLE FINANCING FROM RELATED PERSONS.—For purposes of clause (i),

section 46(c)(8)(D)(iv) shall be applied without regard to subclause (I) thereof (relating to financing from related persons) if the financing from the related person is commercially reasonable and on substantially the same terms as loans involving unrelated persons. "(E) ACTIVITY OF HOLDING REAL PROPERTY.—For purposes

,

,

of this paragraph— "(i) INCIDENTAL PERSONAL PROPERTY AND SERVICES.—

The activity of holding real property includes the hold-

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 100 STAT. 2244

PUBLIC LAW 99-514—OCT. 22, 1986 ing of personal property and the providing of services which are incidental to making real property available as living accommodations. "(ii) MINERAL PROPERTY.—The activity of holding real property shall not include the holding of mineral property."

"

(c) EFFECTIVE DATES.—

(1) IN GENERAL.—Except as provided in this subsection, the amendments made by this section shall apply to losses incurred after December 31, 1986, with respect to property placed in service by the taxpayer after December 31, 1986. (2) SPECIAL RULE FOR LOSSES OF S CORPORATION, PARTNERSHIP,

' ^'

J

OR PASS-THRU ENTITY.—In the case of an interest in an S corporation, a partnership, or other pass-thru entity acquired after December 31, 1986, the amendments made by this section shall apply to losses after December 31, 1986, which are attributable to property placed in service by the S corporation, partnership, or pass-thru entity on, before, or after January 1, 1986. (3) SPECIAL RULE FOR ATHLETIC STADIUM.—The amendments made by this section shall not apply to any losses incurred by a taxpayer with respect to the holding of a multi-use athletic stadium in Pittsburgh, Pennsylvania, which the taxpayer acquired in a sale for which a letter of understanding was entered into before April 16, 1986.

,;

Subtitle B—Interest Expense

SEC. 511. LIMITATIONS ON DEDUCTION FOR NONBUSINESS INTEREST.

(a) LIMITATION ON INVESTMENT INTEREST.—Subsection (d) of section 163 (relating to limitation on interest on investment indebtedness) is amended to read as follows: "(d) LIMITATION ON INVESTMENT INTEREST.—

"(1) IN GENERAL.—In the case of a taxpayer other than a •• * corporation, the amount allowed as a deduction under this chapter for investment interest for any taxable year shall not exceed the net investment income of the taxpayer for the taxable year. "(2) CARRYFORWARD OF DISALLOWED INTEREST.—The amount

not allowed as a deduction for any taxable year by reason of paragraph (1) shall be treated as investment interest paid or accrued by the taxpayer in the succeeding taxable year. "(3) INVESTMENT INTEREST.—For purposes of this subsection— mm "(A) IN GENERAL.—The term 'investment interest' means any interest allowable as a deduction under this chapter Bit? (determined without regard to paragraph (1)) which is paid or accrued on indebtedness incurred or continued to purchase or carry property held for investment. "(B) EXCEPTIONS.—The term 'investment interest' shall not include— "(i) any qualified residence interest (as defined in subsection (h)(3)), or "(ii) any interest which is taken into account under section 469 in computing income or loss from a passive '*-'0t|: < activity of the taxpayer. "(C) PERSONAL PROPERTY USED IN SHORT SALE.—For

- '-'^

pur-

poses of this paragraph, the term 'interest' includes any

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 PUBLIC LAW 99-514—OCT. 22, 1986

100 STAT. 2245

amount allowable as a deduction in connection with personal property used in a short sale. "(4) NET INVESTMENT INCOME.—For purposes of this subsection— "(A) IN GENERAL.—The term 'net investment income' means the excess of— "(i) investment income, over "(ii) investment expenses. "(B) INVESTMENT INCOME.—The term 'investment income' means the sum of— "(i) gross income (other than gain described in clause (ii)) from property held for investment, and "(ii) any net gain attributable to the disposition of property held for investment, but only to the extent such amounts are not derived from the conduct of a trade or business. "(C) INVESTMENT EXPENSES.—The term 'investment expenses' means the deductions allowed under this chapter (other than for interest) which are directly connected with the production of investment income. "(D) INCOME AND EXPENSES FROM PASSIVE ACTIVITIES.—

Investment income and investment expenses shall not include any income or expenses taken into account under section 469 in computing income or loss from a passive activity. "(E) REDUCTION IN INVESTMENT INCOME DURING PHASE-IN OF PASSIVE LOSS RULES.—Investment income of the taxpayer

for any taxable year shall be reduced by the amount of the passive activity loss to which section 469(a) does not apply for such taxable year by reason of section 469(1). The preceding sentence shall not apply to any portion of such passive activity loss which is attributable to a rental real estate activity with respect to which the taxpayer actively participates (within the meaning of section 469(i)(6)) during such taxable year. "(5) PROPERTY HELD FOR INVESTMENT.—For purposes of this subsection— "(A) IN GENERAL.—The term 'property held for investment' shall include— "(i) any property which produces income of a type described in section 469(e)(l), and "(ii) any interest held by a taxpayer in an activity involving the conduct of a trade or business— "(I) which is not a passive activity, and "(II) with respect to which the taxpayer does not materially participate. "(B) INVESTMENT EXPENSES.—In the case of property described in subparagraph (A)(i), expenses shall be allocated to such property in the same manner as under section 469. "(C) TERMS.—For purposes of this paragraph, the terms 'activity', 'passive activity', and 'materially participate' have the meanings given such terms by section 469. "(6) PHASE-IN OF DISALLOWANCE.—In the case of any taxable year beginning in calendar years 1987 through 1990— "(A) IN GENERAL.—The amount of interest disallowed under this subsection for any such taxable year shall be equal to the sum of—

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Page:United States Statutes at Large Volume 100 Part 3.djvu/438

 100 STAT. 2246

PUBLIC LAW 99-514—OCT. 22, 1986

"(i) the applicable percentage of the amount which „,^^. ^ (without regard to this paragraph) is not allowed as a deduction under this subsection for the taxable year to ^^.,,;, _ the extent such amount does not exceed the ceiling ^ amount, "(ii) the amount which (without regard to this paragraph) is not allowed as a deduction under this subsec-,. _, tion in excess of the ceiling amount, plus "(iii) the amount of any carryforward to such taxable, §{'•'• ^^^^ under paragraph (2) with respect to which a deduction was disallowed under this subsection for a '|.^.. preceding taxable year. For purposes of this subparagraph, the amount under f., clause (i) or (ii) shall be computed without regard to the amount described in clause (iii). "(B) APPLICABLE PERCENTAGE.—For purposes of this paragraph, the applicable percentage shall be determined in ,. accordance with the following table:

- .1' i -•-H^ah^

"In the case of taxable years beginning in: 1987 1988 1989 1990

The applicable percentage is: 35 60 80 90.

"(C) CEILING AMOUNT.—For purposes of this paragraph, ^, n..^... ^j^^ term 'ceiling amount' means— "(i) $10,000 in the case of a taxpayer not described in clause (ii) or (iii), "(ii) $5,000 in the case of a married individual filing a separate return, and "(iii) zero in the case of a trust." (b)

DISALLOWANCE OF DEDUCTION FOR PERSONAL INTEREST OF

INDIVIDUALS.—Section 163 (relating to deduction for interest) is amended by redesignating subsection (h) as subsection (i) and by inserting after subsection (g) the following new subsection: "(h) DISALLOWANCE OF DEDUCTION FOR PERSONAL INTEREST.—

"(1) IN GENERAL.—In the case of a taxpayer other than a corporation, no deduction shall be allowed under this chapter for personal interest paid or accrued during the taxable year. ' f V "(2) PERSONAL INTEREST.—For purposes of this subsection, the ^^ term 'personal interest' means any interest allowable as a V- ^' deduction under this chapter other than— "(A) interest paid or accrued on indebtedness incurred or continued in connection with the conduct of a trade or .0n f business (other than the trade or business of performing services as an employee),, -' "(B) any investment interest (within the meaning of subsection (d)), "(C) any interest which is taken into account under section 469 in computing income or loss from a passive activity of the taxpayer, "(D) any qualified residence interest (within the meaning '"' of paragraph (3)), and "(E) any interest payable under section 6601 on any -"' "* unpaid portion of the tax imposed by section 2001 for the period during which an extension of time for payment of such tax is in effect under section 6163 or 6166.

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100 STAT. 2247

"(3) QUALIFIED RESIDENCE INTEREST.—For purposes of this subsection— "(A) IN GENERAL.—The term 'quahfied residence interest' means interest which is paid or accrued during the taxable year on indebtedness which is secured by any property > n which (at the time such interest is paid or accrued) is a qualified residence of the taxpayer. "(B) LIMITATION ON AMOUNT OF INTEREST.—The term 'qualified residence interest' shall not include any interest •ompaid or accrued on indebtedness secured by any qualified residence which is allocable to that portion of the principal "i? amount of such indebtedness which, when added to the outstanding aggregate principal amount of all other indebt^r.ir edness previously incurred and secured by such qualified residence, exceeds the lesser of— "(i) the fair market value of such qualified residence, or "(ii) the sum of— "(I) the taxpayer's basis in such qualified residence (adjusted only by the cost of any improve• -• ments to such residence), plus ''.'•• "(II) the aggregate amount of qualified indebtedness of the taxpayer with respect to such qualified residence. "(C) COST NOT LESS THAN BALANCE OF INDEBTEDNESS INCURRED ON OR BEFORE AUGUST 16, 1936.—The amount under

•^'ii

subparagraph (B)(iiXI) at any time after August 16, 1986, shall not be less than the outstanding aggregate principal amount (as of such time) of indebtedness which was incurred on or before August 16, 1986, and which was secured by the qualified residence on August 16, 1986. "(D)

TIME FOR DETERMINATION.—Except as provided in

regulations, any determination under subparagraph (B) shall be made as of the time the indebtedness is incurred. "(4) QUALIFIED INDEBTEDNESS.—For purposes of this subsection— "(A) IN GENERAL.—The term 'qualified indebtedness' means indebtedness secured by a qualified residence of the taxpayer which is incurred after August 16, 1986, to pay for— "(i) qualified medical expenses, or "(ii) qualified educational expenses, which are paid or incurred within a reasonable period of time before or after such indebtedness is incurred. "(B) QUALIFIED MEDICAL EXPENSES.—For purposes of this paragraph, the term 'qualified medical expenses' means amounts, not compensated for by insurance or otherwise, incurred for medical care (within the meaning of subparagraphs (A) and (B) of section 213(d)(1)) for the taxpayer, his spouse, or a dependent. "(C) QUALIFIED EDUCATIONAL EXPENSES.—For purposes of this paragraph— "(i) IN GENERAL.—The term 'qualified educational expenses' means qualified tuition and related expenses of the taxpayer, his spouse, or a dependent for attended fi;?'. ance at an educational institution described in section 170(b)(l)(A)(ii).

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 100 STAT. 2248

PUBLIC LAW 99-514—OCT. 22, 1986 "(ii) Q U A L I F I E D TUITION AND RELATED EXPENSES.—The

term 'qualified tuition and related expenses' has the meaning given such term by section 117(b), except that such term shall include any reasonable living expenses while away from home. "(D) DEPENDENT.—For purposes of this paragraph, the term 'dependent' has the meaning given such term by section 152. "(5) OTHER DEFINITIONS AND SPECIAL RULES.— "(A) QUALIFIED RESIDENCE.—For purposes

of this subsec-

tion—

K

"(i) IN GENERAL.—The term 'qualified residence' means— "(I) the principal residence (within the meaning of section 1034) of the taxpayer, and "(II) 1 other residence of the taxpayer which is selected by the taxpayer for purposes of this subsection for the taxable year and which is used by the taxpayer as a residence (within the meaning of section 280A(d)(l)). "(ii)

,., ^.. I' '.

MARRIED

INDIVIDUALS FILING

SEPARATE RE-

TURNS.—If a married couple does not file a joint return for the taxable year— "(I) such couple shall be treated as 1 taxpayer for purposes of clause (i), and "(II) each individual shall be entitled to take into account 1 residence unless both individuals consent in writing to 1 individual taking into account the principal residence and 1 other residence, "(iii) RESIDENCE NOT USED OR RENTED.—For purposes of clause (i)(II), notwithstanding section 280A(d)(l), if the taxpayer does not rent or use a dwelling unit at any time during a taxable year, such unit may be treated as a residence for such taxable year. "(B)

SPECIAL RULE FOR COOPERATIVE HOUSING CORPORA-

TIONS.—For purposes of this paragraph, any indebtedness .,„ secured by stock held by the taxpayer as a tenant-stockholder (as defined in section 216) in a cooperative housing corporation (as so defined) shall be treated as secured by the house or apartment which the taxpayer is entitled to occupy as such a tenant-stockholder. If stock described in the preceding sentence may not be used to secure indebted,, I ness, indebtedness shall be treated as so secured if the taxpayer establishes to the satisfaction of the Secretary that such indebtedness was incurred to acquire such stock. "(6) PHASE-IN OF LIMITATION.—In the case of any taxable year beginning in calendar years 1987 through 1990, the amount of interest with respect to which a deduction is disallowed under this subsection shall be equal to the applicable percentage (within the meaning of subsection (d)(6)(B)) of the amount which (but for this subsection) would have been so disallowed." (d) TECHNICAL AMENDMENTS.—

(1) Clause (i) of section 7872(d)(l)(E) is amended by striking out "section 163(d)(3)" and inserting in lieu thereof "section 163(d)(4)". (2)(A) Sections 467(c)(5) and 1255(b)(2) are each amended by striking out "section 163(d),".

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100 STAT. 2249

(B) Section 703(b) is amended by striking out paragraph (3) and by redesignating paragraphs (4) and (5) as paragraphs (3) and (4), respectively. (C) Section 1363(c)(2) is amended by striking out subparagraph (A) and by redesignating subparagraphs (B) and (C) as subparagraphs (A) and (B), respectively. (e) EFFECTIVE DATE.—The amendments made by this section shall apply to taxable years beginning after December 31, 1986.

TITLE VI—CORPORATE PROVISIONS Subtitle A—Corporate Rate Reductions SEC. 601. CORPORATE RATE REDUCTIONS.

(a) GENERAL RULE.—Subsection (b) of section 11 is amended to read as follows: "(b) AMOUNT OF TAX.—The amount of the tax imposed by subsection (a) shall be the sum of^ "(1) 15 percent of so much of the taxable income as does not exceed $50,000, "(2) 25 percent of so much of the taxable income as exceeds $50,000 but does not exceed $75,000, and "(3) 34 percent of so much of the taxable income as exceeds $75,000. In the case of a corporation which has taxable income in excess of $100,000 for any taxable year, the amount of tax determined under the preceding sentence for such taxable year shall be increased by the lesser of (A) 5 percent of such excess, or (B) $11,750." (b) EFFECTIVE DATE.—

(1) IN GENERAL.—The amendment made by subsection (a) shall apply to taxable years beginning on or after July 1, 1987. (2) CROSS REFERENCE.— For treatment of taxable years which include July 1, 1987. see section 15 of the Internal Revenue Code of 1986.

Subtitle B—Treatment of Stock and Stock Dividends SEC. 611. REDUCTION IN DIVIDENDS RECEIVED DEDUCTION.

(a) GENERAL RULE.—The following provisions are each amended by striking out "85 percent" and inserting in lieu thereof "80 percent": (1) Section 243(a)(1) (relating to dividends received by corporations). (2) Sections 244(a)(3) and (bK2) (relating to dividends received on certain preferred stock). (3) Section 2460))(1) (relating to limitation on aggregate amount of deductions). (4) Section 246A(a)(l) (relating to dividends received deduction reduced where portfolio stock is debt financed). (5) Subparagraph (B) of section 805(a)(4) (relating to dividends received by insurance company). (b) EFFECTIVE DATES.—

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Page:United States Statutes at Large Volume 100 Part 3.djvu/442

 100 STAT. 2250 f.

PUBLIC LAW 99-514—OCT. 22, 1986 (1) IN GENERAL.—The amendments made by subsection (a) shall apply to dividends received or accrued after December 31, 1986, in taxable years ending after such date. (2) AMENDMENT RELATING TO LIMITATION ON DEDUCTIONS.—

The amendment made by subsection (a) to section 246(b) of the Internal Revenue Code of 1986 shall apply to taxable years beginning after December 31, 1986. SEC. 612. REPEAL OF PARTIAL EXCLUSION OF DIVIDENDS RECEIVED BY INDIVIDUALS. (a) GENERAL RULE.—Section 116 (relating to partial exclusion of

dividends received by individuals) is hereby repealed. (b) TECHNICAL AMENDMENTS.—

(1) Subsection (g) of section 301 is amended by striking out paragraph (4). (2)(A) Subsection (c) of section 584 is amended to read as follows: "(c) INCOME OF PARTICIPANTS IN FUND.—Each participant in the common trust fund in computing its taxable income shall include, whether or not distributed and whether or not distributable— "(1) as part of its gains and losses from sales or exchanges of capital assets held for not more than 6 months, its proportionate share of the gains and losses of the common trust fund from sales or exchanges of capital assets held for not more than 6 months, "(2) as part of its gains and losses from sales or exchanges of capital assets held for more than 6 months, its proportionate share of the gains and losses of the common trust fund from sales or exchanges of capital assets held for more than 6 months, and "(3) its proportionate share of the ordinary taxable income or the ordinary net loss of the common trust fund, computed as provided in subsection (d)." (B) If the amendments made by section 1001 of the Tax Reform Act of 1984 cease to apply, effective with respect to property to which such amendments do not apply, subsection (c) of section 584 is amended by striking out "6 months" each place it appears and inserting in lieu thereof "1 year". (3) Section 642 is amended by striking out subsection (j). (4) Paragraph (7) of section 643(a) is hereby repealed. (5) Paragraph (5) of section 702(a) is amended to read as follows: "(5) dividends with respect to which there is a deduction under part VIII of subchapter B,". (6) Section 854 is amended— (A) by striking out "section 116 (relating to a n exclusion %m0 fQj. dividends received by individuals), and " in subsection ,, (a), ^"^ (B) in subsection (b)— (i) by striking o u t subparagraph (B) of paragraph (1) srSisTj^t ^^^ redesignating subparagraph (C) a s subparagraph "'" ' j^ G-. t-i*,»

(ii) by striking o u t "or (B)" in subparagraph (B) (as so redesignated), (iii) by striking out " the exclusion under section 116 and " in paragraph (2), and

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100 STAT. 2251

(iv) by amending subparagraph (B) of paragraph (3) to read as follows: "(B)(i) The term 'aggregate dividends received' includes only dividends received from domestic corporations. "(ii) For purposes of clause (i), the term 'dividend' shall not include any distribution from— "(I) a corporation which, for the taxable year of the • '.. • corporation in which the distribution is made, or for k the next preceding taxable year of the corporation, is a corporation exempt from tax under section 501 (relat' ing to certain charitable, etc., organizations) or section 521 (relating to farmers' cooperative associations), or "(II) a real estate investment trust which, for the taxable year of the trust in which the dividend is paid, qualifies under part II of subchapter M (section 856 and .; following). ' "(iii) In determining the amount of any dividend for purposes of this subparagraph, a dividend received from a regulated investment company shall be subject to the limitations prescribed in this section." ^ (7) Subsection (c) of section 857 is amended by striking out "section 116 (relating to an exclusion for dividends received by ^ individuals), and". (8) The taljle of sections for part III of subchapter B of chapter 1 is amended by striking out the item relating to section 116. (c) EFFECTIVE DATE.—The amendments made by this section shall apply to taxable years beginning after December 31, 1986. SEC. 613. NONDEDIICTIBILITY OF STOCK REDEMPTION EXPENSES.

(a) IN GENERAL.—Section 162 (relating to trade or business expenses) is amended by redesignating subsection (1) as subsection (m) and inserting after subsection (k) the following new subsection:

\

"(1) STOCK REDEMPTION EXPENSES.—

"(1) IN GENERAL.—Except as provided in paragraph (2), no deduction otherwise allowable shall be allowed under this chapter for any amount paid or incurred by a corporation in connection with the redemption of its stock. "(2) EXCEPTIONS.—Paragraph (1) shall not apply to— "(A) CERTAIN SPECII-'IC DEDUCTIONS.—Any—

"(i) deduction allowable under section 163 (relating to interest), or "(ii) deduction for dividends paid (within the meaning of section 561).

i

"(B)

STOCK OF CERTAIN REGULATED INVESTMENT COMPA-

^^'*

NiES.—Any amount paid or incurred in connection with the redemption of any stock in a regulated investment company which issues only stock which is redeemable upon the demand of the shareholder." (b) EFFECTIVE DATE.—The amendments made by subsection (a) shall apply to any amount paid or incurred after February 28, 1986, in taxable years ending after such date. SEC. 614. REDUCTION IN STOCK BASIS FOR NONTAXED PORTION OF

/

E X T R A O R D I N A R Y DIVIDENDS. /

(a) 2-YEAR HOLDING REQUIREMENT.—

•

•

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Page:United States Statutes at Large Volume 100 Part 3.djvu/444

 100 STAT. 2252

PUBLIC LAW 99-514—OCT. 22, 1986

^"

(1) IN' GENERAL.—Section 1059(a) (relating to corporate shareholder's basis in stock reduced by nontaxed portion of extraordinary dividends) is amended to read as follows: "(a) GENERAL RULE.—If any corporation receives any extraordinary dividend with respect to any share of stock and such corporation has not held such stock for more than 2 years before the dividend announcement date— "(1) REDUCTION IN BASIS.—The basis of such corporation in such stock shall be reduced (but not below zero) by the nontaxed portion of such dividends. "(2) RECOGNinoN UPON SALE OR DISPOSITION IN CERTAIN CASES.—In additivon to any gain recognized under this chapter, there shall be treated as gain from the sale or exchange of any stock for the taxable year in which the sale or disposition of such stock occurs Q.n amount equal to the aggregate nontaxed portions of any extraordinary dividends with respect to such stock which did not reduce the basis of such stock by reason of the limitation on reducing basis below zero." (2) DIVIDEND ANNOUNCEMENT DATE.—Section 1059(d) (relating to special rules) is amended by adding at the end thereof the following new paragraph: "(6) DIVIDEND ANNOUNCEMENT DATE.—The term 'dividend announcement date' means, with respect to any dividend, the date on which the corporation declares, announces, or agrees to the payment of such dividand, whichever is the earliest." (3) CONFORMING AMENDMENT.—Section 1059(d)(3) (relating to determination of holding period) is amended by striking out "1 year" and inserting in lieu thereof "2 years". Qo) EXTRAORDINARY DIVIDEND M A Y B E DETERMINED BY REFERENCE

TO FAIR MARKET VALUE.—Section 1059(c) (defining extraordinary

dividend) is amended by adding a t the end thereof the following new paragraph: "(4) FAIR MARKET VALUE DETERMINATION.—If the

taxpayer

establishes to the satisfaction of the Secretary the fair market value of any share of stock as of the day before the ex-dividend date, the taxpayer may elect to apply paragraphs (1) and (3) by substituting such value for the taxpayer's adjusted basis." (c) TIME FOR REDUCTION IN BASIS.—

(1) IN GENERAL.—Paragraph (1) of section 1059(d) (relating to time for reduction) is amended to read as follows: "(1) TIME FOR REDUCTION.—

ji J', ^

"(A) IN GENERAL.—Except as provided in subparagraph (B), any reduction in basis under subsection (a)(1) shall occur immediately before any sale or disposition of the stock. "(B) SPECIAL RULE FOR COMPUTING EXTRAORDINARY DIVI-

•^

DEND.—In determining a taxpayer's adjusted basis for purposes of subsection (c)(D, any reduction in basis under subsection (a)(1) by reason of a prior distribution which was an extraordinary dividend shall be treated as occurring at the beginning of the ex-dividend date for such distribution." (2) CONFORMING AMENDMENT.—Section 1059(c)(l) is amended by striking out "(determined without regard to this section)".

(d) No EXTRAORDINARY DIVIDEND WHERE STOCK HELD DURING ENTIRE EXISTENCE OF CORPORATION.—Section 1059(d) (relating to

special rules) is amended by adding at the end thereof the following new paragraph:

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 PUBLIC LAW 99-514—OCT. 22, 1986

100 STAT. 2253

"(7) EXCEPTION WHERE STOCK HELD DURING ENTIRE EXISTENCE

OF CORPORATION.—Subsection (a) shall not apply to any extraordinary dividend with respect to any share of stock of a corporation if— "(A) such stock was held by the taxpayer during the entire period such corporation (and any precedessor corporation) was in existence, ii! "(B) except as provided in regulations, the only earnings and profits of such corporation were earnings and profits •' i accumulated by such corporation (or any predecessor corporation) during such period, and "(C) the application of this paragraph to such dividend is not inconsistent with the purposes of this section." (e) CERTAIN LIQUIDATIONS AND REDEMPTIONS TREATED As EXTRAORDINARY DIVIDENDS; QUALIFYING DIVIDENDS NOT TREATED AS EXTRAORDINARY DIVIDENDS; SPECIAL RULE FOR PREFERRED DIVI-

DENDS.—Section 1059 (relating to extraordinary dividends) is amended by redesignating subsection (e) as subsection (f) and by adding after subsection (d) the following new subsection: "(e) SPECIAL RULES FOR CERTAIN DISTRIBUTIONS.— "(1) TREATMENT OF PARTIAL LIQUIDATIONS AND NON-PRO RATA

REDEMPTIONS.—Except as otherwise provided in regulations, in the case of any redemption of stock which is— "(A) part of a partial liquidation (within the meaning of section 302(e)) of the redeeming corporation, or "(B) not pro rata as to all shareholders, any amount treated as a dividend under section 301 with respect to such redemption shall be treated as an extraordinary dividend for purposes of this section (without regard to the holding period of the stock). "(2) QUALIFYING DIVIDENDS.—Except as provided in regulations, the term 'extraordinary dividend' shall not include any qualifying dividend (within the meaning of section 243(b)(l)).

f

"(3) QUALIFIED PREFERRED DIVIDENDS.—

"(A) IN GENERAL.—A qualified preferred dividend shall be treated as an extraordinary dividend— "(i) only if the actual rate of return of the taxpayer on the stock with respect to which such dividend was paid exceeds 15 percent, or "(ii) if clause (i) does not apply, and the taxpayer disposes of such stock before the taxpayer has held such stock for more than 5 years, only to the extent the actual rate of return exceeds the stated rate of return.

r, i

1

"(B) RATE OF RETURN.—For purposes of subparagraph

(A)-

• •'

"(i) ACTUAL RATE OF RETURN.—The actual rate of return shall be the rate of return for the period for which the taxpayer held the stock, determined— "(I) by only taking into account dividends during such period, and "(II) by using the lesser of the adjusted basis of the taxpayer in such stock or the liquidation preference of such stock. "(ii) STATED RATE OF RETURN.—The stated rate of return shall be the annual rate of the qualified preferred dividend payable with respect to any share of

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Page:United States Statutes at Large Volume 100 Part 3.djvu/446

 100 STAT. 2254

PUBLIC LAW 99-514—OCT. 22, 1986

arr fi^ixx H stock (expressed as a percentage of the amount de' J scribed in subparagraph (B)(i)(ID). "(C) DEFINITIONS AND SPECIAL RULES.—For purposes of

this paragraph— 'K-i "(i) QUALIFIED PREFERRED DIVIDEND.—The term • i ^' 'qualified preferred dividend' means any dividend payable with respect to any share of stock which— "(I) provides for fixed preferred dividends pay/\ able not less frequently than annually, and ": - • "(ID is not in arrears as to dividends at the time the taxpayer acquires the stock. J ^\ < ' t "(ii) HOLDING PERIOD.—In determining the holding period for purposes of subparagraph (A)(ii), subsection c.., (d)(3) shall be applied by substituting '5 years' for '2 years'." (f) EFFECTIVE DATE.—

(1) IN GENERAL.—Except as provided in this subsection, the amendments made by this section shall apply to dividends declared after July 18, 1986, in taxable years ending after such date. (2) AGGREGATION.—For purposes of section 1059(c)(3) of the Internal Revenue Code of 1986, dividends declared after July 18, 1986, shall not be aggregated with dividends declared on or (3) REDEMPTIONS.—Section 1059(e)(l) of the Internal Revenue Code of 1986 (as added by subsection (e)) shall apply to dividends ^ declared after the date of the enactment of this Act, in taxable years ending after such date.
 * ,, ^ before July 18, 1986.

Subtitle C—Limitation on Net Operating Loss Carryforwards and Excess Credit Carryforwards SEC. 621. LIMITATION ON NET OPERATING LOSS CARRYFORWARDS.

(a) IN GENERAL.—Section 382 (relating to special limitations on net operating loss carryovers) is amended to read as follows: "SEC. 382. LIMITATION ON NET OPERATING LOSS CARRYFORWARDS AND CERTAIN BUILT-IN LOSSES FOLLOWING OWNERSHIP CHANGE.

"(a) GENERAL RULE.—The amount of the taxable income of any new loss corporation for any post-change year which may be offset by pre-change losses shall not exceed the section 382 limitation for such year. "(b) SECTION 382 LIMITATION.—For purposes of this section— "(1) IN GENERAL.—Except as otherwise provided in this sec^fi • tion, the section 382 limitation for any post-change year is an amount equal to— "(A) the value of the old loss corporation, multiplied by "(B) the long-term tax-exempt rate. "(2) CARRYFORWARD OF UNUSED LIMITATION.—If the section

" ,,

382 limitation for any post-change year exceeds the taxable income of the new loss corporation for such year which wsis offset by pre-change losses, the section 382 limitation for the

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 PUBLIC LAW 99-514—OCT. 22, 1986

100 STAT. 2255

next post-change year shall be increased by the amount of such excess. "(3) SPECIAL RULE FOR POST-CHANGE YEAR WHICH INCLUDES

CHANGE DATE.—In the case of any post-change year which includes the change date— "(A) LIMITATION DOES NOT APPLY TO TAXABLE INCOME BEFORE CHANGE.—Subsection (a) shall not apply to the por-

s { -»•

tion of the taxable income for such year which is allocable to the period in such year on or before the change date. Except as provided in subsection (h)(5) and in regulations, taxable income shall be allocated ratably to each day in the

A:

year. "(B) LIMITATION FOR PERIOD AFTER CHANGE.—For purposes

of applying the limitation of subsection (a) to the remainder of the taxable income for such year, the section 382 limitation shall be an amount which bears the same ratio to such limitation (determined without regard to this paragraph) as— "(i) the number of days in such year after the change date, bears to "(ii) the total number of days in such year. "(c) CARRYFORWARDS DISALLOWED IF CONTINUITY OF BUSINESS REQUIREMENTS NOT MET.—

"(1) IN GENERAL.—Except as provided in paragraph (2), if the new loss corporation does not continue the business enterprise of the old loss corporation at all times during the 2-year period beginning on the change date, the section 382 limitation for any post-change year shall be zero. "(2) EXCEPTION FOR CERTAIN GAINS.—The section 382 limitation for any post-change year shall not be less than the sum of^ "(A) any increase in such limitation under— ?^> "(i) subsection (h)(l)(A) for recognized built-in gains for such year, and ri "(ii) subsection (h)(l)(C) for gain recognized by reason of an election under section 338, plus "(B) any increase in such limitation under subsection (b)(2) for amounts described in subparagraph (A) which are carried forward to such year. "(d) PRE-CHANGE Loss AND POST-CHANGE YEAR.—For purposes of this section— "(1) PRE-CHANGE LOSS.—The term *pre-change loss' means— "(A) any net operating loss carryforward of the old loss corporation to the taxable year ending with the ownership f' change or in which the change date occurs, and "(B) the net operating loss of the old loss corporation for the taxable year in which the ownership change occurs to the extent such loss is allocable to the period in such year on or before the change date. Except as provided in subsection (h)(5) and in regulations, the net operating loss shall, for purposes of subparagraph (B), be allocated ratably to each day in the year. "(2) POST-CHANGE YEAR.—The term 'post-change year' means any taxable year ending after the change date. "(e) VALUE OF OLD Loss CORPORATION.—For purposes of this section— "(1) IN GENERAL.—Except as otherwise provided in this subsection, the value of the old loss corporation is the value of

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Page:United States Statutes at Large Volume 100 Part 3.djvu/448

 100 STAT. 2256

PUBLIC LAW 99-514—OCT. 22, 1986

4:>, the stock of such corporation (including any stock described in section 1504(a)(4)) immediately before the ownership change.
 * J

"(2) SPECIAL RULE I N THE CASE O F REDEMPTION.—If a r e d e m p -

-M tion occurs in connection with a n ownership change, the value under paragraph (1) shall be determined after taking such redemption into account. "(f) L O N G - T E R M T A X - E X E M P T R A T E. — For purposes of t h i s section—

"(1) IN GENERAL.—The long-term tax-exempt r a t e shall be the highest of the adjusted Federal long-term r a t e s in effect for any month in the 3-calendar-month period ending w i t h the calendar month in which the change date occurs. "(2) A D J U S T E D FEDERAL LONG-TERM RATE.—For purposes of

paragraph (1), the term 'adjusted Federal long-term r a t e ' means the Federal long-term r a t e determined under section 1274(d), except that— "(A) paragraph s (2) and (3) thereof shall not apply, and "(B) such r a t e shall be properly adjusted for differences between r a t e s on long-term tax a b l e and tax-exempt obligations. "(g) O W N E R S H I P C H A N G E. — For purposes of t h i s section—

"(1) IN GENERAL.—There is a n ownership change if, immems diately after any owner shift involving a 5-percent shareholder or any equity s t r u c t u r e shift— ''^ "(A) the percentage of the stock of the new loss corporation owned by 1 or more 5-percent shareholders has increased by more than 50 percentage points, over v!j> t "(B) the lowest percentage of stock of the old loss corporation (or any predecessor corporation) owned by such shareholders a t any t i m e during the testing period. "(2) O W N E R SHIFT INVOLVING 5-PERCENT SHAREHOLDER.—There

is a n owner shift involving a 5-percent shareholder if— -71 "(A) the r e is any change in the respective ownership of stock of a corporation, and

"(B) such change affects the percentage of stock of such corporation owned by any person who is a 5-percent shareholder before or after such change. "(3) EQUITY STRUCTURE SHIFT D E F I N E D. —

"(A) IN GENERAL.—The term 'equity s t r u c t u r e shift' ':o;-".-^ means any reorganization (within the m e a n i n g of section 368). Such term shall not include— —^ "(i) any reorganization described in subparagraph (D) or (G) of section 368(a)(1) unless the requirements of section 354(b)(1) a r e met, and "(ii) any reorganization described in subparagraph (F) of section 368(a)(1). "(B) TAXABLE REORGANIZATION-TYPE TRANSACTIONS, ETC.—
 * t

it 14 «i

To the extent provided in regulations, the term 'equity s t r u c t u r e shift' includes taxable reorganization-type transactions, public offerings, and similar transactions. "(4) SPECIAL RULES FOR APPLICATION OF SUBSECTION.— "(A) T R E A T M ENT OF LESS THAN 5-PERCENT SHAREHOLD-

Bimetit

ERS.—Except a s provided in subparagraph s (B)(i) and (C), in determining w h e the r a n ownership change has occurred, n3f>?;ri all stock owned by shareholders of a corporation w h o a r e not 5-percent shareholders of such corporation shall be >'rij « t r e a t e d a s stock owned by 1 5-percent shareholder of such to BLUP^ corporation.

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100 STAT. 2257

"(B) COORDINATION WITH EQUITY STRUCTURE SHIFTS.—For

purposes of determining whether an equity structure shift (or subsequent transaction) is an ownership change— "(i) LESS THAN 5-PERCENT SHAREHOLDERS.—Subpara-

graph (A) shall be applied separately with respect to each group of shareholders (immediately before such equity structure shift) of each corporation which was a party to the reorganization involved in such equity structure shift. "(ii) ACQUISITIONS

" '' r

OF STOCK.—Unless a

different

proportion is established, acquisitions of stock after such equity structure shift shall be treated as being made proportionately from all shareholders immediately before such acquisition. "(C) COORDINATION WITH OTHER OWNER SHIFTS.—Except as

provided in regulations, the rules of subparagraph (B) shall apply in determining whether there has been an owner shift involving a 5-percent shareholder and whether such shift (or subsequent transaction) results in an ownership change. "(h) SPECIAL RULES FOR BUILT-IN GAINS AND LOSSES AND SECTION

338 GAINS.—For purposes of this section— "(1) IN GENERAL.— "(A) NET UNREALIZED BUILT-IN GAIN.—

^^„ -T^r gj^.,

"(i) IN GENERAL.—If the old loss corporation has a net unrealized built-in gain, the section 382 limitation for any recognition period taxable year shall be increased by the recognized built-in gains for such taxable year. "(ii) LIMITATION.—The increase under clause (i) for any recognition period taxable year shall not exceed— "(I) the net unrealized built-in gain, reduced by "(II) recognized built-in gains for prior years ending in the recognition period. "(B) NET UNREALIZED BUILT-IN LOSS.—

 * r

"(i) IN GENERAL.—If the old loss corporation has a net unrealized built-in loss, the recognized built-in loss for any recognition period taxable year shall be subject to limitation under this section in the same manner as if such loss were a pre-change loss. "(ii) LIMITATION.—Clause (i) shall apply to recognized built-in losses for any recognition period taxable year only to the extent such losses do not exceed— "(I) the net unrealized built-in loss, reduced by "(II) recognized built-in losses for prior taxable years ending in the recognition period. "(C) SECTION 338 GAIN.—The section 382 limitation for any taxable year in which gain is recognized by reason of an election under section 338 shall be increased by the excess of— "(i) the amount of such gain, over "(ii) the portion of such gain taken into account in computing recognized built-in gains for such taxable year. "(2) RECOGNIZED BUILT-IN GAIN AND LOSS.— "(A) RECOGNIZED BUILT-IN GAIN.—The

term 'recognized built-in gain' means any gain recognized during the rec-

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Page:United States Statutes at Large Volume 100 Part 3.djvu/450

 100 STAT. 2258

PUBLIC LAW 99-514—OCT. 22, 1986

-j^'if._

ognition period on the disposition of any asset to the extent JWIIH: the new loss corporation establishes that— "(i) such asset was held by the old loss corporation « immediately before the change date, and "(ii) such gain does not exceed the excess of— "(I) the fair market value of such asset on the change date, over "(II) the adjusted basis of such asset on such date. built-in loss' means any loss recognized during the recognition period on the disposition of any asset except to the .,,, extent the new loss corporation establishes that— "(i) such asset was not held by the old loss corporation immediately before the change date, or "(ii) such loss exceeds the excess of— ...;,. "(I) the adjusted basis of such asset on the „ \',, ^ change date, over -., "(II) the fair market value of such asset on such date. "(3) NET UNREALIZED BUILT-IN GAIN AND LOSS DEFINED.— "(A) NET UNREALIZED BUILT-IN GAIN AND LOSS.—
 * .<o"(B) RECOGNIZED BUILT-IN LOSS.—The term 'recognized

7

"(i) IN GENERAL.—The terms 'net unrealized built-in gain' and 'net unrealized built-in loss' mean, with respect to any old loss corporation, the amount by which— "(I) the fair market value of the assets of such corporation immediately before an ownership change is more or less, respectively, than "(II) the aggregate adjusted basis of such assets at such time.

5

"(ii^ SPECIAL RULE FOR REDEMPTIONS.—If a redemp-

(ix:^o:; lis? > ,

"(i) If the amount of the net unrealized built-in gain or net unrealized built-in loss (determined without regard to this subparagraph) of any old loss corporation is not greater than 25 percent of the amount determined for purposes of subparagraph (A)(i)(I), the net unrealized built-in gain or net unrealized built-in loss shall be zero. "(ii)

'

ni

•'•

CASH AND CASH ITEMS NOT TAKEN INTO AC-

COUNT.—In computing any net unrealized built-in gain or net unrealized built-in loss under clause (i), there shall not be taken into account— "(I) any cash or cash item, or "(II) any marketable security which has a value which does not substantially differ from adjusted basis.

"(4) DISALLOWED LOSS TREATED AS A NET OPERATING LOSS.—If a

3i n'li net operating losses, but,. _

.

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 PUBLIC LAW 99-514—OCT. 22, 1986

100 STAT. 2259

"(B) shall be subject to limitation under this section in the same manner as a pre-change loss. "(5) SPECIAL RULES FOR POST-CHANGE YEAR WHICH INCLUDES CHANGE DATE.—For purposes of subsection (b)(3)—

'^ '

^

"(A) in applying subparagraph (A) thereof, taxable income shall be computed without regard to recognized built-in gains and losses, and gain described in paragraph (1)(C), for the year, and "(B) in applying subparagraph (B) thereof, the section 382 limitation shall be computed without regard to recognized built-in gains, and gain described in paragraph (I)(C), for the year. "(6) SECRETARY MAY TREAT CERTAIN DEDUCTIONS AS BUILT-IN

^ 8ft

^

LOSSES.—The Secretary may by regulation treat amounts which accrue on or before the change date but which are allowable as a deduction after such date as recognized built-in losses. "(7) RECOGNITION PERIOD, ETC.— «(^) RECOGNITION PERIOD.—The

term 'recognition period' means, with respect to any ownership change, the 5-year period beginning on the change date. "(B) RECOGNITION PERIOD TAXABLE YEAR.—The term 'recognition period taxable year' means any tsixable year any portion of which is in the recognition period.

"(8)

DETERMINATION OF FAIR MARKET VALUE IN CERTAIN

'^

CASES.—If 80 percent or more in value of the stock of a corporation is acquired in 1 transaction (or in a series of related transactions during any 12-month period), for purposes of determining the net unrealized built-in loss, the fair market value of the assets of such corporation shall not exceed the grossed up " amount paid for such stock properly adjusted for indebtedness ^ of the corporation and other relevant items. X "(9) TAX-FREE EXCHANGES OR TRANSFERS.—The Secretary shall prescribe such regulations as may be necessary to carry out the ••'' purposes of this subsection where property held on the change date is transferred in a transaction where gain or loss is not recognized (in whole or in part). "(i) TESTING PERIOD.—For purposes of this section— "^ "(1) 3-YEAR PERIOD.—Except as otherwise provided in this ^I section, the testing period is the 3-year period ending on the day of any owner shift involving a 5-percent shareholder or equity structure shift. "(2) SHORTER PERIOD WHERE THERE HAS BEEN RECENT OWNERSHIP CHANGE.—If there has been an ownership change under

^'

'

this section, the testing period for determining whether a 2nd ownership change has occurred shall not begin before the 1st day following the change date for such earlier ownership change. "(3) SHORTER PERIOD WHERE ALL LOSSES ARISE AFTER 3-YEAR

PERIOD BEGINS.—The testing period shall not begin before the 1st day of the 1st taxable year from which there is a carryforward of a loss or of an excess credit to the 1st postchange year. Except as provided in regulations, this paragraph shall not apply to any loss corporation which has a net unrealized built-in loss (determined after application of subsection (h)(3)(B)). "(j) CHANGE DATE.—For purposes of this section, the change date is—

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Page:United States Statutes at Large Volume 100 Part 3.djvu/452

 100 STAT. 2260

PUBLIC LAW 99-514—OCT. 22, 1986

"(1) in the case where the last component of an ownership change is an owner shift involving a 5-percent shareholder, the s. date on which such shift occurs, and "(2) in the case where the last component of an ownership change is an equity structure shift, the date of the reorganization, "(k) DEFINITIONS AND SPECIAL RULES.—For purposes of this section— "(1) Loss CORPORATION.—The term 'loss corporation' means a corporation entitled to use a net operating loss carryover. Except to the extent provided in regulations, such term includes any corporation with a net unrealized built-in loss. "(2) OLD LOSS CORPORATION.—The term 'old loss corporation' means any corporation with respect to which there is an owner,. ship change— "(A) which (before the ownership change) was a loss corporation, or •5 "(B) with respect to which there is a pre-change loss described in subsection (d)(1)(B). "(3) NEW LOSS CORPORATION.—The term 'new loss corporation' means a corporation which (after an ownership change) is a loss corporation. Nothing in this section shall be treated as implying that the same corporation may not be both the old loss corporation and the new loss corporation. "(4) TAXABLE INCOME.—Taxable income shall be computed with the modifications set forth in section 172(d). "(5) VALUE.—The term 'value' means fair market value. "(6) RULES RELATING TO STOCK.— "(A) PREFERRED STOCK.—Except as provided in regula-

,,^

. tions and subsection (e), the term 'stock' means stock other than stock described in section 1504(a)(4). "(B) TREATMENT OF CERTAIN RIGHTS, ETC.—The Secretary

shall prescribe such regulations as may be necessary— "(i) to treat warrants, options, contracts to acquire stock, convertible debt interests, and other similar interests as stock, and "(ii) to treat stock as not stock, "(C) DETERMINATIONS ON BASIS OF VALUE.—Determina-

tions of the percentage of stock of any corporation held by any person shall be made on the basis of value. "(7) 5-PERCENT SHAREHOLDER.—The term '5-percent shareholder' means any person holding 5 percent or more of the stock of the corporation at any time during the testing period. "(1) CERTAIN ADDITIONAL OPERATING RULES.—For purposes of this section— "(1) CERTAIN CAPITAL CONTRIBUTIONS NOT TAKEN INTO ACCOUNT.— fA "(A) IN GENERAL.—Any capital c o n t r i b u t i o n received by

a n old loss corporation a s part of a p l a n a principal purpose of which is to avoid or increase any limitation under this

section shall not be taken into account for purposes of this section. "(B) CERTAIN CONTRIBUTIONS TREATED AS PART OF PLAN.—

For purposes of subparagraph (A), any capital contribution made during the 2-year period ending on the change date shall, except as provided in regulations, be treated as part of a plan described in subparagraph (A).

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Page:United States Statutes at Large Volume 100 Part 3.djvu/453

 PUBLIC LAW 99-514—OCT. 22, 1986

100 STAT. 2261

"(2) ORDERING RULES FOR APPLICATION OF SECTION.— "(A) COORDINATION WITH SECTION 172(b) CARRYOVER

RULES.—In the case of any pre-change loss for any taxable year (hereinafter in this subparagraph referred to as the 'loss year') subject to limitation under this section, for purposes of determining under the 2nd sentence of section 172(b)(2) the amount of such loss which may be carried to any taxable year, taxable income for any taxable year shall be treated as not greater than— "(i) the section 382 limitation for such taxable year, reduced by "(ii) the unused pre-change losses for taxable years preceding the loss year. Similar rules shall apply in the case of any credit or loss subject to limitation under section 383. "(B) ORDERING RULE FOR LOSSES CARRIED FROM SAME TAXABLE YEAR.—In any case in which—

"(i) a pre-change loss of a loss corporation for any taxable year is subject to a section 382 limitation, and "(ii) a net operating loss of such corporation from such taxable year is not subject to such limitation, taxable income shall be treated as having been offset first by the loss subject to such limitation. "(3) OPERATING RULES RELATING TO OWNERSHIP OF STOCK.— "(A) CONSTRUCTIVE OWNERSHIP.—Section 318 (relating to

constructive ownership of stock) shall apply in determining ownership of stock, except that— "(i) paragraphs (1) and (5)(B) of section 318(a) shall not apply and an individual and all members of his family described in paragraph (1) of section 318(a) shall be treated as 1 individual for purposes of applying this section, "(ii) paragraph (2) of section 318(a) shall be applied— "(I) without regard to the 50-percent limitation contained in subparagraph (C) thereof, and "(II) except as provided in regulations, by treating stock attributed thereunder as no longer being held by the entity from which attributed, "(iii) paragraph (3) of section 318(a) shall be applied only to the extent provided in regulations, and "(iv) except to the extent provided in regulations, paragraph (4) of section 318(a) shall apply to an option if such application results in an ownership change. A rule similar to the rule of clause (iv) shall apply in the case of any contingent purchase, warrant, convertible debt, put, stock subject to a risk of forfeiture, contract to acquire stock, or similar interests. "(B) STOCK ACQUIRED BY REASON OF DEATH, GIFT, DIVORCE, SEPARATION, ETC.—If^

"(i) the basis of any stock in the hands of any person is determined— "(I) under section 1014 (relating to property acquired from a decedent), "(II) section 1015 (relating to property acquired by a gift or transfer in trust), or "(III) section 1041(b)(2) (relating to transfers of property between spouses or incident to divorce,

71-19^ 0 - 89 - 16: QL. 3 Part 3

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Page:United States Statutes at Large Volume 100 Part 3.djvu/454

 100 STAT. 2262

PUBLIC LAW 99-514—OCT. 22, 1986 "(ii) stock is received by any person in satisfaction of t a right to receive a pecuniary bequest, or "(iii) stock is acquired by a person pursuant to any divorce or separation instrument (within the meaning of section 71(b)(2)), such person shall be treated as owning such stock during the period such stock was owned by the person from whom it was acquired.

,1

"(C)

SPECIAL RULE FOR EMPLOYEE STOCK OWNERSHIP

"i.- J" - P L A N S. —

"(i) IN GENERAL.—Except as provided in clause (ii), '' * -' the acquisition of employer securities (within the meaning of section 409(1)) by— ^ -' ' ' "(I) a tax credit employee stock ownership plan or an employee stock ownership plan (within the '^- KJ/./ ^'meaningofsection 4975(e)(7)), or "(II) a participant of any such plan pursuant to '''^' " the requirements of section 409(h), '•' „ shall not be taken into account in determining whether " an ownership change has occurred. '

"(ii)

Subclause (I) of clause (i) shall not apply to any acquisition unless— "(I) immediately after such acquisition the plan holds stock meeting the requirements of section ^- • 1042(b)(2), except that such section shall be applied by substituting '50 percent' for *30 percent', and "(II) the plan meets requirements similar to the requirements of section 409(n).

' '

"(D) CERTAIN CHANGES IN PERCENTAGE OWNERSHIP WHICH ARE ATTRIBUTABLE TO FLUCTUATIONS IN VALUE NOT TAKEN

' '

INTO ACCOUNT.—Except as provided in regulations, any change in proportionate ownership which is attributable solely to fluctuations in the relative fair market values of differeat classes of stock shall not be taken into account.

^,^ ' ^

'r

OWNERSHIP AND ALLOCATION REQUIREMENTS.—

"(4) REDUCTION IN VALUE WHERE SUBSTANTIAL NONBUSINESS

ASSETS.— "(A) IN GENERAL.—If, immediately after an ownership change, the new loss corporation has substantial ^, nonbusiness assets, the value of the old loss corporation ,y shall be reduced by the excess (if any) of— "(i) the fair market value of the nonbusiness assets of jf-. the old loss corporation, over "(ii) the nonbusiness asset share of indebtedness for c,, 5 which such corporation is liable. "(B)

CORPORATION HAVING

SUBSTANTIAL NONBUSINESS

ASSETS.—For purposes of subparagraph (A)— "(i) IN GENERAL.—The old loss corporation shall be 3'*,, treated as having substantial nonbusiness assets if at least V of the value of the total assets of such corporab ...r.. tion consists of nonbusiness assets. "(ii) EXCEPTION FOR CERTAIN INVESTMENT ENTITIES.—

.J- I j. to?'i3 •d'.i^i.^

A regulated investment company to which part I of subchapter M applies, a real estate investment trust to which part II of subchapter M applies, or a real estate mortgage pool to which part IV of subchapter M ap-

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Page:United States Statutes at Large Volume 100 Part 3.djvu/455

 PUBLIC LAW 99-514—OCT. 22, 1986

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100 STAT. 2263

plies, shall not be treated as a new loss corporation having substantial nonbusiness assets. "(C) NONBUSINESS ASSETS.—For purposes of this paragraph, the term 'nonbusiness assets' means assets held for investment. "(D) NONBUSINESS ASSET SHARE.—For purposes of this paragraph, the nonbusiness asset share of the indebtedness of the corporation is an amount which bears the same ratio to such indebtedness as— "(i) the fair market value of the nonbusiness assets of the corporation, bears to "(ii) the fair market value of all assets of such corporation. "(E) TREATMENT OF SUBSIDIARIES.—For purposes of this paragraph, stock and securities in any subsidiary corporation shall be disregarded and the parent corporation shall be deemed to own its ratable share of the subsidiary's assets. For purposes of the preceding sentence, a corporation shall be treated as a subsidiary if the parent owns 50 percent or more of the combined voting power of all clsisses of stock entitled to vote, and 50 percent or more of the total value of shares of all classes of stock. "(5) TITLE i i OR SIMILAR CASE.—

"(A) IN GENERAL.—Subsection (a) shall not apply to any ownership change if— "(i) the old loss corporation is (immediately before such ownership change) under the jurisdiction of the court in a title 11 or similar case, and "(ii) the shareholders and creditors of the old loss corporation (determined immediately before such ownership change) own (immediately after such ownership change) stock of the new loss corporation (or stock of controlling corporation if also in bankruptcy) which meets the requirements of section 1504(a)(2) (determined by substituting '50 percent' for '80 percent' each place it appears). "(B) REDUCTION FOR INTEREST PAYMENTS TO CREDITORS BECOMING SHAREHOLDERS.—In any case to which subpara-

graph (A) applies, the net operating loss deduction under section 172(a) for any post-change year shall be determined as if no deduction was allowable under this chapter for the interest paid or accrued by the old loss corporation on indebtedness which was converted into stock pursuant to title 11 or similar case during— "(i) any taxable year ending during the 3-year period preceding the taxable year in which the ownership change occurs, and "(ii) the period of the taxable year in which the ownership change occurs on or before the change date. "(C) REDUCTION OF CARRYFORWARDS WHERE DISCHARGE OF

INDEBTEDNESS.—In any case to which subparagraph (A) applies, the pre-change losses and excess credits (within the meaning of section 383(a)(2)) which may be carried to a postchange year shall be computed as if 50 percent of the amount which, but for the application of section 108(e)(10XB), would have been includible in gross income for any taxable year had been so included.

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Page:United States Statutes at Large Volume 100 Part 3.djvu/456

 100 STAT. 2264

PUBLIC LAW 99-514—OCT. 22, 1986 "(D) SECTION 382 LIMITATION ZERO IF ANOTHER CHANGE

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« !4

WITHIN 2 YEARS.—If, during the 2-year period immediately following an ownership change to which this paragraph applies, an ownership change of the new loss corporation occurs, this paragraph shall not apply and the section 382 limitation with respect to the 2nd ownership change for any post-change year ending after the change date of the 2nd ownership change shall be zero. "(E) ONLY CERTAIN STOCK OF CREDITORS TAKEN INTO AC-

COUNT.—For purposes of subparagraph (A)(ii), stock transferred to a creditor in satisfaction of indebtedness shall be iw! taken into account only if such indebtedness— "(i) was held by the creditor at least 18 months before the date of the filing of the title 11 or similar case, or "(ii) arose in the ordinary course of the trade or business of the old loss corporation and is held by the person who at all times held the beneficial interest in such indebtedness. "(F) SPECIAL RULE FOR CERTAIN FINANCIAL INSTITUTIONS.— / "(i) IN GENERAL.—In the case of any ownership Hi>: •:'•>-> change to which this subparagraph applies, this paragraph shall be applied— "(I) by substituting '20 percent' for '50 percent' •:•-''• in subparagraph (A)(ii), and "(II) without regard to subparagraphs (B) and (C). .-

"(ii) SPECIAL RULE FOR DEPOSITORS.—For purposes of

en'

applying this paragraph to an ownership change to which this subparagraph applies— ?sm ': ' '• "(I) a depositor in the old loss corporation shall f'j be treated as a stockholder in such loss corporation immediately before the change, "(II) deposits which, after the change, become . deposits of the new loss corporation shall be A-treated as stock of the new loss corporation, and "(III) the fair market value of the outstanding stock of the new loss corporation shall include «. deposits described in subclause (II). "(iii) CHANGES TO WHICH SUBPARAGRAPH APPLIES.— This subparagraph shall apply to— "(I) an equity structure shift which is a reorganization described in section 368(a)(3)(D)(ii), or L "(II) any other equity structure shift (or transit action to which section 351 applies) which occurs as an integral part of a transaction involving a change to which subclause (I) applies. f;l.'krt.'pi This subparagraph shall not apply to any equity structure shift or transaction occurring after December 31, •i- ' 1988. "(G) TITLE i i OR SIMILAR CASE.—For purposes of this
 * >ru: •
 * 5

paragraph, the term 'title 11 or similar case' has the meaning given such term by section 368(a)(3)(A). "(H) ELECTION NOT TO HAVE PARAGRAPH APPLY.—A

new

loss corporation may elect, subject to such terms and conditions as the Secretary may prescribe, not to have the provisions of this paragraph apply. "(6) SPECIAL RULE FOB INSOLVENCY TRANSACTIONS.—If paragraph (5) does not apply to any reorganization described in

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Page:United States Statutes at Large Volume 100 Part 3.djvu/457

 PUBLIC LAW 99-514—OCT. 22, 1986

100 STAT. 2265

subparagraph (G) of section 368(a)(1) or any exchange of debt for stock in a title 11 or similar case (as defined in section 368(a)(3)(A)), the value under subsection (e) shall be the value of the new loss corporation immediately after the ownership change. "(7)

COORDINATION WITH ALTERNATIVE MINIMUM TAX.—The

Secretary shall by regulation provide for the application of this section to the alternative tax net operating loss deduction under section 56(d). "(m) REGULATIONS.—The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section and section 383, including (but not limited to) regulations— "(1) providing for the application of this section and section 383 where an ownership change with respect to the old loss corporation is followed by an ownership change with respect to the new loss corporation, and "(2) providing for the application of this section and section 383 in the case of a short taxable year, "(3) providing for such adjustments to the application of this section and section 383 as is necessary to prevent the avoidance of the purposes of this section and section 383, including the avoidance of such purposes through the use of related persons, pass-thru entities, or other intermediaries, "(4) providing for the treatment of corporate contractions as redemptions for purposes of subsections (e)(2) and (h)(3)(A), and "(5) providing for the application of subsection (g)(4) where there is only 1 corporation involved." (b) AMENDMENT OF SECTION 383.—Section 383 (relating to special limitations on unused investment credits, etc.) is amended to read as follows: "SEC. 383. SPECIAL LIMITATIONS ON CERTAIN EXCESS CREDITS, ETC. "(a) EXCESS CREDITS.—

"(1) IN GENERAL.—Under regulations, if an ownership change occurs with respect to a corporation, the amount of any excess credit for any taxable year which may be used in any postchange year shall be limited to an amount determined on the basis of the tax liability which is attributable to so much of the taxable income as does not exceed the section 382 limitation for such post-change year to the extent available after the application of section 382 and subsections (b) and (c) of this section. "(2) EXCESS CREDIT.—For purposes of paragraph (1), the term 'excess credit' means— "(A) any unused general business credit of the corporation under section 39, and "(B) any unused minimum tax credit of the corporation under section 53. "(b) LIMITATION ON NET CAPITAL Loss.—If an ownership change occurs with respect to a corporation, the amount of any net capital loss under section 1212 for any taxable year before the 1st postchange year which may be used in any post-change year shall be limited under regulations which shall be based on the principles applicable under section 382. Such regulations shall provide that any such net capital loss used in a post-change year shall reduce the section 382 limitation which is applied to pre-change losses under section 382 for such year.

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Page:United States Statutes at Large Volume 100 Part 3.djvu/458

 100 STAT. 2266

PUBLIC LAW 99-514—OCT. 22, 1986

"(c) FOREIGN TAX CREDITS.—If an ownership change occurs with respect to a corporation, the amount of any excess foreign taxes under section 904(c) for any taxable year before the 1st post-change taxable year shall be limited under regulations which shall be consistent with purposes of this section and section 382. "(d) PRO RATION RULES FOR YEAR WHICH INCLUDES CHANGE.—For

purposes of this section, rules similar to the rules of subsections (b)(3) and (d)(1)(B) of section 382 shall apply. "(e) DEFINITIONS.—Terms used in this section shall have the same respective meanings as when used in section 382, except that appropriate adjustments shall be made to take into account that the limitations of this section apply to credits and net capital losses." (c) CONFORMING AMENDMENTS.—

(1) Paragraph (5) of section 318(b) is amended by striking out "section 382(a)(3)" and inserting in lieu thereof "section 382(1)(3)". (2) The table of sections for part V of subchapter C of chapter 1 is amended— J (A) by striking out the item relating to section 382 and "Sec. 382. Limitation on net operating loss carryforwards and certain builtin losses following ownership change.",
 * ^'inserting in lieu thereof the following new item:

and (B) by striking out the item relating to section 383 and inserting in lieu thereof the following new item: "Sec. 383. Special limitations on certain excess credits, etc.". (d) REPORT ON DEPRECIATION AND BUILT-IN DEDUCTIONS; REPORT

ON BANKRUPTCY WORKOUTS.—The Secretary of the Treasury or his

delegate— (1) shall, not later than January 1, 1989, conduct a study and report to the Committee on Ways and Means of the House of Representatives and the Committee on Finance of the Senate with respect to the treatment of depreciation, amortization, depletion, and other built-in deductions for purposes of sections 382 and 383 of the Internal Revenue Code of 1986 (as amended by this section), and (2) shall, not later than January 1, 1988, conduct a study and report to the committees referred to in paragraph (1) with respect to the treatment of informal bankruptcy workouts for purposes of sections 108 and 382 of such Code. (e) REPEAL OF CHANGES MADE BY TAX REFORM ACT OF 1976.— (1) Subsections (e) and (f) of section 806 of the Tax Reform Act of 1976 (including the amendment treated as part of such subsections under section 59(b) of the Tax Reform Act of 1984) are hereby repealed. (2) Subsection (g) of such section 806 is amended by striking out paragraphs (2) and (3). (f) EFFECTIVE DATES.—

(1) IN GENERAL.—The amendments made by subsections (a), (b), and (c) shall apply to any ownership change following— (A) an owner shift involving a 5-percent shareholder occurring after December 31, 1986, or (B) an equity structure shift occurring pursuant to a plan ISO of reorganization adopted after December 31, 1986. (2) FOR AMENDMENTS TO T A X R E FOR M ACT O F 1976.—

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Page:United States Statutes at Large Volume 100 Part 3.djvu/459

 PUBLIC LAW 99-514—OCT. 22, 1986

100 STAT. 2267

(A) IN GENERAL.—The repeals made by subsection (e)(D and the amendment made by subsection (e)(2) shall take effect on January 1, 1986. (B) ELECTION TO HAVE AMENDMENTS APPLY.—

f

(i) If a taxpayer described in clause (ii) elects to have the provisions of this subparagraph apply, the amendments made by subsections (e) and (f) of section 806 of the Tax Reform Act of 1976 shall apply to the reorganization described in clause (ii). (ii) A taxpayer is described in this clause if the taxpayer filed a title 11 or similar case on December 8, 1981, filed a plan of reorganization on February 5, 1986, filed an amended plan on March 14, 1986, and received court approval for the amended plan and disclosure statement on April 16, 1986. (C) APPLICATION OF OLD RULES TO CERTAIN DEBT.—In the

^1 ^

case of debt of a corporation incorpqrated in Colorado on November 8, 1924, with headquarters in Denver, Colorado— (i) the amendments made by subsections (a), (b), and (c) shall not apply to any debt restructuring of such debt which was approved by the debtor's Board of Directors and the lenders in 1986, and (ii) the amendments made by subsections (e) and (f) of section 806 of the Tax Reform Act of 1976 (including the amendment treated as part of such subsections under section 590t)) of the Tax Reform Act of 1984) shall apply to such debt restructuring. (D) SPECIAL RULE FOR OIL AND GAS WELL DRILUNG BUSI-

NESS.—In the case of a Texas corporation incorporated on July 23, 1935, in applying section 382 of the Internal Revenue Code of 1986 (as in effect before and after the amendments made by subsections (a), (b), and (c)) to a loan restructuring agreement during 1985, section 382(a)(5)(C) of the Internal Revenue Code of 1954 (as added by the amendments made by subsections (e) and (f) of section 806 of the Tax Reform Act of 1976) shall be applied as if it were in effect with respect to such restructuring or reorganization. (3) TESTING PERIOD.—For purposes of determining whether there is an ownership change after December 31, 1986, the testing period shall not begin before the later of— (A) May 6, 1986, or (B) in the case of an ownership change which occurs after May 5, 1986, and to which the amendments made by subsections (a), (b), and (c) do not apply, the first day following the date on which such ownership change occurs. (4) SPECIAL TRANSITION RULES.—The amendments made by subsections (a), (b), and (c) shall not apply to any— (A) stock-for-debt exchanges and stock sales made pursuant to a plan of reorganization with respect to a petition for reorganization filed by a corporation under chapter 11 of title 11, United States Code, on August 26, 1982, and which filed with a United States district court a first amended and related plan of reorganization before March 1, 1986, or (B) ownership change of a Delaware corporation incorporated in August 1983, which may result from the exercise of put or call option under an agreement entered into on September 14, 1983, but only with respect to taxable years

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Page:United States Statutes at Large Volume 100 Part 3.djvu/460

 100 STAT. 2268

PUBLIC LAW 99-514—OCT. 22, 1986

•>M; change takes place. Any regulations prescribed under section 382(g)(3)(B) of the Internal Revenue Code of 1986 (as amended by subsection (a)) ft' shall not apply with respect to domestic building and loan trasactions for any period before January 1, 1989. (5) BANKRUPTCY PROCEEDINGS.—In the case of a reorganization , described in subparagraph (G) of section 368(a)(1) of the Internal Revenue Code of 1986 or an exchange of debt for stock in a title 11 or similar case, as defined in section 368(a)(3) of such Code, the amendments made by subsections (a), (b), and (c) shall not apply to any ownership change resulting from such a reorganization or proceeding if a petition in such case was filed with (6) CERTAIN PLANS.—The amendments made by subsections (a), (b), and (c) shall not apply to any ownership change with respect to— (A) the acquisition of a corporation the stock of which is acquired pursuant to a plan of divestiture which identified such corporation and its assets, and was agreed to by the board of directors of such corporation's parent corporation on May 17, 1985, (B) a merger which occurs pursuant to a merger agreement (entered into before September 24, 1985) and an application for approval by the Federal Home Loan Bank Board was filed on October 4, 1985, (C) a reorganization involving a party to a reorganization of a group of corporations engaged in enhanced oil recovery operations in California, merged in furtherance of a plan of reorganization adopted by a board of directors vote on September 24, 1985, and a Delaware corporation whose principal oil and gas producing fields are located in California, or (D) the conversion of a mutual savings and loan association holding a Federal charter dated March 22, 1985, to a stock savings and loan association pursuant to the rules and regulations of the Federal Home Loan Bank Board. ^ ^
 * 2) -It beginning after 1991 regardless of when such ownership
 * ' the court before August 14, 1986.

(7)

OWNERSHIP CHANGE OF REGULATED AIR CARRIER.—The

amendments made by subsections (a), (b), and (c) shall not apply to an ownership change of a regulated air carrier if— (A) on July 16, 1986, at least 40 percent of the outstanding common stock (excluding all preferred stock, whether or not convertible) of such carrier had been acquired by the ^' parent corporation referred to in section 203(d)(13XB), and .„ (B) the acquisition (by or for such parent corporation) or retirement of the remaining common stock of such carrier is completed before the later of March 31, 1987, or 90 days after the requisite governmental approvals are finally granted, but only if the ownership change occurs on or before the later of March 31, 1987, or such 90th day. The aggregate reduction in tax for any taxable year by reason of this paragraph shall not exceed $10,000,000. The testing period for determining whether a subsequent ownership change has occurred shall not begin before the 1st day following an ownership change to which this paragraph applies.

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Page:United States Statutes at Large Volume 100 Part 3.djvu/461

 PUBLIC LAW 99-514—OCT. 22, 1986

'

100 STAT. 2269

(8) The amendments made by subsections (a), (b), and (c) shall not apply to any ownership change resulting from the conversion of a Minnesota mutual savings bank holding a Federal charter dated December 31, 1985, to a stock savings bank pursuant to the rules and regulations of the Federal Home Loan Bank Board, and from the issuance of stock pursuant to that conversion to a holding company incorporated in Delaware on February 21, 1984. For purposes of determining whether any ownership change occurs with respect to the holding company or any subsidiary thereof (whether resulting from the transaction described in the preceding sentence or otherwise), any issuance of stock made by such holding company in connection with the transaction described in the preceding sentence shall not be taken into account. (9) DEFINITIONS.—Except as otherwise provided, terms used in this subsection shall have the same meaning as when used in section 382 of the Internal Revenue Code of 1986 (as amended by this section).

Subtitle D—Recognition of Gain and Loss on \ Distributions of Property in Liquidation SEC. 631. RECOGNITION OF GAIN AND LOSS ON DISTRIBUTIONS OF PROPERTY IN LIQUIDATION.

(a) GENERAL RULE.—Subpart B of part II of subchapter C (relating to effects on corporation) is amended by striking out sections 336 and 337 and inserting in lieu thereof the following: "SEC. 336. GAIN OR LOSS RECOGNIZED ON PROPERTY DISTRIBUTED IN COMPLETE LIQUIDATION.

"(a) GENERAL RULE.—Except as otherwise provided in this section or section 337, gain or loss shall be recognized to a liquidating corporation on the distribution of property in complete liquidation as if such property were sold to the distributee at its fair market value. "(bj TREATMENT OF LIABILITIES IN EXCESS OF BASIS.—If any property distributed in the liquidation is subject to a liability or the shareholder assumes a liability of the liquidating corporation in connection with the distribution, for purposes of subsection (a) and section 337. the fair market value of such property shall be treated as not less than the amount of such liability. "(c) EXCEPTION FOR CERTAIN LIQUIDATIONS TO WHICH PART III

APPLIES.—This section shall not apply with respect to any distribution of property to the extent there is nonrecognition of gain or loss with respect to such property to the recipient under part III. "(d) LIMITATIONS ON RECOGNITION OF Loss.— "(1) N o LOSS RECOGNIZED IN CERTAIN DISTRIBUTIONS TO RELATED PERSONS.—

"(A) IN GENERAL.—No loss shall be recognized to a liquidating corporation on the distribution of any property to a related person (within the meaning of section 267) if— "(i) such distribution is not pro rata, or "(ii) such property is disqualified property. "(B) DISQUALIFIED PROPERTY.—For purposes of subpara-

graph (A), the term 'disqualified property means any prop-

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Page:United States Statutes at Large Volume 100 Part 3.djvu/462

 100 STAT. 2270

PUBLIC LAW 99-514—OCT. 22, 1986

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, erty which is acquired by the liquidating corporation in a transaction to which section 351 applied, or as a contribution to capital, during the 5-year period ending on the date of the distribution. Such term includes any property if the adjusted basis of such property is determined (in whole or in part) by reference to the adjusted basis of property described in the preceding sentence. "(2) SPECIAL RULE FOR CERTAIN PROPERTY ACQUIRED IN CERTAIN CARRYOVER BASIS TRANSACTIONS.—

"(A) IN GENERAL.—For purposes of determining the amount of loss recognized by any liquidating corporation on ';i. any sale, exchange, or distribution of property described in . subparagraph (B), the adjusted basis of such property shall be reduced (but not below zero) by the excess (if any) of— f»i:. "(i) the adjusted basis of such property immediately after its acquisition by such corporation, over "(ii) the fair market value of such property as of such time. "(B) DESCRIPTION OF PROPERTY.—

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"(i) IN GENERAL.—For purposes of subparagraph (A), property is described in this subparagraph if^ iti^ "(I) such property is acquired by the liquidating corporation in a transaction to which section 351 .. ..',. applied or as a contribution to capital, and "(II) the acquisition of such property by the liq, uidating corporation was part of a plan a principal ' •' purpose of which was to recognize loss by the liquidating corporation with respect to such property in connection with the liquidation. ,, Other property shall be treated as so described if the adjusted basis of such other property is determined (in whole or in part) by reference to the adjusted basis of property described in the preceding sentence. "(ii)

CERTAIN ACQUISITIONS TREATED AS PART OF

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PLAN.—For purposes of clause (i), any property described in clause (i)(I) acquired by the liquidating corporation during the 2-year period ending on the date of the adoption of the plan of complete liquidation shall, except as provided in regulations, be treated as part of a plan described in clause (i)(II). "(C) RECAPTURE IN LIEU OF DISALLOWANCE.—The Secretary may prescribe regulations under which, in lieu of disallowing a loss under subparagraph (A) for a prior taxable year, the gross income of the liquidating corporation for the taxable year in which the plan of complete liquidation is adopted shall be increased by the amount of the disallowed loss.

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"(3) SPECIAL RULE IN CASE OF LIQUIDATION TO WHICH SECTION

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332 APPLIES.—In the case of any liquidation to which section 332 applies, no loss shall be recognized to the liquidating corporation on any distribution in such liquidation. "(e) CERTAIN STOCK SALES AND DISTRIBUTIONS MAY B E TREATED As

ASSET TRANSFERS.—Under regulations prescribed by the Secretary, if— "(1) a corporation owns stock in another corporation meeting the requirements of section 1504(a)(2), and

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