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Page:United States Statutes at Large Volume 100 Part 3.djvu/397

 PUBLIC LAW 99-514—OCT. 22, 1986 "'

100 STAT. 2205

"(C) CERTAIN RULE NOT TO APPLY.—Subsection (h)(6)(B)(i) shall not apply for purposes of this paragraph."

(b) LOW-INCOME HOUSING CREDIT TREATED A S OTHER BUSINESS CREDITS.—

(1) Subsection (b) of section 38 (relating to current year business credits), as amended by this Act, is amended by striking out "plus" at the end of paragraph (3), but striking out the period at the end of paragraph (4) and inserting in lieu thereof ", plus", and by adding at the end thereof the following new paragraph: "(5) the low-income housing credit determined under section 42(a)." (2) Subsection (d) of section 38 is amended by inserting "42(a)," before "46(a)". (c) RECAPTURE TAX NOT TO REDUCE MINIMUM TAX.—Paragraph (1)

of section 55(c), as amended by section 701 of this Act, is amended by inserting "or section 42(j)" after "section 47". (d) CLERICAL AMENDMENT.—The table of sections for subpart D of part IV of subchapter A of chapter 1 is amended by adding at the end thereof the following new item: "Sec. 42. Low-income housing credit." (e) EFFECTIVE DATE.—

(1) IN GENERAL.—The amendments made by this section shall apply to buildings placed in service after December 31, 1986, in taxable years ending after such date. (2) SPECIAL RULE FOR REHABILITATION EXPENDITURES.—Subsec-

tion (e) of section 42 of the Internal Revenue Code of 1986 (as added by this section) shall apply for purposes of paragraph (1). if) TRANSITIONAL RULES.— (1) LIMITATION TO NON-ACRS BUILDINGS NOT TO APPLY TO CERTAIN BUILDINGS, ETC.—

?•'.

(A) IN GENERAL.—In the case of a building which is part of a project described in subparagraph (B)— (i) section 42(c)(2)(B) of the Internal Revenue Code of 1986 (as added by this section) shall not apply, and (ii) such building shall be treated as not federally subsidized for purposes of section 42(b)(l)(A) of such Code. (B) PROJECT DESCRIBED.—A project is described in this subparagraph if— (i) an urban development action grant application with respect to such project was submitted on September 13, 1984, (ii) a zoning commission map amendment related to such project was granted on July 17, 1985, and (iii) the number assigned to such project by the Federal Housing Administration is 023-36602. (C) ADDITIONAL UNITS ELIGIBLE FOR CREDIT.—In the case of a building to which subparagraph (A) applies and which is part of a project which meets the requirements of subparagraph (D), for each low-income unit in such building which is occupied by individuals whose income is 30 percent or less of area median gross income, one additional unit (not otherwise a low-income unit) in such building shall be treated as a low-income unit for purposes of such section 42.

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Page:United States Statutes at Large Volume 100 Part 3.djvu/398

 100 STAT. 2206

PUBLIC LAW 99-514—OCT. 22, 1986

i Y^q-':.

(D) PROJECT DESCRIBED.—A project is described in this subparagraph if— j^jg^^ (i) rents charged for units in such project are restricted by State regulations, (ii) the annual cash flow of such project is restricted by State law, (iii) the project is located on land owned by or ground leased from a public housing authority, (iv) construction of such project begins on or before ' " ' " December 31, 1986, and units within such project are , placed in service on or before June 1, 1990, and '" (v) for a 20-year period, 20 percent or more of the residential units in such project are occupied by l^.y^i '^ft individuals whose income is 50 percent or less of area median gross income. • J (E) MAXIMUM ADDITIONAL CREDIT.—The maximum annual ^' additional credit allowable under section 42 of such Code by reason of subparagraph (C) shall not exceed 25 percent of the eligible basis of the building. (2) ADDITIONAL ALLOCATION OF HOUSING CREDIT CEILING.—

'•

(A) IN GENERAL.—There is hereby allocated to each housing credit agency described in subparagraph (B) an additional housing credit dollar amount determined in accordance with the following table: ' .^«s.,

For calendar year: 1987 1988 1989

' The additional allocation is: $3,900,000 $7,600,000 $1,300,000.

(B) HOUSING CREDIT AGENCIES DESCRIBED.—The housing credit agencies described in this subparagraph are: ''^ * (i) A corporate governmental agency constituted as a public benefit corporation and established in 1971 iifc i hi under the provisions of Article XII of the Private Housing Finance Law of the State. (ii) A city department established on December 20, 1979, pursuant to chapter XVIII of a municipal code of such city for the purpose of supervising and coordinating the formation and execution of projects and programs affecting housing within such city. Mth m (iii) The State housing finance agency referred to in subparagraph (C), but only with respect to projects
 * UJII ''

described in subparagraph (C). ..• (C) PROJECT DESCRIBED.—A project is described in this subparagraph if such project is a qualified low-income housry| f ing project which— (i) receives financing from a State housing finance 4>3 f id agency from the proceeds of bonds issued pursuant to chapter 708 of the Acts of 1966 of such State pursuant %.. n. to loan commitments from such agency made between May 8, 1984, and July 8, 1986, and (ii) is subject to subsidy commitments issued pursuant to a program established under chapter 574 of the Acts of 1983 of such State having award dates from such agency between May 31, 1984, and June 11, 1985. (D) SPECIAL RULES.—

,,,

(i) Any building—

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Page:United States Statutes at Large Volume 100 Part 3.djvu/399

 PUBLIC LAW 99-514—OCT. 22, 1986

100 STAT. 2207

(I) which is allocated any housing credit dollar amount by a housing credit agency described in clause (iii) of subparagraph (B), and (II) which is placed in service after June 30, 1986, and before January 1, 1987, shall be treated for purposes of the amendments made by this section as placed in service on January 1, 1987. (ii) Section 42(c)(2)(B) of the Internal Revenue Code of 1986 shall not apply to any building which is allocated any housing credit dollar amount by any agency described in subparagraph (B).

I

(E) ALL UNITS TREATED AS LOW INCOME UNITS IN CERTAIN

CASES.—In the case of any building— (i) which is allocated any housing credit dollar amount by any agency described in subparagraph (B), and (ii) which after the application of subparagraph (D)(ii) is a qualified low-income building at all times during any taxable year, such building shall be treated as described in section 42(b)(1)(B) of such Code and having an applicable fraction for such year of 1. (3) CERTAIN PROJECTS PLACED IN SERVICE BEFORE 1987.—

(A) IN GENERAL.—In the case of a building which is part of a project described in subparagraph (B)— (i) section 42(c)(2)(B) of such Code shall not apply, (ii) such building shall be treated as placed in service during the first calendar year after 1986 and before 1990 in which such building is a qualified low-income building (determined after the application of clause (i)), and (iii) for purposes of section 42(h) of such Code, such building shall be treated as having allocated to it a housing credit dollar amount equal to the dollar amount appearing in the clause of subparagraph (B) in which such building is described. (B) PROJECT DESCRIBED.—A project is described in this subparagraph if the code number assigned to such project by the Farmers' Home Administration appears in the following table: '••'

The code number is: (i) 49284553664 (ii) 4927742022446 (iii) 49270742276087 (iv) 490270742387293 (V) 4927074218234 (vi) 49270742274019 (vii) 5146074234.5074

The housing credit dollar amount is: $16,000 $22,000 $64,000 $48,000 $32,000 $36,000 $53,000.

(C) DETERMINATION OF ADJUSTED BASIS.—The adjusted

basis of any building to which this paragraph applies for purposes of section 42 of such Code shall be its adjusted basis as of the close of the taxable year ending before the first taxable year of the credit period for such building (D) CERTAIN RULES TO APPLY.—Rules similar to the rules of subparagraph (E) of paragraph (2) shall apply for purposes of this paragraph.

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Page:United States Statutes at Large Volume 100 Part 3.djvu/400

 100 STAT. 2208

PUBLIC LAW 99-514—OCT. 22, 1986 (4) DEFINITIONS.—For purposes of this subsection, terms used in such subsection which are also used in section 42 of the Internal Revenue Code of 1986 (as added by this section) shall have the meanings given such terms by such section 42.

Subtitle G—Merchant Marine Capital Construction Funds SEC. 261. PROVISIONS RELATING TO MERCHANT CONSTRUCTION FUNDS.

MARINE

CAPITAL

(a) PURPOSE.—The purpose of this section is to coordinate the application of the Internal Revenue Code of 1986 with the capital construction program under the Merchant Marine Act, 1936. (b) AMENDMENT OF 1986 CODE.—Chapter 77 (relating to miscellaneous provisions) is amended by adding at the end thereof the following new section: "SEC. 7518. TAX INCENTIVES RELATING TO MERCHANT MARINE CAPITAL CONSTRUCTION FUNDS. "(a) C E I L I N G ON D E P O S I T S. —

"(1) IN GENERAL.—The amount deposited in a fund established under section 607 of the Merchant Marine Act, 1936 (hereinafter in this section referred to as a 'capital construction fund') shall not exceed for any taxable year the sum of: "(A) that portion of the taxable income of the owner or lessee for such year (computed as provided in chapter 1 but without regard to the carryback of any net operating loss or net capital loss and without regard to this section) which is attributable to the operation of the agreement vessels in ,.. the foreign or domestic commerce of the United States or in the fisheries of the United States, "(B) the amount allowable as a deduction under section 167 for such year with respect to the agreement vessels, "(C) if the transaction is not taken into account for purposes of subparagraph (A), the net proceeds (as defined in joint regulations) from— "(i) the sale or other disposition of any agreement vessel, or "(ii) insurance or indemnity attributable to any agreement vessel, and "(D) the receipts from the investment or reinvestment of amounts held in such fund. "(2) LIMITATIONS ON DEPOSITS BY LESSEES.—In the case of a lessee, the maximum amount which may be deposited with respect to an agreement vessel by reason of paragraph (1)(B) for any period shall be reduced by any amount which, under an agreement entered into under section 607 of the Merchant Marine Act, 1936, the owner is required or permitted to deposit for such period with respect to such vessel by reason of paragraph (1)(B). "(3) CERTAIN BARGES AND CONTAINERS INCLUDED.—For purposes of paragraph (1), the term 'agreement vessel' includes barges and containers which are part of the complement of such vessel and which are provided for in the agreement. "(b) REQUIREMENTS AS TO INVESTMENTS.—

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Page:United States Statutes at Large Volume 100 Part 3.djvu/401

 PUBLIC LAW 99-514—OCT. 22, 1986

100 STAT. 2209

"(1) IN GENERAL.—Amounts in any capital construction fund shall be kept in the depository or depositories specified in the agreement and shall be subject to such trustee and other fiduciary requirements as may be specified by the Secretary. "(2) LIMITATION ON FUND INVESTMENTS.—Amounts in any capital construction ftind may be invested only in interest-bearing securities approved by the Secretary; except that, if such Secretary consents thereto, an agreed percentage (not in excess of 60 percent) of the assets of the fund may be invested in the stock of domestic corporations. Such stock must be currently fully listed and registered on an exchange registered with the Securities and Exchange Commission as a national securities exchange, and must be stock which would be acquired by prudent men of discretion and intelligence in such matters who are seeking a reasonable income and the preservation of their capital. If at any time the fair market value of the stock in the fund is more than the agreed percentage of the assets in the fund, any subsequent investment of amounts deposited in the fund, and any subsequent withdrawal from the fund, shall be made in such a way as to tend to restore the fund to a situation in which the fair market value of the stock does not exceed such agreed percentage. "(3) INVESTMENT IN CERTAIN PREFERRED STOCK PERMITTED.—

For purposes of this subsection, if the common stock of a corporation meets the requirements of this subsection and if the preferred stock of such corporation would meet such requirements but for the fact that it cannot be listed and registered as required because it is nonvoting stock, such preferred stock shall be treated as meeting the requirements of this subsection. "(c) NONTAXABILITY FOR DEPOSITS.—

"(1) IN GENERAL.—For purposes of this title— "(A) taxable income (determined without regard to this section and section 607 of the Merchant Marine Act, 1936) for the taxable year shall be reduced by an amount equal to the amount deposited for the taxable year out of amounts referred to in subsection (a)(1)(A), "(B) gain from a transaction referred to in subsection ^ (a)(1)(C) shall not be taken into account if an amount equal to the net proceeds (as defined in joint regulations) from such transaction is deposited in the fund, "(C) the earnings (including gains and losses) from the investment and reinvestment of amounts held in the fund shall not be taken into account, "(D) the earnings and profits (within the meaning of section 316) of any corporation shall be determined without regard to this section and section 607 of the Merchant Marine Act, 1936, and "(E) in applying the tax imposed by section 531 (relating to the accumulated earnings tax), amounts while held in the fund shall not be taken into account. "(2) ONLY QUALIFIED DEPOSITS ELIGIBLE FOR TREATMENT.—Para-

graph (1) shall apply with respect to any amount only if such amount is deposited in the fund pursuant to the agreement and not later than the time provided in joint regulations. "(d) ESTABLISHMENT OF ACCOUNTS.—For purposes of this section— "(1) IN GENERAL.—Within a capital construction fund 3 accounts shall be maintained:

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Page:United States Statutes at Large Volume 100 Part 3.djvu/402

 100 S T A T. 2210

P U B L I C L A W 9 9 - 5 1 4 — O C T. 22, 1986 "(A) the capital account, »,; • "(B) the capital gain account, and ' •>. J. ' '(C) the ordinary income account. "(2) CAPITAL ACCOUNT.—The capital account shall consist of— "(A) a m o u n t s referred to in subsection (a)(l KB), "(B) a m o u n t s referred to in subsection (a)(1)(C) other than that portion thereof which r e p r e s e n t s gain not t a k e n into account by reason of subsection (c)(1)(B), "(C) the percentage applicable under section 243(a)(1) of any dividend received by the fund with respect to which the person m a i n t a i n i n g the fund would (but for subsection (c)(1)(C)) be allowed a deduction under section 243, and "(D) interest income exempt from taxation under section 103. "(3) CAPITAL GAIN ACCOUNT. — The c a p i t a l g a i n accounts h a l l

consist of— "(A) a m o u n t s r e p r e s e n t i n g capital gains on assets held for more than 6 months and referred to in subsection (a)(1)(C) or (a)(1)(D), reduced by "(B) a m o u n t s r e p r e s e n t i n g capital losses on assets held in I? j the fund for more than 6 months. "(4) ORDINARY INCOME ACCOUNT. — The o r d i n a r y i n c o m e ac-

count shall consist of— "(A) a m o u n t s referred to in subsection (a)(1)(A), "(B)(i) a m o u n t s r e p r e s e n t i n g capital gains on assets held for 6 months or less and referred to in subsection (a)(1)(C) or (a)(1)(D), reduced by "(ii) a m o u n t s r e p r e s e n t i n g capital losses on assets held in the fund for 6 months or less, "(C) interest (not including any tax-exempt i n t e r e s t referred to in paragraph (2)(D)) and other ordinary income (not including any dividend referred to in subparagraph (E)) received on assets held in the fund, "(D) ordinary income from a t r a n s a c t i o n described in subsection (a)(1)(C), and "(E) the portion of any dividend referred to in paragraph (2)(C) not t a k e n into account under such paragraph. "(5) CAPITAL LOSSES ONLY ALLOWED TO OFFSET CERTAIN G A I N S. —

Except on termination of a capital construction fund, capital losses referred to in paragraph (3)(B) or in paragraph (4)(B)(ii) shall be allowed only as a n offset to gains referred to in paragraph (3)(A) or (4)(B)(i), respectively. "(e) P U R P O S E S OF QUALIFIED W I T H D R A W A L S. —

"(1) IN GENERAL.—A qualified w i t h d r a w a l from the fund is one m a d e in accordance with the term s of the a g r e e m e n t b u t only if it is for: "(A) the acquisition, construction, or reconstruction of a ',;f?i: qualified vessel, i: I "(B) the acquisition, construction, or reconstruction of barges and containers which a r e part of the c o m p l e m e n t of a qualified vessel, or "(C) the payment of the principal on indebtedness inIjif. curred in connection with the acquisition, construction, or reconstruction of a qualified vessel or a barge or c o n t a i n e r which is part of the complement of a qualified vessel. Except to the e x t e n t provided in regulations prescribed by the Secretary, subparagraph (B), and so much of subparagraph (C)

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Page:United States Statutes at Large Volume 100 Part 3.djvu/403

 PUBLIC LAW 99-514—OCT. 22, 1986

100 STAT. 2211

as relates only to barges and containers, shall apply only with respect to barges and containers constructed in the United States. "(2)

PENALTY FOR FAILING TO FULFILL ANY SUBSTANTIAL

OBLIGATION.—Under joint regulations, if the Secretary determines that any substantial obligation under any agreement is not being fulfilled, he may, after notice and opportunity for hearing to the person maintaining the fund, treat the entire fund or any portion thereof as an amount withdrawn from the fund in a nonqualified withdrawal. "(f) TAX TREATMENT OF QUALIFIED WITHDRAWALS.— "(1) ORDERING RULE.—Any qualified withdrawal

from a fund

shall be treated— "(A) first as made out of the capital account, "(B) second as made out of the capital gain account, and "(C) third as made out of the ordinary income account. "(2) ADJUSTMENT TO BASIS OF VESSEL, ETC., WHERE WITHDRAWAL FROM ORDINARY INCOME ACCOUNT.—If any portion of a

qualified withdrawal for a vessel, barge, or container is made out of the ordinary income account, the basis of such vessel, barge, or container shall be reduced by an amount equal to such portion. "(3) ADJUSTMENT TO BASIS OF VESSEL, ETC., WHERE WITHDRAWAL FROM CAPITAL GAIN ACCOUNT.—If any portion of a

qualified withdrawal for a vessel, barge, or container is made out of the capital gain account, the basis of such vessel, barge, or container shall be reduced by an amount equal to such portion. "(4) ADJUSTMENT TO BASIS OF VESSELS, ETC., WHERE WITHDRAWALS PAY PRINCIPAL ON DEBT.—If any portion of a qualified with-

drawal to pay the principal on any indebtedness is made out of the ordinary income account or the capital gain account, then an amount equal to the aggregate reduction which would be required by paragraphs (2) and (3) if this were a qualified withdrawal for a purpose described in such paragraphs shall be applied, in the order provided in joint regulations, to reduce the basis of vessels, barges, and containers owned by the person maintaining the fund. Any amount of a withdrawal remaining after the application of the preceding sentence shall be treated as a nonqualified withdrawal. "(5) ORDINARY INCOME RECAPTURE OF BASIS REDUCTION.—If any

property the basis of which was reduced under paragraph (2), (3), or (4) is disposed of, any gain realized on such disposition, to the extent it does not exceed the aggregate reduction in the basis of such property under such paragraphs, shall be treated as an amount referred to in subsection (g)(3)(A) which was withdrawn on the date of such disposition. Subject to such conditions and requirements as may be provided in joint regulations, the preceding sentence shall not apply to a disposition where there is a redeposit in an amount determined under joint regulations which will, insofar as practicable, restore the fund to the position it was in before the withdrawal. "(g) TAX TREATMENT OF NONQUALIFIED WITHDRAWALS.—

"(1) IN GENERAL.—Except as provided in subsection (h), any withdrawal from a capital construction fund which is not qualified withdrawal shall be treated as a nonqualified withdrawal.

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Page:United States Statutes at Large Volume 100 Part 3.djvu/404

 100 STAT. 2212

PUBLIC LAW 99-514—OCT. 22, 1986

"(2) ORDERING RULE.—Any nonqualified withdrawal from a « fund shall be treated— "(A) first as made out of the ordinary income account, ,,.,,_.„, "(B) second as made out of the capital gain account, and "(C) third as made out of the capital account. For purposes of this section, items withdrawn from any account shall be treated as withdrawn on a first-in-first-out basis; except that (i) any nonqualified withdrawal for research, development, and design expenses incident to new and advanced ship design, machinery and equipment, and (ii) any amount treated as a nonqualified withdrawal under the second sentence of subsection (f)(4), shall be treated as withdrawn on a last-in-first-out basis. "(3) OPERATING RULES.—For purposes of this title— "(A) any amount referred to in paragraph (2)(A) shall be '''" included in income as an item of ordinary income for the taxable year in which the withdrawal is made, "(B) any amount referred to in paragraph (2)(B) shall be included in income for the taxable year in which the withdrawal is made as an item of gain realized during such year from the disposition of an asset held for more than 6 months, and "(C) for the period on or before the last date prescribed '] for payment of tax for the taxable year in which this ^^' withdrawal is made— "(i) no interest shall be payable under section 6601 and no addition to the tax shall be payable under section 6651, "(ii) interest on the amount of the additional tax attributable to any item referred to in subparagraph (A) or (B) shall be paid at the applicable rate (as defined in paragraph (4)) from the last date prescribed for payment of the tax for the taxable year for which such r item was deposited in the fund, and "(iii) no interest shall be payable on amounts referred to in clauses (i) and (ii) of paragraph (2) or in the case of any nonqualified withdrawal arising from the application of the recapture provision of section 606(5) I of the Merchant Marine Act of 1936 as in effect on December 31, 1969. "(4) INTEREST RATE.—For purposes of paragraph (3)(C)(ii), the applicable rate of interest for any nonqualified withdrawal— "(A) made in a taxable year beginning in 1970 or 1971 is 8 percent, or "(B) made in a taxable year beginning after 1971, shall be determined and published jointly by the Secretary of the Treasury or his delegate and the applicable Secretary and shall bear a relationship to 8 percent which the Secretaries determine under joint regulations to be comparable to the relationship which the money rates and investment yields for the calendar year immediately preceding the beginning of the taxable year bear to the money rates and investment yields for the calendar year 1970. "(5) AMOUNT NOT WITHDRAWN FROM FUND AFTER 25 YEARS FROM DEPOSIT TAXED AS NONQUALIFIED WITHDRAWAL.—

"(A) IN GENERAL.—The applicable percentage of any amount which remains in a capital construction fund at the

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Page:United States Statutes at Large Volume 100 Part 3.djvu/405

 PUBLIC LAW 99-514—OCT. 22, 1986

100 STAT. 2213

close of the 26th, 27th, 28th, 29th, or 30th taxable year following the taxable year for which such a m o u n t was deposited shall be treated as a nonqualified withdrawal in accordance with the following table: "If the amount remains in the fund at the close of the— 26th taxable year 27th taxable year 28th taxable year 29th taxable year 30th taxable year

The applicable percentage is— 20 percent 40 percent 60 percent 80 percent 100 percent.

"(B) E A R N I N G S TREATED AS DEPOSITS.—The e a r n i n g s of any

capital construction fund for any taxable year (other than net gains) shall be t r e a t e d for purposes of this paragraph as an a m o u n t deposited for such taxable year. "(C) A M O U N T S COMMITTED TREATED AS W I T H D R A W N. — For

purposes of subparagraph (A), a n a m o u n t shall not be treated a s r e m a i n i n g in a capital construction fund a t the close of any taxable year to the extent the r e is a binding contract a t the close of such year for a qualified withdrawal of such a m o u n t with respect to a n identified item for which such withdrawal may be made. "(D) AUTHORITY TO TREAT EXCESS FUNDS AS W I T H D R A W N. —

If the Secretary determines that the balance in any capital construction fund exceeds the a m o u n t which is a p p r o p r i a t e to meet the vessel construction program objectives of the person who established such fund, the a m o u n t of such excess shall be treated as a nonqualified withdrawal under subparagraph (A) unless such person develops appropriate program objectives within 3 years to dissipate such excess. "(E) A M O U N T S IN FUND ON JANUARY i, 1987.—For pur-

poses of this paragraph, all a m o u n t s in a capital construction fund on January 1, 1987, shall be t r e a t e d a s deposited in such fund on such date. "(6) NONQUALIFIED GINAL RATE.—

WITHDRAWALS

TAXED AT HIGHEST

MAR-

"(A) IN GENERAL.—In the case of any taxable year for which the r e is a nonqualified withdrawal (including any a m o u n t so treated under paragraph (5)), the tax imposed by chapter 1 shall be determined— "(i) by excluding such withdrawal from gross income, and "(ii) by increasing the tax imposed by chapter 1 by the product of the a m o u n t of such withdrawal and the highest r a t e of tax specified in section 1 (section 11 in the case of a corporation). With respect to the portion of any nonqualified withdrawal made out of the capital gain account during a taxable year to which section l(i) or 1201(a) applies, the r a t e of tax t a k e n into account under the preceding sentence shall not exceed 28 percent (34 percent in the case of a corporation). "(B) T A X BENEFIT RULE.—If any portion of a nonqualified

withdrawal is properly a t t r i b u t a b l e to deposits (other than earnings on deposits) made by the tax p a y e r in any taxable year which did not reduce the tax p a y e r ' s liability for \x under chapter 1 for any taxable year preceding the taxable year in which such withdrawal occurs—

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Page:United States Statutes at Large Volume 100 Part 3.djvu/406

 100 S T A T. 2 2 1 4

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

'^^'•''

"(i) such portion shall not be t a k e n into account under subparagraph (A), and "(ii) a n a m o u n t equal to such portion shall be treated as allowed a s a deduction under section 172 for the taxable year in which such w i t h d r a w a l occurs. "(C) COORDINATION WITH DEDUCTION FOR N E T OPERATING

LOSSES.—Any nonqualified w i t h d r a w a l excluded from gross income under subparagraph (A) shall be excluded in determining taxable income under section 172(b)(2). "(h) CERTAIN CORPORATE REORGANIZATIONS AND C H A N G E S I N P A R T -

NERSHIPS.—Under joint regulations— " ( D a transfer of a fund from one person to a n other person in a transaction to which section 381 applies may be t r e a t e d as if such transaction did not constitute a nonqualified withdrawal, and "(2) a similar rule shall be applied in the case of a continuation of a partnership. "(i) DEFINITIONS.—For purposes of this section, any term defined in section 607(k) of the M e r c h a n t Marine Act, 1936 which is also used in this section (including the definition of 'Secretary') shall have the m e a n i n g given such term by such section 607(k) a s in effect on the date of the e n a c t m e n t of this section." (c) CREDITS N O T ALLOWED A G A I N S T INCREASE I N T A X. — Paragraph

(2) of section 26(b) is amended by striking out " and " a t the end of subparagraph (G), by striking o u t the period a t the end of subparagraph (H) and inserting in lieu thereof ", and ", and by adding a t the end thereof the following new subparagraph: "(I) subparagraph (A) of section 7518(g)(6) (relating to nonqualified w i t h d r a w a l s from capital construction funds taxed a t highest m a r g i n a l rate)." (d) DEPARTMENTAL REPORTS AND CERTIFICATION.—Section 607 of

the M e r c h a n t Marine Act, 1936, is amended by adding a t the end thereof the following new subsection: "(m) DEPARTMENTAL REPORTS AND CERTIFICATION.—

"(1) IN GENERAL.—For each calendar year, the shall each provide the Secretary of the Treasury, days after the close of such calendar year, a w r i t t e n respect to those capital construction funds that a r e jurisdiction. «^

'

»'

Secretaries within 120 report with under their

"(2) CONTENTS OF REPORTS.—Each report shall set forth

the

n a m e and tax p a y e r identification n u m b e r of each person— "(A) establishing a capital construction fund during such calendar year; "(B) m a i n t a i n i n g a capital construction fund a s of the last day of such calendar year; "(C) term i n a t i n g a capital construction fund during such c a l e n d a r year; "(D) making any w i t h d r a w a l from or deposit into (and the a m o u n t s thereof) a capital construction fund during such calendar year; or "(E) with respect to which a determination has been made during such calendar year that such person has failed to fulfill a substantial obligation under any capital construction fund a g r e e m e n t to which such person is a party." (e) CONFORMING AMENDMENTS. —

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Page:United States Statutes at Large Volume 100 Part 3.djvu/407

 PUBLIC LAW 99-514—OCT. 22, 1986

100 STAT. 2215

(1) Subparagraph (A) of section 607(d)(1) of the Merchant Marine Act, 1936 is amended by inserting "and section 7518 of such Code" after "this section". (2) Subparagraph (D) of section 607(d)(1) of such Act is amended by inserting "and section 7518 of such Code" after "this section". (3) Subparagraph (C) of section 607(e)(2) of such Act is amended by striking out "85 percent" and inserting in lieu thereof "the percentage applicable under section 243(a)(1) of the Internal Revenue Code of 1986". (4) Subparagraph (E) of section 607(e)(4) of such Act is amended to read as follows: "(E) the portion of any dividend referred to in paragraph (2)(C) not taken into account under such paragraph." (5) Paragraph (3) of section 607(g) of such Act is amended to read as follows: "(3) If any portion of a qualified withdrawal for a vessel, barge, or container is made out of the capital gain account, the basis of such vessel, barge, or container shall be reduced by an amount equal to such portion." (6) Subsection (h) of section 607 of such Act is amended by adding at the end thereof the following new paragraphs: "(5) AMOUNT NOT WITHDRAWN FROM FUND AFTER 25 YEARS FROM DEPOSIT TAXED AS NONQUALIFIED WITHDRAWAL.—

"(A) IN GENERAL.—The applicable percentage of any amount which remains in a capital construction fund at the close of the 26th, 27th, 28th, 29th, or 30th taxable year following the taxable year for which such amount was deposited shall be treated as a nonqualified withdrawal in accordance with the following table: "If the amount remains in the fund at the close of the— 2th taxable year 27th taxable year 2Sth taxable year 29th taxable year
 * ?th taxable year

The applicable percentage is— 20 percent 40 percent (jO percent 80 percent 100 percent.

"(B) EARNINGS TREATED AS DEPOSITS.—The earnings of any

capital construction fund for any taxable year (other than net gains) shall be treated for purposes of this paragraph as an amount deposited for such taxable year. "(C) AMOUNTS COMMITTED TREATED AS WITHDRAWN.—For

purposes of subparagraph (A), an amount shall not be treated as remaining in a capital construction fund at the close of any taxable year to the extent there is a binding contract at the close of such year for a qualified withdrawal of such amount with respect to an identified item for which such withdrawal may be made. "(D) AUTHORITY TO TREAT EXCESS FUNDS AS WITHDRAWN.—

If the Secretary determines that the balance in any capital construction fund exceeds the amount which is appropriate to meet the vessel construction program objectives of the person who established such fund, the amount of such excess shall be treated as a nonqualified withdrawal under subparagraph (A) unless such person develops appropriate program objectives within 3 years to dissipate such excess.

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Page:United States Statutes at Large Volume 100 Part 3.djvu/408

 100 STAT. 2216

PUBLIC LAW 99-514—OCT. 22, 1986 "(E) AMOUNTS IN FUND ON JANUARY i, 1987.—For purposes of this paragraph, all amounts in a capital construction fund on January 1, 1987, shall be treated as deposited in such fund on such date. "(6) NONQUALIFIED WITHDRAWALS TAXED AT HIGHEST MARGINAL RATE.—

"(A) IN GENERAL.—In the case of any taxable year for which there is a nonqualified withdrawal (including any amount so treated under paragraph (5)), the tax imposed by chapter 1 of the Internal Revenue Code of 1986 shall be determined— "(i) by excluding such withdrawal from gross income, .;. and "(ii) by increasing the tax imposed by chapter 1 of < - |, v such Code by the product of the amount of such withdrawal and the highest rate of tax specified in section 1 (section 11 in the case of a corporation) of such Code. With respect to the portion of any nonqualified withdrawal made out of the capital gain account during a taxable year to which section l(i) or 1201(a) of such Code applies, the rate ,,l of tax taken into account under the preceding sentence shall not exceed 28 percent (34 percent in the case of a corporation). "(B) TAX BENEFIT RULE.—If any portion of a nonqualified withdrawal is properly attributable to deposits (other than earnings on deposits) made by the taxpayer in any taxable year which did not reduce the taxpayer's liability for tax under chapter 1 for any taxable year preceding the taxable year in which such withdrawal occurs— "(i) such portion shall not be taken into account under subparagraph (A), and ' "(ii) an amount equal to such portion shall be treated as allowed as a deduction under section 172 of such Code for the taxable year in which such withdrawal occurs. "(C) COORDINATION WITH DEDUCTION FOR NET OPERATING

LOSSES.—Any nonqualified withdrawal excluded from gross income under subparagraph (A) shall be excluded in determining taxable income under section 172(b)(2) of the Internal Revenue Code of 1986." (f) CLERICAL AMENDMENT.—The table of sections for chapter 77 is amended by adding at the end thereof the following new item: "Sec. 7518. Tax incentives relating to merchant marine capital construction funds." EFFECTIVE DATE.—The amendments made by this section shall

(g) apply to taxable years beginning after December 31, 1986.

TITLE III—CAPITAL GAINS Subtitle A—Individual Capital Gains SEC. 301. REPEAL OF EXCLUSION FOR LONG-TERM CAPITAL GAINS OF INDIVIDUALS.

(a) IN GENERAL.—Section 1202 (relating to deduction for capital gains) is hereby repealed.

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Page:United States Statutes at Large Volume 100 Part 3.djvu/409

 PUBLIC LAW 99-514—OCT. 22, 1986

100 STAT. 2217

(b) CONFORMING AMENDMENTS.—

(1) Section 62(a) (defining adjusted gross income), as amended by section 132, is amended by striking out paragraph (3) and redesignating paragraphs (4), (5), (6), (7), (10), (11), (12), (13), (14), and (15) as paragraphs (3) through (12), respectively. (2) Section 170(e)(1) (relating to certain contributions of ord'nary income and capital gain property) is amended by striking out "40 percent (^%6 in the case of a corporation) of. (3) Paragraph (2) of section 172(d) (relating to modifications with respect to net operating loss deduction) is amended to read as follows: "(2) CAPITAL GAINS AND LOSSES OF TAXPAYERS OTHER THAN

CORPORATIONS.—In the case of a taxpayer other than a corporation, the amount deductible on account of losses from sales or exchanges of capital assets shall not exceed the amount includible on account of gains from sales or exchanges of capital assets." (4) Paragraph (1) of section 219(f) (defining compensation) is amended by striking out "paragraph (7)" and inserting in lieu thereof "paragraph (6)". (5)(A) Section 223 (relating to cross references) is amended to read as follows:

j

"SEC. 223. CROSS REFERENCE. "For deductions in respect of a decedent, see section 691."

-

,'

(B) The table of sections for part VII of subchapter B of chapter 1 is amended by striking out "references" in the item relating to section 223 and inserting in lieu thereof "reference". (6) Paragraph (4) of section 642(c) (relating to deduction for amounts paid or permanently set aside for a charitable purpose) is amended— (A) by striking out the 1st sentence, and (B) by striking out "ADJUSTMENTS" in the paragraph heading and inserting in lieu thereof "COORDINATION WITH SECTION 6 8 l ".

'

(7) Paragraph (3) of section 643(a) (relating to distributable net income) is amended by striking out the last sentence. (8) Paragraph (4) of section 691(c) (relating to deduction for estate tax) is amended— (A) by striking out "1201, 1202, and 1211, and for purposes of section 57(a)(9)" and inserting in lieu thereof "l(j), 1201, and 1211", and

^^.;

(B) by striking out "CAPITAL GAIN DEDUCTION, ETC.—" in

the paragraph heading and inserting in lieu thereof "CAPj.^.,,

ITAL GAIN PROVISIONS.—".

(9) The second sentence of paragraph (2) of section 871(a) (relating to income not connected with United States business) is amended by striking out "such gains and losses shall be determined without regard to section 1202 (relating to deduction for capital gains) and". (10) Subsection (b) of section 1211 (relating to limitation on capital losses) is amended to read as follows: "(b) OTHER TAXPAYERS.—In the case of a taxpayer other than a corporation, losses from sales or exchanges of capital assets shall be allowed only to the extent of the gains from such sales or exchanges, plus (if such losses exceed such gains) the lower of—

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Page:United States Statutes at Large Volume 100 Part 3.djvu/410

 100 STAT. 2218

'

PUBLIC LAW 99-514—OCT. 22, 1986

"(1) $3,000 ($1,500 in the case of a married individual filing a separate return), or "(2) the excess of such losses over such gains." ' (11) Paragraph (2) of section 12120t)) (relating to capital loss carrybacks and carryovers) is amended to read as follows: "(2) SPECIAL RULE.—For purposes of determining the excess -^ referred to in subparagraph (A) or (B) of paragraph (1), an f amount equal to the amount allowed for the taxable year under paragraph (1) or (2) of section 1211(b) shall be treated as a shortterm capital gain in such year." (12) Paragraph (1) of section 1402(i) (relating to special rules •"^'- for options and commodities dealers) is amended to read as follows: "(1) IN GENERAL.—Notwithstanding subsection (a)(3)(A), in determining the net earnings from self-employment of any options dealer or commodities dealer, there shall not be excluded any gain or loss (in the normal course of the taxpayer's activity of dealing in or trading section 1256 contracts) from ' " section 1256 contracts or property related to such contracts." (13) The table of sections for part I of subchapter P of chapter 1 is amended by striking out the item relating to section 1202. (c) EFFECTIVE DATE.—The amendments made by this section shall apply to taxable years beginning after December 31, 1986. SEC. 302. 28-PERCENT CAPITAL GAINS RATE FOR TAXPAYERS OTHER THAN CORPORATIONS.

(a) IN GENERAL.—Section 1 (relating to tax imposed on individuals), as amended by sections 101 and 1411, is amended by adding at the end thereof the following new subsection: "(j) MAXIMUM CAPITAL GAINS RATE.—

"(1) IN GENERAL.—If a taxpayer has a net capital gain for any taxable year to which this subsection applies, then the tax imposed by this section shall not exceed the sum of— "(A) a tax computed at the rates and in the same manner '^ ' as if this subsection had not been enacted on the greater r.

Of-

"(i) the taxable income reduced by the amount of net ^ capital gain, or " ' "(ii) the amount of taxable income taxed at a rate below 28 percent, plus f/t ' "(B) a tax of 28 percent of the amount of taxable income ^ J, 1 in excess of the amount determined under subparagraph (A), plus ^. "(C) the amount of increase determined under subsection '''" (g). "(2) YEARS TO WHICH SUBSECTION APPLIES.—This subsection shall apply to— '(A) any taxable year beginning in 1987, and ' "(B) any taxable year beginning after 1987 if the highest . b * rate of tax set forth in subsection (a), (b), (c), (d), or (e) (whichever applies) for such taxable year exceeds 28 percent." (b) EFFECTIVE DATE.—The amendment made by this section shall apply to taxable years beginning after December 31, 1986. (c) TRANSITIONAL RULE.—The tax under section 1 of the Internal Revenue Code of 1986 on the long-term capital gain on rights to royalties paid under leases and assignments binding on Septem-

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Page:United States Statutes at Large Volume 100 Part 3.djvu/411

 PUBLIC LAW 99-514—OCT. 22, 1986

100 STAT. 2219

ber 25, 1985, by a limited partnership formed on March 1, 1977, which on October 30, 1979, assigned leases and which assignment was amended on April 27, 1981, shall not exceed 20 percent.

Subtitle B—Repeal of Corporate Capital Gains Treatment SEC. 311. REPEAL OF CORPORATE CAPITAL GAINS TREATMENT.

(a) GENERAL RULE.—Section 1201 (relating to alternative tax for corporations) is amended to read as follows: "SEC. 1201. ALTERNATIVE TAX FOR CORPORATIONS.

"(a) GENERAL RULE.—If for any taxable year a corporation has a net capital gain and any rate of tax imposed by section 11, 511, or 831(a) (whichever is applicable) exceeds 34 percent (determined without regard to the last sentence of section 110))), then, in lieu of any such tax, there is hereby imposed a tax (if such tax is less than the tax imposed by such sections) which shall consist of the sum of— "(1) a tax computed on the taxable income reduced by the amount of the net capital gain, at the rates and in the manner as if this subsection had not been enacted, plus "(2) a tax of 34 percent of the net capital gain. "(b) CROSS REFERENCES.— "For computation of the alternative tax— !• "(1) in the case of life insurance companies, see section 801(a)(2), thi' "(2) in the case of regulated investment companies and their shareholders, see section 852(b)(3)(A) and (D), and "(3) in the case of real estate investment trusts, see section 857(b)(3)(A)." (b) TECHNICAL AMENDMENTS.—

(1) Clause (iii) of section 8520b)(3)(D) is amended by striking out "72 percent" and inserting in lieu thereof "66 percent'. (2) Subparagraph (E) of section 593(b)(2), as in effect before the amendments made by title IX, is amended by adding "and" at the end of clause (iii), by striking out clause (iv), and by redesignating clause (v) as clause (iv). (3) The second sentence of section 631(c) is amended by strik; ing out "Such owner" and inserting in lieu thereof "If for the taxable year of such gain or loss the maximum rate of tax imposed by this chapter on any net capital gain is less than such maximum rate for ordinary income, such owner". (4) Paragraphs (1) and (2) of section 1445(e) (as amended by title XVIII) are each amended by striking out "28 percent" and inserting in lieu thereof "34 percent". (c) EFFECTIVE DATE.—The amendments made by subsections (a) and (b) shall apply to taxable years beginning after December 31, 1986. (d) T R A N S I T I O N A L RULES. — (1) T A X A B L E Y E A R S W H I C H B E G I N I N 1986

.

A N D E N D I N 1987.—In

the case of any taxable year which begins before January 1, 1987, and ends on or after such date, paragraph (2) of section 1201(a) of the Internal Revenue Code of 1954, as in effect on the date before the date of enactment of this Act, shall be applied as if it read as follows: "(2) the sum of— "(A) 28 percent of the lesser of—

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text:
Page:United States Statutes at Large Volume 100 Part 3.djvu/412

 100 STAT. 2220

PUBLIC LAW 99-514—OCT. 22, 1986 '

'

"(i) the net capital gain determined by taking into account only gain or loss which is properly taken into account for the portion of the taxable year before January 1, 1987, or ';^ "(ii) the net capital gain for the taxable year, and "(B) 34 percent of the excess (if any) of^ "(i) the net capital gain for the taxable year, over "(ii) the amount of the net capital gain taken into account under subparagraph (A)." (2) REVOCATION OF ELECTIONS UNDER SECTION 631(a).—Any election under section 631(a) of the Internal Revenue Code of 1954 made (whether by a corporation or a person other than a corporation) for a taxable year beginning before January 1, 1987, may be revoked by the taxpayer for any taxable year ending after December 31, 1986. For purposes of determining whether the taxpayer may make a further election under such section, such election (and any revocation under this paragraph) shall not be taken into account.

Subtitle C—Incentive Stock Options SEC. 321. REPEAL OF REQUIREMENT THAT INCENTIVE STOCK OPTIONS ARE EXERCISABLE ONLY IN CHRONOLOGICAL ORDER; MODIFICATION OF $100,000 LIMITATION.

(a) GENERAL RULE.—Subsection (b) of section 422A is amended by inserting "and" at the end of paragraph (6) and by striking out paragraphs (7) and (8) and inserting in lieu thereof the following new paragraph: "(7) under the terms of the plan, the aggregate fair market value (determined at the time the option is granted) of the stock with respect to which incentive stock options are exercisable for the 1st time by such individual during any calendar year (under all such plans of the individual's employer corporation and its parent and subsidiary corporations) shall not exceed $100,000." 0)) CONFORMING AMENDMENTS.—

(1) Subsection (c) of section 422A is amended— (A) by striking out paragraphs (4) and (7), and (B) by redesignating paragraphs (5), (6), (8), (9), and (10) as paragraphs (4), (5), (6), (7), and (8), respectively. (2) The last sentence of section 422A(c)(l) is amended by striking out "paragraph (8) of subsection (b) and paragraph (4) of this subsection" and inserting in lieu thereof "paragraph (7) of subsection (b)". (c) EFFECTIVE DATE.—The amendments made by this section shall apply to options granted after December 31, 1986.

Subtitle D—Straddles SEC. 331. YEAR-END RULE EXPANDED.

(a) IN GENERAL.—Subparagraph (E) of section 1092(c)(4) (defining straddle) is amended— (1) by inserting "or the stock is disposed of at a loss" in clause (i) after "closed", (2) by striking out "is" in clause (ii) and inserting in lieu thereof "or gains on such options are", and

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Page:United States Statutes at Large Volume 100 Part 3.djvu/413

 PUBLIC LAW 99-514—OCT. 22, 1986

100 STAT. 2221

(3) by inserting " o r option" after "stock" and " o r the disposition of such stock" after "options" in clause (iii). (b) EFFECTIVE D A T E. — The amendments m a d e by this section shall apply to positions established on or after January 1, 1987.

TITLE IV^AGRICULTURE, ENERGY, AND NATURAL RESOURCES Subtitle A—Agriculture SEC. 401. LIMITATION ON EXPENSING OF SOIL AND WATER CONSERVATION EXPENDITURES.

(a) GENERAL RULE.—Subsection (c) of section 175 (relating to soil and w a t e r conservation expenditures) is amended by adding a t the end thereof the following new paragraph: .:

V.: '.";

"(3) ADDITIONAL LIMITATIONS.— "(A) EXPENDITURES MUST BE CONSISTENT WITH SOIL CONSERVATION P L A N. — Notwithstanding any other provision of

this section, subsection (a) shall not apply to any expenditures unless such expenditures a r e consistent with— "(i) the plan (if any) approved by the Soil Conservation Service of the Department of Agriculture for the a r e a in which the land is located, or "(ii) if the r e is no plan described in clause (i), any soil conservation plan of a comparable State agency. "(B) CERTAIN WETLAND, ETC., ACTIVITIES NOT Q U A U F I E D. —

Subsection (a) shall not apply to any expenditures in connection with the d r a i n i n g or filling of wetlands or land preparation for center pivot irrigation systems." (b) EFFECTIVE DATE.—The amendment m a d e by this section shall apply to a m o u n t s paid or incurred after December 31, 1986, in taxable years ending after such date. SEC. 402. REPEAL OF SPECIAL TREATMENT FOR EXPENDITURES FOR CLEARINC; LAND.

(a) IN GENERAL.—Section 182 (relating to expenditures by farmers for clearing land) is hereby repealed. (b) TECHNICAL AMENDMENTS. —

(1) Paragraph (1) of section 263(a) (relating to capital expenditures) is amended by striking o u t subparagraph (E) and by redesignating subparagraph s (F), (G), and (H) as subparagraph s (E), (F), and (G), respectively. (2) Subparagraph (A) of section 1252(a)(1) (relating to gain from disposition of farm land) is amended by striking out "(relating to expenditures by farmers for clearing land)" and inserting in lieu thereof "(as in effect on the day before the date of the e n a c t m e n t of the T a x Reform Act of 1986)". (3) The table of sections for part VI of subchapter B of chapter 1 is amended by striking out the item relating to section 182. (c) EFFECTIVE DATE.—The amendments m a d e by this section shall apply to a m o u n t s paid or incurred after December 31, 1985, in taxable years ending after such date.

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Page:United States Statutes at Large Volume 100 Part 3.djvu/414

 100 STAT. 2222

PUBLIC LAW 99-514—OCT. 22, 1986

SEC. 403. TREATMENT OF DISPOSITIONS OF CONVERTED WETLANDS OR HIGHLY ERODIBLE CROPLANDS.

(a) GENERAL RULE.—Part IV of subchapter P of chapter 1 (relating to special rules for determining capital gains and losses) is amended by adding at the end thereof the following new section: "SEC. 1257. DISPOSITION OF CONVERTED WETLANDS OR HIGHLY ERODIBLE CROPLANDS.

"(a) GAIN TREATED AS ORDINARY INCOME.—Any gain on the disposition of converted wetland or highly erodible cropland shall be treated as ordinary income. Such gain shall be recognized notwithstanding any other provision of this subtitle, except that this section shall not apply to the extent such gain is recognized as ordinary income under any other provision of this part. "(b) Loss TREATED AS LONG-TERM CAPITAL LOSS.—Any loss recognized on the disposition of converted wetland or highly erodible cropland shall be treated as a long-term capital loss. t^ "(c) DEFINITIONS.—For purposes of this section— "(1) CONVERTED WETLAND.—The term 'converted wetland' means any converted wetland (as defined in section 1201(4) of the Food Security Act of 1985 (16 U.S.C. 3801(4))) held— "(A) by the person whose activities resulted in such land 4; being converted wetland, or "(B) by any other person who at any time used such land for farming purposes. "(2) HIGHLY ERODIBLE CROPLAND.—The term 'highly erodible cropland' means any highly erodible cropland (as defined in section 1201(6) of the Food Security Act of 1985 (16 U.S.C. 3801(6))), if at any time the taxpayer used such land for farming purposes (other than the grazing of animals). "(3) TREATMENT OF SUCCESSORS.—If any land is converted wetland or highly erodible cropland in the hands of any person, such land shall be treated as converted wetland or highly erodible cropland in the hands of any other person whose adjusted basis in such land is determined (in whole or in part) by reference to the adjusted basis of such land in the hands of such person. "(d) SPECIAL RULES.—Under regulations prescribed by the Secretary, rules similar to the rules applicable under section 1245 shall apply for purposes of subsection (a). For purposes of sections 170(e), 341(e)(12), and 751(c), amounts treated as ordinary income under subsection (a) shall be treated in the same manner as amounts treated as ordinary income under section 1245." OD) CLERICAL AMENDMENT.—The table of sections for part IV of subchapter P of chapter 1 is amended by adding at the end thereof the following new item: "Sec. 1257. Disposition of converted wetlands or highly erodible croplands." EFFECTIVE DATE.—The amendments made by this section shall

(c) apply to dispositions of converted wetland or highly erodible cropland (as defined in section 1257(c) of the Internal Revenue Code of 1986 as added by this section) first used for farming after March 1, 1986, in taxable years ending after that date.

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Page:United States Statutes at Large Volume 100 Part 3.djvu/415

 PUBLIC LAW 99-514—OCT. 22, 1986

100 STAT. 2223

SEC. 404. LIMITATION ON CERTAIN PREPAID FARMING EXPENSES.

(a) GENERAL RULE.—Section 464 (relating to limitations on deductions in case of farming syndicates) is amended by adding at the end thereof the following new subsection: "(f) SUBSECTIONS (a) AND (b) To APPLY TO CERTAIN PERSONS PREPAYING 50 PERCENT OR MORE OF CERTAIN FARMING EXPENSES.—

"(1) IN GENERAL.—In the case of a taxpayer to whom this subsection applies, subsections (a) and O> shall apply to the t) excess prepaid farm supplies of such taxpayer in the same manner as if such taxpayer were a farming syndicate. "(2) TAXPAYER TO WHOM SUBSECTION APPLIES.—This subsection applies to any taxpayer for any taxable year if such taxpayer— "(A) does not use an accrual method of accounting, "(B) has excess prepaid farm supplies for the taxable year, and "(C) is not a qualified farm-related taxpayer. "(3) QUALIFIED FARM-RELATED TAXPAYER.—

' '•''

'

'

'•'

" y' ' sj-

"(A) IN GENERAL.—For purposes of this subsection, the term 'qualified farm-related taxpayer' means any farmrelated taxpayer if— "(i)(I) the aggregate prepaid farm supplies for the 3 taxable years preceding the taxable year are less than 50 percent of, "(II) the aggregate deductible farming expenses (other than prepaid farm supplies) for such 3 taxable years, or "(ii) the taxpayer has excess prepaid farm supplies for the taxable year by reason of any change in business operation directly attributable to extraordinary circumstances. "(B) FARM-RELATED TAXPAYER.—For purposes of this paragraph, the term 'farm-related taxpayer' means any taxpayer— "(i) whose principal residence (within the meaning of section 1034) is on a farm, "(ii) who has a principal occupation of farming, or "(iii) who is a member of the family (within the meaning of subsection (c)(2)(E)) of a taxpayer described in clause (i) or (ii). "(4) DEFINITIONS.—For purposes of this subsection— "(A) EXCESS PREPAID FARM SUPPLIES.—The term 'excess prepaid farm supplies' means the prepaid farm supplies for the taxable year to the extent the amount of such supplies exceeds 50 percent of the deductible farming expenses for the taxable year (other than prepaid farm supplies). "(B) PREPAID FARM SUPPLIES.—The term 'prepaid farm supplies' means any amounts which are described in subsection (a) or (b) and would be allowable for a subsequent taxable year under the rules of subsections (a) and (b). "(C) DEDUCTIBLE FARMING EXPENSES.—The term 'deductible farming expenses' means any amount allowable as a deduction under this chapter (including any amount allowable as a deduction for depreciation or amortization) which is properly allocable to the trade or business of farming."

(b) CONFORMING AMENDMENTS.—

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text:
Page:United States Statutes at Large Volume 100 Part 3.djvu/416

 100 STAT. 2224

PUBLIC LAW 99-514—OCT. 22, 1986

(1) The heading for section 464 is amended by striking out "IN CASE OF FARMING SYNDICATES" and inserting in lieu thereof "FOR CERTAIN FARMING". (2) The table of sections for subpart C of part II of subchapter E of chapter 1 is amended by striking out "in case of farming syndicates" in the item relating to section 464 and inserting in lieu thereof "for certain farming expenses". (c) EFFECTIVE DATE.—The amendments made by this section shall apply to amounts paid or incurred after March 1, 1986, in taxable years beginning after such date. SEC. 405. TAX TREATMENT OF DISCHARGE OF CERTAIN INDEBTEDNESS OF SOLVENT FARMERS. (a) IN GENERAL.—Section 108 (relating to income from discharge of indebtedness) is amended by adding at the end thereof the following new subsection: "(g) SPECIAL RULES FOR DISCHARGE OF QUALIFIED FARM INDEBTEDNESS OF SOLVENT FARMERS.—

"(1) IN GENERAL.—For purposes of this section and section 1017, the discharge by a qualified person of qualified farm indebtedness of a taxpayer who is not insolvent at the time of the discharge shall be treated in the same manner as if the discharge had occurred when the taxpayer was insolvent. "(2)

QUALIFIED FARM INDEBTEDNESS.—For purpOSeS of t h i s

subsection, indebtedness of a taxpayer shall be treated as qualified farm indebtedness if— "(A) such indebtedness was incurred directly in connection with the operation by the taxpayer of the trade or business of farming, and "(B) 50 percent or more of the average annual gross sfriJ receipts of the taxpayer for the 3 taxable years preceding .;(, the taxable year in which the discharge of such indebtedness occurs is attributable to the trade or business of farming. "(3) QuAUFiED PERSON.—For purposes of this subsection, the term 'qualified person' means a person described in section 46(c)(8)(D)(iv)." Ob) BASIS ADJUSTMENT.—Section lOlTOt)) (relating to basis adjustment) is amended by adding at the end thereof the following new paragraph: "(4) ORDERING RULE IN THE CASE OF QUALIFIED FARM INDEBTED-

NESS.—Any amount which is excluded from gross income under section 108(a) by reason of the discharge of qualified farm indebtedness (within the meaning of section 108(g)(2)) and which under subsection (b) of section 108 is to be applied to reduce basis shall be applied— "(A) first to reduce the tax attributes described in section 108(b)(2) (other than subparagraph (D) thereof), "(B) then to reduce basis of property other than property described in subparagraph (C), and "(C) then to reduce the basis of land used or held for use in the trade or business of farming." (c) EFFECTIVE DATE.—The amendments made by this section shall apply to discharges of indebtedness occurring after April 9, 1986, in taxable years ending after such date.

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Page:United States Statutes at Large Volume 100 Part 3.djvu/417

 PUBLIC LAW 99-514—OCT. 22, 1986

100 STAT. 2225

SEC. 406. RETENTION OF CAPITAL GAINS TREATMENT FOR SALES OF DAIRY CATTLE UNDER MILK PRODUCTION TERMINATION PROGRAM.

The amendments made by subtitles A and B of title III shall not apply to any gain from the sale of dairy cattle under a valid contract with the United States Department of Agriculture under the milk production termination program to the extent such gain is properly taken into account under the taxpayer's method of accounting after January 1, 1987, and before September 1, 1987.

Subtitle B—Treatment of Oil, Gas, Geothermal, and Hard Minerals SEC. 411. TREATMENT OF INTANGIBLE DRILLING COSTS AND MINERAL EXPLORATION AND DEVELOPMENT COSTS. (a) TREATMENT UNDER SECTION 291.— (1) INCREASE IN PERCENTAGE DISALLOWANCE.—Paragraph (1) of

section 291(b) (relating to special rules for treatment of intangible drilling costs and mineral exploration and development costs) is amended by striking out "20 percent" and inserting in lieu thereof "30 percent". (2) TREATMENT OF DISALLOWED AMOUNT.—Subsection (b) of

section 291 is amended by striking out paragraphs (2), (3), (4), (5), and (6) and inserting in lieu thereof the following new paragraphs: "(2) AMORTIZATION OF AMOUNTS NOT ALLOWABLE AS DEDUC-

•

TiONS UNDER PARAGRAPH (1).—The amount not allowable as a deduction under section 263(c), 616(a), or 617(a) (as the case may be) for any taxable year by reason of paragraph (1) shall be allowable as a deduction ratably over the 60-month period beginning with the month in which the costs are paid or incurred. "(3) DISPOSITIONS.—For purposes of section 1254, any deduction under paragraph (2) shall be treated as a deduction allowable under section 263(c), 616(a), or 617(a) (whichever is appropriate). "(4) INTEGRATED OIL COMPANY DEFINED.—For purposes of this subsection, the term 'integrated oil company' means, with respect to any taxable year, any producer (within the meaning of section 4996(a)(l)) of crude oil other than an independent producer (within the meaning of section 4992(b)). "(5) COORDINATION WITH COST DEPLETION.—The portion of the

adjusted basis of any property which is attributable to amounts to which paragraph (1) applied shall not be taken into account for purposes of determining depletion under section 611." (b) TREATMENT OF COSTS INCURRED OUTSIDE THE UNITED STATES.— (1) INTANGIBLE DRILUNG AND DEVELOPMENT COSTS.—

(A) IN GENERAL.—Section 263 (relating to capital expenditures) is amended by adding at the end thereof the following new subsection: "(i) SPECIAL RULES FOR INTANGIBLE DRILLING AND DEVELOPMENT COSTS INCURRED OUTSIDE THE UNITED STATES.—In the case of intan-

gible drilling and development costs paid or incurred with respect to an oil, gas, or geothermal well located outside the United States— "(1) subsection (c) shall not apply, and

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 100 STAT. 2226

PUBLIC LAW 99-514—OCT. 22, 1986 ^>

"(2) such costs shall—

^

i^ * •-'••

'-

4H

"(A) at the election of the taxpayer, be included in adjusted basis for purposes of computing the amount of any deduction allowable under section 611 (determined without regard to section 613), or "(B) if subparagraph (A) does not apply, be allowed as a deduction ratably over the 10-taxable year period r f. PC beginning with the taxable year in which such costs were paid or incurred. This subsection shall not apply to costs paid or incurred with respect to a nonproductive well." (B) CONFORMING AMENDMENT.—Section 263(c) is amended

by inserting "and except as provided in subsection (i)," after "subsection (a),". jf

(2) DEVELOPMENT AND MINING EXPLORATION COSTS.—

(A) IN GENERAL.—Section 616 (relating to development expenditures) is amended by redesignating subsection (d) as subsection (e), and inserting after subsection (c) the following new subsection: "(d) SPECIAL RULES FOR FOREIGN DEVELOPMENT.—In the case of any expenditures paid or incurred with respect to the development of a mine or other natural deposit (other than an oil, gas, or geothermal well) located outside of the United States— "(1) subsections (a) and (b) shall not apply, and "(2) such expenditures shall— "(A) at the election of the taxpayer, be included in adjusted basis for purposes of computing the amount of any deduction allowable under section 611 (without regard to section 613), or "(B) if subparagraph (A) does not apply, be allowed as a deduction ratably over the 10-taxable year period beginning with the taxable year in which such expenditures were paid or incurred."

(B) CERTAIN MINING EXPLORATION EXPENDITURES OUTSIDE THE UNITED STATES.—Section 617(h) (relating to limitation)

is amended to read as follows: "(h) SPECIAL RULES FOR FOREIGN EXPLORATION.—In the case of any expenditures paid or incurred before the development stage for the purpose of ascertaining the existence, location, extent, or quality of any deposit of ore or other mineral (other than an oil, gas, or geothermal well) located outside the United States— "(1) subsection (a) shall not apply, and "(2) such expenditures shall— "(A) at the election of the taxpayer, be included in adjusted basis for purposes of computing the amount of any deduction allowable under section 611 (without regard to • *''"' section 613), or "(B) if subparagraph (A) does not apply, be allowed as a deduction ratably over the 10-taxable year period beginning with the taxable year in which such expenditures were paid or incurred." (C) CONFORMING AMENDMENTS.—

(i) Subsection (a) of section 616 is amended by striking out "subsection (b)" and inserting in lieu thereof "subsections (b) and (d)".

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 PUBLIC LAW 99-514—OCT. 22, 1986 } '.* • i • '

'

100 STAT. 2227

(ii) Subparagraph (B) of section 29103)(1) is amended by striking out "617" and inserting in lieu thereof "617(a)". (iii) Paragraph (10) of section 381(c) is amended by striking out the last sentence thereof. (iv) Subparagraph (C) of section 243(b)(3) is amended— (I) by adding "and" at the end of clause (i), (II) by striking out clause (ii), and (III) by redesignating clause (iii) as clause (ii).

(c) EFFECTIVE DATE.—

(1) IN GENERAL.—The amendments made by this section shall apply to costs paid or incurred after December 31, 1986, in taxable years ending after such date. (2) TRANSITION RULE.—The amendments made by this section shall not apply with respect to intangible drilling and development costs incurred,by United States companies pursuant to a minority interest in a license for Netherlands or United Kingdom North Sea development if such interest was acquired on or before December 31, 1985. SEC. 412. MODIFICATION OF PERCENTAGE DEPLETION RULES. (a) PERCENTAGE DEPLETION NOT ALLOWED FOR LEASE BONUSES, ETC.—

(1) IN GENERAL.—Subsection (d) of section 613A (relating to limitations on application of subsection (c)) is amended by adding at the end thereof the following new paragraph: "(5) PERCENTAGE DEPLETION NOT ALLOWED FOR LEASE BONUSES,

ETC.—In the case of any oil or gas property to which subsection (c) applies, for purposes of section 613, the term 'gross income from the property' shall not include any lease bonus, advance royalty, or other amount payable without regard to production from property." (2) GEOTHERMAL DEPOSITS.—Section 613(e) is amended by adding at the end thereof the following new paragraph: "(4) PERCENTAGE DEPLETION NOT TO INCLUDE LEASE BONUSES,

ETC.—In the case of any geothermal deposit, the term 'gross income from the property' shall, for purposes of this section, not include any amount described in section 613A(d)(5)." (3) EFFECTIVE DATE.—The amendment made by this subsection shall apply to amounts received or accrued after August 16, 1986, in taxable years ending after such date. (b) TREATMENT UNDER SECTION 291 OF COAL AND IRON ORE.—

(1) IN GENERAL.—Paragraph (2) of section 291(a) (relating to reductions in percentage depletion) is amended by striking out "15 percent" and inserting in lieu thereof "20 percent". (2) EFFECTIVE DATE.—The amendment made by paragraph (1) shall apply to taxable years beginning after December 31, 1986. SEC. 413. GAIN FROM DISPOSITION OF INTERESTS IN OIL. GAS. GEOTHERMAL. OR OTHER MINERAL PROPERTIES.

(a) GENERAL RULE.—Section 1254 is amended to read as follows: "SEC. 1254. GAIN FROM DISPOSITION OF INTEREST IN OIL. GAS. GEOTHERMAL. OR OTHER MINERAL PROPERTIES. "(a) GENERAL RULE.—

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Page:United States Statutes at Large Volume 100 Part 3.djvu/420

 100 STAT. 2228

PUBLIC LAW 99-514—OCT. 22, 1986 •'^' "(1) ORDINARY INCOME.—If any section 1254 property is dis'.; posed of, the lesser of— ~ "(A) the aggregate amount of— "(i) expenditures which have been deducted by the taxpayer or any person under section 263, 616, or 617 .1, with respect to such property and which, but for such deduction, would have been included in the adjusted . i basis of such property, and "(ii) the deductions for depletion under section 611 which reduced the adjusted basis of such property, or "(B) the excess of— "(i) in the case of— "(I) a sale, exchange, or involuntary conversion, the amount realized, or "(II) in the case of any other disposition, the fair market value of such property, over "(ii) the adjusted basis of such property, shall be treated as gain which is ordinary income. Such gain shall be recognized notwithstanding any other provision of this subtitle. "(2) DISPOSITION OF PORTION OF PROPERTY.—For purposes of

paragraph (1)— "(A) In the case of the disposition of a portion of section 1254 property (other than an undivided interest), the entire . amount of the aggregate expenditures or deductions de.^j scribed in paragraph (I)(A) with respect to such property shall be treated as allocable to such portion to the extent of the amount of the gain to which paragraph (1) applies. "(B) In the case of the disposition of an undivided interest in a section 1254 property (or a portion thereof), a proportionate part of the expenditures or deductions described in paragraph (1)(A) with respect to such property shall be treated as allocable to such undivided interest to the extent of the amount of the gain to which paragraph (1) applies. This paragraph shall not apply to any expenditures to the extent the taxpayer establishes to the satisfaction of the Secretary that such expenditures do not relate to the portion (or interest therein) disposed of. "(3) SECTION 1254 PROPERTY.—The term 'section 1254 property' means any property (within the meaning of section 614) if— "(A) any expenditures described in paragraph (I)(A) are «" properly chargeable to such property, or "(B) the adjusted basis of such property includes adjustments for deductions for depletion under section 611. "(b) SPECIAL RULES UNDER REGULATIONS.—Under regulations prescribed by the Secretary— "(1) rules similar to the rule of subsection (g) of section 617 and to the rules of subsections (b) and (c) of section 1245 shall be applied for purposes of this section; and "(2) in the case of the sale or exchange of stock in an S corporation, rules similar to the rules of section 751 shall be applied to that portion of the excess of the amount realized over the adjusted basis of the stock which is attributable to expenditures referred to in subsection (a)(l)(A) of this section." (b) COORDINATION WITH SECTION 617(d).—Subsection (d) of section 617 is amended by adding at the end thereof the following new paragraph:

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100 STAT. 2229

"(5) COORDINATION WITH SECTION 1254.—This subsection shall not apply to any disposition to which section 1254 applies." (c) EFFECTIVE DATES.—

(1) IN GENERAL.—The amendments made by this section shall apply to any disposition of property which is placed in service by the taxpayer after December 31, 1986. (2) EXCEPTION FOR BINDING CONTRACTS.—The amendments made by this section shall not apply to any disposition of property placed in service after December 31, 1986, if such property was acquired pursuant to a written contract which was entered into before September 26, 1985, and which was binding at all times thereafter.

Subtitle C—Other Provisions SEC. 421. EXTENSION OF ENERGY INVESTMENT CREDIT FOR SOLAR, GEOTHERMAL, OCEAN THERMAL, AND BIOMASS PROPERTY.

(a) IN GENERAL.—The table contained in subparagraph (A) of section 460t)X2) (relating to energy percentage) is amended by adding at the end thereof the following new items: "(viii) SOLAR ENERGY PROPERTY.—Property de- A. 15 percent Jan. 1, 1986 scribed in section 48(1)(4) (other than wind B. 12 percent Jan. 1, 1987 energy property). C. 10 percent Jan. 1, 1988

Dec. 31, 1986. Dec. 31, 1987. Dec. 31, 1988.

"(ix) GEOTHERMAL PROPERTY.—Property de- A. 15 percent Jan. 1, 1986 scribed in section 48(lK3XAXviii). B. 10 percent Jan. 1, 1987

Dec. 31, 1986. Dec. 31, 1988.

"(x) OCEAN THERMAL PROPERTY.—Property de- 15 percent scribed in section 48(l)(3)(A)(ix).

Jan. 1, 1986

Dec. 31, 1988.

"(xi) BiOMASS PROPERTY.—Property described A. 15 percent Jan. 1, 1986 in section 48(1)(15). B. 10 percent Jan. 1, 1987

Dec. 31, 1986. Dec. 31, 1987."

(h) TREATMENT OF CERTAIN TRANSITIONAL RULE PROPERTY.—Para-

graph (2) of section 460t>) is amended by adding at the end thereof the following new subparagraph: "(E) CERTAIN RULES MADE APPLICABLE.—Rules similar to

the rules of subsections (c) and (d) of section 49 shall apply to any credit allowable by reason of subparagraph (C) or (D)." (c) EFFECTIVE DATE.—The amendments made by this section shall apply to periods beginning after December 31, 1985, under rules similar to rules under section 48(m) of the Internal Revenue Code of 1986. SEC. 422. PROVISIONS RELATING TO EXCISE TAX ON FUELS. (a) REDUCTION IN EXCISE T A X EXEMPTION FOR Q U A U F I E D METHANOL AND ETHANOL F U E L S. —

f

(1) IN GENERAL.—Subparagraph (A) of section 404103X2) (relating to exemption for qualified ethanol and methanol fuels) is amended to read as follows: "(A) IN GENERAL.—In the case of any qualified methanol or ethanol fuel, subsection (a)(2) shall be applied by substituting '3 cents' for '9 cents'.". (2) CONFORMING

AMENDMENT.—The

heading

for

section

4041(b) is amended by striking out "Exemption" the second

71-194 0 - 89 - 15: ex.. 3 Part3

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Page:United States Statutes at Large Volume 100 Part 3.djvu/422

 100 STAT. 2230

PUBLIC LAW 99-514—OCT. 22, 1986

• "^R- Tax". (3) EFFECTIVE DATE.—The amendments made by this subsection shall take effect on January 1, 1987. (b) EXTENSION OF REDUCTION IN TAX FOR FUEL USED BY TAXI-
 * l«r* place it appears and inserting in lieu thereof "Reduction in

CABS.—Paragraph (3) of section 6427(e) (relating to termination) is amended by striking out "September 30, 1985" and inserting in lieu thereof "September 30, 1988". SEC. 423. ETHYL ALCOHOL AND MIXTURES THE R E O F FOR F U E L USE.

(a) IN GENERAL.—Except as provided in subsection (b), no ethyl alcohol or a mixture thereof may be considered— (1) for purposes of general headnote 3(a) of the Tariff Schedules of the United States, to be— (A) the growth or product of an insular possession of the United States, j'^ft (B) manufactured or produced in an insular possession from materials which are the growth, product, or manufac-j,, ture of any such possession, or '.,<'/? (C) otherwise eligible for exemption from duty under such '^•"' • headnote as the growth or product of an insular possession; or (2) for purposes of section 213 of the Caribbean Basin Economic Recovery Act, to be— (A) an article that is wholly the growth, product, or manufacture of a beneficiary country, .•*'•'• (B) a new or different article of commerce which has been grown, produced, or manufactured in a beneficiary country, (C) a material produced in a beneficiary country, or (D) otherwise eligible for duty-free treatment under such ~Act as the growth, product, or manufacture of a beneficiary country; unless the ethyl alcohol or mixture thereof is an indigenous product vt 1 hat insular possession or beneficiary country. (b) EXCEPTION. —

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^

(1) Subject to the limitation in paragraph (2), subsection (a) shall not apply to ethyl alcohol that is imported into the United States during calendar years 1987 and 1988 and produced in— (A) an azeotropic distillation facility located in an insular 1 V possession of the United States or a beneficiary country, if that facility was established before, and in operation on, January 1, 1986, or (B) an azeotropic distillation facility— k' ajx>3 (i) at least 50 percent of the total value of the equipment and components of which were— (I) produced in the United States, and (II) owned by a corporation at least 50 percent of 'Wr-iM f s r I the total value of the outstanding shares of stock of which were owned by a United States person (or -Isl^i) V0. persons) on or before January 1, 1986, and ai (aiBifl (ii) substantially all of the equipment and components of which were, on or before January 1, 1986— (I) located in the United States under the possession or control of such corporation, (II) ready for shipment to, and installation in, a v< ' o, ,' beneficiary country, and , jnotxif':'-" (iii) which—
 * «i»>.-isi.-c: ixi iu^ij*A:i:.<.i> -,. vu«»--.;s-

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 PUBLIC LAW 99-514—OCT. 22, 1986

100 STAT. 2231

(I) has on the date of enactment of this Act, or (II) will have at the time such facility is placed in service (based on estimates made before the date of enactment of this Act), ' ''" a stated capacity to produce not more than 42,000,000 gallons of such product per year. (2) The exception provided under paragraph (1) shall cease to apply during each of calendar years 1987 and 1988 to ethyl alcohol produced in a facility described in subparagraph (A) or (B) of paragraph (1) after 20,000,000 gallons of ethyl alcohol produced in that facility are entered into the United States during that year. (c) DEFINITIONS.—For purposes of this section— (1) The term "ethyl alcohol or a mixture thereof means (except for purposes of subsection (e)) ethyl alcohol or any mixture thereof described in item 901.50 of the Appendix to the Tariff Schedules of the United States. (2) Ethyl alcohol or a mixture thereof may be treated as being an indigenous product of an insular possession or beneficiary country only if the ethyl alcohol or a mixture thereof— (A) has been both dehydrated and produced by a process of full-scale fermentation within that insular possession or beneficiary country; or (B) has been dehydrated within that insular possession or beneficiary country from hydrous ethyl alcohol that includes hydrous ethyl alcohol which is wholly the product or -i ^ manufacture of any insular possession or beneficiary coun'^ try and which has a value not less than— (i) 30 percent of the value of the ethyl alcohol or r, > mixture, if entered during calendar year 1987, except that this clause shall not apply to any ethyl alcohol or mixture which has been dehydrated in the United States Virgin Islands by a facility with respect to which— (I) the owner has entered into a binding contract for the engineering and design of full-scale fermentation capacity, and (II) authorization for operation of a full-scale fermentation facility has been granted by the Island authorities before May 1, 1986, , (ii) 60 percent of the value of the ethyl alcohol or mixture, if entered during calendar year 1988, and (iii) 75 percent of the value of the ethyl alcohol or mixture, if entered after December 31, 1988. (3) The term "beneficiary country" has the meaning given to such term under section 212 of the Caribbean Basin Economic Recovery Act (19 U.S.C. 2702). (4) The term "United States person" has the meaning given to such term by section 7701(a)(3) of the Internal Revenue Code of 1986. (5) The term "entered" means entered, or withdrawn from warehouse, for consumption in the customs territory of the United States. (d) AMENDMENT TO APPENDIX TO SCHEDULES.—The item designation for item 901.50 of the Appendix to the Tariff Schedules of the United States is amended to read as follows: "Ethyl alcohol (provided for in item 427.88, part 2D, schedule 4) or any mixture

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Page:United States Statutes at Large Volume 100 Part 3.djvu/424

 100 STAT. 2232

PUBLIC LAW 99-514—OOT. 22, 1986

containing such ethyl alcohol (provided for in part 1, 2 or 10, schedule 4) if such ethyl alcohol or mixture is to be used as fuel or in producing a mixture of gasoline and alcohol, a mixture of a special fuel and alcohol, or any other mixture to be used as fuel (including motor fuel provided for in item 475.25), or is suitable for any such uses." (e) DRAWBACKS.—

(1) For purposes of subsections O?) and (j)(2) of section 313 of the Tariff Act of 1930 (19 U.S.C. 1313), as amended by section 1888(2) of this Act, any ethyl alcohol (provided for in item 427.88 of the Tariff Schedules of the United States) or mixture containing such ethyl alcohol (provided for in part 1, 2, or 10 of schedule 4 of such Schedules) which is subject to the additional duty imposed by item 901.50 of the Appendix to such Schedules may be treated as being fungible with, or of being of the same kind and quality as, any other imported ethyl alcohol (provided for in item 427.88 of such Schedules) or mixture containing such ethyl alcohol (provided for in part 1, 2, or 10 of schedule 4 of such Schedules) only if such other imported ethyl alcohol or mixture thereof is also subject to such additional duty. (2) Paragraph (1) shall not apply with respect to ethyl alcohol (provided for in item 427.88 of the Tariff Schedules of the United States) or mixture containing such ethly alcohol (provided for in part 1, 2, or 10 of schedule 4 of such Schedules) that is exempt from the additional duty imposed by item 901.50 of the Appendix to such Schedules by resison of— (A) subsection (b), or (B) any agreement entered into under section 102(b) of the Trade Act of 1974. (f) CONFORMING AMENDMENTS.—

(1) General headnote 3(a)(i) of the Tariff Schedules of the United States is amended by inserting "and except as provided in section 423 of the Tax Reform Act of 1986," after "part 7 of schedule 7,". (2) Section 213(a)(l) of the Caribbean Basin Economic Recovery Act (19 U.S.C. 2703(a)(l)) is amended by inserting "and subject to section 423 of the Tax Reform Act of 1986,' after "Unless otherwise excluded from eligibility by this title,". (3) The headnotes to subpart A of part 1 of the Appendix to the Tariff Schedules of the United States are amended by adding at the end thereof the following: "2. For purposes of item 901.50, the phrase 'is suitable for any such uses' does not include ethyl alcohol (provided for in item 427.88, part 2D, schedule 4) that is certified by the importer of record to the satisfaction of the Commissioner of Customs (hereinafter in this headnote referred to as the 'Commissioner') to be ethyl alcohol or a mixture containing such ethyl alcohol imported for uses other than liquid motor fuel use or use in producing liquid motor fuel related mixtures. If the importer of record certifies nonliquid motor fuel use for purposes of establishing actual use or suitability under item 901.50, the Commissioner shall not liquidate the entry of ethyl alcohol until he is satisfied that the ethyl alcohol has in fact not been used for liquid motor fuel use or use in producing liquid motor fuel related mixtures. If he is not satisfied within a reasonable period of time not less than 18 months from the date of entry, then the duties provided for in item 901.50 shall be payable retroactive to the date of entry. Such duties shall also become payable, retroactive

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 PUBLIC LAW 99-514—OCT. 22, 1986

100 STAT. 2233

to the date of entry, immediately upon the diversion to liquid motor fuel use of any ethyl alcohol or ethyl alcohol mixture certified upon entry as having been imported for non-liquid motor fuel use." (g) EFFECTIVE PERIOD.—

(1) The provisions of, and the amendments made by, this section (other than subsection (e)) shall apply to articles entered— (A) after December 31, 1986, and (B) before the expiration of the effective period of item 901.50 of the Appendix to the Tariff Schedules of the United States. (2) The provisions of subsection (e) shall take effect on the date of the enactment of this Act.

TITLE V—TAX SHELTER LIMITATIONS; INTEREST LIMITATIONS Subtitle A—Limitations On Tax Shelters SEC. 501. LIMITATIONS ON LOSSES AND CREDITS FROM PASSIVE ACTIVITIES.

(a) GENERAL RULE.—Subpart C of part II of subchapter E of chapter 1 (relating to taxable year for which deductions taken) is amended by adding at the end thereof the following new section: "SEC. 469. PASSIVE ACTIVITY LOSSES AND CREDITS LIMITED. "(a) DISALLOWANCE.—

"(1) IN GENERAL.—If for any taxable year the taxpayer is described in paragraph (2), neither— "(A) the passive activity loss, nor "(B) the passive activity credit, for the taxable year shall be allowed. "(2) PERSONS DESCRIBED.—The following are described in this paragraph: "(A) any individual, estate, or trust, "(B) any closely held C corporation, and "(C) any personal service corporation.

^

"(b) DISALLOWED LOSS OR CREDIT CARRIED TO NEXT YEAR.—Except

as otherwise provided in this section, any loss or credit from an activity which is disallowed under subsection (a) shall be treated as a deduction or credit allocable to such activity in the next taxable year. "(c) PASSIVE ACTIVITY DEFINED.—For purposes of this section— "(1) IN GENERAL.—The term 'passive activity' means any activity— "(A) which involves the conduct of any trade or business, and "(B) in which the taxpayer does not materially participate. -n.

'«(2) PASSIVE ACTIVITY INCLUDES ANY RENTAL ACTIVITY.—The

term 'passive activity' includes any rental activity. "(3) WORKING INTERESTS IN OIL AND GAS PROPERTY.—

\

"(A) IN GENERAL.—The term 'passive activity' shall not include any working interest in any oil or gas property which the taxpayer holds directly or through an entity

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 100 STAT. 2234

PUBLIC LAW 99-514—OCT. 22, 1986

'i^'* ^ which does not limit the liability of the taxpayer with l^K ' ' respect to such interest. "(B) INCOME IN SUBSEQUENT YEARS.—If any taxpayer has

^'^' '^

J

any loss for any taxable year from a working interest in any oil or gas property which is treated as a loss which is not from a passive activity, then any net income from such property (or any property the basis of which is determined in whole or in part by reference to the basis of such property) for any succeeding taxable year shall be treated as income of the taxpayer which is not from a passive activity. "(4) MATERIAL PARTICIPATION NOT REQUIRED FOR PARAGRAPHS

(2) AND (3).—Paragraphs (2) and (3) shall be applied without regard to whether or not the taxpayer materially participates in the activity. "(5) TRADE OR BUSINESS INCLUDES RESEARCH AND EXPERIMENTATION ACTIVITY.—For purposes of paragraph (I)(A), the term

'trade or business' includes any activity involving research or experimentation (within the meaning of section 174). "(6)

ACTIVITY IN CONNECTION WITH TRADE OR BUSINESS OR

PRODUCTION OF INCOME.—To the extent provided in regulations, for purposes of paragraph (I)(A), the term 'trade or business' includes— "(A) any activity in connection with a trade or business, or "(B) any activity with respect to which expenses are allowable as a deduction under section 212. "(d) PASSIVE ACTIVITY Loss AND CREDIT DEFINED.—For purposes of this section— "(1) PASSIVE ACTIVITY LOSS.—The term 'passive activity loss' means the amount (if any) by which— "(A) the aggregate losses from all passive activities for the taxable year, exceed «! It "(B) ^j^e aggregate income from all psissive activities for such year. "(2) PASSIVE ACTIVITY CREDIT.—The term 'passive activity credit' means the amount (if any) by which—^ "(A) the sum of the credits from all passive activities allowable for the taxable year under— "(i) subpart D of part IV of subchapter A, or ' > "(ii) subpart B (other than section 27(a)) of such part IV, exceeds "(B) the regular tax liability of the taxpayer for the taxable year allocable to all passive activities. "(e) SPECIAL RULES FOR DETERMINING INCOME OR LOSS FROM A PASSIVE ACTIVITY.—For purposes of this section— "(1) CERTAIN INCOME NOT TREATED AS INCOME FROM PASSIVE
 * 4_

ACTIVITY.—In determining the income or loss from any activity»iyll "(A) IN GENERAL.—There shall not be taken into account— . "(i) any— ,, \. ', "(I) gross income from interest, dividends, annuities, or royalties not derived in the ordinary .:J 5; ^, course of a trade or business.

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COS preparing for hostilities. His first object was to introduce order and economy into the civil department, and then to place himself at the head of the army. His physical powers had, however, been overtasked, and the privations of a long voyage had had their effect, and he died at Ghazepore, 5th October 1805, aged 66, endeavouring to the last to fulfil the duties imposed upon him. In India, as in Ireland, he was actuated by none but the purest motives of duty—the most unselfish and sincere desire for the good of the peoples over whom he was placed. He would not permit his son to enter the army. He had no grandson; but in the next generation no less than six of his descendants embraced the profession he had adorned; four of them fell in the Crimea in the space of ten months—two at Inkerman, one at Balaclava, one in the trenches before Sebastopol. His character has thus been summed up: "Lord Cornwallis was a statesman and a soldier of solid rather than showy qualities. He was noted for his moderation and prudence, his love of truth, and boldness in enouncing it. He had large views, a cultivated and correct understanding, a keen insight into character, much energy, much enterprise, much fertility of resource, a chivalrous attachment to king and country, and an unshaken resolution in doing and enforcing what he thought right." Barrington says Cornwallis and Castlereagh "seemed created for such a crisis; an unremitting perseverance, an absence of all political compunctions, an unqualified contempt of public opinion, and a disregard of every constitutional principle, were common to both. They held that 'the end justifies the means'; and unfortunately their private characters were calculated to screen their public conduct from popular suspicion."  Cosby, Francis, settled in Ireland in the reign of Queen Mary. He was in 1558 appointed by patent General of the Kerne, and in 1562 was granted the site of the suppressed Abbey of Stradbally, Queen's County, still owned by his descendants. He fell in the battle of Glenmalure, 25th August 1580. The leadership in the massacre at the moat at Mllaghmast, in 1577, of a number of the native Irish in cold blood, has been usually attributed to Francis Cosby; but written records do not bear out the tradition, although he may have borne part with the other English settlers, who were naturally anxious to clear off as many as possible of the old occupiers. The following is the account given of the transaction in the Four Masters, under date 1577: "A horrible and abominable act of treachery was committed by the English of Leinster and Meath upon that part of the people of Offaly and Leix that remained in confederacy with them, and under their protection. It was effected thus: they were all summoned to show themselves, with the greatest number they could be able to bring with them, at the great rath of Mullach-Maistean; and on their arrival at that place they were surrounded on every side by four lines of soldiers and cavalry, who proceeded to shoot and slaughter them without mercy, so that not a single individual escaped by flight or force."  Cosby, Philip, Admiral, a distinguished naval officer, was born, probably at Stradbally, in 1730. He was one of the numerous descendants of Francis Cosby who rose to high places in government employ. He entered the navy early, and from the first saw much service. General Wolfe appointed him his marine aide-de-camp, and in this capacity he served with the General until his death at Quebec in 1759. His naval services are fully set out by Ryan in his Worthies of Ireland. In 1774 he succeeded his cousin, Baron Sidney of Leix, in the family estates. In 1788 he satisfactorily concluded a treaty with the Emperor of Morocco on behalf of Great Britain, and in 1794, as Vice-Admiral of the Red, he was present at the capture of Corsica and Toulon. In 1805 he rose to be Admiral of the Red. He died at Bath, l0th January 1808, aged about 78, and was there buried in the Abbey Church.  Costello, Louisa Stuart, an authoress, was born in Ireland in 1815. She commenced her literary career at an early age by the publication of a volume of poems that attracted the attention of Moore, to whom, in 1835, she dedicated her first important work, Specimens of the Early Poetry of France. She soon became widely known as an authoress of history, travel, romance, and poetry. Ainsworth speaks of her "exquisite sense of the picturesque, and vivid appreciation of local historical association, always simple and unpretending in their enunciation." Perhaps her Memoirs of Eminent Englishwomen (1844), and Falls, Lakes, and Mountains of Wales (1845), are the best known of her works. She died on 24th April 1870, aged about 55.  Cox, Sir Richard, was born at Bandon, 25th March 1650. [His grandfather, Michael Cox, was one of the many English 100


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Page:United States Statutes at Large Volume 100 Part 3.djvu/427

 PUBLIC LAW 99-514—OCT. 22, 1986

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"(II) expenses (other than interest) which are clearly and directly allocable to such gross income, and "(III) interest expense properly allocable to such gross income, and "(ii) gain or loss attributable to the disposition of property— "(I) producing income of a type described in clause (i), or "(II) held for investment. For purposes of clause (ii), any interest in a passive activity shall not be treated as property held for investment. "(B)

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100 STAT. 2235

RETURN ON WORKING CAPITAL.—For purposes

of

subparagraph (A), any income, gain, or loss which is attributable to an investment of working capital shall be treated as not derived in the ordinary course of a trade or business. "(2) PASSIVE LOSSES OF CERTAIN CLOSELY HELD CORPORATIONS MAY OFFSET ACTIVE INCOME.—

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£, i, fio -; t lis J' r

"(A) IN GENERAL.—If a closely held C corporation (other than a personal service corporation) has net active income for any taxable year, the passive activity loss of such taxpayer for such taxable year (determined without regard to this paragraph)— "(i) shall be allowable as a deduction against net active income, and "(ii) shall not be taken into account under subsection (a) to the extent so allowable as a deduction. A similar rule shall apply in the case of any passive activity credit of the taxpayer. "(B) NET ACTIVE INCOME.—For purposes of this paragraph, the term 'net active income' means the taxable 0 income of the taxpayer for the taxable year determined without regard to— "(i) any income or loss from a passive activity, and "(ii) any item of gross income, expense, gain, or loss described in paragraph (I)(A). "(3) COMPENSATION FOR PERSONAL SERVICES.—Earned income (within the meaning of section 911(d)(2)(A)) shall not be taken into account in computing the income or loss from a passive activity for any taxable year. "(4) DIVIDENDS REDUCED BY DIVIDENDS RECEIVED DEDUCTION.—

For purposes of paragraphs (1) and (2), income from dividends shall be reduced by the amount of any dividends received deduction under section 243, 244, or 245. "(f) TREATMENT OF FORMER PASSIVE ACTIVITIES.—For purposes of this section— "(1) IN GENERAL.—If an activity is a former passive activity for any taxable year— "(A) any unused deduction allocable to such activity under subsection (b) shall be offset against the income from such activity for the taxable year, "(B) any unused credit allocable to such activity under subsection (b) shall be offset against the regular tax liability (computed after the application of paragraph (1)) allocable to such activity for the taxable year, and

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Page:United States Statutes at Large Volume 100 Part 3.djvu/428

 100 STAT. 2236

PUBLIC LAW 99-514—OCT. 22, 1986 "(C) any such deduction or credit remaining after the application of subparagraphs (A) and (B) shall continue to be treated as arising from a passive activity.

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"(2) CHANGE IN STATUS OF CLOSELY HELD CORPORATION OR

PERSONAL SERVICE CORPORATION.—If a taxpayer ceases for any taxable year to be a closely held C corporation or personal service corporation, this section shall continue to apply to losses and credits to which this section applied for any preceding taxable year in the same manner as if such taxpayer continued to be a closely held C corporation or personal service corporation, whichever is applicable. "(3) FORMER PASSIVE ACTIVITY.—The term 'former passive activity' means any activity which, with respect to the taxpayer— "(A) is not a passive activity for the taxable year, but "(B) was a passive activity for any prior taxable year. "(g) DISPOSITIONS OF ENTIRE INTEREST IN PASSIVE ACTIVITY.—If

during the taxable year a taxpayer disposes of his entire interest in any passive activity (or former passive activity), the following rules shall apply: "(1) FULLY TAXABLE TRANSACTION.—

"(A) IN GENERAL.—If all gain or loss realized on such disposition is recognized, any loss from such activity which •' has not previously been allowed as a deduction (and in the case of a passive activity for the taxable year, any loss ^ tt > realized on such disposition) shall not be treated as a passive activity loss and shall be allowable as a deduction "'^- ' against income in the following order: "(i) Income or gain from the passive activity for the taxable year (including any gain recognized on the '•'f-' disposition). >^?:" "(ii) Net income or gain for the taxable year from all passive activities. • "(iii) Any other income or gain. "(B) SUBPARAGRAPH (A) NOT TO APPLY TO DISPOSITION INVOLVING RELATED PARTY.—If the taxpayer and the person

acquiring the interest bear a relationship to each other described in section 267(b) or section 707(b)(l), then subpara'-'"" graph (A) shall not apply to any loss of the taxpayer until the taxable year in which such interest is acquired (in a transaction described in subparagraph (A)) by another •iyfji person who does not bear such a relationship to the taxpayer. "(C) COORDINATION WITH SECTION 1211.—In the ceise of ~ any loss realized on the disposition of an interest in a passive activity, section 1211 shall be applied before subparagraph (A) is applied. "(2) DISPOSITION BY DEATH.—If an interest in the activity is

transferred by reason of the death of the taxpayer— "(A) paragraph (1) shall apply to such losses to the extent such losses are greater than the excess (if any) of— i "(i) the basis of such property in the hands of the transferee, over "(ii) the adjusted basis of such property immediately before the death of the taxpayer, and

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