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Page:United States Statutes at Large Volume 100 Part 3.djvu/1001

 PUBLIC LAW 99-514—OCT. 22, 1986

100 STAT. 2809

(7) LIMITATION ON TREATMENT OF PAYMENT PURSUANT TO SECURITIES LAW VIOLATION AS PARACHUTE PAYMENT.—Subparagraph

(B) of section 280G(b)(2) (defining parachute payments) is amended to read as follows: "(B) AGREEMENTS.—The term 'parachute payment' shall also include any payment in the nature of compensation to (or for the benefit of) a disqualified individual if such payment is made pursuant to an agreement which violates any generally enforced securities laws or regulations. In any proceeding involving the issue of whether any payment made to a disqualified individual is a parachute payment on account of a violation of any generally enforced securities laws or regulations, the burden of proof with respect to establishing the occurrence of a violation of such a law or regulation shall be upon the Secretary." (8) CLERICAL AMENDMENT.—Paragraph (2) of section 280G(d) (defining base period) is amended by striking out "was an employee of the corporation" and inserting in lieu thereof "performed personal services for the corporation". (k) AMENDMENTS RELATING TO SECTION 68 OF THE ACT.— (1) No DISC PREFERENCE REDUCTION FOR S CORPORATIONS.—

Effective with respect to taxable years beginning after December 31, 1982, paragraph (4) of section 291(a) (as in effect on the day before the date of the enactment of the Tax Reform Act of 1984) is amended by striking out "a corporation" and inserting in lieu thereof "a C corporation". (2) CLARIFICATION OF EFFECTIVE DATES.—

-^ g,

(A) Paragraph (2) of section 68(e) of the Tax Reform Act of 1984 (relating to section 1250 gain) is amended by striking out "of the Internal Revenue Code of 1954" and inserting in lieu thereof "of the Internal Revenue Code of 1954, and the amendment made by subsection (c)(2) of this section,". (B) Paragraph (3) of section 68(e) of the Tax Reform Act of 1984 (relating to pollution control facilities) is amended by striking out "of such Code" and inserting in lieu thereof "of such Code, and so much of the amendment made by subsection (c)(1) of this section as relates to pollution control facilities,". (3) CLERICAL AMENDMENTS.—

(A) The subsection heading of section 291(a) is amended by striking out "20-PERCENT".

(B) Paragraph (2) of section 68(c) of the Tax Reform Act of 1984 is amended by striking out "section 57(h)" and inserting in lieu thereof "section 57(b)". (C) Subparagraph (B) of section 570t)Xl) is amended to read as follows: "(B) IRON ORE AND COAL.—In the case of any item of tax preference of a corporation described in paragraph (8) of subsection (a) (but only to the extent such item is allocable to a deduction for depletion for iron ore and coal, including lignite), only 71.6 percent of the amount of such item of tax preference (determined without regard to this subsection) shall be taken into account as an item of tax preference." (D) Paragraph (2) of section 570t)) is amended by striking out "85 percent" and inserting in lieu thereof "80 percent".

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Page:United States Statutes at Large Volume 100 Part 3.djvu/1002

 100 STAT. 2810

PUBLIC LAW 99-514—OCT. 22, 1986

SEC. 1805. AMENDMENTS RELATED TO PARTNERSHIP PROVISIONS. (a) AMENDMENTS RELATED TO SECTION 72 OF THE ACT. — (1) CLARIFICATION THAT CHANGE NEED NOT OCCUR DURING TAXABLE YEAR OF PAYMENT.—

(A) Clause (i) of section 706(d)(2)(A) is amended by striking out "each such item" and inserting in lieu thereof "such item". (B) Subparagraph (B) of section 706(d)(2) is amended by striking out "which are described in paragraph (1) and". (2) CLERICAL AMENDMENT.—Clause (i) of section 706(d)(2)(C) (relating to items attributable to periods not within taxable year) is amended by striking out "the first day of such taxable year" and inserting in lieu thereof "the first day of the taxable year". (b) AMENDMENT RELATED TO SECTION 73 OF THE ACT.—Clause (iii)

of section 707(a)(2)(B) (relating to treatment of certain property transfers) is amended by striking out "sale of property" and inserting in lieu thereof "sale or exchange of property". (c) AMENDMENTS RELATED TO SECTION 75 OF THE ACT.—

(1) LIMITATION ON AMOUNT OF GAIN.—Section 386 (relating to

transfers of partnership and trust interests by a corporation) is amended by redesignating subsection (d) as subsection (e) and by inserting after subsection (c) the following new subsection: "(d) LIMITATION ON AMOUNT OF GAIN RECOGNIZED IN CASE OF NONLIQUIDATING DISTRIBUTIONS.—In the case of any distribution by a

corporation to which section 311 applies, the amount of any gain recognized by reason of subsection (a) shall not exceed the amount of the gain which would have been recognized if the partnership interest had been sold. The Secretary may by regulations provide that the amount of such gain shall be computed without regard to any loss attributable to property contributed to the partnership for the principal purpose of recognizing such loss on the distribution." (2) CLARIFICATION OF SECTION 761(e).—Subsection (e) of section 761 (relating to distributions treated as exchanges) is amended— (A) by striking out "For purposes of" and inserting in lieu thereof "Except as otherwise provided in regulations, for purposes of", (B) by striking out "any distribution (not otherwise treated as an exchange)" and inserting in lieu thereof "any ^' distribution of an interest in a partnership (not otherwise . ^ treated as an exchange)", and 7,';' (C) by striking out "DISTRIBUTIONS" in the subsection heading and inserting in lieu thereof "DISTRIBUTIONS OF PARTNERSHIP INTERESTS". (d) AMENDMENT RELATED TO SECTION 77 OF THE ACT.—Subpara-

graph (A) of section 1031(a)(3) (relating to requirement that property be identified) is amended by striking out "before the day" and inserting in lieu thereof "on or before the day". SEC. 1806. AMENDMENTS RELATED TO TRUST PROVISIONS. (a) AMENDMENT RELATED TO SECTION 81 OF THE ACT.—Subpara-

graph (B) of section 643(e)(3), as redesignated by subsection (c) (relating to election to recognize gain), is amended to read as follows: "(B) ELECTION.—Any election under this paragraph shall apply to all distributions made by the estate or trust during

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


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Page:United States Statutes at Large Volume 100 Part 3.djvu/1003

 PUBLIC LAW 99-514—OCT. 22, 1986

100 STAT. 2811

a taxable year and shall be made on the return of such estate or trust for such taxable year." (b) TREATMENT OF MULTIPLE TRUSTS.—Subsection (b) of section 82 of the Tax Reform Act of 1984 (relating to treatment of multiple trusts) is amended by inserting before the period at the end thereof the following: "; except that, in the case of a trust which was irrevocable on March 1, 1984, such amendment shall so apply only to that portion of the trust which is attributable to contributions to corpus after March 1, 1984". (c) CLERICAL AMENDMENTS.—Section 643 (relating to definitions applicable to subparts A, B, C, and D) is amended— (1) by redesignating the subsection added by section 81 of the Tax Reform Act of 1984 as subsection (e), and (2) by redesignating the subsection added by section 82 of such Act as subsection (f). SEC. 1807. AMENDMENTS RELATED TO ACCOUNTING CHANGES. (a) AMENDMENTS RELATED TO SECTION 91 OF THE ACT.— (1) CLARIFICATION OF CASH BASIS EXCEPTION TO TAX SHELTER RULE.—

(A) Subparagraph (A) of section 461(i)(2) is amended by striking out "within 90 days after the close of the taxable year" and inserting in lieu thereof "before the close of the 90th day after the close of the taxable year". (B) The heading for paragraph (2) of section 461(i) is amended by striking out "WITHIN 90 DAYS" and inserting in

n

lieu thereof "ON OR BEFORE THE 90TH DAY". (2) CLARIFICATION OF COORDINATION WITH SECTION 464.— Subparagraph (A) of section 461(i)(4) (relating to special rules for farming) is amended to read as follows: (A) any tax shelter described in paragraph (3)(C) shall be treated as a farming syndicate for purposes of section 464; except that this subparagraph shall not apply for purposes of determining the income of an individual meeting the requirements of section 464(c)(2),". (3) TREATMENT OF MINING AND SOUD WASTE RECLAMATION AND CLOSING COSTS.— (A) RESERVE INCREASED BY AMOUNT DEDUCTED.—Para-

S8f

graph (2) of section 468(a) (relating to establishment of reserves for reclamation and closing costs) is amended by adding at the end thereof the following new subparagraph: "(D)

RESERVE INCREASED BY AMOUNT DEDUCTED.—A re-

serve shall be increased each taxable year by the amount allowable as a deduction under paragraph (1) for such taxable year which is allocable to such reserve." (B) EFFECTIVE DATE.—Subsection (g) of section 91 of the Tax Reform Act of 1984 (relating to effective dates) is amended by adding at the end thereof the following new paragraph: "(4) EFFECTIVE DATE FOR TREATMENT OF MINING AND SOUD

WASTE RECLAMATION AND CLOSING COSTS.—Except as otherwise

provided in subsection (h), the amendments made by subsection (b) shall take effect on the date of the enactment of this Act with respect to taxable years ending after such date." (C) CLERICAL AMENDMENT.—Paragraph (1) of section 468(a) is amended by striking out this subsection" and inserting in lieu thereof "this section".

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Page:United States Statutes at Large Volume 100 Part 3.djvu/1004

 100 STAT. 2812

PUBLIC LAW 99-514-OCT. 22, 1986

11:

(4) TREATMENT OF DECOMMISSIONING OF NUCLEAR POWERPLANT.— (A) TIME WHEN PAYMENTS DEEMED MADE.—

(i) IN GENERAL.—Section 468A is amended by adding at the end thereof the following new subsection: "(g) TIME WHEN PAYMENTS DEEMED MADE.—For purposes of this section, a taxpayer shall be deemed to have made a payment to the Fund on the last day of a taxable year if such payment is made on account of such taxable year and is made within V-k months after the close of such taxable year." (ii) TRANSITIONAL RULE.—To the extent provided in

""

regulations prescribed by the Secretary of the Treasury . o r his delegate, subsection (g) of section 468A of the '"'*'* ' ' Internal Revenue Code of 1954 (as added by clause (i)) shall be applied with respect to any payment on ac. count of a taxable year beginning before January 1, 1987, Eis if it did not contain the requirement that the ,,, „^, payment be made within V-h months after the close of the taxable year. Such regulations may provide that, to the extent such payment to the Fund is made more than 2 ¥2 months after the close of the taxable year, any adjustment to the tax attributable to such payment shall not affect the amount of interest payable with respect to periods before the payment is made. Such regulations may provide appropriate adjustments to the deduction allowed under such section 468A for any ., i: such taxable year to take into account the fact that the payment to the Fund is made more than V-k months after the close of the taxable year. (B) TREATMENT OF AMOUNTS DISTRIBUTED.—Subparagraph
 * '^ I.-;.

(A) of section 468A(c)(l) (relating to inclusion of amount distributed) is amended by striking out "subsection (e)(2)(B)" and inserting in lieu thereof "subsection (e)(4)(B)". (C) CLARIFICATION OF TAXATION OF FUND.—Paragraph (2)

mik

 * of section 468A(e) (relating to taxation of Fund) is amended

to read as follows: .j; "(2) TAXATION OF FUND.—

f u

i

"(A) IN GENERAL.—There is hereby imposed on the gross income of the Fund for any taxable year a tax at a rate equal to the highest rate of tax specified in section 11(b), except that— "(i) there shall not be included in the gross income of the Fund any payment to the Fund with respect to which a deduction is allowable under subsection (a), and "(ii) there shall be allowed as a deduction to the Fund any amount paid by the Fund which is described in paragraph (4)(B) (other than an amount paid to the taxpayer) and which would be deductible under this chapter for purposes of determining the taxable income of a corporation. "(B) TAX IN LIEU OF OTHER TAXATION.—The tax imposed

-'' »fii

by subparagraph (A) shall be in lieu of any other taxation under this subtitle of the income from assets in the Fund. "(C) FUND TREATED AS CORPORATION.—For purposes of subtitle F—

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Page:United States Statutes at Large Volume 100 Part 3.djvu/1005

 PUBLIC LAW 99-514—OCT. 22, 1986

100 STAT. 2813

"(i) the Fund shall be treated as if it were a corporation, and "(ii) any tax imposed by this paragraph shall be treated as a tax imposed by section 11." (D) LIMITATION ON INVESTMENTS.—Paragraph (4) of section 468A(e) is amended by striking out "and" at the end of =: subparagraph (A), by striking out the period at the end of subparagraph (B) and inserting in lieu thereof ", and", and i by adding at the end thereof the following new subparagraph: "(C) to the extent that a portion of the Fund is not currently needed for purposes described in subparagraph (A) or (B), making investments described in section 501(c)(21)(B)(ii)." (E) CLERICAL AMENDMENTS.—

J,

f-"

(i) Subsection (a) of section 468A is amended by striking out "this subsection" and inserting in lieu thereof "this section". (ii) Subsection (d) of section 468A is amended by striking out "this subsection" in the material preceding paragraph (1) and inserting in lieu thereof "this section". (iii) The subsection heading for subsection (e) of section 468A is amended by striking out "TRUST F U N D " and inserting in lieu thereof "RESERVE FUND". (iv) Paragraph (1) of section 468A(e) is amended— (I) by striking out "this subsection" and inserting in lieu thereof "this section", and (II) by striking out "Trust Fund" and inserting in lieu thereof "Reserve Fund". (v) Paragraph (6) of section 468A(e) is amended— (I) by striking out "this subsection" each place it appears and inserting in lieu thereof "this section", and (II) by striking out "this subparagraph" and inserting in lieu thereof "this paragraph". (vi) Subsection (f) of section 468A is amended by striking out "The term" and inserting in lieu thereof "For purposes of this section, the term". (vii) Section 88 is amended by striking out "of ratemaking purposes" and inserting in lieu thereof "for ratemaking purposes". (F) EFFECTIVE DATE.—Subsection (g) of section 91 of the Tax Reform Act of 1984 is amended by adding at the end thereof the following new paragraph:

"(5)

RULES

FOR

NUCLEAR

DECOMMISSIONING

COSTS.—The

amendments made by subsections (c) and (f) shall take effect on the date of the enactment of this Act with respect to taxable years ending after such date." (5) EFFECTIVE DATE FOR NET OPERATING LOSS PROVISIONS.—

Subsection (g) of section 91 of the Tax Reform Act of 1984 is amended by adding at the end thereof the following new paragraph: "(6)

MODIFICATION

OF

NET

OPERATING

LOSS

CARRYBACK

PERIOD.—The amendments made by subsection (d) shall apply to losses for taxable years beginning after December 31, 1983."

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Page:United States Statutes at Large Volume 100 Part 3.djvu/1006

 100 STAT. 2814

PUBLIC LAW 99-514—OCT. 22, 1986 (6) CLARIFICATION OF ELECTION FOR EARLIER EFFECTIVE DATE.—

Subparagraph (A) of section 91(g)(2) of the Tax Reform Act of ft 1984 (relating to taxpayer may elect earlier application) is amended— (A) by striking out "incurred before" and inserting in lieu •: thereof "incurred on or before", (B) by striking out "incurred on or after" and inserting in ': lieu thereof "incurred after", and • ' -, V (C) by adding at the end thereof the following new sentence: -:•' ' "The Secretary of the Treasury or his delegate may by regulations provide that (in lieu of an election under the preceding sentence) a taxpayer may (subject to such conditions as such regulations may provide) elect to have subsection (h) of section 461 of such Code apply to the taxpayer's entire taxable year in which occurs July 19, 1984." '«

(7) SPECIAL RULES FOR DESIGNATED SETTLEMENT FUNDS.—

(A) IN GENERAL.—Subpart C of part II of subchapter E of chapter 1 (relating to taxable year for which deduction taken) is amended by adding at the end thereof the following new section: "SEC. 468B. SPECIAL RULES FOR DESIGNATED SETTLEMENT FUNDS.

"(a) IN GENERAL.—For purposes of section 461(h), economic performance shall be deemed to occur as qualified payments are made by the taxpayer to a designated settlement fund.
 * "(b) TAXATION OF DESIGNATED SETTLEMENT FUND.—

ii

"(1) IN GENERAL.—There is imposed on the gross income of any designated settlement fund for any taxable year a tax at a rate equal to the maximum rate in effect for such taxable year under section 1(e). "(2) CERTAIN EXPENSES ALLOWED.—For purposes of paragraph

(1), gross income for any taxable year shall be reduced by the amount of any administrative costs (including State and local •. taxes) and other incidental expenses of the designated settlement fund (including legal, accounting, and actuarial -^; expenses)— l©&i»j "(A) which are incurred in connection with the operation of the fund, and "(B) which would be deductible under this chapter for H:v purposes of determining the taxable income of the corporation, a- no other deduction shall be allowed to the fund. !;• "(3) TRANSFERS TO THE FUND.—In the case of any qualified payment made to the fund— "(A) the amount of such payment shall not be treated as iit income of the designated settlement fund. If "(B) the basis of the fund in any property which constitutes a qualified payment shall be equal to the fair market value of such property at the time of payment, and "(C) the fund shall be treated as the owner of the prop, ? erty in the fund (and any earnings thereon). "(4) TAX IN UEU OF OTHER TAXATION.—The tax imposed by

-^

paragraph (1) shall be in lieu of any other taxation under thL subtitle of income from assets in the designated settlement fund.

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Page:United States Statutes at Large Volume 100 Part 3.djvu/1007

 PUBLIC LAW 99-514—OCT. 22, 1986

100 STAT. 2815

"(5) COORDINATION WITH SUBTITLE F.—For purposes of subtitle F— "(A) a designated settlement fund shall be treated as a corporation, and "(B) any tax imposed by this subsection shall be treated as a tax imposed by section 11. "(c)

DEDUCTIONS NOT ALLOWED FOR TRANSFER OF INSURANCE

AMOUNTS.—No deduction shall be allowable for any qualified payment by the taxpayer of any amounts received from the settlement of any insurance claim to the extent such amounts are excluded from the gross income of the taxpayer. "(d) DEFINITIONS.—For purposes of this section— "(1) QUALIFIED PAYMENT.—The term 'qualified payment' means any money or property which is transferred to any designated settlement fund pursuant to a court order, other than— "(A) any amount which may be transferred from the fund to the taxpayer, or "(B) the transfer of any stock or indebtedness of the taxpayer (or any related person). "(2) DESIGNATED SETTLEMENT FUND.—The term 'designated settlement fund' means any fund— "(A) which is established pursuant to a court order, "(B) with respect to which no amounts may be transferred other than in the form of qualified payments, ,o/ "(C) which is administered by persons a majority of whom are independent of the taxpayer, "(D) which is established for the principal purpose of resolving and satisfying present and future claims against the taxpayer (or any related person or formerly related person) arising out of personal injury, death, or property damage, "(E) under the terms of which the taxpayer may not hold any beneficial interest in the income or corpus of the fund, and "(F) with respect to which an election is made under this section by the taxpayer. An election under this section shall be made at such time and in such manner as the Secretary shall by regulation prescribe. Such an election, once made, may be revoked only with the consent of the Secretary. "(3) RELATED PERSON.—The term 'related person' means a person related to the taxpayer within the meaning of section 267(b). "(e) NoNAPPLICABILITY OF SECTION.—This section shall not apply with respect to any liability of the taxpayer arising under any workers' compensation Act or any contested liability of the taxpayer within the meaning of section 461(f). "(f) OTHER FUNDS.—Except as provided in regulations, any payment in respect of a liability described in subsection (d)(2)(D) (and not described in subsection (e)) to a trust fund or escrow fund which is not a designated settlement fund shall not be treated as constituting economic performance." (B) CLERICAL AMENDMENT.—The table of sections for subpart C of part II of subchapter E of chapter 1 is amended by adding after the item relating to section 468A the following new item:

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Page:United States Statutes at Large Volume 100 Part 3.djvu/1008

 100 STAT. 2816

PUBLIC LAW 99-514—OCT. 22, 1986 "Sec. 468B. Special rules for designated settlement funds." (C) SPECIAL RULE FOR TAXPAYER IN BANKRUPTCY REORGA-

NIZATION.—In the case of any settlement fund which is established for claimants against a corporation which filed a petition for reorganization under chapter 11 of title 11, United States Code, on August 26, 1982, and which filed ^•i v^rith a United States district court a first amended and restated plan of reorganization before March 1, 1986— (i) any portion of such fund which meets the require^ ^ -ments of subparagraphs (A), (C), (D), and (F) of section 468B(d)(2) of the Internal Revenue Code of 1954 (as .,^^,, added by this paragraph) shall be treated as a des,^^.V'. ignated settlement fund for purposes of section 468B of .V such Code, (ii) such corporation (or any successor thereof) shall y-^il. be liable for the tax imposed by section 468B of such Code on such portion of the fund (and the fund shall f.(- .;. not be liable for such tax), such tax shall be deductible by the corporation, and the rate of tax under section l« - •. u 468B of such Code for any taxable year shall be equal to 15 percent, and (iii) any transaction by any portion of the fund not -.u:> ' described in clause (i) shall be treated as a transaction made by the corporation. umih^'

(D) CLARIFICATION OF LAW WITH RESPECT TO CERTAIN FUNDS.—

'^ • ,;..

, s... •*

i-

(i) IN GENERAL.—Nothing in any provision of law shall be construed as providing that an escrow account, settlement fund, or similar fund is not subject to curj.gj^^ income tax. If contributions to such an account or fund are not deductible, then the account or fund shall be taxed as a grantor trust. (ii) EFFECTIVE DATE.—The provisions of clause (i) shall apply to accounts or funds established after August 16, 1986.

(8) TRANSITIONAL RULE FOR CERTAIN AMOUNTS.—For purposes

of section 461(h) of the Internal Revenue Code of 1954, economic performance shall be treated as occurring on the date of a payment to an insurance company if— 5 (A) such payment was made before November 23, 1985, for indemnification Eigainst a tort liability relating to personal injury or death caused by inhalation or ingestion of dust from asbestos-containing insulation products, (B) such insurance company is unrelated to taxpayer, (C) such payment is not refundable, and (D) the taxpayer is not engaged in the mining of asbestos nor is any member of any affiliated group which includes the taxpayer so engaged, (b) AMENDMENTS RELATED TO SECTION 92 OF THE ACT.— (1) TREATMENT OF SERVICES.—Subsection (g) of section
 * r'

467 (relating to comparable rules for services) is amended by adding at the end thereof the following new sentence: "The preceding sentence shall not apply to any amount to which section 404 or ^*i 404A (or any other provision specified in regulations) applies." (2) CLERICAL AMENDMENTS.—

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Page:United States Statutes at Large Volume 100 Part 3.djvu/1009

 PUBLIC LAW 99-514—OCT. 22, 1986

100 STAT. 2817

(A) Subparagraph (A) of section 467(b)(4) is amended by striking out "statutory recover period" and inserting in lieu thereof "statutory recovery period". (B) Paragraph (4) of section 467(c) is amended by striking out "subsection (b)(3)(A)" and inserting in lieu thereof "subsection (b)(4)(A)". (C) The last sentence of section 467(d)(2) is amended by striking out "section 1274(c)(2)(C)" and inserting in lieu thereof "section 1274(c)(4)(C)". (D) Paragraph (5) of section 467(e) is amended by striking out "section 168((1)(4)(D)" and inserting in lieu thereof "section 168(e)(4)(D)". (c) TRANSITION RULE.—A taxpayer shall be allowed to use the cash receipts and disbursements method of accounting for taxable years ending after January 1, 1982, if such taxpayer— (1) is a partnership which was founded in 1936, (2) has over 1,000 professional employees, (3) used a long-term contract method of accounting for a substantial part of its income from the performance of architectural and engineering services, and (4) is headquartered in Chicago, Illinois. SEC. 1808. AMENDMENTS RELATED TO TAX STRADDLE PROVISIONS. (a) TREATMENT OF SUBCHAPTER S CORPORATIONS.—

(1) Section 102 of the Tax Reform Act of 1984 (relating to section 1256 extended to certain options) is amended by adding at the end thereof the following new subsection: "0") COORDINATION OF ELECTION UNDER SUBSECTION (d)(3) WITH ELECTIONS UNDER SUBSECTIONS (g) AND (h).—The Secretary of the Tresisury or his delegate shall prescribe such regulations as may be necessary to coordinate the election provided by subsection (d)(3) with the elections provided by subsections (g) and (h)." (2) Paragraph (3) of section 102(d) of the Tax Reform Act of 1984 (relating to subchapter S election) is amended by striking out "(as so defined)" and inserting in lieu thereof "(as so defined) or such other day as may be permitted under regulations". (b) TREATMENT OF AMOUNTS RECEIVED FOR LOANING SECURITIES.—

Subparagraph (B) of section 263(g)(2) (defining interest and carrying charges) is amended by striking out "and" at the end of clause (ii), by striking out the period at the end of clause (iii) and inserting in lieu thereof ", and", and by inserting after clause (iii) the following new clause: "(iv) any amount which is a payment with respect to ' a security loan (within the meaning of section 512(a)(5)) includible in gross income with respect to such property for the taxable year." (c) TREATMENT OF OPTION STRADDLES.—Subparagraph (A) of section 1092(d)(3) (relating to special rules for stocks) is amended by adding at the end thereof the following new sentence: "The preceding sentence shall not apply to any interest in stock." (d) SECTION 108.—Section 108 of the Tax Reform Act of 1984 is amended— (1) by striking out "if such position is part of a transaction entered into for profit" and inserting in lieu thereof "if such loss is incurred in a trade or business, or if such loss is incurred

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Page:United States Statutes at Large Volume 100 Part 3.djvu/1010

 100 STAT. 2818

PUBLIC LAW 99-514—OCT. 22, 1986

in a transaction entered into for profit though not connected with a trade or business", (2) by striking out subsection (b) and inserting in lieu thereof the following: "(b) Loss INCURRED IN A TRADE OR BUSINESS.—For purposes of subsection (a), any loss incurred by a commodities dealer in the trading of commodities shall be treated as a loss incurred in a trade or business.", (3) by striking out the heading for subsection (c) and inserting in lieu thereof the following: "(c) NET LOSS ALLOWED.—",

(4) by striking out subsection (f) and inserting in lieu thereof the following: "(f) COMMODITIES DEALER.—For purposes of this section, the term 'commodities dealer' means any taxpayer who— "(1) at any time before January 1, 1982, was an individual described in section 1402(i)(2)(B) of the Internal Revenue Code of 1954 (as added by this subtitle), or "(2) was a member of the family (within the meaning of section 704(e)(3) of such Code) of an individual described in paragraph (1) to the extent such member engaged in commodities trading through an organization the members of which consisted solely of— "(A) 1 or more individuals described in paragraph (1), and "(B) 1 or more members of the families (as so defined) of such individuals.", and (4) by striking out subsection (h) and inserting in lieu thereof the following: "(h) SYNDICATES.—For purposes of this section, any loss incurred by a person (other than a commodities dealer) with respect to an interest in a syndicate (within the meaning of section 1256(e)(3)(B) of the Internal Revenue Code of 1954) shall not be considered to be a loss incurred in a trade or business." SEC. 1809. AMENDMENTS RELATED TO DEPRECIATION PROVISIONS. (a) AMENDMENTS RELATED TO SECTION 111 OF THE ACT.— (1) 15-YEAR STRAIGHT LINE ELECTION FOR LOW-INCOME HOUS-

ING.—The table contained in subparagraph (A) of section 1680t))(3) (relating to election of different recovery percentage) is amended— (A) by striking out "and low-income housing" in the last ' item, and ^, (B) by adding at the end thereof the following new item: ,

"Low-income housing

15, 35, or 45 years."

(2) USE OF CONVENTIONS.— (A) MID-MONTH CONVENTION FOR I9-YEAR REAL PROPERTY.—

(i) Paragraph (2) of section 1680?) (relating to 19-year real property) is amended— (I) by striking out the last sentence of subpara.; -'• graph (A), and (II) by amending subparagraph (B) to read as K ,follows:

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Page:United States Statutes at Large Volume 100 Part 3.djvu/1011

 PUBLIC LAW 99-514—OCT. 22, 1986

100 STAT. 2819

"(B) MID-MONTH CONVENTION FOR 19-YEAR REAL PROP-

ERTY.—In the case of 19-year real property, the amount of the deduction determined under any provision of this section (or for purposes of section 57(a)(12)(B) or 312(k)) for any taxable year shall be determined on the basis of the number of months (using a mid-month convention) in which the property is in service." • (ii) Subparagraph (B) of section 168(fK2) (relating to recovery property used predominantly outside the t"lavo United States) is amended to read as follows: "(B) REAL PROPERTY.—Except as provided in subpara-

graph (C), in the case of 19-year real property or low-income housing which, during the taxable year, is predominantly used outside the United States, the recovery deduction for the taxable year shall be, in lieu of the amount determined under subsection 03), the amount determined by applying to the unadjusted basis of such property the applicable percentage determined under tables prescribed by the Secretary. For purposes of the preceding sentence, in prescribing such tables, the Secretary shall— "(i) assign to the property described in this subparagraph a 35-year recovery period, and "(ii) assign percentages determined in accordance with the use of the method of depreciation described in section 167(j)(l)(B), switching to the method described in section 1670t)Xl) at a time to maximize the deduction allowable under subsection (a)."

s

?'

(B) MONTHLY CONVENTION FOR LOW-INCOME HOUSING.—

Subparagraph (B) of section 1680t)X4) (relating to low-income housing) is amended to read as follows: "(B) MONTHLY CONVENTION.—In the case of low-income housing, the amount of the deduction determined under any provision of this section (or for purposes of section 57(a)(12XB) or 312(k)) for any taxable year shall be determined on the basis of the number of months (treating all property placed in service or disposed of during any month as placed in service or disposed of on the first day of such month) in which the property is in service."

K

^c

(C) CONFORMING AMENDMENTS.—

vii

(i) Effective on and after the date of the enactment of this Act, clause (ii) of section 168(j)(2)(B) (relating to conventions) is amended to read as follows:

• *

(V

"(ii) C R O S S REFERENCE.—

"For other applicable conventions, see paragraphs (2)(B) and (4)(B) of subsection (b)."

(ii) Subparagraph (A) of section 312(k)(3) is amended by striking out ", and rules similar to the rules under the next to the last sentence of section 1680t)X2XA) and section 168a)X2XB) shall apply". (3) MINIMUM TAX TREATMENT.—Subparagraph (B) of section

57(a)(12) (relating to 19-year real property and low-income housing) is amended by striking out so much of such subparagraph as precedes clause (i) thereof and inserting in lieu thereof the following: "(B) 19-YEAR REAL PROPERTY AND LOW-INCOME HOUSING.—

With respect to each recovery property which is 19-year

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real property or low-income housing, the amount (if any) by which the deduction allowed under section 168(a) (or, in the Case of property described in section 167(k), under section 167) for the taxable year exceeds the deduction which would have been allowable for the taxable year had the property been depreciated using a straight-line method (without regard to salvage value) over a recovery period of—". (4) TREATMENT OF PROPERTY FINANCED WITH TAX-EXEMPT BONDS.—

(A) Clause (ii) of section 168(f)(12)(B) (relating to recovery method) is amended to read as follows: "(ii) 19-YEAR REAL PROPERTY.—In the case of 19-year real property, the amount of the deduction allowed shall be determined by using the straight-line method (without regard to salvage value) and a recovery period of 19 years. (B) Subparagraph (C) of section 168(f)(12) (relating to exception for projects for residential rental property) is amended to read as follows:

''

"(C) EXCEPTION FOR LOW- AND MODERATE-INCOME HOUS-

,, 5> -

•::

ING.—Subparagraph (A) shall not apply to— "(i) any low-income housing, and "(ii) any other recovery property which is placed in service in connection with projects for residential rental property financed by the proceeds of obligations described in section 103(b)(4)(A)." (C) Any property described in paragraph (3) of section 631(d) of the Tax Reform Act of 1984 shall be treated as property described in clause (ii) of section 168(f)(12)(C) of the Internal Revenue Code of 1954 as amended by subparagraph (B).

(5) COORDINATION WITH IMPUTED INTEREST CHANGES.—In the

case of any property placed in service before May 9, 1985 (or treated as placed in service before such date by section 105(b)(3) of Public Law 99-121)— (A) any reference in any amendment made by this subsection to 19-year real property shall be treated as a reference to 18-year real property, and (B) section 168(f)(12XBXii) of the Internal Revenue Code of 1954 (as amended by paragraph (4)(A)) shall be applied by substituting "18 years for "19 years". OD) TREATMENT OF TRANSFEREE IN CERTAIN TRANSACTIONS.—

(1) IN GENERAL.—Subparagraph (A) of section 168(fK10) (relating to transferee bound by transferor's period and method in certain cases) is amended to read as follows: "(A) IN GENERAL.—In the case of recovery property transferred in a transaction described in subparagraph (B), for .. purposes of computing the deduction allowable under subsection (a) with respect to so much of the basis in the hands of the transferee as does not exceed the adjusted basis in the hands of the transferor— "(i) if the transaction is described in subparagraph (B)(i), the transferee shall be treated in the same manner as the transferor, or _;p, "(ii) if the transaction is described in clause (ii) or (iii) •i-f '.*yjj "• of subparagraph (B) and the transferor made an election with respect to such property under subsection

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(b)(3) or (f)(2)(C), the transferee shall be treated as having made the same election (or its equivalent)." (2) TREATMENT OF TERMINATIONS OF PARTNERSHIPS.—Subpara-

graph (B) of section 168(f)(10) is amended by adding at the end thereof the following new sentence: "Clause (i) shall not apply in the case of the termination of a partnership under section 708(b)(1)(B)." (3) EFFECTIVE DATE.—The amendments made by this subsection shall apply to property placed in service by the transferee after December 31, 1985, in taxable years ending after such date. (c) AMENDMENT RELATED TO SECTION 112 OF THE ACT.—Paragraph

(2) of section 453(i) (defining recapture income) is amended by striking out "section 1245 or 1250' and inserting in lieu thereof "section 1245 or 1250 (or so much of section 751 as relates to section 1245 or 1250)". (d) AMENDMENTS RELATED TO SECTION 113 OF THE ACT.— (1) TREATMENT OF FILMS, VIDEO TAPES, AND SOUND RECORD-

INGS.—Except with respect to property placed in service by the taxpayer on or before March 28, 1985, subsection (c) of section 167 (relating to limitations on use of certain methods and rates) is amended by adding at the end thereof the following new sentence: "Paragraphs (2), (3), and (4) of subsection (h) shall not apply to any motion picture film, video tape, or sound recording." (2) CLERICAL AMENDMENT.—Subsection (q) of section 48 is amended by redesignating the paragraph relating to special rule for qualified films as paragraph (7). (e) AMENDMENTS RELATED TO SECTION 114 OF THE ACT.—

(1) Paragraph (1) of section 48(b) (defining new section 38 property) is amended by adding at the end thereof the following new sentence: "Such term includes any section 38 property the reconstruction of which is completed by the taxpayer, but only with respect to that portion of the basis which is properly attributable to such reconstruction." (2) Paragraph (2) of section 480t)) (relating to special rule for sale-leasebacks) is amended— (A) by striking out "paragraph (1)" and inserting in lieu thereof "the first sentence of paragraph (1)", (B) by striking out "used under the lease" and inserting in lieu thereof "used under the leaseback (or lease) referred to in subparagraph (B)", (C) by adding at the end thereof the following new sentence: "The preceding sentence shall not apply to any property if the lessee and lessor of such property make an election under this sentence. Such an election, once made, may be revoked only with the consent of the Secretary.", and (D) by striking out "3 months o f in subparagraph (B) and inserting in lieu thereof "3 months after". SEC. 1810. AMENDMENTS RELATED TO FOREIGN PROVISIONS. (a) AMENDMENTS RELATED TO SECTION 121 OF THE ACT.— (1) TREATMENT OF CERTAIN DOMESTICORPORATIONS.—

(A) IN GENERAL.—Subsection (g) of section 904 (relating to source rules in the case of United States-owned foreign corporations) is amended by redesignating paragraph (9) as

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paragraph (10), and by inserting after paragraph (8) the following new paragraph: "(9)

TREATMENT OF CERTAIN DOMESTICORPORATIONS.—For

purposes of this subsection— "(A) in the case of interest treated as not from sources within the United States under section 861(a)(1)(B), the corporation paying such interest shall be treated as a United States-owned foreign corporation, and "(B) in the case of any dividend treated as not from sources within the United States under section 861(a)(2)(A), the corporation paying such dividend shall be treated as a United States-owned foreign corporation." (B) EFFECTIVE DATE.—The amendment made by subparagraph (A) shall take effect on March 28, 1985. In the case of any taxable year ending after such date of any corporation treated as a United States-owned foreign corporation by reason of the amendment made by subparagraph (A)— (i) only income received or accrued by such corporation after such date shall be taken into account under section 904(g) of the Internal Revenue Code of 1954; except that (ii) paragraph (5) of such section 904(g) shall be applied by taking into account all income received or accrued by such corporation during such taxable year. (2) TREATMENT OF CERTAIN FOREIGN CORPORATIONS ENGAGED IN TRADE OR BUSINESSES WITHIN THE UNITED STATES.—Subparagraph

(E) of section 121(b)(2) of the Tax Reform Act of 1984 (relating to special rules for applicable CFC) is amended by adding at the end thereof the following new clause: "(iii) TREATMENT OF CERTAIN FOREIGN CORPORATIONS ENGAGED IN BUSINESS IN UNITED STATES.—For purpOSeS

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of clause (ii), a foreign corporation shall be treated as a United States person with respect to any interest payment made by such corporation if^ "(I) at least 50 percent of the gross income from all sources of such corporation for the 3-year period ending with the close of its last taxable year ending on or before March 31, 1984, was effectively connected with the conduct of a trade or business within the United States, and "(II) at least 50 percent of the gross income from all sources of such corporation for the 3-year period ending with the close of its taxable year preceding the payment of such interest was effectively connected with the conduct of a trade or business within the United States."

(3) TREATMENT OF CERTAIN SHORT-TERM BORROWING.—Clause

(ii) of section 121(b)(2)(D) of the Tax Reform Act of 1984 (defining applicable CFC) is amended by striking out "or the holding of short-term obligations" and all that follows and inserting in lieu thereof "(or short-term borrowing from nonaffiliated persons) and lending the proceeds of such obligations (or such borrowing) to affiliates." (4) COORDINATION WITH TREATY OBLIGATIONS.—Section 904(g)

of the Internal Revenue Code of 1954 shall apply notwithstanding any treaty obligation of the United States to the contrary (whether entered into on, before, or after the date of the enact-

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ment of this Act) unless (in the case of a treaty entered into after the date of the enactment of this Act) such treaty by specific reference to such section 904(g) clearly expresses the intent to override the provisions of such section. (5) TRANSITIONAL RULE RELATED TO SECTION I25(bx5) OF THE

ACT.—For purposes of section 1250t)X5) of the Tax Reform Act of 1984 (relating to separate application of section 904 in case of income covered by transitional rules), any carryover under section 904(c) of the Internal Revenue Code of 1954 allowed to a taxpayer which was incorporated on August 31, 1962, attributable to taxes paid or accrued in taxable years beginning in 1981, 1982, 1983, or 1984, with respect to amounts included in gross income under section 951 of such Code in respect of a controlled foreign corporation which was incorporated on May 27, 1977, shall be treated as taxes paid or accrued on income separately treated under such section 1250t)X5). (b) AMENDMENTS RELATED TO SECTION 122 OF THE ACT.— (1) TREATMENT OF SUBPART F AND FOREIGN PERSONAL HOLDING

COMPANY INCLUSIONS.—Subparagraph (C) of section 904(d)(3) (relating to exception where designated corporation has small amount of separate limitation interest) is amended by adding at the end thereof the following new sentence: "The preceding sentence shall not apply to any amount includible in gross income under section 551 or 951." (2) TREATMENT OF INTEREST AND DIVIDENDS FROM MEMBERS OF SAME AFFIUATED GROUP.—Paragraph (3) of section 904(d) (relat-

ing to certain amounts attributable to United States-owned foreign corporations, etc., treated as interest) is amended by striking out subparagraph (J), by redesignating subparagraph (I) as subparagraph (J), and by inserting after subparagraph (H) the following new subparagraph: "(I) INTEREST AND DIVIDENDS FROM MEMBERS OF SAME AFFIUATED GROUP.—For purposes of this paragraph, divi-

dends and interest received or accrued by the designated payor corporation from another member of the same affiliated group (determined under section 1504 without regard to subsection (b)(3) thereof) shall be treated as separate limitation interest if (and only if) such amounts are attributable (directly or indirectly) to separate limitation interest of any other member of such group." (3) TREATMENT OF INTEREST FROM DESIGNATED PAYOR CORPORA-

TION.—Paragraph (2) of section 904(d) is amended by inserting at the end thereof the following: "For purposes of this subsection, interest (after the operation of section 904(d)(3)) received from a designated payor corporation described in section 904(d)(3)(E)(iii) by a taxpayer which owns directly or indirectly less than 10 percent of the voting stock of such designated payor corporation shall be treated as interest described in subparagraph (A) to the extent such interest would have been so treated had such taxpayer received it from other than a designated payor corporation." (4) DEFINITION OF DESIGNATED PAYOR CORPORATION.—

(A) IN GENERAL.—Subparagraph (E) of section 904(d)(3) (defining designated payor corporation) is amended by striking out "and' at the end of clause (ii), by striking out the period at the end of clause (iii) and inserting in lieu thereof ', and", and by adding at the end thereof the following:

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"(iv) any other corporation formed or availed of for purposes of avoiding the provisions of this paragraph. For purposes of this paragraph, the rules of paragraph (9) of subsection (g) shall apply." (B) EFFECTIVE DATES.—

,,^^.., ^,, ..

.

(i) The amendment made by subparagraph (A) insofar as it adds the last sentence to subparagraph (E) of section 905(d)(3) shall take effect on March 28, 1985. In the case of any taxable year ending after such date of any corporation treated as a designated payor corporation by reason of the amendment made by subparagraph (A)— (I) only income received or accrued by such corporation after such date shall be taken into account under section 904(d)(3) of the Internal Revenue Code of 1954; except that (II) subparagraph (C) of such section 904(d)(3) shall be applied by taking into account all income received or accrued by such corporation during such taxable year. (ii) The amendment made by subparagraph (A) insofar as it adds clause (iv) to subparagraph (E) of section 904(d)(3) shall take effect on December 31, 1985. For purposes of such amendment, the rule of the second sentence of clause (i) shall be applied by taking into account December 31, 1985, in lieu of March 28, 1985.

(c) AMENDMENTS RELATED TO SECTION 123 OF THE ACT.—

(1) Subparagraph (A) of section 956(b)(3) (relating to certain trade or service receivables acquired from related United States persons) is amended by striking out "paragraph (2)" and inserting in lieu thereof "paragraph (2) (other than subparagraph (H) thereof)". (2) Subsection (d) of section 864 (relating to treatment of related person factoring income) is amended by redesignating paragraph (7) as paragraph (8) and by inserting after paragraph (6) the following new paragraph: "(7) EXCEPTION FOR CERTAIN RELATED PERSONS DOING BUSINESS IN SAME FOREIGN COUNTRY.—Paragraph (1) shall not apply to

any trade or service receivable acquired by any person from a related person if— "(A) the person acquiring such receivable and such related person are created or organized under the laws of the same foreign country and such related person has a substantial part of its assets used in its trade or business located in such same foreign country, and "(B) such related person would not have derived any foreign base company income (as defined in section 954(a), determined without regard to section 954(b)(3)(A)), or any ^^ income effectively connected with the conduct of a trade or "** business within the United States, from such receivable if it had been collected by such related person." (3) Clause (i) of section 864(d)(5)(A) (relating to certain provisions not to apply) is amended by inserting before the period at the end thereof the following: "and subparagraph (J) of section 904(d)(3) (relating to interest from members of same affiliated group)".

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(d) AMENDMENTS RELATED TO SECTION 127 OF THE ACT.— (1) DEFINITION OF PORTFOLIO INTEREST.—

(A) Paragraph (2) of section 871(h) (defining portfolio interest) is amended by striking out "which is described in" in the matter preceding subparagraph (A) and inserting in Heu thereof "which would be subject to tax under subsection (a) but for this subsection and which is described in". (B) Paragraph (2) of section 881(c) (defining portfolio interest) is amended by striking out "which is described in" in the matter preceding subparagraph (A) and inserting in lieu thereof "which would be subject to tax under subsection (a) but for this subsection and which is described in". (2) ATTRIBUTION OF SHAREHOLDER STOCK TO CORPORATION.—

Subparagraph (C) of section 871(h)(3) (relating to portfolio interest not to include interest received by 10-percent shareholders) is amended by striking out "and" at the end of clause (i), by redesignating clause (ii) as clause (iii), and by inserting after clause (i) the following new clause: "(ii) section 318(a)(3)(C) shall be applied— "(I) without regard to the 50-percent limitation therein; and "(II) in any case where such section would not apply but for subclause (I), by considering a corporation as owning the stock (other than stock in such corporation) which is owned by or for any shareholder of such corporation in that proportion which the value of the stock which such shareholder owns in such corporation bears to the value of all stock in such corporation, and". (3) CLERICAL AMENDMENTS.—

(A) Paragraph (1) of section 871(a) is amended by striking out "provided in subsection (i)" in the matter preceding subparagraph (A), and inserting in lieu thereof "provided in subsection (h)". (B) Clause (ii) of section 871(h)(2)(B) is amended by striking out "has received" and inserting in lieu thereof "receives". (C) Clause (ii) of section 881(c)(2)(B) is amended by striking out "has received" and inserting in lieu thereof "receives". (D) Paragraph (9) of section 1441(c) is amended by striking out "871(h)(2)" and inserting in lieu thereof "section 871(h)". (E) Subsection (a) of section 1442 is amended— (i) by striking out "sections 871(h)(2)" and inserting in lieu thereof "sections 871(h)", (ii) by striking out "sections 881(c)(2)" and inserting in lieu thereof "sections 881(c)", and (iii) by striking out "section 1449(c)(9)" and inserting in lieu thereof "section 1441(c)(9)". (e) AMENDMENTS RELATED TO SECTION 128 OF THE ACT.— (1) DEDUCTION FOR ORIGINAL ISSUE DISCOUNT.—

(A) Subparagraph (A) of section 163(e)(3) (relating to special rule for original issue discount on obligation held by related foreign person) is amended by adding at the end thereof the following new sentence: "The preceding sentence shall not apply to the extent that the original issue

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PUBLIC LAW 99-514—OCT. 22, 1986 discount is effectively connected with the conduct by such foreign related person of a trade or business within the United States unless such original issue discount is exempt from taxation (or is subject to a reduced rate of tax) pursuant to a treaty obligation of the United States." (B) Subsection (e) of section 163 is amended by redesignating the paragraph relating to cross references as paragraph (5). (2) TAXATION OF ORIGINAL ISSUE DISCOUNT.—

(A) Subparagraph (C) of section 871(a)(1) (relating to income not connected with United States business) is amended to read as follows: "(C) in the case of— "(i) a sale or exchange of an original issue discount obligation, the amount of the original issue discount accruing while such obligation was held by the nonresident alien individual (to the extent such discount was not theretofore taken into account under clause (ii)), and fj ' iif "(ii) a payment on an original issue discount obligation, an amount equal to the original issue discount accruing while such obligation was held by the nonresident alien individual (except that such original issue discount shall be taken into account under this clause only to the extent such discount was not theretofore taken into account under this clause and only to the extent that the tax thereon does not exceed the payment less the tax imposed by subparagraph (A) thereon), and". (B) Paragraph (3) of section 881(a) (relating to tax on income of foreign corporations not connected with United States business) is amended to read as follows: O i "(3) in the case of— f "(A) a sale or exchange of an original issue discount obligation, the amount of the original issue discount accruing while such obligation was held by the foreign corporation (to the extent such discount was not theretofore taken into account under subparagraph (B)), and "(B) a payment on an original issue discount obligation, an amount equal to the original issue discount accruing while such obligation was held by the foreign corporation (except that such original issue discount shall be taken into account under this subparagraph only to the extent such discount was not theretofore taken into account under this ^fii subparagraph and only to the extent that the tax thereon does not exceed the payment less the tax imposed by paragraph (1) thereon), and", (f) AMENDMENTS RELATED TO SECTION 129 OF THE ACT.— (1) T R E A T M E N T OF ELECTIONS UNDER SECTION 897(i).—

"^•'

(A) Paragraph (1) of section 897(i) (relating to election by foreign corporation to be treated as domestic corporation) is amended by striking out "and section 6039C" and inserting in lieu thereof ", section 1445, and section 6039C". (B) Paragraph (4) of section 897(i) is amended by striking out "this section and section 6039C" and inserting in lieu thereof "this section, section 1445, and section 6039C".

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(2) EXEMPTION FOR INTERESTS IN CERTAIN CORPORATIONS.—

Paragraph (3) of section 1445(b) (relating to nonpublicly traded domestic corporation furnishing affidavit that it is not a United States real property holding corporation) is amended to read as follows: "(3) NONPUBLICLY TRADED DOMESTICORPORATION FURNISHES AFFIDAVIT THAT INTERESTS IN CORPORATION NOT UNITED STATES REAL PROPERTY INTERESTS.—Except as provided in paragraph (7), this paragraph applies in the case of a disposition of any interest in any domestic corporation if the domestic corporation furnishes to the transferee an affidavit by the domestic corporation stating, under penalty of perjury, that— "(A) the domestic corporation is not and has not been a United States real property holding corporation (as defined in section 897(c)(2)) during the applicable period specified in section 897(c)(l)(A)(ii), or "(B) as of the date of the disposition, interests in such corporation are not United States real property interests by reason of section 897(c)(l)(B)." ^3) NOTICE OF FALSE AFFIDAVIT.—

(A) Clause (i) of section 1445(d)(l)(B) (relating to notice of false affidavit; foreign corporations) is amended to read as follows: "(i) any transferor's agent— "(I) such agent has actual knowledge that such affidavit is false, or "(II) in the case of an affidavit described in subsection (b)(2) furnished by a corporation, such corporation is a foreign corporation, or". (B) Paragraph (1) of section 1445(d) is amended by striking out "described in paragraph (2)(A)" and inserting in lieu thereof "described in paragraph (2)". (4) TREATMENT OF CERTAIN DOMESTIC PARTNERSHIPS, TRUSTS, AND ESTATES.—

(A) IN GENERAL.—Paragraph (1) of section 1445(e) (relating to certain domestic partnerships, trusts, and estates) is amended to read as follows: "(1) CERTAIN DOMESTIC PARTNERSHIPS, TRUSTS, AND ESTATES.—

In the case of any disposition of a United States real property interest as defined in section 897(c) (other than a disposition described in paragraph (4) or (5)) by a domestic partnership, domestic trust, or domestic estate, such partnership, the trustee of such trust, or the executor of such estate (as the case may be) shall be required to deduct and withhold under subsection (a) a tax equal to 28 percent of the gain realized to the extent such gain— "(A) is allocable to a foreign person who is a partner or beneficiary of such partnership, trust, or estate, or "(B) is allocable to a portion of the trust treated as owned by a foreign person under subpart E of part I of subchapter J.

i

(B) EFFECTIVE DATE.—The amendment made by subparagraph (A) shall apply to dispositions after the day 30 days after the date of the enactment of this Act. (5)

DISTRIBUTIONS BY DOMESTICORPORATIONS TO FOREIGN

SHAREHOLDER.—Paragraph (3) of section 1445(e) (relating to distributions by certain domestic corporations to foreign share-

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PUBLIC LAW 9 9 - 5 1 4 - O C T. 22, 1986 holders) is amended by adding at the end thereof the following new sentence: "The preceding sentence shall not apply if, as of the date of the distribution, interests in such corporation are not United States real property interests by reason of section 897(c)(1)(B)." (6) CERTAIN TAXABLE DISTRIBUTIONS.—Paragraph (4) of section

1445(e) (relating to taxable distributions by domestic or foreign partnerships, trusts, or estates) is amended by striking out "section 897(g)" and inserting in lieu thereof "section 897". (7) PAYMENT OF TAX.—Subsection (d) of section 6039C (relating to special rule for United States interests and Virgin Islands interests) is amended by striking out "subject to tax under section 897(a)" and inserting in lieu thereof "subject to tax under section 897(a) (and any person required to withhold tax under section 1445)". (8) PAYMENTS THROUGH i OR MORE ENTITIES.—Paragraph (6) of

section 1445(e) (relating to regulations) is amended by inserting before the period at the end thereof the following: "and regulations for the application of this subsection in the case of payments through 1 or more entities", (9) CONFORMING AMENDMENTS TO SECTION 6652(g).—

(A) Paragraph (1) of section 6652(g) (relating to returns, etc., required under section 6039C) is amended to read as follows: "(1) IN GENERAL.—In the case of each failure to make a return required by section 6039C which contains the information required by such section on the date prescribed therefor (determined with regard to any extension of time for filing), unless it is shown that such failure is due to reasonable cause and not to willful neglect, the amount determined under paragraph (2) shall be paid (upon notice and demand by the Secretary and in the same manner as tax) by the person failing to make such return." (B) Paragraph (3) of section 6652(g) is amended to read as follows: "(3) LIMITATION.—The amount determined under paragraph (2) with respect to any person for failing to meet the requirements of section 6039C for any calendar year shall not exceed the lesser of— "(A) $25,000, or "(B) 5 percent of the aggregate of the fair market value of the United States real property interests owned by such person at any time during such year. For purposes of the preceding sentence, fair market value shall be determined as of the end of the calendar year (or, in the case of any property disposed of during the calendar year, as of the date of such disposition)." (C) The subsection heading for subsection (g) of section 6652 is amended by striking out ", ETC.,". (g) AMENDMENTS RELATED TO SECTION 131 OF THE ACT.—

(1) Subsection (f) of section 367 (relating to transitional rule) is hereby repealed. (2) Paragraph (1) of section 7482(b) (relating to venue) is amended by striking out "section 7428, 7476, or 7477" and inserting in lieu thereof "section 7428 or 7476". (3) Paragraph (8) of section 6501(c) (relating to failure to notify the Secretary under section 6038B) is amended—

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(A) by striking out "subsection (a) or (d)" and inserting in lieu thereof "subsection (a), (d), or (e)", and (B) by striking out "exchange" each place it appears and inserting in lieu thereof "exchange or distribution". (4)(A) Subsection (a)(1) of section 367 (relating to foreign corporations) is amended by striking out "355,". (B) Subsection (e) of section 367 (relating to treatment of liquidations under section 336) is amended— (i) by striking out "described in section 336" and inserting in lieu thereof "described in section 336 or 355 (or so much of section 356 as relates to section 355)", and (ii) by striking out "LIQUIDATIONS UNDER SECTION 366" in the subsection heading and inserting in lieu thereof "DISTRIBUTIONS DESCRIBED IN SECTION 336 OR 355". (h) AMENDMENTS RELATED TO SECTION 132 OF THE ACT.—

(1) Subsection (c) of section 552 (relating to certain dividends and interest not taken into account) is amended by adding at the end thereof the following new sentence: "For purposes of the preceding sentence, the term 'related person' has the meaning given such term by section 954(d)(3) (determined by substituting 'foreign personal holding company' for 'controlled foreign corporation' each place it appears)." (2) Paragraph (1) of section 551(f) (relating to stock held through foreign entity) is amended by striking out "United States shareholder" and inserting in lieu thereof "United States shareholder or an estate or trust which is a foreign estate or trust". (i) AMENDMENTS RELATED TO SECTION 133 OF THE ACT.—

(1) Subparagraph (B) of section 1248(i)(l) (relating to treatment of certain indirect transfers) is amended by striking out "in redemption of his stock" and inserting in lieu thereof "in redemption or liquidation (whichever is appropriate)". (2) Clause (iii) of section 133(d)(3)(B) of the Tax Reform Act of 1984 (relating to amendments related to section 1248) is amended by striking out "180 days after the date of the enactment of this Act" and inserting in lieu thereof "the date which is 1 year after the date of the enactment of the Tax Reform Act of 1985". (j) AMENDMENTS RELATED TO SECTION 136 OF THE ACT.— (1) COLLECTION OF TAX.—Subsection (b) of section 269B (relat-

ing to stapled entities) is amended by inserting before the period at the end thereof the following: "and regulations providing that any tax imposed on the foreign corporation referred to in subsection (a)(1) may, if not paid by such corporation, be collected from the domestic corporation referred to in such subsection or the shareholders of such foreign corporation". (2) EXCEPTION WHERE CORPORATIONS OWNED BY FOREIGN PER-

SONS.—Section 269B is amended by adding at the end thereof the following new subsection: "(e) SUBSECTION (a)(1) NOT TO APPLY IN CERTAIN CASES.—

"(1) IN GENERAL.—Subsection (a)(1) shall not apply if it is established to the satisfaction of the Secretary that the domestic corporation and the foreign corporation referred to in such subsection are foreign owned. "(2) FOREIGN OWNED.—For purposes of paragraph (1), a corporation is foreign owned if less than 50 percent of^

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PUBLIC LAW 99-514—OCT. 22, 1986

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"(A) the total combined voting power of all classes of stock of such corporation entitled to vote, and bf "(B) the total value of the stock of the corporation, is held directly (or indirectly through applying paragraphs (2) f' and (3) of section 958(a) and paragraph (4) of section 318(a)) by United States persons (as defined in section 7701(a)(30))." (k) AMENDMENT RELATED TO SECTION 137 OF THE ACT.—Subsection

(e) of section 954 (defining foreign base company services income) is amended to read as follows: "(e) FOREIGN BASE COMPANY SERVICES INCOME.—

"(1) IN GENERAL.—For purposes of subsection (a)(3), the term 'foreign base company services income' means income (whether in the form of compensation, commissions, fees, or otherwise) derived in connection with the performance of technical, managerial, engineering, architectural, scientific, skilled, industrial, commercial, or like services which— "(A) are performed for or on behalf of any related person (within the meaning of subsection (d)(3)), and "(B) are performed outside the country under the laws of which the controlled foreign corporation is created or organized. "(2) EXCEPTION.—Parg^aph (1) shall not apply to income derived in connection with the performance of services which are directly related to— "(A) the sale or exchange by the controlled foreign corporation of property manufactured, produced, grown, or extracted by it and which are performed before the time of the sale or exchange, or "(B) an offer or effort to sell or exchange such property. "(3) TREATMENT OF CERTAIN INSURANCE CONTRACTS.—For purposes of paragraph (1), in the case of any services performed with respect to any policy of insurance or reinsurance with respect to which the primary insured is a related person (within the meaning of section 864(d)(4))— "(A) such primary insured shall be treated as a related person for purposes of paragraph (I)(A) (whether or not the requirements of subsection (d)(3) are met), "(B) such services shall be treated as performed in the country within which the insured hazards, risks, losses, or liabilities occur, and "(C) except as otherwise provided in regulations by the Secretary, rules similar to the rules of section 953(b) shall be applied in determining the income from such services."

.

(1) AMENDMENTS RELATED TO SECTION 138 OF THE ACT.—

7.

(1) Clause (i) of section 7701(b)(4)(E) (relating to limitation of teachers and trednees) is amended by adding at the end thereof the following new sentence: "In the case of an individual all of whose compensation is described in section 872(b)(3), the preceding sentence shall be applied by substituting '4 calendar years' for *2 calendar years'." (2) Subparagraph (A) of section 7701(b)(l) is amended— (A) by striking out "the requirements of clause (i) or (ii)" and inserting in lieu thereof the requirements of clause (i), u. (ii), or (iii)", and (B) by adding at the end thereof the following new clause:

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(iii) FIRST YEAR ELECTION.—Such individual makes

the election provided in paragraph (4)."

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(3) Subparagraph (A) of section 7701(b)(2) is amended by adding at the end thereof the following new clause: "(iv) RESIDENCY STARTING DATE FOR INDIVIDUALS MAKING FIRST YEAR ELECTION.—In the case of an

individual who makes the election provided by paragraph (4) with respect to any calendar year, the residency starting date shall be the 1st day during such calendar year on which the individual is treated as a resident of the United States under that paragraph." (4) Subsection (b) of section 7701 is amended by redesignating paragraphs (4), (5), (6), (7), (8), (9), and (10) as paragraphs (5), (6), [1), (8), (9), (10), and (11), respectively, and by inserting after paragraph (3) the following new paragraph: "(4) FIRST-YEAR ELECTION.—

"(A) An alien individual shall be deemed to meet the requirements of this subparagraph if such individual— "(i) is not a resident of the United States under clause (i) or (ii) of paragraph (1)(A) with respect to a calendar year (hereinafter referred to as the 'election year'), "(ii) was not a resident of the United States under paragraph (1)(A) with respect to the calendar year immediately preceding the election year, "(iii) is a resident of the United States under clause (ii) of paragraph (1)(A) with respect to the calendar year immediately following the election year, and "(iv) is both— "(I) present in the United States for a period of at least 31 consecutive days in the election year, and "(II) present in the United States during the period beginning with the first day of such 31-day period and ending with the last day of the election year (hereinafter referred to as the 'testing period') for a number of days equal to or exceeding 75 percent of the number of days in the testing period (provided that an individual shall be treated for purposes of this subclause as present in the United States for a number of days during the testing period not exceeding 5 days in the aggregate, notwithstanding his absence from the United States r; on such days). "(B) An alien individual who meets the requirements of subparagraph (A) shall, if he so elects, be treated as a resident of the United States with respect to the election year. "(C) An alien individual who makes the election provided by subparagraph (B) shall be treated as a resident of the United States for the portion of the election year which begins on the 1st day of the earliest testing period during such year with respect to which the individual meets the requirements of clause (iv) of subparagraph (A). ' (D) The rules of subparagraph (D)(i) of paragraph (3) shall apply for purposes of determining an individual's presence in the United States under this paragraph. "(E) An election under subparagraph (B) shall be made on the individual's tax return for the election year, provided

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that such election may not be made before the individual has met the substantial presence test of paragraph (3) with s« respect to the calendar year immediately following the election year. "(F) An election once made under subparagraph (B) remains in effect for the election year, unless revoked with the consent of the Secretary." (5)(A) Section 7701(b)(4)(A) (defining exempt individual) is amended by striking "or" at the end of clause (ii), by striking the period at the end of clause (iii) and inserting ", or" and by adding after clause (iii) the following new clause: .... "(jy) a professional athlete who is temporarily in the United States to compete in a charitable sports event described in section 274(k)(2)." (B) The amendments made by this paragraph shall apply to periods after the date of the enactment of this Act. SEC. 1811. AMENDMENTS RELATED TO REPORTING, PENALTY, AND OTHER PROVISIONS. (a) AMENDMENTS RELATED TO SECTION 145 OF THE ACT.—

(1) Section 6050H (relating to returns relating to mortgage interest received in trade or business from individuals) is amended by adding at the end thereof the following new subsection: "(g) SPECIAL RULES FOR COOPERATIVE HOUSING CORPORATIONS.—

For purposes of subsection (a), an amount received by a cooperative housing corporation from a tenant-stockholder shall be deemed to be interest received on a mortgage in the course of a trade or business engaged in by such corporation, to the extent of the tenant-stockholder's proportionate share of interest described in section 216(a)(2). Terms used in the preceding sentence shall have the same meanings as when used in section 216." (2) Paragraph (2) of section 145(d) of the Tax Reform Act of 1984 is amended l3y striking out "section 6652" and inserting in lieu thereof "section 6676". (b) AMENDMENTS RELATED TO SECTION 149 OF THE ACT.— (1) RETURN OF PARTNERSHIP INCOME.—

(A) IN GENERAL.—Section 6031 (relating to return of partnership income) is amended— fc3,'i < ? (i) by inserting "or who holds an interest in such partnership as a nominee for another person" in subsection (b) after "who is a partner", and (ii) by adding at the end thereof, the following new subsection: "(c) NOMINEE REPORTING.—Any person who holds an interest in a partnership as a nominee for another person— "(1) shall furnish to the partnership, in the manner prescribed by the Secretary, the name and address of such other person, and any other information for such taxable year as the Secretary may by form and regulation prescribe, and "(2) shall furnish in the manner prescribed by the Secretary such other person the information provided by such partnership under subsection (b)." (B) EFFECTIVE DATE.—The amendments made by this subsection shall apply to partnership taxable years beginning after the date of the enactment of this Act,

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100 STAT. 2833

(2) RETURNS RELATING TO CERTAIN PARTNERSHIP INTERESTS.—

Paragraph (2) of section 6050K(c) (relating to requirement that transferor notify partnership) is amended by striking out "this subsection" and inserting in lieu thereof "this section". (c) AMENDMENTS RELATED TO SECTION 150 OF THE ACT.—

(1) Paragraph (3) of section 6678(a) (relating to failure to furnish certain statements) is amended by striking out "or" at the end of subparagraph (E), by adding "or" at the end of subparagraph (F), and by inserting after subparagraph (F) the following new subparagraph: "(G) section 6045(d) (relating to statements required in the case of certain substitute payments),". (2) Clause (ii) of section 6652(a)(3)(A) (relating to penalty in the case of intentional disregard) is amended by inserting "(other than by subsection (d) of such section)" after "section 6045". (d) AMENDMENT RELATED TO SECTION 155 OF THE ACT.—Section

6660 (relating to addition of tax in the case of valuation understatement for purposes of estate or gift taxes) is amended by adding at the end thereof the following new subsection: "(f) UNDERPAYMENT DEFINED.—For purposes of this section, the term 'underpayment' has the meaning given to such term by section 6653(c)(1)." (e) AMENDMENT RELATED TO SECTION 157 OF THE ACT.—Paragraph

(3) of section 7502(e) is amended by striking out "the tax' and inserting in lieu thereof "any tax". SEC. 1812. AMENDMENTS RELATED TO MISCELLANEOUS PROVISIONS. (a) AMENDMENTS RELATED TO SECTION 171 OF THE ACT.—

(1) Subsection (a) of section 111 (relating to recovery of tax benefit items) is amended by striking out "did not reduce income subject to tax" and inserting in lieu thereof "did not reduce the amount of tax imposed by this chapter". (2) Subsection (c) of section 111 (relating to treatment of carryovers) is amended by striking out "reducing income subject to tax or reducing tax imposed by this chapter, as the case may be" and inserting in lieu thereof "reducing tax imposed by this chapter". (3) Paragraph (12) of section 381(c) (relating to recovery of bad debts, prior taxes, or delinquency amounts) is amended to read v as follows: "(12) RECOVERY OF TAX BENEFIT ITEMS.—If the acquiring corporation is entitled to the recovery of any amounts previously deducted by (or allowable as credits to) the distributor or transferor corporation, the acquiring corporation shall succeed to the treatment under section 111 which would apply to such amounts in the hands of the distributor or transferor corporation." (4) Paragraph (2) of section 1351(d) is amended by striking out "relating to recovery of bad debts, etc." and inserting in lieu thereof "relating to recovery of tax benefit items". (5) Paragraph (3) of section 1398(g) is amended to read as follows: "(3) RECOVERY OF TAX BENEFIT ITEMS.—Any amount to which section 111 (relating to recovery of tax benefit items) applies." (b) AMENDMENTS RELATED TO SECTION 172 OF THE ACT.— (1) COORDINATION OF SECTION 7872 WITH TAXES ON PRIVATE

FOUNDATIONS.—Subparagraph (B) of section 4941(d)(2) (defining

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PUBLIC LAW 99-514—OCT. 22, 1986 self-dealing) is amended by striking out "without interest or other charge" and inserting in lieu thereof "without interest or other charge (determined without regard to section 7872)", (2) COORDINATION WITH WITHHOLDING.—Paragraph (9) of section 7872(f) (relating to no withholding) is amended to read as r follows: "(9) No WITHHOLDING.—No amount shall be withheld under chapter 24 with respect to— "(A) any amount treated as transferred or retransferred under subsection (a), and i7 "(B) any amount treated as received under subsection (b)." (3) DEFINITION OF DEMAND LOAN.—Paragraph (5) of section

7872(f) (defining demand loan) is amended to read as follows: "(5) DEMAND LOAN.—The term 'demand loan' means any loan which is payable in full at any time on the demand of the lender. Such term also includes (for purposes other than determining the applicable Federal rate under paragraph (2)) any loan if the benefits of the interest arrangements of such loan are not transferable and are conditioned on the future performance of substantial services by an individual. To the extent provided in regulations, such term also includes any loan with an indefinite maturity." (4) CLARIFICATION OF APPLICABLE FEDERAL RATE.—Subpara-

graph (B) of section 7872(fK2) (defining applicable Federal rate) is amended by inserting ", compounded semiannually" immediately before the period at the end thereof. (5) CERTAIN ISRAEL BONDS NOT SUBJECT TO RULES RELATING TO BELOW-MARKET LOANS.—Section 7872 of the Internal Revenue

Code of 1954 (relating to treatment of loans with below-market interest rates) shall not apply to any obligation issued by Israel if— (A) the obligation is payable in United States dollars, and (B) the obligation bears interest at an annual rate of not less than 4 percent. (c) AMENDMENTS RELATED TO SECTION 174 OF THE ACT.— (1) TREATMENT OF FOREIGN PERSONS.—Subsection (a) of section

267 is amended by adding at the end thereof the following new paragraph: "(3) PAYMENTS TO FOREIGN PERSONS.—The Secretary shall by ^ regulations apply the matching principle of paragraph (2) in cases in which the person to whom the payment is to be made is not a United States person." (2) TREATMENT OF CERTAIN SALES OF INVENTORY EXPANDED.—

Subparagraph (B) of section 267(fK3) (relating to loss deferral rules not to apply in certain Cases) is amended by inserting "(or persons described in subsection (b)(10))" after "same controlled group". (3) TREATMENT OF CERTAIN RELATED PARTNERSHIPS.—

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(A) Effective with respect to sales or exchanges after September 27, 1985, paragraphs (I)(A) and (2)(A) of section 707(b) (relating to certain sales or exchanges of property with respect to controlled partnerships) are each amended by striking out "a partner' and inserting in lieu thereof "a person". (B) Paragraph (1) of section 707(b) is amended by adding at the end thereof the following new sentence: "For pur-

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poses of section 267(a)(2), partnerships described in subparagraph (B) of this paragraph shall be treated as persons specified in section 2670t))." (C) Subsection (e) of section 267 is amended by adding at the end thereof the following new paragraph: "(6) CROSS REFERENCE.— "For additional rules relating: to partnerships, see section 707(b)." (4) CLERICAL AMENDMENTS.—

(A) Paragraph (12) of section 2670t>) (defining related persons) is amended by striking out "same persons owns" and inserting in lieu thereof "same persons own". (B) Subparagraph (B) of section 178(b)(2) (defining related persons) is amended by inserting before the period "and subsection (f)(1)(A) of such section shall not apply". (C) Clause (ii) of section 936(h)(3)(D) (defining related person) is amended to read as follows: "(ii) SPECIAL RULE.—For purposes of clause (i), section 267(b) and section 707(b)(l) shall be applied by substituting '10 percent' for '50 percent'." (5) EXCEPTION FOR CERTAIN INDEBTEDNESS.—Clause (i) of section 174(c)(3)(A) of the Tax Reform Act of 1984 shall be applied by substituting "December 31, 1983" for "September 29, 1983" in the case of indebtedness which matures on January 1, 1999, the payments on which from January 1989 through November 1993 equal U/L plus $77,600, the payments on which from December 1993 to maturity equal U/L plus $50,100, and which accrued interest at 13.75 percent through December 31, 1989. (d) AMENDMENTS RELATED TO SECTION 177 OF THE ACT.— (1) CLARIFICATION OF TREATMENT OF DIVIDENDS PAID BY FEDERAL HOME LOAN BANKS.—

.

(A) Subparagraph (B) of section 246(a)(2) (relating to certain dividends of Federal home loan banks) is amended— (i) by striking out "For purposes of subparagraph (A), in" and inserting in lieu thereof "In", and (ii) by striking out subclause (II) of clause (i) and inserting in lieu thereof the following: "(II) which were not previously treated as distributed under subparagraph (A) or this subparagraph, bears to". (B) Paragraph (2) of section 246(a) (relating to subsection not to apply to certain dividends of Federal Home Loan Banks) is amended by redesignating subparagraph (C) as subparagraph (D) and by inserting after subparagraph (B) the following new subparagraph: "(C) COORDINATION WITH SECTION 243.—To the extent that paragraph (1) does not apply to any dividend by reason of subparagraph (A) or (B) of this paragraph, the requirement contained in section 243(a) that the corporation paying the dividend be subject to taxation under this chapter shall not apply." (C) Subparagraph (D) of section 246(a)(2) (as redesignated by subparagraph (B)) is amended by adding at the end thereof the following new clause: "(iv) EARNINGS AND PROFITS.—The earnings and profits of any FHLB for any taxable year shall be treated as equal to the sum of—

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PUBLIC LAW 99-514—OCT. 22, 1986 £":«-->' ry,.: '. ' --. '

"(I) any dividends received by the FHLB from the FHLMC during such taxable year, and "(11) the total earnings and profits (determined ^c,.;' without regard to dividends described in subclause (I)) of the FHLB as reported in its annual financial statement prepared in accordance with section 20 of the Federal Home Loan Bank Act (12 U.S.C. 1440)." (2) CLARIFICATION OF EFFECTIVE DATE.—Paragraph (4) of section 177(d) of the Tax Reform Act of 1984 (relating to effective dates) is amended to read as follows: "(4) CLARIFICATION OF EARNINGS AND PROFITS OF FEDERAL HOME LOAN MORTGAGE CORPORATION.— "(A) TREATMENT OF DISTRIBUTION OF PREFERRED STOCK,

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ETC.—For purposes of the Internal Revenue Code of 1954, the distribution of preferred stock by the Federal Home Loan Mortgage Corporation during December of 1984, and the other distributions of such stock by Federal Home Loan Banks during January of 1985, shall be treated as if they were distributions of money equal to the fair market value of the stock on the date of the distribution by the Federal Home Loan Banks (and such stock shall be treated as if it were purchased with the money treated as so distributed). No deduction shall be allowed under section 243 of the Internal Revenue Code of 1954 with respect to any dividend paid by the Federal Home Loan Mortgage Corporation out of earnings and profits accumulated before January 1, 1985. "(B) SECTION 246(a) NOT TO APPLY TO DISTRIBUTIONS OUT

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'

OF EARNINGS AND PROFITS ACCUMULATED DURING 1985.—

Subsection (a) of section 246 of the Internal Revenue Code of 1954 shall not apply to any dividend paid by the Federal Home Loan Mortgage Corporation during 1985 out of earnings and profits accumulated after December 31, 1984." (e) AMENDMENTS RELATED TO SECTION 179 OF THE ACT.— (1) CLARIFICATION OF DEFINITION OF PASSENGER AUTOMOBILE.— (A) SECTION 280F.—Clause (ii) of section 280F(d)(5)(A)

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(defining passenger automobile) is amended by striking out "gross vehicle weight" and inserting in lieu thereof "unloaded gross vehicle weight". (B) GAS GUZZLER TAX.— (i) Clause (ii) of section 406403)(1)(A) (defining passenger automobile) is amended by striking out "gross vehicle weight" and inserting in lieu thereof "unloaded ' gross vehicle weight". (ii) Paragraph (5) of section 4064(b) (defining manufacturer) is amended to read as follows: "(5) MANUFACTURER.—

"(A) IN GENERAL.—The term 'manufacturer' includes a producer or importer. •

"(B) EXCEPTION FOR CERTAIN SMALL MANUFACTURERS.—A

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person shall not be treated as the manufacturer of any automobile if— "(i) such person would (but for this subparagraph) be so treated solely by reason of lengthening an existing automobile, and

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100 STAT. 2837

"(ii) such person is a small manufacturer (as defined in subsection (d)(4)) for the model year in which such lengthening occurs." (iii) The amendments made by clauses (i) and (ii) shall take effect as if included in the amendments made by section 201 of Public Law 95-618; except that the amendment made by clause (i) shall not apply to any station wagon if— (I) such station wagon is originally equipped with more than 6 seat belts, (II) such station wagon was manufactured before November 1, 1985, and (III) such station wagon is of the 1985 or 1986 model year. (C) TRUCKS AND VANS.—Subparagraph (A) of section

280F(d)(5) is amended by adding at the end thereof the following new sentence: "In the case of a truck or van, clause (ii) shall be applied by substituting 'gross vehicle weight' for 'unloaded gross vehicle weight'." (2) DEDUCTIONS OF EMPLOYEE FOR USE OF LISTED PROPERTY.—

Subparagraph (A) of section 280F(d)(3) (relating to deductions of employee) is amended by striking out "recovery deduction allowable to the employee" and inserting in lieu thereof "recovery deduction allowable to the employee (or the amount of any deduction allowable to the employee for rentals or other payments under a lease of listed property)". (3) TREATMENT OF CERTAIN COMPUTERS.—Subparagraph (B) of

section 280F(d)(4) (relating to exception for certain computers) is amended by striking out "at a regular business establishment" and inserting in lieu thereof "at a regular business establishment and owned or leased by the person operating such establishment". (4) EXCEPTION FOR PROPERTY USED IN BUSINESS OF TRANSPORT-

ING PERSONS OR PROPERTY.—Paragraph (4) of section 280F(d) (defining listed property) is amended by adding at the end thereof the following new subparagraph: "(C)

EXCEPTION

FOR PROPERTY USED IN BUSINESS OF

TRANSPORTING PERSONS OR PROPERTY.—Except to the extent provided in regulations, clause (ii) of subparagraph (A) shall not apply to any property substantially all of the use of which is in a trade or business of providing to unrelated persons services consisting of the transportation of persons or property for compensation or hire." (5) CLERICAL AMENDMENT.—Paragraph (2) of section 280F(d) (relating to subsequent depreciation deductions reduced for deductions allocable to personal use) is amended by striking out "is not use described in" and inserting in lieu thereof "is use described in". CHAPTER 2—AMENDMENTS RELATED TO TITLE II OF THE ACT SEC. 1821. AMENDMENTS RELATED TO SECTION 211 OF THE ACT. (a) CERTAIN AMOUNTS NOT LESS THAN SURRENDER VALUE OF CON-

TRACT.—Subsection (c) of section 807 (relating to rules for certain

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reserves) is amended by adding at the end thereof the following new sentence: "In no case shall the amount determined under paragraph (3) for any contract be less than the net surrender value of such contract." (b) CLARIFICATION OF DEFINITION OF EXCESS INTEREST.—Subpara-

graph (B) of section 808(d)(l) (defining excess interest) is amended to read as follows: "(B) in excess of interest determined at the prevailing State assumed rate for such contract." (c) COORDINATION OF 1984 FRESH-START ADJUSTMENT WITH CERTAIN ACCELERATIONS OF POLICYHOLDER DIVIDENDS DEDUCTIONS.—Sec-

tion 808 (relating to policyholder dividends deduction) is amended by adding at the end thereof the following new subsection: "(f) COORDINATION OF 1984 FRESH-START ADJUSTMENT WITH ACCELERATION OF POLICYHOLDER DIVIDENDS DEDUCTION THROUGH CHANGE IN BUSINESS PRACTICE.—

"(1) IN GENERAL.—The amount determined under paragraph (1) of subsection (c) for the year of change shall (before any reduction under paragraph (2) of subsection (c)) be reduced by so much of the accelerated policyholder dividends deduction for such year as does not exceed the 1984 fresh-start adjustment for policyholder dividends (to the extent such adjustment was not previously taken into account under this subsection). "(2) YEAR OF CHANGE.—For purposes of this subsection, the term 'year of change' means the taxable year in which the change in business practices which results in the accelerated policyholder dividends deduction takes effect. "(3)

ACCELERATED POLICYHOLDER DIVIDENDS DEDUCTION DE-

FINED.—For purposes of this subsection, the term 'accelerated policyholder dividends deduction' means the amount which (but for this subsection) would be determined for the taxable year under paragraph (1) of subsection (c) but which would have been determined (under such paragraph) for a later taxable year under the business practices of the taxpayer as in effect at the close of the preceding taxable year, "(4)

1984

FRESH-START ADJUSTMENT FOR POLICYHOLDER DIVI-

DENDS.—For purposes of this subsection, the term '1984 freshstart adjustment for policyholder dividends' means the amounts held as of December 31, 1983, by the taxpayer as reserves for dividends to policyholders under section 811(b) (as in effect on the day before the date of the enactment of the Tax Reform Act of 1984) other than for dividends which accrued before January 1, 1984. Such amounts shall be properly reduced to reflect the amount of previously nondeductible policyholder dividends (as determined under section 809(f) as in effect on the day before the date of the enactment of the Tax Reform Act of 1984). "(5) SEPARATE APPLICATION WITH RESPECT TO LINES OF BUSI-

NESS.—This subsection shall be applied separately with respect to each line of business of the taxpayer. "(6) SUBSECTION NOT TO APPLY TO MERE CHANGE IN DIVIDEND

AMOUNT.—This subsection shall not apply to a mere change in the amount of policyholder dividends. "(7) SUBSECTION NOT TO APPLY TO POUCIES ISSUED AFTER DECEM-

BER 31, 1983.—

"(A) IN GENERAL.—This subsection shall not apply to any policyholder dividend paid or accrued with respect to a policy issued after December 31, 1983.

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"(B) EXCHANGES OF SUBSTANTIALLY SIMILAR POLICIES.—For

purposes of subparagraph (A), any policy issued after December 31, 1983, in exchange for a substantially similar policy issued on or before such date shall be treated as issued before January 1, 1984. A similar rule shall apply in the case of a series of exchanges. "(8) SUBSECTION TO APPLY TO POLICIES PROVIDED UNDER EMPLOYEE BENEFIT PLANS.—This subsection shall not apply to any

policyholder dividend paid or accrued with respect to a group policy issued in connection with a plan to provide welfare benefits to employees (within the meaning of section 419(e)(2))." (d) CLARIFICATION OF EQUITY BASE.—Paragraph (2) of section

809(b) (defining equity base) is amended by adding at the end thereof the following new sentence: "No item shall be taken into account more than once in determining equity base." (e) DEFINITION OF 50 LARGEST STOCK COMPANIES.—

(1) IN GENERAL.—Subparagraph (C) of section 809(d)(4) (defining 50 largest stock companies) is amended by striking out the last sentence and inserting in lieu thereof the following: "the Secretary— "(i) shall, for purposes of determining the base period stock earnings rate, exclude from the group determined under the preceding sentence any company which had a negative equity base at any time during 1981, 1982, or 1983, "(ii) shall exclude from such group for any calendar year any company which has a negative equity base, and "(iii) may by regulations exclude any other company which otherwise would have been included in such group if the inclusion of the excluded company or companies would, by reason of the small equity base of such company, seriously distort the stock earnings rate. The aggregate number of companies excluded by the Secretary under clause (iii) shall not exceed the excess of 2 over the number of companies excluded under clause (ii)." (2) ONLY DOMESTIC COMPANIES TAKEN INTO ACCOUNT.—Section

809 is amended— (A) by striking out "largest stock life insurance companies" in subsection (d)(4)(C) and inserting in lieu thereof "largest domestic stock life insurance companies", and (B) by striking out "mutual life insurance companies" in subsection (e)(1) and inserting in lieu thereof "domestic mutual life insurance companies". (f) CLARIFICATION OF STATEMENT GAIN OR LOSS FROM OPER-

ATIONS.—Paragraph (1) of section 809(g) (defining statement gain or loss from operations) is amended by striking out so much of such paragraph as precedes subparagraph (B) and inserting in lieu thereof the following: "(1) STATEMENT GAIN OR LOSS FROM OPERATIONS.—The term 'statement gain or loss from operations' means the net gain or loss from operations required to be set forth in the annual statement, determined without regard to Federal income taxes, and— "(A) determined by substituting for the amount shown for policyholder dividends the amount of deduction for policy-

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PUBLIC LAW 99-514—OCT. 22, 1986 holder dividends determined under section 808 (without regard to section 808(c)(2)),".

(g) DIFFERENTIAL EARNINGS RATE WHICH MAY B E USED FOR PURPOSES OF ESTIMATED TAX PAYMENTS.—Subsection (c) of section 809

(defining differential earnings rate) is amended by adding at the end thereof the following new paragraph: "(3) COORDINATION WITH ESTIMATED TAX PAYMENTS.—For purposes of applying section 6655 with respect to any installment of estimated tax, the amount of tax shall be determined by using the lesser of— "(A) the differential earnings rate of the second tax year preceding the taxable year for which the installment is made, or "(B) the differential earnings rate for the taxable year for which the installment is made." (h) RECOMPUTATION OF DIFFERENTIAL EARNINGS AMOUNT NOT TAKEN INTO ACCOUNT FOR PURPOSES OF ESTIMATED TAX.—Subsection

(f) of section 809 (relating to recomputation in subsequent year) is amended by adding at the end thereof the following new paragraph: "(5) SUBSECTION NOT TO APPLY FOR PURPOSES OF ESTIMATED

TAX.—Section 6655 shall be applied to any taxable year without regard to any adjustments under this subsection for such year." (i) AMENDMENTS RELATED TO PRORATION FORMULAS.—

(1) Paragraph (2) of section 812(b) is amended— (A) by striking out "the prevailing State assumed rate" in subparagraph (A) and inserting in lieu thereof "the prevailing State assumed rate or, where such rate is not used, another appropriate rate", (B) by striking out "and" at the end of subparagraph (B), (C) by striking out the period at the end of subparagraph (C) and inserting in lieu thereof ", and", and (D) by adding at the end thereof the following new subparagraph: "(D) interest on amounts left on deposit with the company." (2) Subparagraph (B) of section 8120t>)(3) (relating to gross investment income's proportionate share of policyholder dividends) is amended— (A) by striking out "(including tax-exempt interest)" in clause (ii), and (B) by adding at the end thereof the following new sentence: "For purposes of subparagraph (B)(ii), life insurance gross income shall be determined by including tax-exempt interest and by applying section 807(a)(2)(B) as if it did not contain clause (i) thereof." (3) Subsection (c) of section 812 (defining net investment income) is amended to read as follows: "(c) N E T INVESTMENT INCOME.—For purposes of this section, the term 'net investment income' means— "(1) except as provided in paragraph (2), 90 percent of gross investment income; or "(2) in the case of gross investment income attributable to assets held in segregated asset accounts under variable contracts, 95 percent of gross investment income." (4) Section 812 is amended by adding at the end thereof the following new subsection:

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text:
Page:United States Statutes at Large Volume 100 Part 3.djvu/1033

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

100 STAT. 2841

"(g) TREATMENT OF INTEREST PARTIALLY TAX-EXEMPT UNDER SECTION 133.—For purposes of this section and subsections (a) and 0)) of

section 807, the terms 'gross investment income' and 'tax-exempt interest' shall not include any interest received with respect to a securities acquisition loan (as defined in section 133(b)). Such interest shall not be included in life insurance gross income for purposes of subsection (b)(3)." (j) TREATMENT OF FOREIGN LIFE INSURANCE (COMPANIES.—Para-

graph (1) of section 813(a) (relating to adjustment where surplus held in United States is less than specified minimum) is amended by adding at the end thereof the following new sentence: "The preceding sentence shall be applied before computing the amount of the special life insurance company deduction and the small life insurance company deduction, and any increase under the preceding sentence shall be treated as gross investment income." (k) TREATMENT OF CERTAIN DISTRIBUTIONS TO SHAREHOLDERS FROM PRE-1984 POLICYHOLDERS SURPLUS ACCOUNT.—

(1) Subsection (f) of section 815 (relating to other rules applicable to policyholders surplus account continued) is amended by striking out "sections 6501(c)(6)" and inserting in lieu thereof "sections 8190)), 6501(c)(6)". (2) Subsection (a) of section 815 is amended by adding at the end thereof the following new sentence: "For purposes of the preceding sentence, the term 'indirect distribution' shall not include any bona fide loan with arms-length terms and conditions." (3) In the case of any loan made before March 1, 1986 (other than a loan which is renegotiated, extended, renewed, or revised after February 28, 1986), which does not meet the requirements of the last sentence of section 815(a) of the Internal Revenue Code of 1954 (as added by paragraph (2)), the amount of the indirect distribution for purposes of such section 815(a) shall be the foregone interest on the loan (determined by using the lowest rate which would have met the arms-length requirements of such sentence for such a loan). (1) TREATMENT OF DEFICIENCY RESERVES.—Section 816 (defining life insurance company) is amended by adding at the end thereof the following new subsection: "(h) TREATMENT OF DEFICIENCY RESERVES.—For purposes of this section and section 813(a)(4)(B), the terms 'life insurance reserves' and 'total reserves' shall not include deficiency reserves." (m) TREATMENT OF CERTAIN NONDIVERSIFIED CONTRACTS.—

(1) Subsection (h) of section 817 (relating to treatment of certain nondiversified contracts) is amended by striking out paragraphs (3) and (4) and inserting in lieu thereof the following: '(3) SPECIAL RULE FOR INVESTMENTS IN UNITED STATES OBLIGA-

TIONS.—To the extent that any segregated asset account with respect to a variable life insurance contract is invested in securities issued by the United States Treasury, the investments made by such account shall be treated as adequately diversified for purposes of paragraph (1). "(4) LOOK-THROUGH IN CERTAIN CASES.—For purposes of this subsection, if all of the beneficial interests in a regulated investment company or in a trust are held by 1 or more— "(A) insurance companies (or affiliated companies) in their general account or in segregated asset accounts, or

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