[House Report 115-957]
[From the U.S. Government Publishing Office]
115th Congress } { Report
HOUSE OF REPRESENTATIVES
2d Session } { 115-957
======================================================================
AMERICAN INNOVATION ACT OF 2018
_______
September 24, 2018.--Committed to the Committee of the Whole House on
the State of the Union and ordered to be printed
_______
Mr. Brady of Texas, from the Committee on Ways and Means, submitted the
following
R E P O R T
together with
DISSENTING VIEWS
[To accompany H.R. 6756]
[Including cost estimate of the Congressional Budget Office]
The Committee on Ways and Means, to whom was referred the
bill (H.R. 6756) to amend the Internal Revenue Code of 1986 to
promote new business innovation, and for other purposes, having
considered the same, report favorably thereon with an amendment
and recommend that the bill as amended do pass.
CONTENTS
Page
I. SUMMARY AND BACKGROUND...........................................5
A. Purpose and Summary................................. 5
B. Background and Need for Legislation................. 6
C. Legislative History................................. 6
II. EXPLANATION OF THE BILL..........................................6
A. Simplification and Expansion of Deduction for Start-
Up and Organizational Expenditures (sec. 2 of the
bill and secs. 195, 248, and 709 of the Code)...... 6
B. Preservation of Start-Up Net Operating Losses and
Tax Credits After Ownership Change (sec. 3 of the
bill and secs. 382 and 383 of the Code)............ 8
III. VOTES OF THE COMMITTEE..........................................13
IV. BUDGET EFFECTS OF THE BILL......................................14
A. Committee Estimate of Budgetary Effects............. 14
B. Statement Regarding New Budget Authority and Tax
Expenditures Budget Authority...................... 16
C. Cost Estimate Prepared by the Congressional Budget
Office............................................. 16
V. OTHER MATTERS TO BE DISCUSSED UNDER THE RULES OF THE HOUSE......20
A. Committee Oversight Findings and Recommendations.... 20
B. Statement of General Performance Goals and
Objectives......................................... 20
C. Information Relating to Unfunded Mandates........... 21
D. Applicability of House Rule XXI 5(b)................ 21
E. Tax Complexity Analysis............................. 21
F. Congressional Earmarks, Limited Tax Benefits, and
Limited Tariff Benefits............................ 21
G. Duplication of Federal Programs..................... 21
H. Disclosure of Directed Rule Makings................. 22
VI. CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED...........22
A. Changes in Existing Law Proposed by the Bill, as
Reported........................................... 22
VII. DISSENTING VIEWS...............................................126
The amendment is as follows:
Strike all after the enacting clause and insert the
following:
SECTION 1. SHORT TITLE.
This Act may be cited as the ``American Innovation Act of 2018''.
SEC. 2. SIMPLIFICATION AND EXPANSION OF DEDUCTION FOR START-UP AND
ORGANIZATIONAL EXPENDITURES.
(a) In General.--Section 195 of the Internal Revenue Code of 1986 is
amended by redesignating subsections (c) and (d) as subsections (d) and
(e), respectively, and by striking all that precedes subsection (d) (as
so redesignated) and inserting the following:
``SEC. 195. START-UP AND ORGANIZATIONAL EXPENDITURES.
``(a) Capitalization of Expenditures.--Except as otherwise provided
in this section, no deduction shall be allowed for start-up or
organizational expenditures.
``(b) Election to Deduct.--
``(1) In general.--If a taxpayer elects the application of
this subsection with respect to any active trade or business--
``(A) the taxpayer shall be allowed a deduction for
the taxable year in which such active trade or business
begins in an amount equal to the lesser of--
``(i) the aggregate amount of start-up and
organizational expenditures paid or incurred in
connection with such active trade or business,
or
``(ii) $20,000, reduced (but not below zero)
by the amount by which such aggregate amount
exceeds $120,000, and
``(B) the remainder of such start-up and
organizational expenditures shall be charged to capital
account and allowed as an amortization deduction
determined by amortizing such expenditures ratably over
the 180-month period beginning with the month in which
the active trade or business begins.
``(2) Application to organizational expenditures.--In the
case of organizational expenditures with respect to any
corporation or partnership, the active trade or business
referred to in paragraph (1) means the first active trade or
business carried on by such corporation or partnership.
``(3) Inflation adjustment.--In the case of any taxable year
beginning after December 31, 2019, the $20,000 and $120,000
amounts in paragraph (1)(A)(ii) shall each be increased by an
amount equal to--
``(A) such dollar amount, multiplied by
``(B) the cost-of-living adjustment determined under
section 1(f)(3) for the calendar year in which the
taxable year begins, determined by substituting
`calendar year 2018' for `calendar year 2016' in
subparagraph (A)(ii) thereof.
If any amount as increased under the preceding sentence is not
a multiple of $1,000, such amount shall be rounded to the
nearest multiple of $1,000.
``(c) Allowance of Deduction Upon Liquidation or Disposition.--
``(1) Liquidation of partnership or corporation.--If any
partnership or corporation is completely liquidated by the
taxpayer, any start-up or organizational expenditures paid or
incurred in connection with such partnership or corporation
which were not allowed as a deduction by reason of this section
may be deducted to the extent allowable under section 165.
``(2) Disposition of trade or business.--If any trade or
business is completely disposed of or discontinued by the
taxpayer, any start-up expenditures paid or incurred in
connection with such trade or business which were not allowed
as a deduction by reason of this section (and not taken into
account in connection with a liquidation to which paragraph (1)
applies) may be deducted to the extent allowable under section
165. For purposes of this paragraph, in the case of any
deduction allowed under subsection (b)(1) with respect to both
start-up and organizational expenditures, the amount treated as
so allowed with respect to start-up expenditures shall bear the
same ratio to such deduction as the start-up expenditures taken
into account in determining such deduction bears to the
aggregate of the start-up and organizational expenditures so
taken into account.''.
(b) Organizational Expenditures.--Section 195(d) of such Code, as
redesignated by subsection (a), is amended by adding at the end the
following new paragraphs:
``(3) Organizational expenditures.--The term `organizational
expenditures' means any expenditure which--
``(A) is incident to the creation of a corporation or
a partnership,
``(B) is chargeable to capital account, and
``(C) is of a character which, if expended incident
to the creation of a corporation or a partnership
having an ascertainable life, would be amortizable over
such life.
``(4) Application to certain disregarded entities.--In the
case of any entity with a single owner that is disregarded as
an entity separate from its owner, this section shall be
applied in the same manner as if such entity were a
corporation.''.
(c) Election.--Section 195(e)(2) of such Code, as redesignated by
subsection (a), is amended to read as follows:
``(2) Partnerships and s corporations.--In the case of any
partnership or S corporation, the election under subsection (b)
shall be made (and this section shall be applied) at the entity
level.''.
(d) Conforming Amendments.--
(1)(A) Part VIII of subchapter B of chapter 1 is amended by
striking section 248 of such Code (and by striking the item
relating to such section in the table of sections of such
part).
(B) Section 170(b)(2)(D)(ii) of such Code is amended by
striking ``(except section 248)''.
(C) Section 312(n)(3) of such Code is amended by striking
``Sections 173 and 248'' and inserting ``Sections 173 and
195''.
(D) Section 535(b)(3) of such Code is amended by striking
``(except section 248)''.
(E) Section 545(b)(3) of such Code is amended by striking
``(except section 248)''.
(F) Section 545(b)(4) of such Code is amended by striking
``(except section 248)''.
(G) Section 834(c)(7) of such Code is amended by striking
``(except section 248)''.
(H) Section 852(b)(2)(C) of such Code is amended by striking
``(except section 248)''.
(I) Section 857(b)(2)(A) of such Code is amended by striking
``(except section 248)''.
(J) Section 1363(b) of such Code is amended by adding ``and''
at the end of paragraph (2), by striking paragraph (3), and by
redesignating paragraph (4) as paragraph (3).
(K) Section 1375(b)(1)(B)(i) of such Code is amended by
striking ``(other than the deduction allowed by section 248,
relating to organization expenditures)''.
(2)(A) Section 709 of such Code is amended to read as
follows:
``SEC. 709. TREATMENT OF SYNDICATION FEES.
``No deduction shall be allowed under this chapter to a partnership
or to any partner of the partnership for any amounts paid or incurred
to promote the sale of (or to sell) an interest in the partnership.''.
(B) The item relating to section 709 in the table of sections
for part I of subchapter K of chapter 1 of such Code is amended
to read as follows:
``Sec. 709. Treatment of syndication fees.''.
(3) Section 1202(e)(2)(A) of such Code is amended by striking
``section 195(c)(1)(A)'' and inserting ``section
195(d)(1)(A)''.
(4) The item relating to section 195 in the table of contents
of part VI of subchapter B of chapter 1 of such Code is amended
to read as follows:
``Sec. 195. Start-up and organizational expenditures.''.
(e) Effective Date.--The amendments made by this section shall apply
to expenditures paid or incurred in connection with active trades or
businesses which begin in taxable years beginning after December 31,
2018.
SEC. 3. PRESERVATION OF START-UP NET OPERATING LOSSES AND TAX CREDITS
AFTER OWNERSHIP CHANGE.
(a) Application to Net Operating Losses.--Section 382(d) of the
Internal Revenue Code of 1986 is amended by adding at the end the
following new paragraph:
``(4) Exception for start-up losses.--
``(A) In general.--In the case of any net operating
loss carryforward described in paragraph (1)(A) which
arose in a start-up period taxable year, the amount of
such net operating loss carryforward otherwise taken
into account under such paragraph shall be reduced by
the net start-up loss determined with respect to the
trade or business referred to in subparagraph (B)(i)
for such start-up period taxable year.
``(B) Start-up period taxable year.--The term `start-
up period taxable year' means any taxable year of the
old loss corporation which--
``(i) begins before the close of the 3-year
period beginning on the date on which any trade
or business of such corporation begins as an
active trade or business (as determined under
section 195(d)(2) without regard to
subparagraph (B) thereof), and
``(ii) ends after September 10, 2018.
``(C) Net start-up loss.--
``(i) In general.--The term `net start-up
loss' means, with respect to any trade or
business referred to in subparagraph (B)(i) for
any start-up period taxable year, the amount
which bears the same ratio (but not greater
than 1) to the net operating loss carryforward
which arose in such start-up period taxable
year as--
``(I) the net operating loss (if any)
which would have been determined for
such start-up period taxable year if
only items of income, gain, deduction,
and loss properly allocable to such
trade or business were taken into
account, bears to
``(II) the amount of the net
operating loss determined for such
start-up period taxable year.
``(ii) Special rule for last taxable year in
start-up period.--In the case of any start-up
period taxable year which ends after the close
of the 3-year period described in subparagraph
(B)(i) with respect to any trade or business,
the net start-up loss with respect to such
trade or business for such start-up period
taxable year shall be the same proportion of
such loss (determined without regard to this
clause) as the proportion of such start-up
period taxable year which is on or before the
last day of such period.
``(D) Application to net operating loss arising in
year of ownership change.--Subparagraph (A) shall apply
to any net operating loss described in paragraph (1)(B)
in the same manner as such subparagraph applies to net
operating loss carryforwards described in paragraph
(1)(A), but by only taking into account the amount of
such net operating loss (and the amount of the net
start-up loss) which is allocable under paragraph
(1)(B) to the period described in such paragraph.
Proper adjustment in the allocation of the net start-up
loss under the preceding sentence shall be made in the
case of a taxable year to which subparagraph (C)(ii)
applies.
``(E) Application to taxable years which are start-up
period taxable years with respect to more than 1 trade
or business.--In the case of any net operating loss
carryforward which arose in a taxable year which is a
start-up period taxable year with respect to more than
1 trade or business--
``(i) this paragraph shall be applied
separately with respect to each such trade or
business, and
``(ii) the aggregate reductions under
subparagraph (A) shall not exceed such net
operating loss carryforward.
``(F) Continuity of business requirement.--If the new
loss corporation does not continue the trade or
business referred to in subparagraph (B)(i) at all
times during the 2-year period beginning on the change
date, this paragraph shall not apply with respect to
such trade or business.
``(G) Certain title 11 or similar cases.--
``(i) Multiple ownership changes.--In the
case of a 2nd ownership change to which
subsection (l)(5)(D) applies, this paragraph
shall not apply for purposes of determining the
pre-change loss with respect to such 2nd
ownership change.
``(ii) Certain insolvency transactions.--If
subsection (l)(6) applies for purposes of
determining the value of the old loss
corporation under subsection (e), this
paragraph shall not apply.
``(H) Not applicable to disallowed interest.--This
paragraph shall not apply for purposes of applying the
rules of paragraph (1) to the carryover of disallowed
interest under paragraph (3).
``(I) Transition rule.--This paragraph shall not
apply with respect to any trade or business if the date
on which such trade or business begins as an active
trade or business (as determined under section
195(d)(2) without regard to subparagraph (B) thereof)
is on or before September 10, 2018.''.
(b) Application to Excess Credits.--Section 383 of such Code is
amended by redesignating subsection (e) as subsection (f) and by
inserting after subsection (d) the following new subsection:
``(e) Exception for Start-up Excess Credits.--
``(1) In general.--In the case of any unused general business
credit of the corporation under section 39 which arose in a
start-up period taxable year, the amount of such unused general
business credit otherwise taken into account under subsection
(a)(2)(A) shall be reduced by the start-up excess credit
determined with respect to any trade or business referred to in
section 382(d)(4)(B)(i) for such start-up period taxable year.
``(2) Start-up period taxable year.--For purposes of this
subsection, the term `start-up period taxable year' has the
meaning given such term in section 382(d)(4)(B).
``(3) Start-up excess credit.--For purposes of this
subsection, the term `start-up excess credit' means, with
respect to any trade or business referred to in section
382(d)(4)(B)(i) for any start-up period taxable year, the
amount which bears the same ratio to the unused general
business credit which arose in such start-up period taxable
year as--
``(A) the amount of the general business credit which
would have been determined for such start-up period
taxable year if only credits properly allocable to such
trade or business were taken into account, bears to
``(B) the amount of the general business credit
determined for such start-up period taxable year.
``(4) Application of certain rules.--Rules similar to the
rules of subparagraphs (C)(ii), (D), (E), and (F) of section
382(d)(4) shall apply for purposes of this subsection.
``(5) Transition rule.--This subsection shall not apply with
respect to any trade or business if the date on which such
trade or business begins as an active trade or business (as
determined under section 195(d)(2) without regard to
subparagraph (B) thereof) is on or before September 10,
2018.''.
(c) Effective Date.--The amendments made by this section shall apply
to taxable years ending after September 10, 2018.
I. SUMMARY AND BACKGROUND
A. Purpose and Summary
The bill, H.R. 6756, as reported by the Committee on Ways
and Means, provides that the current law provisions for start-
up expenditures and organizational expenditures in the Internal
Revenue Code of 1986 are combined into a single provision
applicable to all businesses. The bill allows a taxpayer to
immediately deduct up to $20,000 (indexed for inflation) in
combined start-up and organizational expenditures. This
deduction is phased out to the extent that a taxpayer's start-
up and organizational expenditures, in the aggregate, exceed
$120,000 (indexed for inflation). Expenditures above the new
increased limit continue to be amortized over a 180-month
period following the start of the new business.
Additionally, the bill generally provides that a
corporation's start-up losses and start-up credits are not
limited in the event that the corporation undergoes an
ownership change under sections 382 and 383. Start-up losses
and start-up credits are losses and credits that are properly
allocable to the corporation's new business that arise in any
taxable year that begins before the third anniversary of the
date on which the business is considered to begin.
B. Background and Need for Legislation
The Committee believes it is important to continually
improve the tax laws. This bill doubles the amount of start-up
and organizational costs that can be expensed in the first year
of operations. Additionally, the bill provides start-up
businesses more flexibility in attracting capital to fund their
operations during the start-up phase exempting net operating
losses and general business credits generated in the early
years of a start-up business from the limitations on use that
otherwise could apply. This bill helps to foster a friendlier
business climate for entrepreneurs and innovators by reducing
tax barriers and allowing start-up businesses to focus on
growing and innovating. The bill supports entrepreneurship and
innovation, helping new businesses expand and create jobs.
C. Legislative History
Background
H.R. 6756 was introduced on September 10, 2018, and was
referred to the Committee on Ways and Means.
Committee action
The Committee on Ways and Means marked up H.R. 6756, the
``American Innovation Act of 2018,'' on September 13, 2018, and
ordered the bill, as amended, favorably reported (with a quorum
being present).
Committee hearings
Reforms to the rules for expensing business costs were
discussed at a Full Committee hearing on How Tax Reform Will
Grow Our Economy and Create Jobs on May 18, 2017 and a
Subcommittee on Tax Policy hearing on How Tax Reform Will Help
America's Small Businesses Grow and Create New Jobs on July 13,
2017.
II. EXPLANATION OF THE BILL
A. Simplification and Expansion of Deduction for Start-Up and
Organizational Expenditures (Sec. 2 of the Bill and Secs. 195, 248, and
709 of the Code)
PRESENT LAW
In the taxable year in which a taxpayer begins an active
trade or business, the taxpayer may elect to deduct up to
$5,000 of start-up expenditures.\1\ In addition, a taxpayer
that is a corporation or a partnership may separately elect to
deduct up to $5,000 of organizational expenditures.\2\ In each
case, however, the $5,000 amount is reduced (but not below
zero) by the amount by which the cumulative cost of start-up or
organizational expenditures exceeds $50,000.\3\ Any remaining
start-up expenditures or organizational expenditures may be
amortized ratably over a period of 180 months, beginning with
the month in which the active trade or business begins.\4\ A
taxpayer is deemed to make an election to deduct and amortize
start-up or organizational expenditures for the applicable
taxable year, unless the taxpayer affirmatively elects to
capitalize such amounts on a timely-filed (including
extensions) Federal income tax return.\5\ Capitalized amounts
are recovered when the business is sold, exchanged, or
otherwise disposed of before the end of the 180-month
amortization period.\6\
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\1\Sec. 195(b)(1)(A). Unless otherwise stated, all section
references are to the Internal Revenue Code of 1986, as amended (the
``Code'').
\2\Secs. 248(a)(1) and 709(b)(1)(A).
\3\Secs. 195(b)(1)(A)(ii), 248(a)(1)(B), and 709(b)(1)(A)(ii).
\4\Secs. 195(b)(1)(B), 248(a)(2), and 709(b)(1)(B).
\5\Treas. Reg. secs. 1.195-1(b), 1.248-1(c), and 1.709-1(b)(2).
\6\Secs. 195(b)(2) and 709(b)(2). See also Treas. Reg. sec. 1.709-
1(b)(3) and Kingsford Co. v. Commissioner, 41 T.C. 646 (1964).
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Start-up expenditures are amounts that would have been
deductible as trade or business expenses had they not been paid
or incurred before business began.\7\ Organizational
expenditures are expenditures that are incident to the creation
of a corporation or the organization of a partnership, are
chargeable to capital, and would be eligible for amortization
had they been paid or incurred in connection with the
organization of a corporation or partnership with a limited or
ascertainable life.\8\
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\7\Sec. 195(c)(1).
\8\Secs. 248(b) and 709(b)(3).
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REASONS FOR CHANGE
The Committee believes that increasing the amount of start-
up and organizational expenditures that a taxpayer may elect to
deduct, rather than requiring their amortization, will help
facilitate the formation of new businesses. The Committee also
believes that consolidating the rules regarding the treatment
of start-up and organizational expenditures into a single
provision applicable to all business entities (e.g.,
corporations, partnerships, and sole proprietorships) will
simplify tax administration and taxpayer compliance.
EXPLANATION OF PROVISION
Under the provision, the rules for start-up expenditures
(section 195) and organizational expenditures (sections 248 and
709(b)) are consolidated into a single provision.\9\ A taxpayer
may elect\10\ to deduct up to $20,000 of the aggregate amount
of start-up and organizational expenditures in the taxable year
in which the active trade or business begins.\11\ The $20,000
amount is reduced (but not below zero) by the amount by which
the aggregate amount of start-up and organizational
expenditures exceeds $120,000.\12\ The $20,000 and $120,000
amounts are adjusted for inflation in taxable years beginning
after 2019. Any remaining start-up and organizational
expenditures must be amortized ratably over the 180-month
period beginning with the month in which the active trade or
business begins.
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\9\The definitions of start-up and organizational expenditures are
unchanged by the provision, as is the requirement to capitalize
partnership syndication fees under section 709(a).
\10\In the case of a partnership or S corporation, the election is
made (and the provision is applied) at the entity level. In the case of
a disregarded entity, the provision is applied in the same manner as if
such disregarded entity were a corporation.
\11\In the case of organizational expenditures with respect to any
corporation or partnership, the term ``active trade or business'' means
the first active trade or business carried on by such corporation or
partnership.
\12\For example, assume that Corporation X, a calendar year
taxpayer, incurs $100,000 of start-up expenditures and $30,000 of
organizational expenditures that relate to an active trade or business
that begins on July 1, 2019. On its 2019 tax return, Corporation X may
elect to deduct $10,000 ($20,000 - ($130,000 - $120,000)) plus the
portion of the remaining $120,000 that is allocable to July through
December of 2019 ($120,000/180 months x 6 months = $4,000). Thus,
Corporation X's total deduction under section 195 for 2019, the year in
which its active trade or business begins, is $14,000 ($10,000
deduction + $4,000 amortization deduction). Corporation X may amortize
the remaining $116,000 ratably over the remaining 174 months.
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In the case of any partnership, corporation, or disregarded
entity that is completely liquidated by the taxpayer before the
end of the 180-month period, any unamortized amounts may be
deducted to the extent allowable under section 165. In the case
of any active trade or business which is completely disposed of
or discontinued by the taxpayer before the end of the 180-month
period, any unamortized start-up expenditures may be deducted
to the extent allowable under section 165.\13\
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\13\For purposes of the disposition rule, the amount treated as
unamortized start-up expenditures equals the aggregate amount of
unamortized start-up and organizational expenditures multiplied by the
ratio that (1) the amount of start-up expenditures taken into account
in determining the deduction under section 195(b)(1) bears to (2) the
aggregate amount of start-up and organizational expenditures so taken
into account. For example, continuing the example in footnote 13,
assume that on June 30, 2024, Corporation X completely discontinues its
initial trade or business for purposes of section 165, but remains in
existence. Corporation X has $80,000 of unamortized start-up and
organizational expenditures on such date. Corporation X may deduct
$61,538 of unamortized start-up expenditures in 2024 ($80,000 x
($100,000/$130,000)), but must continue to amortize the remaining
$18,462 of unamortized organizational expenditures over the remaining
120 months. Thus, Corporation X's total deduction under section 195 for
2024, the year in which its trade or business is discontinued, is
$66,461 (section 165 loss deduction of $61,538 + amortization deduction
of $4,923 (i.e., the $4,000 amortization deduction for start-up and
organizational expenditures from January 1, 2024, through June 30,
2024, plus the $923 amortization deduction for organizational
expenditures from July 1, 2024, through December 31, 2024)).
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EFFECTIVE DATE
The provision applies to start-up and organizational
expenditures paid or incurred in connection with active trades
or businesses which begin in taxable years beginning after
December 31, 2018.
B. Preservation of Start-Up Net Operating Losses and Tax Credits After
Ownership Change (Sec. 3 of the Bill and Secs. 382 and 383 of the Code)
PRESENT LAW
Net operating losses
Section 382(a) limits the extent to which a corporation
that experiences an ownership change may offset taxable income
after the ownership change with losses attributable to the
period before the ownership change. Specifically, following an
ownership change, a new loss corporation's taxable income may
be offset by pre-change losses from an old loss corporation
only to the extent of the section 382 limitation (discussed
below).\14\ A pre-change loss is (1) any net operating loss
carryforward of an old loss corporation to a taxable year
ending with an ownership change or in which an ownership change
occurs, and (2) any net operating loss of an old loss
corporation for the taxable year in which the ownership change
occurs to the extent such loss is allocable to the period in
such year on or before such change date.\15\ Any loss that is
not a pre-change loss is not limited by section 382(a).\16\
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\14\Sec. 382(a). However, if the new loss corporation does not
continue the business enterprise of the old loss corporation at all
times during the two-year period beginning on the change date, the
section 382 limitation for any post-change year is generally zero. See
sec. 382(c).
\15\Sec. 382(d)(1).
\16\Special rules apply to built-in gains and losses and section
338 gains. See sec. 382(h); Notice 2003-65, 2003-2 C.B. 747; Notice
2018-30, 2018-21 I.R.B. 610. Special rules also apply to financially
troubled corporations, discussed below.
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The section 382 limitation is determined by multiplying the
value of the old loss corporation immediately before the
ownership change by the long-term tax-exempt interest rate.\17\
If the section 382 limitation for a post-change year exceeds
the taxable income of the new loss corporation for such year
which was offset by pre-change losses, the section 382
limitation for the next post-change year is increased by the
amount of such excess.\18\
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\17\Sec. 382(b)(1). The long-term tax-exempt rate is the highest of
the adjusted Federal long-term rates in effect for any month in the
three-calendar-month period ending with the calendar month in which the
change date occurs. Sec. 382(f)(1).
\18\Sec. 382(b)(2).
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A loss corporation is a corporation entitled to use a net
operating loss carryover or having a net operating loss for the
taxable year in which an ownership change occurs.\19\ An old
loss corporation is a corporation with respect to which there
is an ownership change and which was a loss corporation before
the ownership change.\20\ A new loss corporation is a
corporation which is a loss corporation after an ownership
change.\21\
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\19\Sec. 382(k)(1). A loss corporation also includes any
corporation that entitled to use a carryforward of disallowed interest
under section 381(c)(20), and generally includes any corporation with a
net unrealized built-in loss. Treasury Regulation section 1.382-2(a)(1)
contains additional description of when a corporation qualifies as a
loss corporation.
\20\Sec. 382(k)(2).
\21\Sec. 382(k)(3).
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An ownership change generally is defined as an increase by
more than 50 percentage points in the percentage of stock of a
loss corporation that is owned by any one or more five-percent
shareholders\22\ within a three-year period.\23\ Treasury
regulations generally provide that this measurement is to be
made as of any testing date, which is any date on which the
ownership by one or more persons who were or who become five-
percent shareholders changes.\24\
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\22\The term ``5-percent shareholder'' means any person holding
five percent or more of the stock of the corporation at any time during
the testing period. Sec. 382(k)(7). Determinations of the percentage of
stock of a corporation held by any person are made on the basis of
value. Sec. 382(k)(6)(C).
\23\Sec. 382(g) and (i).
\24\See Treas. Reg. sec. 1.382-2(a)(4)(i) (providing that,
generally, a loss corporation is required to determine whether an
ownership change has occurred immediately after any owner shift, or
issuance or transfer of certain options with respect to stock of the
loss corporation that are treated as exercised, and defining a
``testing date'' as ``each date on which a loss corporation is required
to make a determination of whether an ownership change has occurred'').
All computations of increases in percentage ownership are to be made as
of the close of the testing date. Treas. Reg. sec. 1.382-2(a)(4)(i). A
loss corporation must include a statement on or with its Federal income
tax return for each taxable year that it is a loss corporation in which
an event described in Temporary Treasury Regulation section 1.382-
2T(a)(2) occurs. Treas. Reg. sec. 1.382-11(a). The statement must
include: (1) the date(s) of any owner shifts, equity structure shifts,
or other transactions described in Temporary Treasury Regulation
Section 1.382-2T(a)(2)(i), (2) the date(s) on which any ownership
change(s) occurred, and (3) the amount of any attributes described in
Treasury Regulation Section 1.382-2(a)(1)(i) that caused the
corporation to be a loss corporation. Ibid.
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Section 382(l)(5) provides rules that limit section 382's
application to ownership changes that occur in the context of a
title 11 or similar case. These rules generally provide that
the use of pre-change losses is not limited by section 382(a)
where the old loss corporation is under the jurisdiction of a
court in a title 11 or similar case immediately before the
ownership change and the shareholders and creditors of the old
loss corporation immediately before the ownership change own
(after the ownership change) at least 50 percent of the total
voting power of the stock of the new loss corporation and at
least 50 percent of the total value of the stock of the new
loss corporation.\25\ Among other things, these rules provide
that if, during the two-year period immediately following an
ownership change meeting the criteria described in the previous
sentence, an ownership change of the new loss corporation
occurs, the exception described in the previous sentence does
not apply and the section 382 limitation with respect to the
second ownership change for any post-change year after the
second ownership change is zero.\26\
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\25\Sec. 382(l)(5)(A).
\26\Sec. 382(l)(5)(D).
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Section 382(l)(6) provides that in an ownership change
involving a transfer by a corporation of all or part of its
assets to another corporation in a title 11 or similar case
that fails to meet the criteria described in the previous
paragraph, or in an ownership change involving an exchange of
debt for stock in a title 11 or similar case, the value of the
old loss corporation used for purposes of calculating the
section 382 limitation must reflect any increase in value of
the old loss corporation resulting from any surrender or
cancellation of creditors' claims in the transaction.
Tax credits
Section 383 imposes similar limitations to those imposed by
section 382(a) on the use of carryforwards of unused general
business credits, alternative minimum tax credits, foreign tax
credits, and net capital loss carryforwards. With regard to
unused general business credits, section 383 and the
regulations thereunder limit the amount of regular tax
liability that can be offset by excess credits (referred to in
the Treasury regulations as ``pre-change credits'') of the new
loss corporation.\27\ Use of pre-change credits absorbs the
section 383 credit limitation.\28\ Once the section 383 credit
limitation has been fully absorbed, no more pre-change credits
may be used.\29\ Any unused general business credit that is not
a pre-change credit is not limited by section 383 or the
regulations thereunder.
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\27\Treas. Reg. sec. 1.383-1(b).
\28\The section 383 credit limitation is defined as the excess of
(1) the new loss corporation's regular tax liability for the post-
change year over (2) the new loss corporation's regular tax liability
for the post-change year computed, for this purpose, by allowing as an
additional deduction an amount equal to the section 382 limitation
remaining after reduction for pre-change losses and pre-change capital
losses under sections 382 and 383 (and the regulations thereunder). See
Treas. Reg. sec. 1.383-1(c)(6); see generally sec. 383(a).
\29\Treas. Reg. sec. 1.383-1(d)(1).
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REASONS FOR CHANGE
The tax law includes rules that limit the use of tax
attributes of a corporation, such as net operating loss
carryforwards and general business credits, following certain
ownership change transactions in order to prevent abuse, such
as trafficking in these attributes. The Committee believes that
these limits can be unduly restrictive when applied to losses
and credits attributable to the early years of a trade or
business. At the start-up stage of a business, when income
tends to be low or nonexistent, application of the limits can
prevent the future use of all or almost all of the business's
loss carryforwards and unused credits. The Committee believes
that excepting such tax attributes from these limitations will
better allow start-up businesses to raise capital and pursue
opportunities to grow.
EXPLANATION OF PROVISION
The provision amends sections 382 and 383 to permit the
pre-change net operating loss carryforwards, net operating
losses, general business credit carryforwards, and general
business credits of a start-up business to be available for use
in a post-change year without limitation by sections 382(a) and
383.
Start-up losses under section 382
With regard to section 382, the provision generally reduces
a new loss corporation's pre-change losses by the portion of
the old loss corporation's net operating loss carryforwards and
net operating losses that are attributable to a start-up
business of the old loss corporation.\30\ Specifically, in the
case of any pre-change net operating loss carryforward which
arose in any start-up period taxable year (defined below), the
amount of such net operating loss carryforward otherwise taken
into account for purposes of calculating the new loss
corporation's pre-change loss is reduced by the net start-up
loss (defined below) determined with respect to the start-up
trade or business. In a similar manner, pre-change losses are
also reduced by any net operating loss incurred in the year of
the ownership change to the extent such loss is attributable to
a start-up business in the period on or before the change date.
By reducing pre-change losses, the provision reduces the total
amount of losses that are limited by section 382(a).
---------------------------------------------------------------------------
\30\However, the provision does not apply for purposes of including
the carryover of disallowed business interest in the corporation's pre-
change loss under section 382(d)(1) and (3).
---------------------------------------------------------------------------
A start-up period taxable year is any taxable year of the
old loss corporation which (1) begins before the close of the
three-year period beginning on the date on which any trade or
business of such corporation begins as an active trade or
business\31\ and (2) ends after September 10, 2018.\32\ Start-
up period taxable years may predate the beginning of active
trade or business, meaning deductible expenditures paid or
incurred in connection with a trade or business prior to the
beginning of active trade or business may be treated as paid or
incurred in a start-up period taxable year with respect to such
trade or business.\33\
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\31\The beginning of an active trade or business is the same under
the provision as under present-law section 195(c)(2) without regard to
subparagraph (B) thereof. (While section 195 is modified elsewhere in
the bill, those changes do not affect the meaning of the beginning of
active trade or business under section 195.) Thus, the three-year
period described in the provision begins on the same date that triggers
allowance of a deduction under section 195(b)(1)(A). The Senate Finance
Committee Report describing what ultimately became section 195 defined
that concept as follows:
---------------------------------------------------------------------------
Generally, it is anticipated that the definition of when a
business begins is to be made in reference to the existing
provisions for the amortization of organizational
expenditures (Code secs. 248 and 709). Generally, if the
activities of the corporation have advanced to the extent
necessary to establish the nature of its business
operations, it will be deemed to have begun business. For
example, the acquisition of operating assets which are
necessary to the type of business contemplated may
constitute the beginning of business.
See Senate Finance Committee Report to accompany H.R. 7956,
Miscellaneous Revenue Act of 1980, S. Rep. No. 96-1036 (96th Cong., 2d
Sess.), November 25, 1980, p. 14. As the Senate Finance Committee
Report states, this is similar to the concept referred to in section
248(a)(2) and defined in Treasury regulations as follows:
The determination of the date the corporation begins
business presents a question of fact which must be
determined in each case in light of all the circumstances
of the particular case. The words ``begins business,''
however, do not have the same meaning as ``in existence.''
Ordinarily, a corporation begins business when it starts
the business operations for which it was organized; a
corporation comes into existence on the date of its
incorporation. Mere organizational activities, such as the
obtaining of the corporate charter, are not alone
sufficient to show the beginning of business. If the
activities of the corporation have advanced to the extent
necessary to establish the nature of its business
operations, however, it will be deemed to have begun
business. For example, the acquisition of operating assets
which are necessary to the type of business contemplated
may constitute the beginning of business.
See Treas. Reg. sec. 1.248-1(d); see also Treas. Reg. sec. 1.709-2(c)
(echoing the distinctions above and explaining that ``[t]he term
`operating assets', as used herein, means assets that are in a state of
readiness to be placed in service within a reasonable period following
their acquisition''); Richmond Television Corp. v. United States, 345
F.2d 901 (4th Cir. 1965) (holding that trade or business has begun when
the taxpayer has ``begun to function as a going concern and performed
those activities for which it was organized''). The Internal Revenue
Service has cited Richmond Television in interpreting the active trade
or business requirement under section 195. See, e.g., Tech. Adv. Mem.
9310001, November 4, 1992; Tech. Adv. Mem. 9414004, December 17, 1993.
---------------------------------------------------------------------------
\32\By requiring that the start-up taxable year end after September
10, 2018, the provision does not apply to expenses incurred in taxable
years ending on or prior to September 10, 2018.
\33\For example, a taxpayer could have expenses in connection with
a trade or business under section 174 prior to beginning active trade
or business.
---------------------------------------------------------------------------
Generally, a net start-up loss is the portion of the old
loss corporation's net operating loss carryforward from a
particular year that is attributable to activities of a start-
up business in that year. Specifically, the net start-up loss
with respect to a start-up business for any start-up period
taxable year is the amount that bears the same ratio to the net
operating loss carryforward which arose in such year as (1) the
net operating loss (if any) which would have been determined
for such taxable year if only items of income, gain, deduction,
and loss properly allocable to the start-up trade or business
were taken into account, bears to (2) the amount of the net
operating loss determined for such taxable year. If the ratio
described in the previous sentence is greater than one, the
ratio shall be deemed to equal one.
Any net operating loss incurred prior to the ownership
change date in the year of change is treated similarly to net
operating loss carryforwards to the taxable year ending with
the ownership change or in which the change date occurs, after
proper allocation of such net operating loss and any net start-
up loss to the period in such year on or before the change
date.\34\ For example, consider Corporation X, which undergoes
an ownership change. In the year of change (which is also a
start-up period taxable year), Corporation X has a net start-up
loss of $100, $50 of which is allocable to the period on or
before the change date. In this example, Corporation X's pre-
change losses subject to limitation under section 382(a) would
be reduced by $50.
---------------------------------------------------------------------------
\34\Section 382(d)(1)(B) requires allocation of the net operating
loss to the period on or before the change date.
---------------------------------------------------------------------------
In the case of any start-up period taxable year which ends
after the close of the three-year period beginning on the date
an active trade or business begins, the net start-up loss with
respect to such trade or business for such year is the same
proportion of such loss as the proportion of such taxable year
on or before the close of such period. For example, consider
Corporation Y, a calendar year taxpayer that begins an active
trade or business on June 30, 2019. If Corporation Y has a net
start-up loss for tax year 2022 and later undergoes an
ownership change, Corporation Y's pre-change losses would be
reduced by half of the net start-up loss for 2022.
In the event that the old loss corporation starts more than
one trade or business in a timeframe that causes a single
taxable year of the old loss corporation to be a start-up
period taxable year with respect to more than one trade or
business, the provision applies separately to each trade or
business, and the provision's aggregate reduction of pre-change
losses for any taxable year of the old loss corporation cannot
exceed the old loss corporation's net operating loss
carryforward with respect to that year.
If the new loss corporation does not continue the start-up
trade or business at all times during the two-year period
beginning on the change date, the provision does not apply with
respect to such trade or business.
The provision also provides that it does not apply in the
event of an ownership change described in section 382(l)(5)(D)
(i.e., an ownership change that occurs during the two-year
period following an ownership change in a title 11 or similar
case that meets the criteria of section 382(l)(5)(A)), nor does
it apply to an ownership change to which section 382(l)(6)
applies (i.e., certain insolvency transactions).
Start-up excess credits under section 383
The provision generally permits unused general business
credits earned by a start-up business prior to an ownership
change to be used in a post-change year without limitation by
section 383. Using the same definition of a start-up period
taxable year as above, the provision reduces the amount of
excess credits subject to limitation under section 383 by the
amount of any start-up excess credit earned in any start-up
period taxable year.\35\ A start-up excess credit with respect
to a start-up business for any start-up period taxable year is
the amount which bears the same ratio to the unused general
business credit which arose in such taxable year as (1) the
amount of the general business credit which would have been
determined for such taxable year if only credits properly
allocable to the start-up trade or business were taken into
account, bears to (2) the amount of the general business credit
determined for such taxable year. By reducing excess credits,
the provision reduces the total amount of credits that are
limited by section 383.
---------------------------------------------------------------------------
\35\As described above, the regulations under section 383 use the
concept of ``pre-change credits'' rather than excess credits. The
provision alters the Code, and so uses the Code's approach; the intent
is that the rule for reducing excess credits should apply to the
calculation of pre-change credits under Treasury regulation section
1.383-1.
---------------------------------------------------------------------------
Rules similar to those provided by the provision under
section 382 apply to (1) the last taxable year in the start-up
period, (2) credits arising in the year of ownership change,
(3) taxable years which are start-up period taxable years with
respect to more than one trade or business, and (4) the two-
year continuity of business requirement.
EFFECTIVE DATE
The provision is effective for taxable years ending after
September 10, 2018.
Transition rules provide that the provision does not apply
to any active trade or business that begins on or before
September 10, 2018.
III. VOTES OF THE COMMITTEE
In compliance with clause 3(b) of rule XIII of the House of
Representatives, the following statement is made concerning the
vote of the Committee on Ways and Means during the markup
consideration of H.R. 6756, the ``American Innovation Act of
2018,'' on September 13, 2018.
H.R. 6756 was ordered favorably reported to the House of
Representatives as amended by an amendment in the nature of a
substitute offered by Chairman Brady by a voice vote (with a
quorum being present).
IV. BUDGET EFFECTS OF THE BILL
A. Committee Estimate of Budgetary Effects
In compliance with clause 3(d) of rule XIII of the Rules of
the House of Representatives, the following statement is made
concerning the effects on the budget of the bill, H.R. 6756, as
reported.
The bill, as reported, is estimated to have the following
effect on Federal fiscal year budget receipts for the period
2019-2028:
FISCAL YEARS
[Millions of dollars]
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Provision Effective 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2019-23 2019-28
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
1. Simplification and expansion of deduction for start-up [1] -44 -109 -153 -198 -246 -295 -346 -399 -456 -518 -750 -2,764
and organizational expenditures............................
2. Preservation of start-up net operating losses and tax tyea 9/10/18 -17 -32 -55 -90 -144 -225 -329 -459 -592 -709 -338 -2,652
credits after ownership changes............................
-----------------------------------------------------------------------------------------------------------------------------------
NET TOTAL............................................... -61 -141 -208 -288 -390 -520 -675 -858 -1,048 -1,227 -1,088 -5,416
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Joint Committee on Taxation
Note: Details may not add to totals due to rounding. The date of enactment is generally assumed to be October 1, 2018.
Legend for ``Effective'' column: tyea = taxable years ending after
[1] Proposal applies to expenditures paid or incurred in connection with active trades or businesses which begin in taxable years beginning after December 31, 2018.
Pursuant to clause 8 of rule XIII of the Rules of the House
of Representatives, the following statement is made by the
Joint Committee on Taxation with respect to the provisions of
the bill amending the Internal Revenue Code of 1986: The gross
budgetary effect (before incorporating macroeconomic effects)
in any fiscal year is less than 0.25 percent of the current
projected gross domestic product of the United States for that
fiscal year; therefore, the bill is not ``major legislation''
for purposes of requiring that the estimate include the
budgetary effects of changes in economic output, employment,
capital stock and other macroeconomic variables.
B. Statement Regarding New Budget Authority and Tax Expenditures Budget
Authority
In compliance with clause 3(c)(2) of rule XIII of the Rules
of the House of Representatives, the Committee states that the
bill involves no new or increased budget authority. The
Committee further states that the revenue provisions involve no
new tax expenditures.
C. Cost Estimate Prepared by the Congressional Budget Office
In compliance with clause 3(c)(3) of rule XIII of the Rules
of the House of Representatives, requiring a cost estimate
prepared by the CBO, the following statement by CBO is
provided.
U.S. Congress,
Congressional Budget Office,
Washington, DC, September 21, 2018.
Hon. Kevin Brady,
Chairman, Committee on Ways and Means,
House of Representatives, Washington, DC.
Dear Mr. Chairman: The Congressional Budget Office has
prepared the enclosed cost estimate for H.R. 6756, the American
Innovation Act of 2018. It contains estimates of tax provisions
prepared by the staff of the Joint Committee on Taxation.
If you wish further details on this estimate, we will be
pleased to provide them. The CBO staff contact is Cecilia
Pastrone.
Sincerely,
Keith Hall,
Director.
Enclosure.
H.R. 6756--American Innovation Act of 2018
Summary: H.R. 6756, the American Innovation Act of 2018,
would amend the Internal Revenue Code by modifying the
deduction for start-up and organizational expenditures and the
treatment of losses, carryforwards and unused pre-change tax
credits for companies after an ownership change. The bill
raises the amount which may be deducted for start-up and
organizational expenditures. In addition, it removes some
limitations on the use of losses, carryforwards, and unused
pre-change tax credits for new loss corporations that have
experienced an ownership change.
The staff of the Joint Committee on Taxation (JCT)
estimates that enacting the bill would reduce revenues by
$5,416 million over the 2019-2028 period. Pay-as-you-go
procedures apply because enacting the legislation would affect
revenues.
JCT estimates that enacting the legislation would increase
on-budget deficits by more than $5 billion in at least one of
the four consecutive 10-year periods beginning in 2029. CBO and
JCT estimate that enacting the bill would not increase net
direct spending in any of the four consecutive 10-year periods
beginning in 2029.
JCT has determined that the tax provisions of the bill
contain no intergovernmental or private sector mandates as
defined in the Unfunded Mandates Reform Act (UMRA).
Estimated cost to the Federal Government: The estimated
budgetary effect of H.R. 6756 is shown in the following table.
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
By fiscal year, in millions of dollars--
----------------------------------------------------------------------------------------------------------------------------------------
2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2019-2023 2019-2028
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
CHANGES IN REVENUES
Simplification and expansion of deduction for start-up 0 -44 -109 -153 -198 -246 -295 -346 -399 -456 -518 -750 -2,764
and organizational expenditures.......................
Preservation of start-up net operating losses and tax 0 -17 -32 -55 -90 -144 -225 -329 -459 -592 -709 -338 -2,652
credits after ownership changes.......................
Total Estimated Changes in Revenues................ 0 -61 -141 -208 -288 -390 -520 -675 -858 -1,048 -1,227 -1,088 -5,416
NET INCREASE IN THE DEFICIT FROM DECREASES IN REVENUES
Effect on Deficit...................................... 0 61 141 208 288 390 520 675 858 1,048 1,227 1,088 5,416
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Source: Staff of the Joint Committee on Taxation.
Components may not add to totals due to rounding.
Basis of estimate: The Congressional Budget Act of 1974, as
amended, stipulates that revenue estimates provided by the
staff of the Joint Committee on Taxation will be the official
estimates for all tax legislation considered by the Congress.
As such, CBO incorporates those estimates into its cost
estimates of the effects of legislation. All of the estimates
for the provisions of H.R. 6756 were provided by JCT.\1\ The
date of enactment is generally assumed to be October 1, 2018.
---------------------------------------------------------------------------
\1\For JCT's description of the bill and estimates of the
provisions, which include detail beyond the summary presented below,
see Joint Committee on Taxation, Description of H.R. 6756, the
``American Innovation Act of 2018,'' JCX-76-18, https://www.jct.gov/
publications.html?func=startdown&id=5142, and Estimated Revenue Effects
of H.R. 6756, the ``American Innovation Act of 2018,'' JCX-78-18,
https://www.jct.gov/publications.html?func=startdown&id=5144.
---------------------------------------------------------------------------
Simplification and Expansion of Deduction for Start-up and
Organizational Expenditures. Under current law, business start-
up expenditures may be deducted in the amount of $5,000 in the
taxable year in which a business or trade was started. Up to
$5,000 of organizational expenditures may also be deducted. The
amount deducted in both cases is reduced by the amount by which
the cumulative cost of start-up and organizational expenditures
exceeds $50,000.
H.R. 6756 would raise the amount that could be deducted for
start-up and organizational expenditures to $20,000 for the
combined total of start-up and organizational expenses. This is
reduced by the amount by which the sum of start-up and
organizational expenditures exceeds $120,000. The dollar
amounts are adjusted for inflation beginning in 2020. H.R. 6756
also allows partnerships or corporations liquidated within a
180-month period and disposed or discontinued businesses to
deduct any unamortized start-up expenses. JCT estimates that
the changes in this provision would reduce revenues by $2,764
million from 2019 to 2028.
Preservation of Start-Up Net Operating Losses and Tax
Credits after Ownership Changes. Under current law, companies
that experience an ownership change may offset taxable income
by the pre-change net operating losses (NOLs), unused pre-
change tax credits, and net capital losses of the original
corporation subject to certain limitations. Pre-change credits
from the old loss corporation may include unused general
business credits, alternative minimum tax credits, and foreign
tax credits. The pre-change NOL amount that can be used to
offset taxable income is limited to the value of the old loss
corporation before the ownership change multiplied by the long-
term tax-exempt interest rate. Use of pre-change credits and
net capital losses to offset the tax liability of the new loss
corporation are likewise limited. Similarly limited
carryforwards of both losses and pre-change credits may also be
used provided the new loss corporation continues the business
of the old corporation for a two-year period.
H.R. 6756 generally provides for an exception to the
limitations for pre-change net operating and capital losses,
unused credits, and carryforwards in the case of a start-up.
The bill would allow the new loss firm to fully utilize pre-
change losses, unused credits and carryforwards identified as
accruing to the old loss firm as a result of start-up activity.
Use of any remaining pre-change losses, unused credits or
carryforwards of the old loss firm would then be subject to the
limitations. Business continuity conditions still apply for the
use of carryforwards. JCT estimates that this provision would
reduce revenues by $2,652 million from 2019 to 2028.
Pay-As-You-Go Considerations: The Statutory Pay-As-You-Go
Act of 2010 establishes budget-reporting and enforcement
procedures for legislation affecting direct spending or
revenues. The net changes in outlays and revenues that are
subject to those pay-as-you-go procedures are shown in the
following table. Only on-budget changes to outlays or revenues
are subject to pay-as-you-go procedures.
CBO ESTIMATE OF PAY-AS-YOU-GO EFFECTS FOR H.R. 6756, AS ORDERED REPORTED BY THE HOUSE COMMITTEE ON WAYS AND MEANS ON SEPTEMBER 13, 2018
--------------------------------------------------------------------------------------------------------------------------------------------------------
By fiscal year, in millions of dollars--
-----------------------------------------------------------------------------------------------------------
2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2019-2023 2019-2028
--------------------------------------------------------------------------------------------------------------------------------------------------------
NET INCREASE IN THE ON-BUDGET DEFICIT
Statutory Pay-As-You-Go Effects............. 0 61 141 208 288 390 520 675 858 1,048 1,227 1,088 5,416
--------------------------------------------------------------------------------------------------------------------------------------------------------
Source: Staff of the Joint Committee on Taxation.
Components may not add to totals due to rounding.
Increase in long-term direct spending and deficits: JCT
estimates that enacting H.R. 6756 would increase on-budget
deficits by more than $5 billion in at least one of the four
10-year periods beginning in 2029. CBO and JCT estimate that
enacting the bill would not increase net direct spending in any
of the four consecutive 10-year periods beginning in 2029.
Mandates: JCT has determined that H.R. 6756 contains no
private-sector or intergovernmental mandates as defined by
UMRA.
Estimate prepared by: Staff of the Joint Committee on
Taxation and Cecilia Pastrone.
Estimate reviewed by: Joshua Shakin, Chief, Revenue
Estimating Unit; John McClelland, Assistant Director for Tax
Analysis.
V. OTHER MATTERS TO BE DISCUSSED UNDER THE RULES OF THE HOUSE
A. Committee Oversight Findings and Recommendations
Pursuant to clause 3(c)(1) of rule XIII of the Rules of the
House of Representatives, the Committee advises that the
findings and recommendations of the Committee, based on
oversight activities under clause 2(b)(1) of rule X of the
Rules of the House of Representatives, are incorporated into
the description portions of this report.
B. Statement of General Performance Goals and Objectives
With respect to clause 3(c)(4) of rule XIII of the Rules of
the House of Representatives, the Committee advises that the
bill contains no measure that authorizes funding, so no
statement of general performance goals and objectives for which
any measure authorizes funding is required.
C. Information Relating to Unfunded Mandates
This information is provided in accordance with section 423
of the Unfunded Mandates Reform Act of 1995 (Pub. L. No. 104-
4).
The Committee has determined that the bill does not contain
Federal mandates on the private sector. The Committee has
determined that the bill does not impose a Federal
intergovernmental mandate on State, local, or tribal
governments.
D. Applicability of House Rule XXI 5(b)
Rule XXI 5(b) of the Rules of the House of Representatives
provides, in part, that ``A bill or joint resolution,
amendment, or conference report carrying a Federal income tax
rate increase may not be considered as passed or agreed to
unless so determined by a vote of not less than three-fifths of
the Members voting, a quorum being present.'' The Committee has
carefully reviewed the bill and states that the bill does not
involve any Federal income tax rate increases within the
meaning of the rule.
E. Tax Complexity Analysis
Section 4022(b) of the Internal Revenue Service
Restructuring and Reform Act of 1998 (``IRS Reform Act'')
requires the staff of the Joint Committee on Taxation (in
consultation with the Internal Revenue Service and the Treasury
Department) to provide a tax complexity analysis. The
complexity analysis is required for all legislation reported by
the Senate Committee on Finance, the House Committee on Ways
and Means, or any committee of conference if the legislation
includes a provision that directly or indirectly amends the
Internal Revenue Code of 1986 and has widespread applicability
to individuals or small businesses.
Pursuant to clause 3(h)(1) of rule XIII of the Rules of the
House of Representatives, the staff of the Joint Committee on
Taxation has determined that a complexity analysis is not
required under section 4022(b) of the IRS Reform Act because
the bill contains no provisions that amend the Internal Revenue
Code of 1986 and that have ``widespread applicability'' to
individuals or small businesses, within the meaning of the
rule.
F. Congressional Earmarks, Limited Tax Benefits, and Limited Tariff
Benefits
With respect to clause 9 of rule XXI of the Rules of the
House of Representatives, the Committee has carefully reviewed
the provisions of the bill and states that the provisions of
the bill do not contain any congressional earmarks, limited tax
benefits, or limited tariff benefits within the meaning of the
rule.
G. Duplication of Federal Programs
In compliance with Sec. 3(c)(5) of rule XIII of the Rules
of the House of Representatives, the Committee states that no
provision of the bill establishes or reauthorizes: (1) a
program of the Federal Government known to be duplicative of
another Federal program, (2) a program included in any report
from the Government Accountability Office to Congress pursuant
to section 21 of Public Law 111-139, or (3) a program related
to a program identified in the most recent Catalog of Federal
Domestic Assistance, published pursuant to section 6104 of
title 31, United States Code.
H. Disclosure of Directed Rule Makings
In compliance with Sec. 3(i) of H. Res. 5 (115th Congress),
the following statement is made concerning directed rule
makings: The Committee advises that the bill requires no
directed rule makings within the meaning of such section.
VI. CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED
A. Changes in Existing Law Proposed by the Bill, as Reported
In compliance with clause 3(e) of rule XIII of the Rules of
the House of Representatives, changes in existing law proposed
by the bill, as reported, are shown as follows (existing law
proposed to be omitted is enclosed in black brackets, new
matter is printed in italic, existing law in which no change is
proposed is shown in roman):
Changes in Existing Law Made by the Bill, as Reported
In compliance with clause 3(e) of rule XIII of the Rules of
the House of Representatives, changes in existing law made by
the bill, as reported, are shown as follows (existing law
proposed to be omitted is enclosed in black brackets, new
matter is printed in italic, and existing law in which no
change is proposed is shown in roman):
INTERNAL REVENUE CODE OF 1986
* * * * * * *
Subtitle A--Income Taxes
* * * * * * *
CHAPTER 1--NORMAL TAXES AND SURTAXES
* * * * * * *
Subchapter B--Computation of Taxable Income
* * * * * * *
PART VI--ITEMIZED DEDUCTIONS FOR INDIVIDUALS AND CORPORATIONS
* * * * * * *
[Sec. 195. Start-up expenditures.]
Sec. 195. Start-up and organizational expenditures.
* * * * * * *
SEC. 170. CHARITABLE, ETC., CONTRIBUTIONS AND GIFTS.
(a) Allowance of deduction.--
(1) General rule.--There shall be allowed as a
deduction any charitable contribution (as defined in
subsection (c)) payment of which is made within the
taxable year. A charitable contribution shall be
allowable as a deduction only if verified under
regulations prescribed by the Secretary.
(2) Corporations on accrual basis.--In the case of a
corporation reporting its taxable income on the accrual
basis, if--
(A) the board of directors authorizes a
charitable contribution during any taxable
year, and
(B) payment of such contribution is made
after the close of such taxable year and on or
before the 15th day of the fourth month
following the close of such taxable year,
then the taxpayer may elect to treat such contribution
as paid during such taxable year. The election may be
made only at the time of the filing of the return for
such taxable year, and shall be signified in such
manner as the Secretary shall by regulations prescribe.
(3) Future interests in tangible personal property.--
For purposes of this section, payment of a charitable
contribution which consists of a future interest in
tangible personal property shall be treated as made
only when all intervening interests in, and rights to
the actual possession or enjoyment of, the property
have expired or are held by persons other than the
taxpayer or those standing in a relationship to the
taxpayer described in section 267(b) or 707(b). For
purposes of the preceding sentence, a fixture which is
intended to be severed from the real property shall be
treated as tangible personal property.
(b) Percentage limitations.--
(1) Individuals.--In the case of an individual, the
deduction provided in subsection (a) shall be limited
as provided in the succeeding subparagraphs.
(A) General rule.--Any charitable
contribution to--
(i) a church or a convention or
association of churches,
(ii) an educational organization
which normally maintains a regular
faculty and curriculum and normally has
a regularly enrolled body of pupils or
students in attendance at the place
where its educational activities are
regularly carried on,
(iii) an organization the principal
purpose or functions of which are the
providing of medical or hospital care
or medical education or medical
research, if the organization is a
hospital, or if the organization is a
medical research organization directly
engaged in the continuous active
conduct of medical research in
conjunction with a hospital, and during
the calendar year in which the
contribution is made such organization
is committed to spend such
contributions for such research before
January 1 of the fifth calendar year
which begins after the date such
contribution is made,
(iv) an organization which normally
receives a substantial part of its
support (exclusive of income received
in the exercise or performance by such
organization of its charitable,
educational, or other purpose or
function constituting the basis for its
exemption under section 501(a)) from
the United States or any State or
political subdivision thereof or from
direct or indirect contributions from
the general public, and which is
organized and operated exclusively to
receive, hold, invest, and administer
property and to make expenditures to or
for the benefit of a college or
university which is an organization
referred to in clause (ii) of this
subparagraph and which is an agency or
instrumentality of a State or political
subdivision thereof, or which is owned
or operated by a State or political
subdivision thereof or by an agency or
instrumentality of one or more States
or political subdivisions,
(v) a governmental unit referred to
in subsection (c)(1),
(vi) an organization referred to in
subsection (c)(2) which normally
receives a substantial part of its
support (exclusive of income received
in the exercise or performance by such
organization of its charitable,
educational, or other purpose or
function constituting the basis for its
exemption under section 501(a)) from a
governmental unit referred to in
subsection (c)(1) or from direct or
indirect contributions from the general
public,
(vii) a private foundation described
in subparagraph (F),
(viii) an organization described in
section 509(a)(2) or (3), or
(ix) an agricultural research
organization directly engaged in the
continuous active conduct of
agricultural research (as defined in
section 1404 of the National
Agricultural Research, Extension, and
Teaching Policy Act of 1977) in
conjunction with a land-grant college
or university (as defined in such
section) or a non-land grant college of
agriculture (as defined in such
section), and during the calendar year
in which the contribution is made such
organization is committed to spend such
contribution for such research before
January 1 of the fifth calendar year
which begins after the date such
contribution is made,
shall be allowed to the extent that the
aggregate of such contributions does not exceed
50 percent of the taxpayer's contribution base
for the taxable year.
(B) Other contributions.--Any charitable
contribution other than a charitable
contribution to which subparagraph (A) applies
shall be allowed to the extent that the
aggregate of such contributions does not exceed
the lesser of--
(i) 30 percent of the taxpayer's
contribution base for the taxable year,
or
(ii) the excess of 50 percent of the
taxpayer's contribution base for the
taxable year over the amount of
charitable contributions allowable
under subparagraph (A) (determined
without regard to subparagraph (C)).
If the aggregate of such contributions exceeds
the limitation of the preceding sentence, such
excess shall be treated (in a manner consistent
with the rules of subsection (d)(1)) as a
charitable contribution (to which subparagraph
(A) does not apply) in each of the 5 succeeding
taxable years in order of time.
(C) Special limitation with respect to
contributions described in subparagraph (A) of
certain capital gain property (i) In the case
of charitable contributions described in
subparagraph (A) of capital gain property to
which subsection (e)(1)(B) does not apply, the
total amount of contributions of such property
which may be taken into account under
subsection (a) for any taxable year shall not
exceed 30 percent of the taxpayer's
contribution base for such year. For purposes
of this subsection, contributions of capital
gain property to which this subparagraph
applies shall be taken into account after all
other charitable contributions (other than
charitable contributions to which subparagraph
(D) applies).
(ii) If charitable contributions
described in subparagraph (A) of
capital gain property to which clause
(i) applies exceeds 30 percent of the
taxpayer's contribution base for any
taxable year, such excess shall be
treated, in a manner consistent with
the rules of subsection (d)(1), as a
charitable contribution of capital gain
property to which clause (i) applies in
each of the 5 succeeding taxable years
in order of time.
(iii) At the election of the taxpayer
(made at such time and in such manner
as the Secretary prescribes by
regulations), subsection (e)(1) shall
apply to all contributions of capital
gain property (to which subsection
(e)(1)(B) does not otherwise apply)
made by the taxpayer during the taxable
year. If such an election is made,
clauses (i) and (ii) shall not apply to
contributions of capital gain property
made during the taxable year, and, in
applying subsection (d)(1) for such
taxable year with respect to
contributions of capital gain property
made in any prior contribution year for
which an election was not made under
this clause, such contributions shall
be reduced as if subsection (e)(1) had
applied to such contributions in the
year in which made.
(iv) For purposes of this paragraph,
the term ``capital gain property''
means, with respect to any
contribution, any capital asset the
sale of which at its fair market value
at the time of the contribution would
have resulted in gain which would have
been long-term capital gain. For
purposes of the preceding sentence, any
property which is property used in the
trade or business (as defined in
section 1231(b)) shall be treated as a
capital asset.
(D) Special limitation with respect to
contributions of capital gain property to
organizations not described in subparagraph (A)
(i) In general.--In the case of
charitable contributions (other than
charitable contributions to which
subparagraph (A) applies) of capital
gain property, the total amount of such
contributions of such property taken
into account under subsection (a) for
any taxable year shall not exceed the
lesser of--
(I) 20 percent of the
taxpayer's contribution base
for the taxable year, or
(II) the excess of 30 percent
of the taxpayer's contribution
base for the taxable year over
the amount of the contributions
of capital gain property to
which subparagraph (C) applies.
For purposes of this subsection,
contributions of capital gain property
to which this subparagraph applies
shall be taken into account after all
other charitable contributions.
(ii) Carryover.--If the aggregate
amount of contributions described in
clause (i) exceeds the limitation of
clause (i), such excess shall be
treated (in a manner consistent with
the rules of subsection (d)(1)) as a
charitable contribution of capital gain
property to which clause (i) applies in
each of the 5 succeeding taxable years
in order of time.
(E) Contributions of qualified conservation
contributions.--
(i) In general.--Any qualified
conservation contribution (as defined
in subsection (h)(1)) shall be allowed
to the extent the aggregate of such
contributions does not exceed the
excess of 50 percent of the taxpayer's
contribution base over the amount of
all other charitable contributions
allowable under this paragraph.
(ii) Carryover.--If the aggregate
amount of contributions described in
clause (i) exceeds the limitation of
clause (i), such excess shall be
treated (in a manner consistent with
the rules of subsection (d)(1)) as a
charitable contribution to which clause
(i) applies in each of the 15
succeeding years in order of time.
(iii) Coordination with other
subparagraphs.--For purposes of
applying this subsection and subsection
(d)(1), contributions described in
clause (i) shall not be treated as
described in subparagraph (A), (B),
(C), or (D) and such subparagraphs
shall apply without regard to such
contributions.
(iv) Special rule for contribution of
property used in agriculture or
livestock production.--
(I) In general.--If the
individual is a qualified
farmer or rancher for the
taxable year for which the
contribution is made, clause
(i) shall be applied by
substituting ``100 percent''
for ``50 percent''.
(II) Exception.--Subclause
(I) shall not apply to any
contribution of property made
after the date of the enactment
of this subparagraph which is
used in agriculture or
livestock production (or
available for such production)
unless such contribution is
subject to a restriction that
such property remain available
for such production. This
subparagraph shall be applied
separately with respect to
property to which subclause (I)
does not apply by reason of the
preceding sentence prior to its
application to property to
which subclause (I) does apply.
(v) Definition.--For purposes of
clause (iv), the term ``qualified
farmer or rancher'' means a taxpayer
whose gross income from the trade or
business of farming (within the meaning
of section 2032A(e)(5)) is greater than
50 percent of the taxpayer's gross
income for the taxable year.
(F) Certain private foundations.--The private
foundations referred to in subparagraph
(A)(vii) and subsection (e)(1)(B) are--
(i) a private operating foundation
(as defined in section 4942(j)(3)),
(ii) any other private foundation (as
defined in section 509(a)) which, not
later than the 15th day of the third
month after the close of the
foundation's taxable year in which
contributions are received, makes
qualifying distributions (as defined in
section 4942(g), without regard to
paragraph (3) thereof), which are
treated, after the application of
section 4942(g)(3), as distributions
out of corpus (in accordance with
section 4942(h)) in an amount equal to
100 percent of such contributions, and
with respect to which the taxpayer
obtains adequate records or other
sufficient evidence from the foundation
showing that the foundation made such
qualifying distributions, and
(iii) a private foundation all of the
contributions to which are pooled in a
common fund and which would be
described in section 509(a)(3) but for
the right of any substantial
contributor (hereafter in this clause
called ``donor'') or his spouse to
designate annually the recipients, from
among organizations described in
paragraph (1) of section 509(a), of the
income attributable to the donor's
contribution to the fund and to direct
(by deed or by will) the payment, to an
organization described in such
paragraph (1), of the corpus in the
common fund attributable to the donor's
contribution; but this clause shall
apply only if all of the income of the
common fund is required to be (and is)
distributed to one or more
organizations described in such
paragraph (1) not later than the 15th
day of the third month after the close
of the taxable year in which the income
is realized by the fund and only if all
of the corpus attributable to any
donor's contribution to the fund is
required to be (and is) distributed to
one or more of such organizations not
later than one year after his death or
after the death of his surviving spouse
if she has the right to designate the
recipients of such corpus.
(G) Increased limitation for cash
contributions.--
(i) In general.--In the case of any
contribution of cash to an organization
described in subparagraph (A), the
total amount of such contributions
which may be taken into account under
subsection (a) for any taxable year
beginning after December 31, 2017, and
before January 1, 2026, shall not
exceed 60 percent of the taxpayer's
contribution base for such year.
(ii) Carryover.--If the aggregate
amount of contributions described in
clause (i) exceeds the applicable
limitation under clause (i) for any
taxable year described in such clause,
such excess shall be treated (in a
manner consistent with the rules of
subsection (d)(1)) as a charitable
contribution to which clause (i)
applies in each of the 5 succeeding
years in order of time.
(iii) Coordination with subparagraphs
(A) and (B)
(I) In general.--
Contributions taken into
account under this subparagraph
shall not be taken into account
under subparagraph (A).
(II) Limitation reduction.--
For each taxable year described
in clause (i), and each taxable
year to which any contribution
under this subparagraph is
carried over under clause (ii),
subparagraph (A) shall be
applied by reducing (but not
below zero) the contribution
limitation allowed for the
taxable year under such
subparagraph by the aggregate
contributions allowed under
this subparagraph for such
taxable year, and subparagraph
(B) shall be applied by
treating any reference to
subparagraph (A) as a reference
to both subparagraph (A) and
this subparagraph.
(H) Contribution base defined.--For purposes
of this section, the term ``contribution base''
means adjusted gross income (computed without
regard to any net operating loss carryback to
the taxable year under section 172).
(2) Corporations.--In the case of a corporation--
(A) In general.--The total deductions under
subsection (a) for any taxable year (other than
for contributions to which subparagraph (B) or
(C) applies) shall not exceed 10 percent of the
taxpayer's taxable income.
(B) Qualified conservation contributions by
certain corporate farmers and ranchers.--
(i) In general.--Any qualified
conservation contribution (as defined
in subsection (h)(1))--
(I) which is made by a
corporation which, for the
taxable year during which the
contribution is made, is a
qualified farmer or rancher (as
defined in paragraph (1)(E)(v))
and the stock of which is not
readily tradable on an
established securities market
at any time during such year,
and
(II) which, in the case of
contributions made after the
date of the enactment of this
subparagraph, is a contribution
of property which is used in
agriculture or livestock
production (or available for
such production) and which is
subject to a restriction that
such property remain available
for such production,
shall be allowed to the extent the
aggregate of such contributions does
not exceed the excess of the taxpayer's
taxable income over the amount of
charitable contributions allowable
under subparagraph (A).
(ii) Carryover.--If the aggregate
amount of contributions described in
clause (i) exceeds the limitation of
clause (i), such excess shall be
treated (in a manner consistent with
the rules of subsection (d)(2)) as a
charitable contribution to which clause
(i) applies in each of the 15
succeeding taxable years in order of
time.
(C) Qualified conservation contributions by
certain Native Corporations.--
(i) In general.--Any qualified
conservation contribution (as defined
in subsection (h)(1)) which--
(I) is made by a Native
Corporation, and
(II) is a contribution of
property which was land
conveyed under the Alaska
Native Claims Settlement Act,
shall be allowed to the extent that the
aggregate amount of such contributions
does not exceed the excess of the
taxpayer's taxable income over the
amount of charitable contributions
allowable under subparagraph (A).
(ii) Carryover.--If the aggregate
amount of contributions described in
clause (i) exceeds the limitation of
clause (i), such excess shall be
treated (in a manner consistent with
the rules of subsection (d)(2)) as a
charitable contribution to which clause
(i) applies in each of the 15
succeeding taxable years in order of
time.
(iii) Native Corporation.--For
purposes of this subparagraph, the term
``Native Corporation'' has the meaning
given such term by section 3(m) of the
Alaska Native Claims Settlement Act.
(D) Taxable income.--For purposes of this
paragraph, taxable income shall be computed
without regard to--
(i) this section,
(ii) part VIII [(except section
248)],
(iii) any net operating loss
carryback to the taxable year under
section 172,
(iv) any capital loss carryback to
the taxable year under section
1212(a)(1)
(v) section 199A(g).
(c) Charitable contribution defined.--For purposes of this
section, the term ``charitable contribution'' means a
contribution or gift to or for the use of--
(1) A State, a possession of the United States, or
any political subdivision of any of the foregoing, or
the United States or the District of Columbia, but only
if the contribution or gift is made for exclusively
public purposes.
(2) A corporation, trust, or community chest, fund,
or foundation--
(A) created or organized in the United States
or in any possession thereof, or under the law
of the United States, any State, the District
of Columbia, or any possession of the United
States;
(B) organized and operated exclusively for
religious, charitable, scientific, literary, or
educational purposes, or to foster national or
international amateur sports competition (but
only if no part of its activities involve the
provision of athletic facilities or equipment),
or for the prevention of cruelty to children or
animals;
(C) no part of the net earnings of which
inures to the benefit of any private
shareholder or individual; and
(D) which is not disqualified for tax
exemption under section 501(c)(3) by reason of
attempting to influence legislation, and which
does not participate in, or intervene in
(including the publishing or distributing of
statements), any political campaign on behalf
of (or in opposition to) any candidate for
public office.
A contribution or gift by a corporation to a trust,
chest, fund, or foundation shall be deductible by
reason of this paragraph only if it is to be used
within the United States or any of its possessions
exclusively for purposes specified in subparagraph (B).
Rules similar to the rules of section 501(j) shall
apply for purposes of this paragraph.
(3) A post or organization of war veterans, or an
auxiliary unit or society of, or trust or foundation
for, any such post or organization--
(A) organized in the United States or any of
its possessions, and
(B) no part of the net earnings of which
inures to the benefit of any private
shareholder or individual.
(4) In the case of a contribution or gift by an
individual, a domestic fraternal society, order, or
association, operating under the lodge system, but only
if such contribution or gift is to be used exclusively
for religious, charitable, scientific, literary, or
educational purposes, or for the prevention of cruelty
to children or animals.
(5) A cemetery company owned and operated exclusively
for the benefit of its members, or any corporation
chartered solely for burial purposes as a cemetery
corporation and not permitted by its charter to engage
in any business not necessarily incident to that
purpose, if such company or corporation is not operated
for profit and no part of the net earnings of such
company or corporation inures to the benefit of any
private shareholder or individual.
For purposes of this section, the term ``charitable
contribution'' also means an amount treated under subsection
(g) as paid for the use of an organization described in
paragraph (2), (3), or (4).
(d) Carryovers of excess contributions.--
(1) Individuals.--
(A) In general.--In the case of an
individual, if the amount of charitable
contributions described in subsection (b)(1)(A)
payment of which is made within a taxable year
(hereinafter in this paragraph referred to as
the ``contribution year'') exceeds 50 percent
of the taxpayer's contribution base for such
year, such excess shall be treated as a
charitable contribution described in subsection
(b)(1)(A) paid in each of the 5 succeeding
taxable years in order of time, but, with
respect to any such succeeding taxable year,
only to the extent of the lesser of the two
following amounts:
(i) the amount by which 50 percent of
the taxpayer's contribution base for
such succeeding taxable year exceeds
the sum of the charitable contributions
described in subsection (b)(1)(A)
payment of which is made by the
taxpayer within such succeeding taxable
year (determined without regard to this
subparagraph) and the charitable
contributions described in subsection
(b)(1)(A) payment of which was made in
taxable years before the contribution
year which are treated under this
subparagraph as having been paid in
such succeeding taxable year; or
(ii) in the case of the first
succeeding taxable year, the amount of
such excess, and in the case of the
second, third, fourth, or fifth
succeeding taxable year, the portion of
such excess not treated under this
subparagraph as a charitable
contribution described in subsection
(b)(1)(A) paid in any taxable year
intervening between the contribution
year and such succeeding taxable year.
(B) Special rule for net operating loss
carryovers.--In applying subparagraph (A), the
excess determined under subparagraph (A) for
the contribution year shall be reduced to the
extent that such excess reduces taxable income
(as computed for purposes of the second
sentence of section 172(b)(2)) and increases
the net operating loss deduction for a taxable
year succeeding the contribution year.
(2) Corporations.--
(A) In general.--Any contribution made by a
corporation in a taxable year (hereinafter in
this paragraph referred to as the
``contribution year'') in excess of the amount
deductible for such year under subsection
(b)(2)(A) shall be deductible for each of the 5
succeeding taxable years in order of time, but
only to the extent of the lesser of the two
following amounts: (i) the excess of the
maximum amount deductible for such succeeding
taxable year under subsection (b)(2)(A) over
the sum of the contributions made in such year
plus the aggregate of the excess contributions
which were made in taxable years before the
contribution year and which are deductible
under this subparagraph for such succeeding
taxable year; or (ii) in the case of the first
succeeding taxable year, the amount of such
excess contribution, and in the case of the
second, third, fourth, or fifth succeeding
taxable year, the portion of such excess
contribution not deductible under this
subparagraph for any taxable year intervening
between the contribution year and such
succeeding taxable year.
(B) Special rule for net operating loss
carryovers.--For purposes of subparagraph (A),
the excess of--
(i) the contributions made by a
corporation in a taxable year to which
this section applies, over
(ii) the amount deductible in such
year under the limitation in subsection
(b)(2)(A),
shall be reduced to the extent that such excess
reduces taxable income (as computed for
purposes of the second sentence of section
172(b)(2)) and increases a net operating loss
carryover under section 172 to a succeeding
taxable year.
(e) Certain contributions of ordinary income and capital gain
property.--
(1) General rule.--The amount of any charitable
contribution of property otherwise taken into account
under this section shall be reduced by the sum of--
(A) the amount of gain which would not have
been long-term capital gain (determined without
regard to section 1221(b)(3)) if the property
contributed had been sold by the taxpayer at
its fair market value (determined at the time
of such contribution), and
(B) in the case of a charitable
contribution--
(i) of tangible personal property--
(I) if the use by the donee
is unrelated to the purpose or
function constituting the basis
for its exemption under section
501 (or, in the case of a
governmental unit, to any
purpose or function described
in subsection (c)), or
(II) which is applicable
property (as defined in
paragraph (7)(C), but without
regard to clause (ii) thereof)
which is sold, exchanged, or
otherwise disposed of by the
donee before the last day of
the taxable year in which the
contribution was made and with
respect to which the donee has
not made a certification in
accordance with paragraph
(7)(D),
(ii) to or for the use of a private
foundation (as defined in section
509(a)), other than a private
foundation described in subsection
(b)(1)(F),
(iii) of any patent, copyright (other
than a copyright described in section
1221(a)(3) or 1231(b)(1)(C)),
trademark, trade name, trade secret,
know- how, software (other than
software described in section
197(e)(3)(A)(i)), or similar property,
or applications or registrations of
such property, or
(iv) of any taxidermy property which
is contributed by the person who
prepared, stuffed, or mounted the
property or by any person who paid or
incurred the cost of such preparation,
stuffing, or mounting,
the amount of gain which would have been long-
term capital gain if the property contributed
had been sold by the taxpayer at its fair
market value (determined at the time of such
contribution).
For purposes of applying this paragraph (other than in
the case of gain to which section 617(d)(1), 1245(a),
1250(a), 1252(a), or 1254(a) applies), property which
is property used in the trade or business (as defined
in section 1231(b)) shall be treated as a capital
asset. For purposes of applying this paragraph in the
case of a charitable contribution of stock in an S
corporation, rules similar to the rules of section 751
shall apply in determining whether gain on such stock
would have been long-term capital gain if such stock
were sold by the taxpayer.
(2) Allocation of basis.--For purposes of paragraph
(1), in the case of a charitable contribution of less
than the taxpayer's entire interest in the property
contributed, the taxpayer's adjusted basis in such
property shall be allocated between the interest
contributed and any interest not contributed in
accordance with regulations prescribed by the
Secretary.
(3) Special rule for certain contributions of
inventory and other property.--
(A) Qualified contributions.--For purposes of
this paragraph, a qualified contribution shall
mean a charitable contribution of property
described in paragraph (1) or (2) of section
1221(a), by a corporation (other than a
corporation which is an S corporation) to an
organization which is described in section
501(c)(3) and is exempt under section 501(a)
(other than a private foundation, as defined in
section 509(a), which is not an operating
foundation, as defined in section 4942(j)(3)),
but only if--
(i) the use of the property by the
donee is related to the purpose or
function constituting the basis for its
exemption under section 501 and the
property is to be used by the donee
solely for the care of the ill, the
needy, or infants;
(ii) the property is not transferred
by the donee in exchange for money,
other property, or services;
(iii) the taxpayer receives from the
donee a written statement representing
that its use and disposition of the
property will be in accordance with the
provisions of clauses (i) and (ii); and
(iv) in the case where the property
is subject to regulation under the
Federal Food, Drug, and Cosmetic Act,
as amended, such property must fully
satisfy the applicable requirements of
such Act and regulations promulgated
thereunder on the date of transfer and
for one hundred and eighty days prior
thereto.
(B) Amount of reduction.--The reduction under
paragraph (1)(A) for any qualified contribution
(as defined in subparagraph (A)) shall be no
greater than the sum of--
(i) one-half of the amount computed
under paragraph (1)(A) (computed
without regard to this paragraph), and
(ii) the amount (if any) by which the
charitable contribution deduction under
this section for any qualified
contribution (computed by taking into
account the amount determined in clause
(i), but without regard to this clause)
exceeds twice the basis of such
property.
(C) Special rule for contributions of food
inventory.--
(i) General rule.--In the case of a
charitable contribution of food from
any trade or business of the taxpayer,
this paragraph shall be applied--
(I) without regard to whether
the contribution is made by a C
corporation, and
(II) only to food that is
apparently wholesome food.
(ii) Limitation.--The aggregate
amount of such contributions for any
taxable year which may be taken into
account under this section shall not
exceed--
(I) in the case of any
taxpayer other than a C
corporation, 15 percent of the
taxpayer's aggregate net income
for such taxable year from all
trades or businesses from which
such contributions were made
for such year, computed without
regard to this section, and
(II) in the case of a C
corporation, 15 percent of
taxable income (as defined in
subsection (b)(2)(D)).
(iii) Rules related to limitation.--
(I) Carryover.--If such
aggregate amount exceeds the
limitation imposed under clause
(ii), such excess shall be
treated (in a manner consistent
with the rules of subsection
(d)) as a charitable
contribution described in
clause (i) in each of the 5
succeeding taxable years in
order of time.
(II) Coordination with
overall corporate limitation.--
In the case of any charitable
contribution which is allowable
after the application of clause
(ii)(II), subsection (b)(2)(A)
shall not apply to such
contribution, but the
limitation imposed by such
subsection shall be reduced
(but not below zero) by the
aggregate amount of such
contributions. For purposes of
subsection (b)(2)(B), such
contributions shall be treated
as allowable under subsection
(b)(2)(A).
(iv) Determination of basis for
certain taxpayers.--If a taxpayer--
(I) does not account for
inventories under section 471,
and
(II) is not required to
capitalize indirect costs under
section 263A,
the taxpayer may elect, solely for
purposes of subparagraph (B), to treat
the basis of any apparently wholesome
food as being equal to 25 percent of
the fair market value of such food.
(v) Determination of fair market
value.--In the case of any such
contribution of apparently wholesome
food which cannot or will not be sold
solely by reason of internal standards
of the taxpayer, lack of market, or
similar circumstances, or by reason of
being produced by the taxpayer
exclusively for the purposes of
transferring the food to an
organization described in subparagraph
(A), the fair market value of such
contribution shall be determined--
(I) without regard to such
internal standards, such lack
of market, such circumstances,
or such exclusive purpose, and
(II) by taking into account
the price at which the same or
substantially the same food
items (as to both type and
quality) are sold by the
taxpayer at the time of the
contribution (or, if not so
sold at such time, in the
recent past).
(vi) Apparently wholesome food.--For
purposes of this subparagraph, the term
``apparently wholesome food'' has the
meaning given to such term by section
22(b)(2) of the Bill Emerson Good
Samaritan Food Donation Act (42 U.S.C.
1791(b)(2)), as in effect on the date
of the enactment of this subparagraph.
(D) This paragraph shall not apply to so much
of the amount of the gain described in
paragraph (1)(A) which would be long-term
capital gain but for the application of
sections 617, 1245, 1250, or 1252.
(4) Special rule for contributions of scientific
property used for research.--
(A) Limit on reduction.--In the case of a
qualified research contribution, the reduction
under paragraph (1)(A) shall be no greater than
the amount determined under paragraph (3)(B).
(B) Qualified research contributions.--For
purposes of this paragraph, the term
``qualified research contribution'' means a
charitable contribution by a corporation of
tangible personal property described in
paragraph (1) of section 1221(a), but only if--
(i) the contribution is to an
organization described in subparagraph
(A) or subparagraph (B) of section
41(e)(6),
(ii) the property is constructed or
assembled by the taxpayer,
(iii) the contribution is made not
later than 2 years after the date the
construction or assembly of the
property is substantially completed,
(iv) the original use of the property
is by the donee,
(v) the property is scientific
equipment or apparatus substantially
all of the use of which by the donee is
for research or experimentation (within
the meaning of section 174), or for
research training, in the United States
in physical or biological sciences,
(vi) the property is not transferred
by the donee in exchange for money,
other property, or services, and
(vii) the taxpayer receives from the
donee a written statement representing
that its use and disposition of the
property will be in accordance with the
provisions of clauses (v) and (vi).
(C) Construction of property by taxpayer.--
For purposes of this paragraph, property shall
be treated as constructed by the taxpayer only
if the cost of the parts used in the
construction of such property (other than parts
manufactured by the taxpayer or a related
person) do not exceed 50 percent of the
taxpayer's basis in such property.
(D) Corporation.--For purposes of this
paragraph, the term ``corporation'' shall not
include--
(i) an S corporation,
(ii) a personal holding company (as
defined in section 542), and
(iii) a service organization (as
defined in section 414(m)(3)).
(5) Special rule for contributions of stock for which
market quotations are readily available.--
(A) In general.--Subparagraph (B)(ii) of
paragraph (1) shall not apply to any
contribution of qualified appreciated stock.
(B) Qualified appreciated stock.--Except as
provided in subparagraph (C), for purposes of
this paragraph, the term ``qualified
appreciated stock'' means any stock of a
corporation--
(i) for which (as of the date of the
contribution) market quotations are
readily available on an established
securities market, and
(ii) which is capital gain property
(as defined in subsection
(b)(1)(C)(iv)).
(C) Donor may not contribute more than 10
percent of stock of corporation.--
(i) In general.--In the case of any
donor, the term ``qualified appreciated
stock'' shall not include any stock of
a corporation contributed by the donor
in a contribution to which paragraph
(1)(B)(ii) applies (determined without
regard to this paragraph) to the extent
that the amount of the stock so
contributed (when increased by the
aggregate amount of all prior such
contributions by the donor of stock in
such corporation) exceeds 10 percent
(in value) of all of the outstanding
stock of such corporation.
(ii) Special rule.--For purposes of
clause (i), an individual shall be
treated as making all contributions
made by any member of his family (as
defined in section 267(c)(4)).
(7) Recapture of deduction on certain dispositions of
exempt use property.--
(A) In general.--In the case of an applicable
disposition of applicable property, there shall
be included in the income of the donor of such
property for the taxable year of such donor in
which the applicable disposition occurs an
amount equal to the excess (if any) of--
(i) the amount of the deduction
allowed to the donor under this section
with respect to such property, over
(ii) the donor's basis in such
property at the time such property was
contributed.
(B) Applicable disposition.--For purposes of
this paragraph, the term ``applicable
disposition'' means any sale, exchange, or
other disposition by the donee of applicable
property--
(i) after the last day of the taxable
year of the donor in which such
property was contributed, and
(ii) before the last day of the 3-
year period beginning on the date of
the contribution of such property,
unless the donee makes a certification in
accordance with subparagraph (D).
(C) Applicable property.--For purposes of
this paragraph, the term ``applicable
property'' means charitable deduction property
(as defined in section 6050L(a)(2)(A))--
(i) which is tangible personal
property the use of which is identified
by the donee as related to the purpose
or function constituting the basis of
the donee's exemption under section
501, and
(ii) for which a deduction in excess
of the donor's basis is allowed.
(D) Certification.--A certification meets the
requirements of this subparagraph if it is a
written statement which is signed under penalty
of perjury by an officer of the donee
organization and--
(i) which--
(I) certifies that the use of
the property by the donee was
substantial and related to the
purpose or function
constituting the basis for the
donee's exemption under section
501, and
(II) describes how the
property was used and how such
use furthered such purpose or
function, or
(ii) which--
(I) states the intended use
of the property by the donee at
the time of the contribution,
and
(II) certifies that such
intended use has become
impossible or infeasible to
implement.
(f) Disallowance of deduction in certain cases and special
rules.--
(1) In general.--No deduction shall be allowed under
this section for a contribution to or for the use of an
organization or trust described in section 508(d) or
4948(c)(4) subject to the conditions specified in such
sections.
(2) Contributions of property placed in trust.--
(A) Remainder interest.--In the case of
property transferred in trust, no deduction
shall be allowed under this section for the
value of a contribution of a remainder interest
unless the trust is a charitable remainder
annuity trust or a charitable remainder
unitrust (described in section 664), or a
pooled income fund (described in section
642(c)(5)).
(B) Income interests, etc..--No deduction
shall be allowed under this section for the
value of any interest in property (other than a
remainder interest) transferred in trust unless
the interest is in the form of a guaranteed
annuity or the trust instrument specifies that
the interest is a fixed percentage distributed
yearly of the fair market value of the trust
property (to be determined yearly) and the
grantor is treated as the owner of such
interest for purposes of applying section 671.
If the donor ceases to be treated as the owner
of such an interest for purposes of applying
section 671, at the time the donor ceases to be
so treated, the donor shall for purposes of
this chapter be considered as having received
an amount of income equal to the amount of any
deduction he received under this section for
the contribution reduced by the discounted
value of all amounts of income earned by the
trust and taxable to him before the time at
which he ceases to be treated as the owner of
the interest. Such amounts of income shall be
discounted to the date of the contribution. The
Secretary shall prescribe such regulations as
may be necessary to carry out the purposes of
this subparagraph.
(C) Denial of deduction in case of payments
by certain trusts.--In any case in which a
deduction is allowed under this section for the
value of an interest in property described in
subparagraph (B), transferred in trust, no
deduction shall be allowed under this section
to the grantor or any other person for the
amount of any contribution made by the trust
with respect to such interest.
(D) Exception.--This paragraph shall not
apply in a case in which the value of all
interests in property transferred in trust are
deductible under subsection (a).
(3) Denial of deduction in case of certain
contributions of partial interests in property.--
(A) In general.--In the case of a
contribution (not made by a transfer in trust)
of an interest in property which consists of
less than the taxpayer's entire interest in
such property, a deduction shall be allowed
under this section only to the extent that the
value of the interest contributed would be
allowable as a deduction under this section if
such interest had been transferred in trust.
For purposes of this subparagraph, a
contribution by a taxpayer of the right to use
property shall be treated as a contribution of
less than the taxpayer's entire interest in
such property.
(B) Exceptions.--Subparagraph (A) shall not
apply to--
(i) a contribution of a remainder
interest in a personal residence or
farm,
(ii) a contribution of an undivided
portion of the taxpayer's entire
interest in property, and
(iii) a qualified conservation
contribution.
(4) Valuation of remainder interest in real
property.--For purposes of this section, in determining
the value of a remainder interest in real property,
depreciation (computed on the straight line method) and
depletion of such property shall be taken into account,
and such value shall be discounted at a rate of 6
percent per annum, except that the Secretary may
prescribe a different rate.
(5) Reduction for certain interest.--If, in
connection with any charitable contribution, a
liability is assumed by the recipient or by any other
person, or if a charitable contribution is of property
which is subject to a liability, then, to the extent
necessary to avoid the duplication of amounts, the
amount taken into account for purposes of this section
as the amount of the charitable contribution--
(A) shall be reduced for interest (i) which
has been paid (or is to be paid) by the
taxpayer, (ii) which is attributable to the
liability, and (iii) which is attributable to
any period after the making of the
contribution, and
(B) in the case of a bond, shall be further
reduced for interest (i) which has been paid
(or is to be paid) by the taxpayer on
indebtedness incurred or continued to purchase
or carry such bond, and (ii) which is
attributable to any period before the making of
the contribution.
The reduction pursuant to subparagraph (B) shall not
exceed the interest (including interest equivalent) on
the bond which is attributable to any period before the
making of the contribution and which is not (under the
taxpayer's method of accounting) includible in the
gross income of the taxpayer for any taxable year. For
purposes of this paragraph, the term ``bond'' means any
bond, debenture, note, or certificate or other evidence
of indebtedness.
(6) Deductions for out-of-pocket expenditures.--No
deduction shall be allowed under this section for an
out-of-pocket expenditure made by any person on behalf
of an organization described in subsection (c) (other
than an organization described in section 501(h)(5)
(relating to churches, etc.)) if the expenditure is
made for the purpose of influencing legislation (within
the meaning of section 501(c)(3)).
(7) Reformations to comply with paragraph (2)
(A) In general.--A deduction shall be allowed
under subsection (a) in respect of any
qualified reformation (within the meaning of
section 2055(e)(3)(B)).
(B) Rules similar to section 2055(e)(3) to
apply.--For purposes of this paragraph, rules
similar to the rules of section 2055(e)(3)
shall apply.
(8) Substantiation requirement for certain
contributions.--
(A) General rule.--No deduction shall be
allowed under subsection (a) for any
contribution of $250 or more unless the
taxpayer substantiates the contribution by a
contemporaneous written acknowledgment of the
contribution by the donee organization that
meets the requirements of subparagraph (B).
(B) Content of acknowledgement.--An
acknowledgement meets the requirements of this
subparagraph if it includes the following
information:
(i) The amount of cash and a
description (but not value) of any
property other than cash contributed.
(ii) Whether the donee organization
provided any goods or services in
consideration, in whole or in part, for
any property described in clause (i).
(iii) A description and good faith
estimate of the value of any goods or
services referred to in clause (ii) or,
if such goods or services consist
solely of intangible religious
benefits, a statement to that effect.
For purposes of this subparagraph, the term
``intangible religious benefit'' means any
intangible religious benefit which is provided
by an organization organized exclusively for
religious purposes and which generally is not
sold in a commercial transaction outside the
donative context.
(C) Contemporaneous.--For purposes of
subparagraph (A), an acknowledgment shall be
considered to be contemporaneous if the
taxpayer obtains the acknowledgment on or
before the earlier of--
(i) the date on which the taxpayer
files a return for the taxable year in
which the contribution was made, or
(ii) the due date (including
extensions) for filing such return.
(D) Regulations.--The Secretary shall
prescribe such regulations as may be necessary
or appropriate to carry out the purposes of
this paragraph, including regulations that may
provide that some or all of the requirements of
this paragraph do not apply in appropriate
cases.
(9) Denial of deduction where contribution for
lobbying activities.--No deduction shall be allowed
under this section for a contribution to an
organization which conducts activities to which section
162(e)(1) applies on matters of direct financial
interest to the donor's trade or business, if a
principal purpose of the contribution was to avoid
Federal income tax by securing a deduction for such
activities under this section which would be disallowed
by reason of section 162(e) if the donor had conducted
such activities directly. No deduction shall be allowed
under section 162(a) for any amount for which a
deduction is disallowed under the preceding sentence.
(10) Split-dollar life insurance, annuity, and
endowment contracts.--
(A) In general.--Nothing in this section or
in section 545(b)(2), 642(c), 2055, 2106(a)(2),
or 2522 shall be construed to allow a
deduction, and no deduction shall be allowed,
for any transfer to or for the use of an
organization described in subsection (c) if in
connection with such transfer--
(i) the organization directly or
indirectly pays, or has previously
paid, any premium on any personal
benefit contract with respect to the
transferor, or
(ii) there is an understanding or
expectation that any person will
directly or indirectly pay any premium
on any personal benefit contract with
respect to the transferor.
(B) Personal benefit contract.--For purposes
of subparagraph (A), the term ``personal
benefit contract'' means, with respect to the
transferor, any life insurance, annuity, or
endowment contract if any direct or indirect
beneficiary under such contract is the
transferor, any member of the transferor's
family, or any other person (other than an
organization described in subsection (c))
designated by the transferor.
(C) Application to charitable remainder
trusts.--In the case of a transfer to a trust
referred to in subparagraph (E), references in
subparagraphs (A) and (F) to an organization
described in subsection (c) shall be treated as
a reference to such trust.
(D) Exception for certain annuity
contracts.--If, in connection with a transfer
to or for the use of an organization described
in subsection (c), such organization incurs an
obligation to pay a charitable gift annuity (as
defined in section 501(m)) and such
organization purchases any annuity contract to
fund such obligation, persons receiving
payments under the charitable gift annuity
shall not be treated for purposes of
subparagraph (B) as indirect beneficiaries
under such contract if--
(i) such organization possesses all
of the incidents of ownership under
such contract,
(ii) such organization is entitled to
all the payments under such contract,
and
(iii) the timing and amount of
payments under such contract are
substantially the same as the timing
and amount of payments to each such
person under such obligation (as such
obligation is in effect at the time of
such transfer).
(E) Exception for certain contracts held by
charitable remainder trusts.--A person shall
not be treated for purposes of subparagraph (B)
as an indirect beneficiary under any life
insurance, annuity, or endowment contract held
by a charitable remainder annuity trust or a
charitable remainder unitrust (as defined in
section 664(d)) solely by reason of being
entitled to any payment referred to in
paragraph (1)(A) or (2)(A) of section 664(d)
if--
(i) such trust possesses all of the
incidents of ownership under such
contract, and
(ii) such trust is entitled to all
the payments under such contract.
(F) Excise tax on premiums paid.--
(i) In general.--There is hereby
imposed on any organization described
in subsection (c) an excise tax equal
to the premiums paid by such
organization on any life insurance,
annuity, or endowment contract if the
payment of premiums on such contract is
in connection with a transfer for which
a deduction is not allowable under
subparagraph (A), determined without
regard to when such transfer is made.
(ii) Payments by other persons.--For
purposes of clause (i), payments made
by any other person pursuant to an
understanding or expectation referred
to in subparagraph (A) shall be treated
as made by the organization.
(iii) Reporting.--Any organization on
which tax is imposed by clause (i) with
respect to any premium shall file an
annual return which includes--
(I) the amount of such
premiums paid during the year
and the name and TIN of each
beneficiary under the contract
to which the premium relates,
and
(II) such other information
as the Secretary may require.
The penalties applicable to returns
required under section 6033 shall apply
to returns required under this clause.
Returns required under this clause
shall be furnished at such time and in
such manner as the Secretary shall by
forms or regulations require.
(iv) Certain rules to apply.--The tax
imposed by this subparagraph shall be
treated as imposed by chapter 42 for
purposes of this title other than
subchapter B of chapter 42.
(G) Special rule where state requires
specification of charitable gift annuitant in
contract.--In the case of an obligation to pay
a charitable gift annuity referred to in
subparagraph (D) which is entered into under
the laws of a State which requires, in order
for the charitable gift annuity to be exempt
from insurance regulation by such State, that
each beneficiary under the charitable gift
annuity be named as a beneficiary under an
annuity contract issued by an insurance company
authorized to transact business in such State,
the requirements of clauses (i) and (ii) of
subparagraph (D) shall be treated as met if--
(i) such State law requirement was in
effect on February 8, 1999,
(ii) each such beneficiary under the
charitable gift annuity is a bona fide
resident of such State at the time the
obligation to pay a charitable gift
annuity is entered into, and
(iii) the only persons entitled to
payments under such contract are
persons entitled to payments as
beneficiaries under such obligation on
the date such obligation is entered
into.
(H) Member of family.--For purposes of this
paragraph, an individual's family consists of
the individual's grandparents, the grandparents
of such individual's spouse, the lineal
descendants of such grandparents, and any
spouse of such a lineal descendant.
(I) Regulations.--The Secretary shall
prescribe such regulations as may be necessary
or appropriate to carry out the purposes of
this paragraph, including regulations to
prevent the avoidance of such purposes.
(11) Qualified appraisal and other documentation for
certain contributions.--
(A) In general.--
(i) Denial of deduction.--In the case
of an individual, partnership, or
corporation, no deduction shall be
allowed under subsection (a) for any
contribution of property for which a
deduction of more than $500 is claimed
unless such person meets the
requirements of subparagraphs (B), (C),
and (D), as the case may be, with
respect to such contribution.
(ii) Exceptions.--
(I) Readily valued
property.--Subparagraphs (C)
and (D) shall not apply to
cash, property described in
subsection (e)(1)(B)(iii) or
section 1221(a)(1), publicly
traded securities (as defined
in section 6050L(a)(2)(B)), and
any qualified vehicle described
in paragraph (12)(A)(ii) for
which an acknowledgement under
paragraph (12)(B)(iii) is
provided.
(II) Reasonable cause.--
Clause (i) shall not apply if
it is shown that the failure to
meet such requirements is due
to reasonable cause and not to
willful neglect.
(B) Property description for contributions of
more than $500.--In the case of contributions
of property for which a deduction of more than
$500 is claimed, the requirements of this
subparagraph are met if the individual,
partnership or corporation includes with the
return for the taxable year in which the
contribution is made a description of such
property and such other information as the
Secretary may require. The requirements of this
subparagraph shall not apply to a C corporation
which is not a personal service corporation or
a closely held C corporation.
(C) Qualified appraisal for contributions of
more than $5,000.--In the case of contributions
of property for which a deduction of more than
$5,000 is claimed, the requirements of this
subparagraph are met if the individual,
partnership, or corporation obtains a qualified
appraisal of such property and attaches to the
return for the taxable year in which such
contribution is made such information regarding
such property and such appraisal as the
Secretary may require.
(D) Substantiation for contributions of more
than $500,000.--In the case of contributions of
property for which a deduction of more than
$500,000 is claimed, the requirements of this
subparagraph are met if the individual,
partnership, or corporation attaches to the
return for the taxable year a qualified
appraisal of such property.
(E) Qualified appraisal and appraiser.--For
purposes of this paragraph--
(i) Qualified appraisal.--The term
``qualified appraisal'' means, with
respect to any property, an appraisal
of such property which--
(I) is treated for purposes
of this paragraph as a
qualified appraisal under
regulations or other guidance
prescribed by the Secretary,
and
(II) is conducted by a
qualified appraiser in
accordance with generally
accepted appraisal standards
and any regulations or other
guidance prescribed under
subclause (I).
(ii) Qualified appraiser.--Except as
provided in clause (iii), the term
``qualified appraiser'' means an
individual who--
(I) has earned an appraisal
designation from a recognized
professional appraiser
organization or has otherwise
met minimum education and
experience requirements set
forth in regulations prescribed
by the Secretary,
(II) regularly performs
appraisals for which the
individual receives
compensation, and
(III) meets such other
requirements as may be
prescribed by the Secretary in
regulations or other guidance.
(iii) Specific appraisals.--An
individual shall not be treated as a
qualified appraiser with respect to any
specific appraisal unless--
(I) the individual
demonstrates verifiable
education and experience in
valuing the type of property
subject to the appraisal, and
(II) the individual has not
been prohibited from practicing
before the Internal Revenue
Service by the Secretary under
section 330(c) of title 31,
United States Code, at any time
during the 3-year period ending
on the date of the appraisal.
(F) Aggregation of similar items of
property.--For purposes of determining
thresholds under this paragraph, property and
all similar items of property donated to 1 or
more donees shall be treated as 1 property.
(G) Special rule for pass-thru entities.--In
the case of a partnership or S corporation,
this paragraph shall be applied at the entity
level, except that the deduction shall be
denied at the partner or shareholder level.
(H) Regulations.--The Secretary may prescribe
such regulations as may be necessary or
appropriate to carry out the purposes of this
paragraph, including regulations that may
provide that some or all of the requirements of
this paragraph do not apply in appropriate
cases.
(12) Contributions of used motor vehicles, boats, and
airplanes.--
(A) In general.--In the case of a
contribution of a qualified vehicle the claimed
value of which exceeds $500--
(i) paragraph (8) shall not apply and
no deduction shall be allowed under
subsection (a) for such contribution
unless the taxpayer substantiates the
contribution by a contemporaneous
written acknowledgement of the
contribution by the donee organization
that meets the requirements of
subparagraph (B) and includes the
acknowledgement with the taxpayer's
return of tax which includes the
deduction, and
(ii) if the organization sells the
vehicle without any significant
intervening use or material improvement
of such vehicle by the organization,
the amount of the deduction allowed
under subsection (a) shall not exceed
the gross proceeds received from such
sale.
(B) Content of acknowledgement.--An
acknowledgement meets the requirements of this
subparagraph if it includes the following
information:
(i) The name and taxpayer
identification number of the donor.
(ii) The vehicle identification
number or similar number.
(iii) In the case of a qualified
vehicle to which subparagraph (A)(ii)
applies--
(I) a certification that the
vehicle was sold in an arm's
length transaction between
unrelated parties,
(II) the gross proceeds from
the sale, and
(III) a statement that the
deductible amount may not
exceed the amount of such gross
proceeds.
(iv) In the case of a qualified
vehicle to which subparagraph (A)(ii)
does not apply--
(I) a certification of the
intended use or material
improvement of the vehicle and
the intended duration of such
use, and
(II) a certification that the
vehicle would not be
transferred in exchange for
money, other property, or
services before completion of
such use or improvement.
(v) Whether the donee organization
provided any goods or services in
consideration, in whole or in part, for
the qualified vehicle.
(vi) A description and good faith
estimate of the value of any goods or
services referred to in clause (v) or,
if such goods or services consist
solely of intangible religious benefits
(as defined in paragraph (8)(B)), a
statement to that effect.
(C) Contemporaneous.--For purposes of
subparagraph (A), an acknowledgement shall be
considered to be contemporaneous if the donee
organization provides it within 30 days of--
(i) the sale of the qualified
vehicle, or
(ii) in the case of an
acknowledgement including a
certification described in subparagraph
(B)(iv), the contribution of the
qualified vehicle.
(D) Information to Secretary.--A donee
organization required to provide an
acknowledgement under this paragraph shall
provide to the Secretary the information
contained in the acknowledgement. Such
information shall be provided at such time and
in such manner as the Secretary may prescribe.
(E) Qualified vehicle.--For purposes of this
paragraph, the term ``qualified vehicle'' means
any--
(i) motor vehicle manufactured
primarily for use on public streets,
roads, and highways,
(ii) boat, or
(iii) airplane.
Such term shall not include any property which
is described in section 1221(a)(1).
(F) Regulations or other guidance.--The
Secretary shall prescribe such regulations or
other guidance as may be necessary to carry out
the purposes of this paragraph. The Secretary
may prescribe regulations or other guidance
which exempts sales by the donee organization
which are in direct furtherance of such
organization's charitable purpose from the
requirements of subparagraphs (A)(ii) and
(B)(iv)(II).
(13) Contributions of certain interests in buildings
located in registered historic districts.--
(A) In general.--No deduction shall be
allowed with respect to any contribution
described in subparagraph (B) unless the
taxpayer includes with the return for the
taxable year of the contribution a $500 filing
fee.
(B) Contribution described.--A contribution
is described in this subparagraph if such
contribution is a qualified conservation
contribution (as defined in subsection (h))
which is a restriction with respect to the
exterior of a building described in subsection
(h)(4)(C)(ii) and for which a deduction is
claimed in excess of $10,000.
(C) Dedication of fee.--Any fee collected
under this paragraph shall be used for the
enforcement of the provisions of subsection
(h).
(14) Reduction for amounts attributable to
rehabilitation credit.--In the case of any qualified
conservation contribution (as defined in subsection
(h)), the amount of the deduction allowed under this
section shall be reduced by an amount which bears the
same ratio to the fair market value of the contribution
as--
(A) the sum of the credits allowed to the
taxpayer under section 47 for the 5 preceding
taxable years with respect to any building
which is a part of such contribution, bears to
(B) the fair market value of the building on
the date of the contribution.
(15) Special rule for taxidermy property.--
(A) Basis.--For purposes of this section and
notwithstanding section 1012, in the case of a
charitable contribution of taxidermy property
which is made by the person who prepared,
stuffed, or mounted the property or by any
person who paid or incurred the cost of such
preparation, stuffing, or mounting, only the
cost of the preparing, stuffing, or mounting
shall be included in the basis of such
property.
(B) Taxidermy property.--For purposes of this
section, the term ``taxidermy property'' means
any work of art which--
(i) is the reproduction or
preservation of an animal, in whole or
in part,
(ii) is prepared, stuffed, or mounted
for purposes of recreating one or more
characteristics of such animal, and
(iii) contains a part of the body of
the dead animal.
(16) Contributions of clothing and household items.--
(A) In general.--In the case of an
individual, partnership, or corporation, no
deduction shall be allowed under subsection (a)
for any contribution of clothing or a household
item unless such clothing or household item is
in good used condition or better.
(B) Items of minimal value.--Notwithstanding
subparagraph (A), the Secretary may by
regulation deny a deduction under subsection
(a) for any contribution of clothing or a
household item which has minimal monetary
value.
(C) Exception for certain property.--
Subparagraphs (A) and (B) shall not apply to
any contribution of a single item of clothing
or a household item for which a deduction of
more than $500 is claimed if the taxpayer
includes with the taxpayer's return a qualified
appraisal with respect to the property.
(D) Household items.--For purposes of this
paragraph--
(i) In general.--The term ``household
items'' includes furniture,
furnishings, electronics, appliances,
linens, and other similar items.
(ii) Excluded items.--Such term does
not include--
(I) food,
(II) paintings, antiques, and
other objects of art,
(III) jewelry and gems, and
(IV) collections.
(E) Special rule for pass-thru entities.--In
the case of a partnership or S corporation,
this paragraph shall be applied at the entity
level, except that the deduction shall be
denied at the partner or shareholder level.
(17) Recordkeeping.--No deduction shall be allowed
under subsection (a) for any contribution of a cash,
check, or other monetary gift unless the donor
maintains as a record of such contribution a bank
record or a written communication from the donee
showing the name of the donee organization, the date of
the contribution, and the amount of the contribution.
(18) Contributions to donor advised funds.--A
deduction otherwise allowed under subsection (a) for
any contribution to a donor advised fund (as defined in
section 4966(d)(2)) shall only be allowed if--
(A) the sponsoring organization (as defined
in section 4966(d)(1)) with respect to such
donor advised fund is not--
(i) described in paragraph (3), (4),
or (5) of subsection (c), or
(ii) a type III supporting
organization (as defined in section
4943(f)(5)(A)) which is not a
functionally integrated type III
supporting organization (as defined in
section 4943(f)(5)(B)), and
(B) the taxpayer obtains a contemporaneous
written acknowledgment (determined under rules
similar to the rules of paragraph (8)(C)) from
the sponsoring organization (as so defined) of
such donor advised fund that such organization
has exclusive legal control over the assets
contributed.
(g) Amounts paid to maintain certain students as members of
taxpayer's household.--
(1) In general.--Subject to the limitations provided
by paragraph (2), amounts paid by the taxpayer to
maintain an individual (other than a dependent, as
defined in section 152 (determined without regard to
subsections (b)(1), (b)(2), and (d)(1)(B) thereof), or
a relative of the taxpayer) as a member of his
household during the period that such individual is--
(A) a member of the taxpayer's household
under a written agreement between the taxpayer
and an organization described in paragraph (2),
(3), or (4) of subsection (c) to implement a
program of the organization to provide
educational opportunities for pupils or
students in private homes, and
(B) a full-time pupil or student in the
twelfth or any lower grade at an educational
organization described in section
170(b)(1)(A)(ii) located in the United States,
shall be treated as amounts paid for the use of
the organization.
(2) Limitations.--
(A) Amount.--Paragraph (1) shall apply to
amounts paid within the taxable year only to
the extent that such amounts do not exceed $50
multiplied by the number of full calendar
months during the taxable year which fall
within the period described in paragraph (1).
For purposes of the preceding sentence, if 15
or more days of a calendar month fall within
such period such month shall be considered as a
full calendar month.
(B) Compensation or reimbursement.--Paragraph
(1) shall not apply to any amount paid by the
taxpayer within the taxable year if the
taxpayer receives any money or other property
as compensation or reimbursement for
maintaining the individual in his household
during the period described in paragraph (1).
(3) Relative defined.--For purposes of paragraph (1),
the term ``relative of the taxpayer'' means an
individual who, with respect to the taxpayer, bears any
of the relationships described in subparagraphs (A)
through (G) of section 152(d)(2).
(4) No other amount allowed as deduction.--No
deduction shall be allowed under subsection (a) for any
amount paid by a taxpayer to maintain an individual as
a member of his household under a program described in
paragraph (1)(A) except as provided in this subsection.
(h) Qualified conservation contribution.--
(1) In general.--For purposes of subsection
(f)(3)(B)(iii), the term ``qualified conservation
contribution'' means a contribution--
(A) of a qualified real property interest,
(B) to a qualified organization,
(C) exclusively for conservation purposes.
(2) Qualified real property interest.--For purposes
of this subsection, the term ``qualified real property
interest'' means any of the following interests in real
property:
(A) the entire interest of the donor other
than a qualified mineral interest,
(B) a remainder interest, and
(C) a restriction (granted in perpetuity) on
the use which may be made of the real property.
(3) Qualified organization.--For purposes of
paragraph (1), the term ``qualified organization''
means an organization which--
(A) is described in clause (v) or (vi) of
subsection (b)(1)(A), or
(B) is described in section 501(c)(3) and--
(i) meets the requirements of section
509(a)(2), or
(ii) meets the requirements of
section 509(a)(3) and is controlled by
an organization described in
subparagraph (A) or in clause (i) of
this subparagraph.
(4) Conservation purpose defined.--
(A) In general.--For purposes of this
subsection, the term ``conservation purpose''
means--
(i) the preservation of land areas
for outdoor recreation by, or the
education of, the general public,
(ii) the protection of a relatively
natural habitat of fish, wildlife, or
plants, or similar ecosystem,
(iii) the preservation of open space
(including farmland and forest land)
where such preservation is--
(I) for the scenic enjoyment
of the general public, or
(II) pursuant to a clearly
delineated Federal, State, or
local governmental conservation
policy,
and will yield a significant public
benefit, or
(iv) the preservation of an
historically important land area or a
certified historic structure.
(B) Special rules with respect to buildings
in registered historic districts.--In the case
of any contribution of a qualified real
property interest which is a restriction with
respect to the exterior of a building described
in subparagraph (C)(ii), such contribution
shall not be considered to be exclusively for
conservation purposes unless--
(i) such interest--
(I) includes a restriction
which preserves the entire
exterior of the building
(including the front, sides,
rear, and height of the
building), and
(II) prohibits any change in
the exterior of the building
which is inconsistent with the
historical character of such
exterior,
(ii) the donor and donee enter into a
written agreement certifying, under
penalty of perjury, that the donee--
(I) is a qualified
organization (as defined in
paragraph (3)) with a purpose
of environmental protection,
land conservation, open space
preservation, or historic
preservation, and
(II) has the resources to
manage and enforce the
restriction and a commitment to
do so, and
(iii) in the case of any contribution
made in a taxable year beginning after
the date of the enactment of this
subparagraph, the taxpayer includes
with the taxpayer's return for the
taxable year of the contribution--
(I) a qualified appraisal
(within the meaning of
subsection (f)(11)(E)) of the
qualified property interest,
(II) photographs of the
entire exterior of the
building, and
(III) a description of all
restrictions on the development
of the building.
(C) Certified historic structure.--For
purposes of subparagraph (A)(iv), the term
``certified historic structure'' means--
(i) any building, structure, or land
area which is listed in the National
Register, or
(ii) any building which is located in
a registered historic district (as
defined in section 47(c)(3)(B)) and is
certified by the Secretary of the
Interior to the Secretary as being of
historic significance to the district.
A building, structure, or land area satisfies the
preceding sentence if it satisfies such sentence either
at the time of the transfer or on the due date
(including extensions) for filing the transferor's
return under this chapter for the taxable year in which
the transfer is made.
(5) Exclusively for conservation purposes.--For
purposes of this subsection--
(A) Conservation purpose must be protected.--
A contribution shall not be treated as
exclusively for conservation purposes unless
the conservation purpose is protected in
perpetuity.
(B) No surface mining permitted.--
(i) In general.--Except as provided
in clause (ii), in the case of a
contribution of any interest where
there is a retention of a qualified
mineral interest, subparagraph (A)
shall not be treated as met if at any
time there may be extraction or removal
of minerals by any surface mining
method.
(ii) Special rule.--With respect to
any contribution of property in which
the ownership of the surface estate and
mineral interests has been and remains
separated, subparagraph (A) shall be
treated as met if the probability of
surface mining occurring on such
property is so remote as to be
negligible.
(6) Qualified mineral interest.--For purposes of this
subsection, the term ``qualified mineral interest''
means--
(A) subsurface oil, gas, or other minerals,
and
(B) the right to access to such minerals.
(i) Standard mileage rate for use of passenger automobile.--
For purposes of computing the deduction under this section for
use of a passenger automobile, the standard mileage rate shall
be 14 cents per mile.
(j) Denial of deduction for certain travel expenses.--No
deduction shall be allowed under this section for traveling
expenses (including amounts expended for meals and lodging)
while away from home, whether paid directly or by
reimbursement, unless there is no significant element of
personal pleasure, recreation, or vacation in such travel.
(l) Treatment of certain amounts paid to or for the benefit
of institutions of higher education.--
(1) In general.--No deduction shall be allowed under
this section for any amount described in paragraph (2).
(2) Amount described.--For purposes of paragraph (1),
an amount is described in this paragraph if--
(A) the amount is paid by the taxpayer to or
for the benefit of an educational
organization--
(i) which is described in subsection
(b)(1)(A)(ii), and
(ii) which is an institution of
higher education (as defined in section
3304(f)), and
(B) the taxpayer receives (directly or
indirectly) as a result of paying such amount
the right to purchase tickets for seating at an
athletic event in an athletic stadium of such
institution.
If any portion of a payment is for the purchase of such
tickets, such portion and the remaining portion (if
any) of such payment shall be treated as separate
amounts for purposes of this subsection.
(m) Certain donee income from intellectual property treated
as an additional charitable contribution.--
(1) Treatment as additional contribution.--In the
case of a taxpayer who makes a qualified intellectual
property contribution, the deduction allowed under
subsection (a) for each taxable year of the taxpayer
ending on or after the date of such contribution shall
be increased (subject to the limitations under
subsection (b)) by the applicable percentage of
qualified donee income with respect to such
contribution which is properly allocable to such year
under this subsection.
(2) Reduction in additional deductions to extent of
initial deduction.--With respect to any qualified
intellectual property contribution, the deduction
allowed under subsection (a) shall be increased under
paragraph (1) only to the extent that the aggregate
amount of such increases with respect to such
contribution exceed the amount allowed as a deduction
under subsection (a) with respect to such contribution
determined without regard to this subsection.
(3) Qualified donee income.--For purposes of this
subsection, the term ``qualified donee income'' means
any net income received by or accrued to the donee
which is properly allocable to the qualified
intellectual property.
(4) Allocation of qualified donee income to taxable
years of donor.--For purposes of this subsection,
qualified donee income shall be treated as properly
allocable to a taxable year of the donor if such income
is received by or accrued to the donee for the taxable
year of the donee which ends within or with such
taxable year of the donor.
(5) 10-year limitation.--Income shall not be treated
as properly allocable to qualified intellectual
property for purposes of this subsection if such income
is received by or accrued to the donee after the 10-
year period beginning on the date of the contribution
of such property.
(6) Benefit limited to life of intellectual
property.--Income shall not be treated as properly
allocable to qualified intellectual property for
purposes of this subsection if such income is received
by or accrued to the donee after the expiration of the
legal life of such property.
(7) Applicable percentage.--For purposes of this
subsection, the term ``applicable percentage'' means
the percentage determined under the following table
which corresponds to a taxable year of the donor ending
on or after the date of the qualified intellectual
property contribution:
------------------------------------------------------------------------
Taxable Year of Donor Ending on or
After Date of Contribution: Applicable Percentage:
------------------------------------------------------------------------
1st................................. 100
..
2nd................................. 100
..
3rd................................. 90
..
4th................................. 80
..
5th................................. 70
..
6th................................. 60
..
7th................................. 50
..
8th................................. 40
..
9th................................. 30
..
10th................................ 20
..
11th................................ 10
..
12th................................ 10
..
------------------------------------------------------------------------
(8) Qualified intellectual property contribution.--
For purposes of this subsection, the term ``qualified
intellectual property contribution'' means any
charitable contribution of qualified intellectual
property--
(A) the amount of which taken into account
under this section is reduced by reason of
subsection (e)(1), and
(B) with respect to which the donor informs
the donee at the time of such contribution that
the donor intends to treat such contribution as
a qualified intellectual property contribution
for purposes of this subsection and section
6050L.
(9) Qualified intellectual property.--For purposes of
this subsection, the term ``qualified intellectual
property'' means property described in subsection
(e)(1)(B)(iii) (other than property contributed to or
for the use of an organization described in subsection
(e)(1)(B)(ii)).
(10) Other special rules.--
(A) Application of limitations on charitable
contributions.--Any increase under this
subsection of the deduction provided under
subsection (a) shall be treated for purposes of
subsection (b) as a deduction which is
attributable to a charitable contribution to
the donee to which such increase relates.
(B) Net income determined by donee.--The net
income taken into account under paragraph (3)
shall not exceed the amount of such income
reported under section 6050L(b)(1).
(C) Deduction limited to 12 taxable years.--
Except as may be provided under subparagraph
(D)(i), this subsection shall not apply with
respect to any qualified intellectual property
contribution for any taxable year of the donor
after the 12th taxable year of the donor which
ends on or after the date of such contribution.
(D) Regulations.--The Secretary may issue
regulations or other guidance to carry out the
purposes of this subsection, including
regulations or guidance--
(i) modifying the application of this
subsection in the case of a donor or
donee with a short taxable year, and
(ii) providing for the determination
of an amount to be treated as net
income of the donee which is properly
allocable to qualified intellectual
property in the case of a donee who
uses such property to further a purpose
or function constituting the basis of
the donee's exemption under section 501
(or, in the case of a governmental
unit, any purpose described in section
170(c)) and does not possess a right to
receive any payment from a third party
with respect to such property.
(n) Expenses paid by certain whaling captains in support of
Native Alaskan subsistence whaling.--
(1) In general.--In the case of an individual who is
recognized by the Alaska Eskimo Whaling Commission as a
whaling captain charged with the responsibility of
maintaining and carrying out sanctioned whaling
activities and who engages in such activities during
the taxable year, the amount described in paragraph (2)
(to the extent such amount does not exceed $10,000 for
the taxable year) shall be treated for purposes of this
section as a charitable contribution.
(2) Amount described.--
(A) In general.--The amount described in this
paragraph is the aggregate of the reasonable
and necessary whaling expenses paid by the
taxpayer during the taxable year in carrying
out sanctioned whaling activities.
(B) Whaling expenses.--For purposes of
subparagraph (A), the term ``whaling expenses''
includes expenses for--
(i) the acquisition and maintenance
of whaling boats, weapons, and gear
used in sanctioned whaling activities,
(ii) the supplying of food for the
crew and other provisions for carrying
out such activities, and
(iii) storage and distribution of the
catch from such activities.
(3) Sanctioned whaling activities.--For purposes of
this subsection, the term ``sanctioned whaling
activities'' means subsistence bowhead whale hunting
activities conducted pursuant to the management plan of
the Alaska Eskimo Whaling Commission.
(4) Substantiation of expenses.--The Secretary shall
issue guidance requiring that the taxpayer substantiate
the whaling expenses for which a deduction is claimed
under this subsection, including by maintaining
appropriate written records with respect to the time,
place, date, amount, and nature of the expense, as well
as the taxpayer's eligibility for such deduction, and
that (to the extent provided by the Secretary) such
substantiation be provided as part of the taxpayer's
return of tax.
(o) Special rules for fractional gifts.--
(1) Denial of deduction in certain cases.--
(A) In general.--No deduction shall be
allowed for a contribution of an undivided
portion of a taxpayer's entire interest in
tangible personal property unless all interests
in the property are held immediately before
such contribution by--
(i) the taxpayer, or
(ii) the taxpayer and the donee.
(B) Exceptions.--The Secretary may, by
regulation, provide for exceptions to
subparagraph (A) in cases where all persons who
hold an interest in the property make
proportional contributions of an undivided
portion of the entire interest held by such
persons.
(2) Valuation of subsequent gifts.--In the case of
any additional contribution, the fair market value of
such contribution shall be determined by using the
lesser of--
(A) the fair market value of the property at
the time of the initial fractional
contribution, or
(B) the fair market value of the property at
the time of the additional contribution.
(3) Recapture of deduction in certain cases; addition
to tax.--
(A) Recapture.--The Secretary shall provide
for the recapture of the amount of any
deduction allowed under this section (plus
interest) with respect to any contribution of
an undivided portion of a taxpayer's entire
interest in tangible personal property--
(i) in any case in which the donor
does not contribute all of the
remaining interests in such property to
the donee (or, if such donee is no
longer in existence, to any person
described in section 170(c)) on or
before the earlier of--
(I) the date that is 10 years
after the date of the initial
fractional contribution, or
(II) the date of the death of
the donor, and (ii) in any case
in which the donee has not,
during the period beginning on
the date of the initial
fractional contribution and
ending on the date described in
clause (i)--
(I) had substantial physical
possession of the property, and
(II) used the property in a
use which is related to a
purpose or function
constituting the basis for the
organizations' exemption under
section 501.
(B) Addition to tax.--The tax imposed under
this chapter for any taxable year for which
there is a recapture under subparagraph (A)
shall be increased by 10 percent of the amount
so recaptured.
(4) Definitions.--For purposes of this subsection--
(A) Additional contribution.--The term
``additional contribution'' means any
charitable contribution by the taxpayer of any
interest in property with respect to which the
taxpayer has previously made an initial
fractional contribution.
(B) Initial fractional contribution.--The
term ``initial fractional contribution'' means,
with respect to any taxpayer, the first
charitable contribution of an undivided portion
of the taxpayer's entire interest in any
tangible personal property.
(p) Other cross references.--
(1) For treatment of certain organizations providing
child care, see section 501(k).
(2) For charitable contributions of estates and
trusts, see section 642(c).
(3) For nondeductibility of contributions by common
trust funds, see section 584.
(4) For charitable contributions of partners, see
section 702.
(5) For charitable contributions of nonresident
aliens, see section 873.
(6) For treatment of gifts for benefit of or use in
connection with the Naval Academy as gifts to or for
use of the United States, see section 6973 of title 10,
United States Code.
(7) For treatment of gifts accepted by the Secretary
of State, the Director of the International
Communication Agency, or the Director of the United
States International Development Cooperation Agency, as
gifts to or for the use of the United States, see
section 25 of the State Department Basic Authorities
Act of 1956.
(8) For treatment of gifts of money accepted by the
Attorney General for credit to the ``Commissary Funds
Federal Prisons'' as gifts to or for the use of the
United States, see section 4043 of title 18, United
States Code.
(9) For charitable contributions to or for the use of
Indian tribal governments (or their subdivisions), see
section 7871.
* * * * * * *
SEC. 195. START-UP [EXPENDITURES] AND ORGANIZATIONAL EXPENDITURES.
[(a) Capitalization of expenditures.--Except as otherwise
provided in this section, no deduction shall be allowed for
start-up expenditures.
[(b) Election to deduct.--
[(1) Allowance of deduction.--If a taxpayer elects
the application of this subsection with respect to any
start-up expenditures--
[(A) the taxpayer shall be allowed a
deduction for the taxable year in which the
active trade or business begins in an amount
equal to the lesser of--
[(i) the amount of start-up
expenditures with respect to the active
trade or business, or
[(ii) $5,000, reduced (but not below
zero) by the amount by which such
start-up expenditures exceed $50,000,
and
[(B) the remainder of such start-up
expenditures shall be allowed as a deduction
ratably over the 180-month period beginning
with the month in which the active trade or
business begins.
[(2) Dispositions before close of amortization
period.--In any case in which a trade or business is
completely disposed of by the taxpayer before the end
of the period to which paragraph (1) applies, any
deferred expenses attributable to such trade or
business which were not allowed as a deduction by
reason of this section may be deducted to the extent
allowable under section 165.
[(3) Special rule for taxable years beginning in
2010.--In the case of a taxable year beginning in 2010,
paragraph (1)(A)(ii) shall be applied--
[(A) by substituting ``$10,000'' for
``$5,000'', and
[(B) by substituting ``$60,000'' for
``$50,000''.]
(a) Capitalization of Expenditures.--Except as otherwise
provided in this section, no deduction shall be allowed for
start-up or organizational expenditures.
(b) Election to Deduct.--
(1) In general.--If a taxpayer elects the application
of this subsection with respect to any active trade or
business--
(A) the taxpayer shall be allowed a deduction
for the taxable year in which such active trade
or business begins in an amount equal to the
lesser of--
(i) the aggregate amount of start-up
and organizational expenditures paid or
incurred in connection with such active
trade or business, or
(ii) $20,000, reduced (but not below
zero) by the amount by which such
aggregate amount exceeds $120,000, and
(B) the remainder of such start-up and
organizational expenditures shall be charged to
capital account and allowed as an amortization
deduction determined by amortizing such
expenditures ratably over the 180-month period
beginning with the month in which the active
trade or business begins.
(2) Application to organizational expenditures.--In
the case of organizational expenditures with respect to
any corporation or partnership, the active trade or
business referred to in paragraph (1) means the first
active trade or business carried on by such corporation
or partnership.
(3) Inflation adjustment.--In the case of any taxable
year beginning after December 31, 2019, the $20,000 and
$120,000 amounts in paragraph (1)(A)(ii) shall each be
increased by an amount equal to--
(A) such dollar amount, multiplied by
(B) the cost-of-living adjustment determined
under section 1(f)(3) for the calendar year in
which the taxable year begins, determined by
substituting ``calendar year 2018'' for
``calendar year 2016'' in subparagraph (A)(ii)
thereof.
If any amount as increased under the preceding sentence
is not a multiple of $1,000, such amount shall be
rounded to the nearest multiple of $1,000.
(c) Allowance of deduction upon liquidation or disposition.--
(1) Liquidation of partnership or corporation.--If
any partnership or corporation is completely liquidated
by the taxpayer, any start-up or organizational
expenditures paid or incurred in connection with such
partnership or corporation which were not allowed as a
deduction by reason of this section may be deducted to
the extent allowable under section 165.
(2) Disposition of trade or business.--If any trade
or business is completely disposed of or discontinued
by the taxpayer, any start-up expenditures paid or
incurred in connection with such trade or business
which were not allowed as a deduction by reason of this
section (and not taken into account in connection with
a liquidation to which paragraph (1) applies) may be
deducted to the extent allowable under section 165. For
purposes of this paragraph, in the case of any
deduction allowed under subsection (b)(1) with respect
to both start-up and organizational expenditures, the
amount treated as so allowed with respect to start-up
expenditures shall bear the same ratio to such
deduction as the start-up expenditures taken into
account in determining such deduction bears to the
aggregate of the start-up and organizational
expenditures so taken into account.
[(c)] (d) Definitions.--For purposes of this section--
(1) Start-up expenditures.--The term ``start-up
expenditure'' means any amount--
(A) paid or incurred in connection with--
(i) investigating the creation or
acquisition of an active trade or
business, or
(ii) creating an active trade or
business, or
(iii) any activity engaged in for
profit and for the production of income
before the day on which the active
trade or business begins, in
anticipation of such activity becoming
an active trade or business, and
(B) which, if paid or incurred in connection
with the operation of an existing active trade
or business (in the same field as the trade or
business referred to in subparagraph (A)),
would be allowable as a deduction for the
taxable year in which paid or incurred.
The term ``start-up expenditure'' does not include any
amount with respect to which a deduction is allowable
under section 163(a), 164, or 174.
(2) Beginning of trade or business.--
(A) In general.--Except as provided in
subparagraph (B), the determination of when an
active trade or business begins shall be made
in accordance with such regulations as the
Secretary may prescribe.
(B) Acquired trade or business.--An acquired
active trade or business shall be treated as
beginning when the taxpayer acquires it.
(3) Organizational expenditures.--The term
``organizational expenditures'' means any expenditure
which--
(A) is incident to the creation of a
corporation or a partnership,
(B) is chargeable to capital account, and
(C) is of a character which, if expended
incident to the creation of a corporation or a
partnership having an ascertainable life, would
be amortizable over such life.
(4) Application to certain disregarded entities.--In
the case of any entity with a single owner that is
disregarded as an entity separate from its owner, this
section shall be applied in the same manner as if such
entity were a corporation.
[(d)] (e) Election.--
(1) Time for making election.--An election under
subsection (b) shall be made not later than the time
prescribed by law for filing the return for the taxable
year in which the trade or business begins (including
extensions thereof).
[(2) Scope of election.--The period selected under
subsection (b) shall be adhered to in computing taxable
income for the taxable year for which the election is
made and all subsequent taxable years.]
(2) Partnerships and s corporations.--In the case of
any partnership or S corporation, the election under
subsection (b) shall be made (and this section shall be
applied) at the entity level.
* * * * * * *
PART VIII--SPECIAL DEDUCTIONS FOR CORPORATIONS
[Sec. 248. Organizational expenditures.]
* * * * * * *
[SEC. 248. ORGANIZATIONAL EXPENDITURES.
[(a) Election to deduct.--If a corporation elects the
application of this subsection (in accordance with regulations
prescribed by the Secretary) with respect to any organizational
expenditures--
[(1) the corporation shall be allowed a deduction for
the taxable year in which the corporation begins
business in an amount equal to the lesser of--
[(A) the amount of organizational
expenditures with respect to the taxpayer, or
[(B) $5,000, reduced (but not below zero) by
the amount by which such organizational
expenditures exceed $50,000, and
[(2) the remainder of such organizational
expenditures shall be allowed as a deduction ratably
over the 180-month period beginning with the month in
which the corporation begins business.
[(b) Organizational expenditures defined.--The term
``organizational expenditures'' means any expenditure which--
[(1) is incident to the creation of the corporation;
[(2) is chargeable to capital account; and
[(3) is of a character which, if expended incident to
the creation of a corporation having a limited life,
would be amortizable over such life.
[(c) Time for and scope of election.--The election provided
by subsection (a) may be made for any taxable year but only if
made not later than the time prescribed by law for filing the
return for such taxable year (including extensions thereof).
The period so elected shall be adhered to in computing the
taxable income of the corporation for the taxable year for
which the election is made and all subsequent taxable years.]
* * * * * * *
Subchapter C--Corporate Distributions and Adjustments
* * * * * * *
PART I--DISTRIBUTIONS BY CORPORATIONS
* * * * * * *
Subpart B--Effects on Corporation
* * * * * * *
SEC. 312. EFFECT ON EARNINGS AND PROFITS.
(a) General rule.--Except as otherwise provided in this
section, on the distribution of property by a corporation with
respect to its stock, the earnings and profits of the
corporation (to the extent thereof) shall be decreased by the
sum of--
(1) the amount of money,
(2) the principal amount of the obligations of such
corporation (or, in the case of obligations having
original issue discount, the aggregate issue price of
such obligations), and
(3) the adjusted basis of the other property, so
distributed.
(b) Distributions of appreciated property.--On the
distribution by a corporation, with respect to its stock, of
any property (other than an obligation of such corporation) the
fair market value of which exceeds the adjusted basis thereof--
(1) the earnings and profits of the corporation shall
be increased by the amount of such excess, and
(2) subsection (a)(3) shall be applied by
substituting ``fair market value'' for ``adjusted
basis''.
For purposes of this subsection and subsection (a), the
adjusted basis of any property is its adjusted basis as
determined for purposes of computing earnings and profits.
(c) Adjustments for liabilities.--In making the adjustments
to the earnings and profits of a corporation under subsection
(a) or (b), proper adjustment shall be made for--
(1) the amount of any liability to which the property
distributed is subject, and
(2) the amount of any liability of the corporation
assumed by a shareholder in connection with the
distribution.
(d) Certain distributions of stock and securities.--
(1) In general.--The distribution to a distributee by
or on behalf of a corporation of its stock or
securities, of stock or securities in another
corporation, or of property, in a distribution to which
this title applies, shall not be considered a
distribution of the earnings and profits of any
corporation--
(A) if no gain to such distributee from the
receipt of such stock or securities, or
property, was recognized under this title, or
(B) if the distribution was not subject to
tax in the hands of such distributee by reason
of section 305(a).
(2) Stock or securities.--For purposes of this
subsection, the term ``stock or securities'' includes
rights to acquire stock or securities.
(f) Effect on earnings and profits of gain or loss and of
receipt of tax-free distributions.--
(1) Effect on earnings and profits of gain or loss.--
The gain or loss realized from the sale or other
disposition (after February 28, 1913) of property by a
corporation--
(A) for the purpose of the computation of the
earnings and profits of the corporation, shall
(except as provided in subparagraph (B)) be
determined by using as the adjusted basis the
adjusted basis (under the law applicable to the
year in which the sale or other disposition was
made) for determining gain, except that no
regard shall be had to the value of the
property as of March 1, 1913; but
(B) for purposes of the computation of the
earnings and profits of the corporation for any
period beginning after February 28, 1913, shall
be determined by using as the adjusted basis
the adjusted basis (under the law applicable to
the year in which the sale or other disposition
was made) for determining gain.
Gain or loss so realized shall increase or decrease the
earnings and profits to, but not beyond, the extent to
which such a realized gain or loss was recognized in
computing taxable income under the law applicable to
the year in which such sale or disposition was made.
Where, in determining the adjusted basis used in
computing such realized gain or loss, the adjustment to
the basis differs from the adjustment proper for the
purpose of determining earnings and profits, then the
latter adjustment shall be used in determining the
increase or decrease above provided. For purposes of
this subsection, a loss with respect to which a
deduction is disallowed under section 1091 (relating to
wash sales of stock or securities), or the
corresponding provision of prior law, shall not be
deemed to be recognized.
(2) Effect on earnings and profits of receipt of tax-
free distributions.--Where a corporation receives
(after February 28, 1913) a distribution from a second
corporation which (under the law applicable to the year
in which the distribution was made) was not a taxable
dividend to the shareholders of the second corporation,
the amount of such distribution shall not increase the
earnings and profits of the first corporation in the
following cases:
(A) no such increase shall be made in respect
of the part of such distribution which (under
such law) is directly applied in reduction of
the basis of the stock in respect of which the
distribution was made; and
(B) no such increase shall be made if (under
such law) the distribution causes the basis of
the stock in respect of which the distribution
was made to be allocated between such stock and
the property received (or such basis would, but
for section 307(b), be so allocated).
(g) Earnings and profits - increase in value accrued before
March 1, 1913.--
(1) If any increase or decrease in the earnings and
profits for any period beginning after February 28,
1913, with respect to any matter would be different had
the adjusted basis of the property involved been
determined without regard to its March 1, 1913, value,
then, except as provided in paragraph (2), an increase
(properly reflecting such difference) shall be made in
that part of the earnings and profits consisting of
increase in value of property accrued before March 1,
1913.
(2) If the application of subsection (f) to a sale or
other disposition after February 28, 1913, results in a
loss which is to be applied in decrease of earnings and
profits for any period beginning after February 28,
1913, then, notwithstanding subsection (f) and in lieu
of the rule provided in paragraph (1) of this
subsection, the amount of such loss so to be applied
shall be reduced by the amount, if any, by which the
adjusted basis of the property used in determining the
loss exceeds the adjusted basis computed without regard
to the value of the property on March 1, 1913, and if
such amount so applied in reduction of the decrease
exceeds such loss, the excess over such loss shall
increase that part of the earnings and profits
consisting of increase in value of property accrued
before March 1, 1913.
(h) Allocation in certain corporate separations and
reorganizations.--
(1) Section 355.--In the case of a distribution or
exchange to which section 355 (or so much of section
356 as relates to section 355) applies, proper
allocation with respect to the earnings and profits of
the distributing corporation and the controlled
corporation (or corporations) shall be made under
regulations prescribed by the Secretary.
(2) Section 368(a)(1)(C) or (D).--In the case of a
reorganization described in subparagraph (C) or (D) of
section 368(a)(1), proper allocation with respect to
the earnings and profits of the acquired corporation
shall, under regulations prescribed by the Secretary,
be made between the acquiring corporation and the
acquired corporation (or any corporation which had
control of the acquired corporation before the
reorganization).
(i) Distribution of proceeds of loan insured by the United
States.--If a corporation distributes property with respect to
its stock and if, at the time of distribution--
(1) there is outstanding a loan to such corporation
which was made, guaranteed, or insured by the United
States (or by any agency or instrumentality thereof),
and
(2) the amount of such loan so outstanding exceeds
the adjusted basis of the property constituting
security for such loan,
then the earnings and profits of the corporation shall be
increased by the amount of such excess, and (immediately after
the distribution) shall be decreased by the amount of such
excess. For purposes of paragraph (2), the adjusted basis of
the property at the time of distribution shall be determined
without regard to any adjustment under section 1016(a)(2)
(relating to adjustment for depreciation, etc.). For purposes
of this subsection, a commitment to make, guarantee, or insure
a loan shall be treated as the making, guaranteeing, or
insuring of a loan.
(k) Effect of depreciation on earnings and profits.--
(1) General rule.--For purposes of computing the
earnings and profits of a corporation for any taxable
year beginning after June 30, 1972, the allowance for
depreciation (and amortization, if any) shall be deemed
to be the amount which would be allowable for such year
if the straight line method of depreciation had been
used for each taxable year beginning after June 30,
1972.
(2) Exception.--If for any taxable year a method of
depreciation was used by the taxpayer which the
Secretary has determined results in a reasonable
allowance under section 167(a) and which is the unit-
of-production method or other method not expressed in a
term of years, then the adjustment to earnings and
profits for depreciation for such year shall be
determined under the method so used (in lieu of the
straight line method).
(3) Exception for tangible property.--
(A) In general.--Except as provided in
subparagraph (B), in the case of tangible
property to which section 168 applies, the
adjustment to earnings and profits for
depreciation for any taxable year shall be
determined under the alternative depreciation
system (within the meaning of section
168(g)(2)).
(B) Treatment of amounts deductible under
section 179, 179B, 179C, 179D, or 179E.--For
purposes of computing the earnings and profits
of a corporation, any amount deductible under
section 179, 179B, 179C, 179D, or 179E shall be
allowed as a deduction ratably over the period
of 5 taxable years (beginning with the taxable
year for which such amount is deductible under
section 179, 179B, 179C, 179D, or 179E, as the
case may be).
(4) Certain foreign corporations.--The provisions of
paragraph (1) shall not apply in computing the earnings
and profits of a foreign corporation for any taxable
year for which less than 20 percent of the gross income
from all sources of such corporation is derived from
sources within the United States.
(5) Basis adjustment not taken into account.--In
computing the earnings and profits of a corporation for
any taxable year, the allowance for depreciation (and
amortization, if any) shall be computed without regard
to any basis adjustment under section 50(c).
(l) Discharge of indebtedness income.--
(1) Does not increase earnings and profits if applied
to reduce basis.--The earnings and profits of a
corporation shall not include income from the discharge
of indebtedness to the extent of the amount applied to
reduce basis under section 1017.
(2) Reduction of deficit in earnings and profits in
certain cases.--If--
(A) the interest of any shareholder of a
corporation is terminated or extinguished in a
title 11 or similar case (within the meaning of
section 368(a)(3)(A)), and
(B) there is a deficit in the earnings and
profits of the corporation,
then such deficit shall be reduced by an amount equal
to the paid-in capital which is allocable to the
interest of the shareholder which is so terminated or
extinguished.
(m) No adjustment for interest paid on certain registration-
required obligations not in registered form.--The earnings and
profits of any corporation shall not be decreased by any
interest with respect to which a deduction is not or would not
be allowable by reason of section 163(f), unless at the time of
issuance the issuer is a foreign corporation that is not a
controlled foreign corporation (within the meaning of section
957) and the issuance did not have as a purpose the avoidance
of section 163(f) of this subsection
(n) Adjustments to earnings and profits to more accurately
reflect economic gain and loss.--For purposes of computing the
earnings and profits of a corporation, the following
adjustments shall be made:
(1) Construction period carrying charges.--
(A) In general.--In the case of any amount
paid or incurred for construction period
carrying charges--
(i) no deduction shall be allowed
with respect to such amount, and
(ii) the basis of the property with
respect to which such charges are
allocable shall be increased by such
amount.
(B) Construction period carrying charges
defined.--For purposes of this paragraph, the
term ``construction period carrying charges''
means all--
(i) interest paid or accrued on
indebtedness incurred or continued to
acquire, construct, or carry property,
(ii) property taxes, and
(iii) similar carrying charges, to
the extent such interest, taxes, or
charges are attributable to the
construction period for such property
and would be allowable as a deduction
in determining taxable income under
this chapter for the taxable year in
which paid or incurred.
(C) Construction period.--The term
``construction period'' has the meaning given
the term production period under section
263A(f)(4)(B).
(2) Intangible drilling costs and mineral exploration
and development costs.--
(A) Intangible drilling costs.--Any amount
allowable as a deduction under section 263(c)
in determining taxable income (other than costs
incurred in connection with a nonproductive
well)--
(i) shall be capitalized, and
(ii) shall be allowed as a deduction
ratably over the 60-month period
beginning with the month in which such
amount was paid or incurred.
(B) Mineral exploration and development
costs.--Any amount allowable as a deduction
under section 616(a) or 617 in determining
taxable income--
(i) shall be capitalized, and
(ii) shall be allowed as a deduction
ratably over the 120-month period
beginning with the later of--
(I) the month in which
production from the deposit
begins, or
(II) the month in which such
amount was paid or incurred.
(3) Certain amortization provisions not to apply.--
[Sections 173 and 248] Sections 173 and 195 shall not
apply.
(4) LIFO inventory adjustments.--
(A) In general.--Earnings and profits shall
be increased or decreased by the amount of any
increase or decrease in the LIFO recapture
amount as of the close of each taxable year;
except that any decrease below the LIFO
recapture amount as of the close of the taxable
year preceding the 1st taxable year to which
this paragraph applies to the taxpayer shall be
taken into account only to the extent provided
in regulations prescribed by the Secretary.
(B) LIFO recapture amount.--For purposes of
this paragraph, the term ``LIFO recapture
amount'' means the amount (if any) by which--
(i) the inventory amount of the
inventory assets under the first-in,
first-out method authorized by section
471, exceeds
(ii) the inventory amount of such
assets under the LIFO method.
(C) Definitions.--For purposes of this
paragraph--
(i) LIFO method.--The term ``LIFO
method'' means the method authorized by
section 472 (relating to last-in,
first-out inventories).
(ii) Inventory assets.--The term
``inventory assets'' means stock in
trade of the corporation, or other
property of a kind which would properly
be included in the inventory of the
corporation if on hand at the close of
the taxable year.
(iii) Inventory amount.--The
inventory amount of assets under the
first-in, first-out method authorized
by section 471 shall be determined--
(I) if the corporation uses
the retail method of valuing
inventories under section 472,
by using such method, or
(II) if subclause (I) does
not apply, by using cost or
market, whichever is lower.
(5) Installment sales.--In the case of any
installment sale, earnings and profits shall be
computed as if the corporation did not use the
installment method.
(6) Completed contract method of accounting.--In the
case of a taxpayer who uses the completed contract
method of accounting, earnings and profits shall be
computed as if such taxpayer used the percentage of
completion method of accounting.
(7) Redemptions.--If a corporation distributes
amounts in a redemption to which section 302(a) or 303
applies, the part of such distribution which is
properly chargeable to earnings and profits shall be an
amount which is not in excess of the ratable share of
the earnings and profits of such corporation
accumulated after February 28, 1913, attributable to
the stock so redeemed.
(8) Special rule for certain foreign corporations.--
In the case of a foreign corporation described in
subsection (k)(4)--
(A) paragraphs (4) and (6) shall apply only
in the case of taxable years beginning after
December 31, 1985, and
(B) paragraph (5) shall apply only in the
case of taxable years beginning after December
31, 1987.
(o) Definition of original issue discount and issue price for
purposes of subsection (a)(2).--For purposes of subsection
(a)(2), the terms ``original issue discount'' and ``issue
price'' have the same respective meanings as when used in
subpart A of part V of subchapter P of this chapter.
* * * * * * *
PART V--CARRYOVERS
* * * * * * *
SEC. 382. LIMITATION ON NET OPERATING LOSS CARRYFORWARDS AND CERTAIN
BUILT-IN LOSSES FOLLOWING OWNERSHIP CHANGE.
(a) General rule.--The amount of the taxable income of any
new loss corporation for any post-change year which may be
offset by pre-change losses shall not exceed the section 382
limitation for such year.
(b) Section 382 limitation.--For purposes of this section--
(1) In general.--Except as otherwise provided in this
section, the section 382 limitation for any post-change
year is an amount equal to--
(A) the value of the old loss corporation,
multiplied by
(B) the long-term tax-exempt rate.
(2) Carryforward of unused limitation.--If the
section 382 limitation for any post-change year exceeds
the taxable income of the new loss corporation for such
year which was offset by pre-change losses, the section
382 limitation for the next post-change year shall be
increased by the amount of such excess.
(3) Special rule for post-change year which includes
change date.--In the case of any post-change year which
includes the change date--
(A) Limitation does not apply to taxable
income before change.--Subsection (a) shall not
apply to the portion of the taxable income for
such year which is allocable to the period in
such year on or before the change date. Except
as provided in subsection (h)(5) and in
regulations, taxable income shall be allocated
ratably to each day in the year.
(B) Limitation for period after change.--For
purposes of applying the limitation of
subsection (a) to the remainder of the taxable
income for such year, the section 382
limitation shall be an amount which bears the
same ratio to such limitation (determined
without regard to this paragraph) as--
(i) the number of days in such year
after the change date, bears to
(ii) the total number of days in such
year.
(c) Carryforwards disallowed if continuity of business
requirements not met.--
(1) In general.--Except as provided in paragraph (2),
if the new loss corporation does not continue the
business enterprise of the old loss corporation at all
times during the 2-year period beginning on the change
date, the section 382 limitation for any post-change
year shall be zero.
(2) Exception for certain gains.--The section 382
limitation for any post-change year shall not be less
than the sum of--
(A) any increase in such limitation under--
(i) subsection (h)(1)(A) for
recognized built-in gains for such
year, and
(ii) subsection (h)(1)(C) for gain
recognized by reason of an election
under section 338, plus (B) any
increase in such limitation under
subsection (b)(2) for amounts described
in subparagraph (A) which are carried
forward to such year.
(d) Pre-change loss and post-change year.--For purposes of
this section--
(1) Pre-change loss.--The term ``pre-change loss''
means--
(A) any net operating loss carryforward of
the old loss corporation to the taxable year
ending with the ownership change or in which
the change date occurs, and
(B) the net operating loss of the old loss
corporation for the taxable year in which the
ownership change occurs to the extent such loss
is allocable to the period in such year on or
before the change date.
Except as provided in subsection (h)(5) and in
regulations, the net operating loss shall, for purposes
of subparagraph (B), be allocated ratably to each day
in the year.
(2) Post-change year.--The term ``post-change year''
means any taxable year ending after the change date.
(3) Application to carryforward of disallowed
interest.--The term ``pre-change loss'' shall include
any carryover of disallowed interest described in
section 163(j)(2) under rules similar to the rules of
paragraph (1).
(4) Exception for start-up losses.--
(A) In general.--In the case of any net
operating loss carryforward described in
paragraph (1)(A) which arose in a start-up
period taxable year, the amount of such net
operating loss carryforward otherwise taken
into account under such paragraph shall be
reduced by the net start-up loss determined
with respect to the trade or business referred
to in subparagraph (B)(i) for such start-up
period taxable year.
(B) Start-up period taxable year.--The term
``start-up period taxable year'' means any
taxable year of the old loss corporation
which--
(i) begins before the close of the 3-
year period beginning on the date on
which any trade or business of such
corporation begins as an active trade
or business (as determined under
section 195(d)(2) without regard to
subparagraph (B) thereof), and
(ii) ends after September 10, 2018.
(C) Net start-up loss.--
(i) In general.--The term ``net
start-up loss'' means, with respect to
any trade or business referred to in
subparagraph (B)(i) for any start-up
period taxable year, the amount which
bears the same ratio (but not greater
than 1) to the net operating loss
carryforward which arose in such start-
up period taxable year as--
(I) the net operating loss
(if any) which would have been
determined for such start-up
period taxable year if only
items of income, gain,
deduction, and loss properly
allocable to such trade or
business were taken into
account, bears to
(II) the amount of the net
operating loss determined for
such start-up period taxable
year.
(ii) Special rule for last taxable
year in start-up period.--In the case
of any start-up period taxable year
which ends after the close of the 3-
year period described in subparagraph
(B)(i) with respect to any trade or
business, the net start-up loss with
respect to such trade or business for
such start-up period taxable year shall
be the same proportion of such loss
(determined without regard to this
clause) as the proportion of such
start-up period taxable year which is
on or before the last day of such
period.
(D) Application to net operating loss arising
in year of ownership change.--Subparagraph (A)
shall apply to any net operating loss described
in paragraph (1)(B) in the same manner as such
subparagraph applies to net operating loss
carryforwards described in paragraph (1)(A),
but by only taking into account the amount of
such net operating loss (and the amount of the
net start-up loss) which is allocable under
paragraph (1)(B) to the period described in
such paragraph. Proper adjustment in the
allocation of the net start-up loss under the
preceding sentence shall be made in the case of
a taxable year to which subparagraph (C)(ii)
applies.
(E) Application to taxable years which are
start-up period taxable years with respect to
more than 1 trade or business.--In the case of
any net operating loss carryforward which arose
in a taxable year which is a start-up period
taxable year with respect to more than 1 trade
or business--
(i) this paragraph shall be applied
separately with respect to each such
trade or business, and
(ii) the aggregate reductions under
subparagraph (A) shall not exceed such
net operating loss carryforward.
(F) Continuity of business requirement.--If
the new loss corporation does not continue the
trade or business referred to in subparagraph
(B)(i) at all times during the 2-year period
beginning on the change date, this paragraph
shall not apply with respect to such trade or
business.
(G) Certain title 11 or similar cases.--
(i) Multiple ownership changes.--In
the case of a 2nd ownership change to
which subsection (l)(5)(D) applies,
this paragraph shall not apply for
purposes of determining the pre-change
loss with respect to such 2nd ownership
change.
(ii) Certain insolvency
transactions.--If subsection (l)(6)
applies for purposes of determining the
value of the old loss corporation under
subsection (e), this paragraph shall
not apply.
(H) Not applicable to disallowed interest.--
This paragraph shall not apply for purposes of
applying the rules of paragraph (1) to the
carryover of disallowed interest under
paragraph (3).
(I) Transition rule.--This paragraph shall
not apply with respect to any trade or business
if the date on which such trade or business
begins as an active trade or business (as
determined under section 195(d)(2) without
regard to subparagraph (B) thereof) is on or
before September 10, 2018.
(e) Value of old loss corporation.--For purposes of this
section--
(1) In general.--Except as otherwise provided in this
subsection, the value of the old loss corporation is
the value of the stock of such corporation (including
any stock described in section 1504(a)(4)) immediately
before the ownership change.
(2) Special rule in the case of redemption or other
corporate contraction.--If a redemption or other
corporate contraction occurs in connection with an
ownership change, the value under paragraph (1) shall
be determined after taking such redemption or other
corporate contraction into account.
(3) Treatment of foreign corporations.--Except as
otherwise provided in regulations, in determining the
value of any old loss corporation which is a foreign
corporation, there shall be taken into account only
items treated as connected with the conduct of a trade
or business in the United States.
(f) Long-term tax-exempt rate.--For purposes of this
section--
(1) In general.--The long-term tax-exempt rate shall
be the highest of the adjusted Federal long-term rates
in effect for any month in the 3-calendar-month period
ending with the calendar month in which the change date
occurs.
(2) Adjusted Federal long-term rate.--For purposes of
paragraph (1), the term ``adjusted Federal long-term
rate'' means the Federal long-term rate determined
under section 1274(d), except that--
(A) paragraphs (2) and (3) thereof shall not
apply, and
(B) such rate shall be properly adjusted for
differences between rates on long-term taxable
and tax-exempt obligations.
(g) Ownership change.--For purposes of this section--
(1) In general.--There is an ownership change if,
immediately after any owner shift involving a 5-percent
shareholder or any equity structure shift--
(A) the percentage of the stock of the loss
corporation owned by 1 or more 5-percent
shareholders has increased by more than 50
percentage points, over
(B) the lowest percentage of stock of the
loss corporation (or any predecessor
corporation) owned by such shareholders at any
time during the testing period.
(2) Owner shift involving 5-percent shareholder.--
There is an owner shift involving a 5-percent
shareholder if--
(A) there is any change in the respective
ownership of stock of a corporation, and
(B) such change affects the percentage of
stock of such corporation owned by any person
who is a 5-percent shareholder before or after
such change.
(3) Equity structure shift defined.--
(A) In general.--The term ``equity structure
shift'' means any reorganization (within the
meaning of section 368). Such term shall not
include--
(i) any reorganization described in
subparagraph (D) or (G) of section
368(a)(1) unless the requirements of
section 354(b)(1) are met, and
(ii) any reorganization described in
subparagraph (F) of section 368(a)(1).
(B) Taxable reorganization-type transactions,
etc..--To the extent provided in regulations,
the term ``equity structure shift'' includes
taxable reorganization-type transactions,
public offerings, and similar transactions.
(4) Special rules for application of subsection.--
(A) Treatment of less than 5-percent
shareholders.--Except as provided in
subparagraphs (B)(i) and (C), in determining
whether an ownership change has occurred, all
stock owned by shareholders of a corporation
who are not 5-percent shareholders of such
corporation shall be treated as stock owned by
1 5-percent shareholder of such corporation.
(B) Coordination with equity structure
shifts.--For purposes of determining whether an
equity structure shift (or subsequent
transaction) is an ownership change--
(i) Less than 5-percent
shareholders.--Subparagraph (A) shall
be applied separately with respect to
each group of shareholders (immediately
before such equity structure shift) of
each corporation which was a party to
the reorganization involved in such
equity structure shift.
(ii) Acquisitions of stock.--Unless a
different proportion is established,
acquisitions of stock after such equity
structure shift shall be treated as
being made proportionately from all
shareholders immediately before such
acquisition.
(C) Coordination with other owner shifts.--
Except as provided in regulations, rules
similar to the rules of subparagraph (B) shall
apply in determining whether there has been an
owner shift involving a 5-percent shareholder
and whether such shift (or subsequent
transaction) results in an ownership change.
(D) Treatment of worthless stock.--If any
stock held by a 50-percent shareholder is
treated by such shareholder as becoming
worthless during any taxable year of such
shareholder and such stock is held by such
shareholder as of the close of such taxable
year, for purposes of determining whether an
ownership change occurs after the close of such
taxable year, such shareholder--
(i) shall be treated as having
acquired such stock on the 1st day of
his 1st succeeding taxable year, and
(ii) shall not be treated as having
owned such stock during any prior
period.
For purposes of the preceding sentence, the
term ``50-percent shareholder'' means any
person owning 50 percent or more of the stock
of the corporation at any time during the 3-
year period ending on the last day of the
taxable year with respect to which the stock
was so treated.
(h) Special rules for built-in gains and losses and section
338 gains.--For purposes of this section--
(1) In general.--
(A) Net unrealized built-in gain.--
(i) In general.--If the old loss
corporation has a net unrealized built-
in gain, the section 382 limitation for
any recognition period taxable year
shall be increased by the recognized
built-in gains for such taxable year.
(ii) Limitation.--The increase under
clause (i) for any recognition period
taxable year shall not exceed--
(I) the net unrealized built-
in gain, reduced by
(II) recognized built-in
gains for prior years ending in
the recognition period.
(B) Net unrealized built-in loss.--
(i) In general.--If the old loss
corporation has a net unrealized built-
in loss, the recognized built-in loss
for any recognition period taxable year
shall be subject to limitation under
this section in the same manner as if
such loss were a pre-change loss.
(ii) Limitation.--Clause (i) shall
apply to recognized built-in losses for
any recognition period taxable year
only to the extent such losses do not
exceed--
(I) the net unrealized built-
in loss, reduced by
(II) recognized built-in
losses for prior taxable years
ending in the recognition
period.
(C) Special rules for certain section 338
gains.--If an election under section 338 is
made in connection with an ownership change and
the net unrealized built-in gain is zero by
reason of paragraph (3)(B), then, with respect
to such change, the section 382 limitation for
the post-change year in which gain is
recognized by reason of such election shall be
increased by the lesser of--
(i) the recognized built-in gains by
reason of such election, or
(ii) the net unrealized built-in gain
(determined without regard to paragraph
(3)(B)).
(2) Recognized built-in gain and loss.--
(A) Recognized built-in gain.--The term
``recognized built-in gain'' means any gain
recognized during the recognition period on the
disposition of any asset to the extent the new
loss corporation establishes that--
(i) such asset was held by the old
loss corporation immediately before the
change date, and
(ii) such gain does not exceed the
excess of--
(I) the fair market value of
such asset on the change date,
over
(II) the adjusted basis of
such asset on such date.
(B) Recognized built-in loss.--The term
``recognized built-in loss'' means any loss
recognized during the recognition period on the
disposition of any asset except to the extent
the new loss corporation establishes that--
(i) such asset was not held by the
old loss corporation immediately before
the change date, or
(ii) such loss exceeds the excess
of--
(I) the adjusted basis of
such asset on the change date,
over
(II) the fair market value of
such asset on such date.
Such term includes any amount allowable as
depreciation, amortization, or depletion for
any period within the recognition period except
to the extent the new loss corporation
establishes that the amount so allowable is not
attributable to the excess described in clause
(ii).
(3) Net unrealized built-in gain and loss defined.--
(A) Net unrealized built-in gain and loss.--
(i) In general.--The terms ``net
unrealized built-in gain'' and ``net
unrealized built-in loss'' mean, with
respect to any old loss corporation,
the amount by which--
(I) the fair market value of
the assets of such corporation
immediately before an ownership
change is more or less,
respectively, than
(II) the aggregate adjusted
basis of such assets at such
time.
(ii) Special rule for redemptions or
other corporate contractions.--If a
redemption or other corporate
contraction occurs in connection with
an ownership change, to the extent
provided in regulations, determinations
under clause (i) shall be made after
taking such redemption or other
corporate contraction into account.
(B) Threshold requirement.--
(i) In general.--If the amount of the
net unrealized built-in gain or net
unrealized built-in loss (determined
without regard to this subparagraph) of
any old loss corporation is not greater
than the lesser of--
(I) 15 percent of the amount
determined for purposes of
subparagraph (A)(i)(I), or
(II) $10,000,000,
the net unrealized built-in gain or net
unrealized built-in loss shall be zero.
(ii) Cash and cash items not taken
into account.--In computing any net
unrealized built-in gain or net
unrealized built-in loss under clause
(i), except as provided in regulations,
there shall not be taken into account--
(I) any cash or cash item, or
(II) any marketable security
which has a value which does
not substantially differ from
adjusted basis.
(4) Disallowed loss allowed as a carryforward.--If a
deduction for any portion of a recognized built-in loss
is disallowed for any post-change year, such portion--
(A) shall be carried forward to subsequent
taxable years under rules similar to the rules
for the carrying forward of net operating
losses (or to the extent the amount so
disallowed is attributable to capital losses,
under rules similar to the rules for the
carrying forward of net capital losses), but
(B) shall be subject to limitation under this
section in the same manner as a pre-change
loss.
(5) Special rules for post-change year which includes
change date.--For purposes of subsection (b)(3)--
(A) in applying subparagraph (A) thereof,
taxable income shall be computed without regard
to recognized built-in gains to the extent such
gains increased the section 382 limitation for
the year (or recognized built-in losses to the
extent such losses are treated as pre-change
losses), and gain described in paragraph
(1)(C), for the year, and
(B) in applying subparagraph (B) thereof, the
section 382 limitation shall be computed
without regard to recognized built-in gains,
and gain described in paragraph (1)(C), for the
year.
(6) Treatment of certain built-in items.--
(A) Income items.--Any item of income which
is properly taken into account during the
recognition period but which is attributable to
periods before the change date shall be treated
as a recognized built-in gain for the taxable
year in which it is properly taken into
account.
(B) Deduction items.--Any amount which is
allowable as a deduction during the recognition
period (determined without regard to any
carryover) but which is attributable to periods
before the change date shall be treated as a
recognized built-in loss for the taxable year
for which it is allowable as a deduction.
(C) Adjustments.--The amount of the net
unrealized built-in gain or loss shall be
properly adjusted for amounts which would be
treated as recognized built-in gains or losses
under this paragraph if such amounts were
properly taken into account (or allowable as a
deduction) during the recognition period.
(7) Recognition period, etc.
(A) Recognition period.--The term
``recognition period'' means, with respect to
any ownership change, the 5-year period
beginning on the change date.
(B) Recognition period taxable year.--The
term ``recognition period taxable year'' means
any taxable year any portion of which is in the
recognition period.
(8) Determination of fair market value in certain
cases.--If 80 percent or more in value of the stock of
a corporation is acquired in 1 transaction (or in a
series of related transactions during any 12-month
period), for purposes of determining the net unrealized
built-in loss, the fair market value of the assets of
such corporation shall not exceed the grossed up amount
paid for such stock properly adjusted for indebtedness
of the corporation and other relevant items.
(9) Tax-free exchanges or transfers.--The Secretary
shall prescribe such regulations as may be necessary to
carry out the purposes of this subsection where
property held on the change date was acquired (or is
subsequently transferred) in a transaction where gain
or loss is not recognized (in whole or in part).
(i) Testing period.--For purposes of this section--
(1) 3-year period.--Except as otherwise provided in
this section, the testing period is the 3-year period
ending on the day of any owner shift involving a 5-
percent shareholder or equity structure shift.
(2) Shorter period where there has been recent
ownership change.--If there has been an ownership
change under this section, the testing period for
determining whether a 2nd ownership change has occurred
shall not begin before the 1st day following the change
date for such earlier ownership change.
(3) Shorter period where all losses arise after 3-
year period begins.--The testing period shall not begin
before the earlier of the 1st day of the 1st taxable
year from which there is a carryforward of a loss or of
an excess credit to the 1st post-change year or the
taxable year in which the transaction being tested
occurs. Except as provided in regulations, this
paragraph shall not apply to any loss corporation which
has a net unrealized built-in loss (determined after
application of subsection (h)(3)(B)).
(j) Change date.--For purposes of this section, the change
date is--
(1) in the case where the last component of an
ownership change is an owner shift involving a 5-
percent shareholder, the date on which such shift
occurs, and
(2) in the case where the last component of an
ownership change is an equity structure shift, the date
of the reorganization.
(k) Definitions and special rules.--For purposes of this
section--
(1) Loss corporation.--The term ``loss corporation''
means a corporation entitled to use a net operating
loss carryover or having a net operating loss for the
taxable year in which the ownership change occurs. Such
term shall include any corporation entitled to use a
carryforward of disallowed interest described in
section 381(c)(20). Except to the extent provided in
regulations, such term includes any corporation with a
net unrealized built-in loss.
(2) Old loss corporation.--The term ``old loss
corporation'' means any corporation--
(A) with respect to which there is an
ownership change, and
(B) which (before the ownership change) was a
loss corporation.
(3) New loss corporation.--The term ``new loss
corporation'' means a corporation which (after an
ownership change) is a loss corporation. Nothing in
this section shall be treated as implying that the same
corporation may not be both the old loss corporation
and the new loss corporation.
(4) Taxable income.--Taxable income shall be computed
with the modifications set forth in section 172(d).
(5) Value.--The term ``value'' means fair market
value.
(6) Rules relating to stock.--
(A) Preferred stock.--Except as provided in
regulations and subsection (e), the term
``stock'' means stock other than stock
described in section 1504(a)(4).
(B) Treatment of certain rights, etc..--The
Secretary shall prescribe such regulations as
may be necessary--
(i) to treat warrants, options,
contracts to acquire stock, convertible
debt interests, and other similar
interests as stock, and
(ii) to treat stock as not stock.
(C) Determinations on basis of value.--
Determinations of the percentage of stock of
any corporation held by any person shall be
made on the basis of value.
(7) 5-percent shareholder.--The term ``5-percent
shareholder'' means any person holding 5 percent or
more of the stock of the corporation at any time during
the testing period.
(l) Certain additional operating rules.--For purposes of this
section--
(1) Certain capital contributions not taken into
account.--
(A) In general.--Any capital contribution
received by an old loss corporation as part of
a plan a principal purpose of which is to avoid
or increase any limitation under this section
shall not be taken into account for purposes of
this section.
(B) Certain contributions treated as part of
plan.--For purposes of subparagraph (A), any
capital contribution made during the 2-year
period ending on the change date shall, except
as provided in regulations, be treated as part
of a plan described in subparagraph (A).
(2) Ordering rules for application of section.--
(A) Coordination with section 172(b)
carryover rules.--In the case of any pre-change
loss for any taxable year (hereinafter in this
subparagraph referred to as the ``loss year'')
subject to limitation under this section, for
purposes of determining under the 2nd sentence
of section 172(b)(2) the amount of such loss
which may be carried to any taxable year,
taxable income for any taxable year shall be
treated as not greater than--
(i) the section 382 limitation for
such taxable year, reduced by
(ii) the unused pre-change losses for
taxable years preceding the loss year.
Similar rules shall apply in the case of any
credit or loss subject to limitation under
section 383.
(B) Ordering rule for losses carried from
same taxable year.--In any case in which--
(i) a pre-change loss of a loss
corporation for any taxable year is
subject to a section 382 limitation,
and
(ii) a net operating loss of such
corporation from such taxable year is
not subject to such limitation,
taxable income shall be treated as having been
offset first by the loss subject to such
limitation.
(3) Operating rules relating to ownership of stock.--
(A) Constructive ownership.--Section 318
(relating to constructive ownership of stock)
shall apply in determining ownership of stock,
except that--
(i) paragraphs (1) and (5)(B) of
section 318(a) shall not apply and an
individual and all members of his
family described in paragraph (1) of
section 318(a) shall be treated as 1
individual for purposes of applying
this section,
(ii) paragraph (2) of section 318(a)
shall be applied--
(I) without regard to the 50-
percent limitation contained in
subparagraph (C) thereof, and
(II) except as provided in
regulations, by treating stock
attributed thereunder as no
longer being held by the entity
from which attributed,
(iii) paragraph (3) of section 318(a)
shall be applied only to the extent
provided in regulations,
(iv) except to the extent provided in
regulations, an option to acquire stock
shall be treated as exercised if such
exercise results in an ownership
change, and
(v) in attributing stock from an
entity under paragraph (2) of section
318(a), there shall not be taken into
account--
(I) in the case of
attribution from a corporation,
stock which is not treated as
stock for purposes of this
section, or
(II) in the case of
attribution from another
entity, an interest in such
entity similar to stock
described in subclause (I).
A rule similar to the rule of clause (iv) shall
apply in the case of any contingent purchase,
warrant, convertible debt, put, stock subject
to a risk of forfeiture, contract to acquire
stock, or similar interests.
(B) Stock acquired by reason of death, gift,
divorce, separation, etc..--If--
(i) the basis of any stock in the
hands of any person is determined--
(I) under section 1014
(relating to property acquired
from a decedent),
(II) section 1015 (relating
to property acquired by a gift
or transfer in trust), or
(III) section 1041(b)(2)
(relating to transfers of
property between spouses or
incident to divorce),
(ii) stock is received by any person
in satisfaction of a right to receive a
pecuniary bequest, or
(iii) stock is acquired by a person
pursuant to any divorce or separation
instrument (within the meaning of
section 121(d)(3)(C)),
such person shall be treated as owning such
stock during the period such stock was owned by
the person from whom it was acquired.
(C) Certain changes in percentage ownership
which are attributable to fluctuations in value
not taken into account.--Except as provided in
regulations, any change in proportionate
ownership which is attributable solely to
fluctuations in the relative fair market values
of different classes of stock shall not be
taken into account.
(4) Reduction in value where substantial nonbusiness
assets.--
(A) In general.--If, immediately after an
ownership change, the new loss corporation has
substantial nonbusiness assets, the value of
the old loss corporation shall be reduced by
the excess (if any) of--
(i) the fair market value of the
nonbusiness assets of the old loss
corporation, over
(ii) the nonbusiness asset share of
indebtedness for which such corporation
is liable.
(B) Corporation having substantial
nonbusiness assets.--For purposes of
subparagraph (A)--
(i) In general.--The old loss
corporation shall be treated as having
substantial nonbusiness assets if at
least 1/3 of the value of the total
assets of such corporation consists of
nonbusiness assets.
(ii) Exception for certain investment
entities.--A regulated investment
company to which part I of subchapter M
applies, a real estate investment trust
to which part II of subchapter M
applies, or a REMIC to which part IV of
subchapter M applies, shall not be
treated as a new loss corporation
having substantial nonbusiness assets.
(C) Nonbusiness assets.--For purposes of this
paragraph, the term ``nonbusiness assets''
means assets held for investment.
(D) Nonbusiness asset share.--For purposes of
this paragraph, the nonbusiness asset share of
the indebtedness of the corporation is an
amount which bears the same ratio to such
indebtedness as--
(i) the fair market value of the
nonbusiness assets of the corporation,
bears to
(ii) the fair market value of all
assets of such corporation.
(E) Treatment of subsidiaries.--For purposes
of this paragraph, stock and securities in any
subsidiary corporation shall be disregarded and
the parent corporation shall be deemed to own
its ratable share of the subsidiary's assets.
For purposes of the preceding sentence, a
corporation shall be treated as a subsidiary if
the parent owns 50 percent or more of the
combined voting power of all classes of stock
entitled to vote, and 50 percent or more of the
total value of shares of all classes of stock.
(5) Title 11 or similar case.--
(A) In general.--Subsection (a) shall not
apply to any ownership change if--
(i) the old loss corporation is
(immediately before such ownership
change) under the jurisdiction of the
court in a title 11 or similar case,
and
(ii) the shareholders and creditors
of the old loss corporation (determined
immediately before such ownership
change) own (after such ownership
change and as a result of being
shareholders or creditors immediately
before such change) stock of the new
loss corporation (or stock of a
controlling corporation if also in
bankruptcy) which meets the
requirements of section 1504(a)(2)
(determined by substituting ``50
percent'' for ``80 percent'' each place
it appears).
(B) Reduction for interest payments to
creditors becoming shareholders.--In any case
to which subparagraph (A) applies, the pre-
change losses and excess credits (within the
meaning of section 383(a)(2)) which may be
carried to a post-change year shall be computed
as if no deduction was allowable under this
chapter for the interest paid or accrued by the
old loss corporation on indebtedness which was
converted into stock pursuant to title 11 or
similar case during--
(i) any taxable year ending during
the 3-year period preceding the taxable
year in which the ownership change
occurs, and
(ii) the period of the taxable year
in which the ownership change occurs on
or before the change date.
(C) Coordination with section 108.--In
applying section 108(e)(8) to any case to which
subparagraph (A) applies, there shall not be
taken into account any indebtedness for
interest described in subparagraph (B).
(D) Section 382 limitation zero if another
change within 2 years.--If, during the 2-year
period immediately following an ownership
change to which this paragraph applies, an
ownership change of the new loss corporation
occurs, this paragraph shall not apply and the
section 382 limitation with respect to the 2nd
ownership change for any post-change year
ending after the change date of the 2nd
ownership change shall be zero.
(E) Only certain stock taken into account.--
For purposes of subparagraph (A)(ii), stock
transferred to a creditor shall be taken into
account only to the extent such stock is
transferred in satisfaction of indebtedness and
only if such indebtedness--
(i) was held by the creditor at least
18 months before the date of the filing
of the title 11 or similar case, or
(ii) arose in the ordinary course of
the trade or business of the old loss
corporation and is held by the person
who at all times held the beneficial
interest in such indebtedness.
(F) Title 11 or similar case.--For purposes
of this paragraph, the term ``title 11 or
similar case'' has the meaning given such term
by section 368(a)(3)(A).
(G) Election not to have paragraph apply.--A
new loss corporation may elect, subject to such
terms and conditions as the Secretary may
prescribe, not to have the provisions of this
paragraph apply.
(6) Special rule for insolvency transactions.--If
paragraph (5) does not apply to any reorganization
described in subparagraph (G) of section 368(a)(1) or
any exchange of debt for stock in a title 11 or similar
case (as defined in section 368(a)(3)(A)), the value
under subsection (e) shall reflect the increase (if
any) in value of the old loss corporation resulting
from any surrender or cancellation of creditors' claims
in the transaction.
(7) Coordination with alternative minimum tax.--The
Secretary shall by regulation provide for the
application of this section to the alternative tax net
operating loss deduction under section 56(d).
(8) Predecessor and successor entities.--Except as
provided in regulations, any entity and any predecessor
or successor entities of such entity shall be treated
as 1 entity.
(m) Regulations.--The Secretary shall prescribe such
regulations as may be necessary or appropriate to carry out the
purposes of this section and section 383, including (but not
limited to) regulations--
(1) providing for the application of this section and
section 383 where an ownership change with respect to
the old loss corporation is followed by an ownership
change with respect to the new loss corporation, and
(2) providing for the application of this section and
section 383 in the case of a short taxable year,
(3) providing for such adjustments to the application
of this section and section 383 as is necessary to
prevent the avoidance of the purposes of this section
and section 383, including the avoidance of such
purposes through the use of related persons, pass-thru
entities, or other intermediaries,
(4) providing for the application of subsection
(g)(4) where there is only 1 corporation involved, and
(5) providing, in the case of any group of
corporations described in section 1563(a) (determined
by substituting ``50 percent'' for ``80 percent'' each
place it appears and determined without regard to
paragraph (4) thereof), appropriate adjustments to
value, built-in gain or loss, and other items so that
items are not omitted or taken into account more than
once.
(n) Special rule for certain ownership changes.--
(1) In general.--The limitation contained in
subsection (a) shall not apply in the case of an
ownership change which is pursuant to a restructuring
plan of a taxpayer which--
(A) is required under a loan agreement or a
commitment for a line of credit entered into
with the Department of the Treasury under the
Emergency Economic Stabilization Act of 2008,
and
(B) is intended to result in a
rationalization of the costs, capitalization,
and capacity with respect to the manufacturing
workforce of, and suppliers to, the taxpayer
and its subsidiaries.
(2) Subsequent acquisitions.--Paragraph (1) shall not
apply in the case of any subsequent ownership change
unless such ownership change is described in such
paragraph.
(3) Limitation based on control in corporation.--
(A) In general.--Paragraph (1) shall not
apply in the case of any ownership change if,
immediately after such ownership change, any
person (other than a voluntary employees'
beneficiary association under section
501(c)(9)) owns stock of the new loss
corporation possessing 50 percent or more of
the total combined voting power of all classes
of stock entitled to vote, or of the total
value of the stock of such corporation.
(B) Treatment of related persons.--
(i) In general.--Related persons
shall be treated as a single person for
purposes of this paragraph.
(ii) Related persons.--For purposes
of clause (i), a person shall be
treated as related to another person
if--
(I) such person bears a
relationship to such other
person described in section
267(b) or 707(b), or
(II) such persons are members
of a group of persons acting in
concert.
SEC. 383. SPECIAL LIMITATIONS ON CERTAIN EXCESS CREDITS, ETC.
(a) Excess credits.--
(1) In general.--Under regulations, if an ownership
change occurs with respect to a corporation, the amount
of any excess credit for any taxable year which may be
used in any post-change year shall be limited to an
amount determined on the basis of the tax liability
which is attributable to so much of the taxable income
as does not exceed the section 382 limitation for such
post-change year to the extent available after the
application of section 382 and subsections (b) and (c)
of this section.
(2) Excess credit.--For purposes of paragraph (1),
the term ``excess credit'' means--
(A) any unused general business credit of the
corporation under section 39, and
(B) any unused minimum tax credit of the
corporation under section 53.
(b) Limitation on net capital loss.--If an ownership change
occurs with respect to a corporation, the amount of any net
capital loss under section 1212 for any taxable year before the
1st post-change year which may be used in any post-change year
shall be limited under regulations which shall be based on the
principles applicable under section 382. Such regulations shall
provide that any such net capital loss used in a post-change
year shall reduce the section 382 limitation which is applied
to pre-change losses under section 382 for such year.
(c) Foreign tax credits.--If an ownership change occurs with
respect to a corporation, the amount of any excess foreign
taxes under section 904(c) for any taxable year before the 1st
post-change taxable year shall be limited under regulations
which shall be consistent with purposes of this section and
section 382.
(d) Pro ration rules for year which includes change.--For
purposes of this section, rules similar to the rules of
subsections (b)(3) and (d)(1)(B) of section 382 shall apply.
(e) Exception for Start-up Excess Credits.--
(1) In general.--In the case of any unused general
business credit of the corporation under section 39
which arose in a start-up period taxable year, the
amount of such unused general business credit otherwise
taken into account under subsection (a)(2)(A) shall be
reduced by the start-up excess credit determined with
respect to any trade or business referred to in section
382(d)(4)(B)(i) for such start-up period taxable year.
(2) Start-up period taxable year.--For purposes of
this subsection, the term ``start-up period taxable
year'' has the meaning given such term in section
382(d)(4)(B).
(3) Start-up excess credit.--For purposes of this
subsection, the term ``start-up excess credit'' means,
with respect to any trade or business referred to in
section 382(d)(4)(B)(i) for any start-up period taxable
year, the amount which bears the same ratio to the
unused general business credit which arose in such
start-up period taxable year as--
(A) the amount of the general business credit
which would have been determined for such
start-up period taxable year if only credits
properly allocable to such trade or business
were taken into account, bears to
(B) the amount of the general business credit
determined for such start-up period taxable
year.
(4) Application of certain rules.--Rules similar to
the rules of subparagraphs (C)(ii), (D), (E), and (F)
of section 382(d)(4) shall apply for purposes of this
subsection.
(5) Transition rule.--This subsection shall not apply
with respect to any trade or business if the date on
which such trade or business begins as an active trade
or business (as determined under section 195(d)(2)
without regard to subparagraph (B) thereof) is on or
before September 10, 2018.
[(e)] (f) Definitions.--Terms used in this section shall have
the same respective meanings as when used in section 382,
except that appropriate adjustments shall be made to take into
account that the limitations of this section apply to credits
and net capital losses.
* * * * * * *
Subchapter G--Corporations Used to Avoid Income Tax on Shareholders
* * * * * * *
PART I--CORPORATIONS IMPROPERLY ACCUMULATING SURPLUS
* * * * * * *
SEC. 535. ACCUMULATED TAXABLE INCOME.
(a) Definition.--For purposes of this subtitle, the term
``accumulated taxable income'' means the taxable income,
adjusted in the manner provided in subsection (b), minus the
sum of the dividends paid deduction (as defined in section 561)
and the accumulated earnings credit (as defined in subsection
(c)).
(b) Adjustments to taxable income.--For purposes of
subsection (a), taxable income shall be adjusted as follows:
(1) Taxes.--There shall be allowed as a deduction
Federal income and excess profits taxes and income, war
profits, and excess profits taxes of foreign countries
and possessions of the United States (to the extent not
allowable as a deduction under section 275(a)(4)),
accrued during the taxable year or deemed to be paid by
a domestic corporation under section 960 for the
taxable year, but not including the accumulated
earnings tax imposed by section 531 or the personal
holding company tax imposed by section 541.
(2) Charitable contributions.--The deduction for
charitable contributions provided under section 170
shall be allowed without regard to section 170(b)(2).
(3) Special deductions disallowed.--The special
deductions for corporations provided in part VIII
[(except section 248)] of subchapter B (section 241 and
following, relating to the deduction for dividends
received by corporations, etc.) shall not be allowed.
(4) Net operating loss.--The net operating loss
deduction provided in section 172 shall not be allowed.
(5) Capital losses.--
(A) In general.--Except as provided in
subparagraph (B), there shall be allowed as a
deduction an amount equal to the net capital
loss for the taxable year (determined without
regard to paragraph (7)(A)).
(B) Recapture of previous deductions for
capital gains.--The aggregate amount allowable
as a deduction under subparagraph (A) for any
taxable year shall be reduced by the lesser
of--
(i) the nonrecaptured capital gains
deductions, or
(ii) the amount of the accumulated
earnings and profits of the corporation
as of the close of the preceding
taxable year.
(C) Nonrecaptured capital gains deductions.--
For purposes of subparagraph (B), the term
``nonrecaptured capital gains deductions''
means the excess of--
(i) the aggregate amount allowable as
a deduction under paragraph (6) for
preceding taxable years beginning after
July 18, 1984, over
(ii) the aggregate of the reductions
under subparagraph (B) for preceding
taxable years.
(6) Net capital gains.--
(A) In general.--There shall be allowed as a
deduction--
(i) the net capital gain for the
taxable year (determined with the
application of paragraph (7)), reduced
by
(ii) the taxes attributable to such
net capital gain.
(B) Attributable taxes.--For purposes of
subparagraph (A), the taxes attributable to the
net capital gain shall be an amount equal to
the difference between--
(i) the taxes imposed by this
subtitle (except the tax imposed by
this part) for the taxable year, and
(ii) such taxes computed for such
year without including in taxable
income the net capital gain for the
taxable year (determined without the
application of paragraph (7)).
(7) Capital loss carryovers.--
(A) Unlimited carryforward.--The net capital
loss for any taxable year shall be treated as a
short-term capital loss in the next taxable
year.
(B) Section 1212 inapplicable.--No allowance
shall be made for the capital loss carryback or
carryforward provided in section 1212.
(8) Special rules for mere holding or investment
companies.--In the case of a mere holding or investment
company--
(A) Capital loss deduction, etc., not
allowed.--Paragraphs (5) and (7)(A) shall not
apply.
(B) Deduction for certain offsets.--There
shall be allowed as a deduction the net short-
term capital gain for the taxable year to the
extent such gain does not exceed the amount of
any capital loss carryover to such taxable year
under section 1212 (determined without regard
to paragraph (7)(B)).
(C) Earnings and profits.--For purposes of
subchapter C, the accumulated earnings and
profits at any time shall not be less than they
would be if this subsection had applied to the
computation of earnings and profits for all
taxable years beginning after July 18, 1984.
(9) Special rule for capital gains and losses of
foreign corporations.--In the case of a foreign
corporation, paragraph (6) shall be applied by taking
into account only gains and losses which are
effectively connected with the conduct of a trade or
business within the United States and are not exempt
from tax under treaty.
(10) Controlled foreign corporations.--There shall be
allowed as a deduction the amount of the corporation's
income for the taxable year which is included in the
gross income of a United States shareholder under
section 951(a). In the case of any corporation the
accumulated taxable income of which would (but for this
sentence) be determined without allowance of any
deductions, the deduction under this paragraph shall be
allowed and shall be appropriately adjusted to take
into account any deductions which reduced such
inclusion.
(c) Accumulated earnings credit.--
(1) General rule.--For purposes of subsection (a), in
the case of a corporation other than a mere holding or
investment company the accumulated earnings credit is
(A) an amount equal to such part of the earnings and
profits for the taxable year as are retained for the
reasonable needs of the business, minus (B) the
deduction allowed by subsection (b)(6). For purposes of
this paragraph, the amount of the earnings and profits
for the taxable year which are retained is the amount
by which the earnings and profits for the taxable year
exceed the dividends paid deduction (as defined in
section 561) for such year.
(2) Minimum credit.--
(A) In general.--The credit allowable under
paragraph (1) shall in no case be less than the
amount by which $250,000 exceeds the
accumulated earnings and profits of the
corporation at the close of the preceding
taxable year.
(B) Certain service corporations.--In the
case of a corporation the principal function of
which is the performance of services in the
field of health, law, engineering,
architecture, accounting, actuarial science,
performing arts, or consulting, subparagraph
(A) shall be applied by substituting
``$150,000'' for ``$250,000''.
(3) Holding and investment companies.--In the case of
a corporation which is a mere holding or investment
company, the accumulated earnings credit is the amount
(if any) by which $250,000 exceeds the accumulated
earnings and profits of the corporation at the close of
the preceding taxable year.
(4) Accumulated earnings and profits.--For purposes
of paragraphs (2) and (3), the accumulated earnings and
profits at the close of the preceding taxable year
shall be reduced by the dividends which under section
563(a) (relating to dividends paid after the close of
the taxable year) are considered as paid during such
taxable year.
(5) Cross reference.--For limitation on credit
provided in paragraph (2) or (3) in the case of certain
controlled corporations, see section 1561.
(d) Income distributed to United States-owned foreign
corporation retains United States connection.--
(1) In general.--For purposes of this part, if 10
percent or more of the earnings and profits of any
foreign corporation for any taxable year--
(A) is derived from sources within the United
States, or
(B) is effectively connected with the conduct
of a trade or business within the United
States,
any distribution out of such earnings and profits (and
any interest payment) received (directly or through 1
or more other entities) by a United States-owned
foreign corporation shall be treated as derived by such
corporation from sources within the United States.
(2) United States-owned foreign corporation.--The
term ``United States-owned foreign corporation'' has
the meaning given to such term by section 904(h)(6).
* * * * * * *
PART II--PERSONAL HOLDING COMPANIES
* * * * * * *
SEC. 545. UNDISTRIBUTED PERSONAL HOLDING COMPANY INCOME.
(a) Definition.--For purposes of this part, the term
``undistributed personal holding company income'' means the
taxable income of a personal holding company adjusted in the
manner provided in subsections (b), (c), and (d), minus the
dividends paid deduction as defined in section 561. In the case
of a personal holding company which is a foreign corporation,
not more than 10 percent in value of the outstanding stock of
which is owned (within the meaning of section 958(a)) during
the last half of the taxable year by United States persons, the
term ``undistributed personal holding company income'' means
the amount determined by multiplying the undistributed personal
holding company income (determined without regard to this
sentence) by the percentage in value of its outstanding stock
which is the greatest percentage in value of its outstanding
stock so owned by United States persons on any one day during
such period.
(b) Adjustments to taxable income.--For the purposes of
subsection (a), the taxable income shall be adjusted as
follows:
(1) Taxes.--There shall be allowed as a deduction
Federal income and excess profits taxes and income, war
profits and excess profits taxes of foreign countries
and possessions of the United States (to the extent not
allowable as a deduction under section 275(a)(4)),
accrued during the taxable year or deemed to be paid by
a domestic corporation under section 960 for the
taxable year, but not including the accumulated
earnings tax imposed by section 531 or the personal
holding company tax imposed by section 541.
(2) Charitable contributions.--The deduction for
charitable contributions provided under section 170
shall be allowed, but in computing such deduction the
limitations in section 170(b)(1)(A), (B), (D), and (E)
shall apply, and section 170(b)(2) and (d)(1) shall not
apply. For purposes of this paragraph, the term
``contribution base'' when used in section 170(b)(1)
means the taxable income computed with the adjustments
(other than the 10-percent limitation) provided in
section 170(b)(2) and (d)(1) and without deduction of
the amount disallowed under paragraph (6) of this
subsection.
(3) Special deductions disallowed.--The special
deductions for corporations provided in part VIII
[(except section 248)] of subchapter B (section 241 and
following, relating to the deduction for dividends
received by corporations, etc.) shall not be allowed.
(4) Net operating loss.--The net operating loss
deduction provided in section 172 shall not be allowed,
but there shall be allowed as a deduction the amount of
the net operating loss (as defined in section 172(c))
for the preceding taxable year computed without the
deductions provided in part VIII [(except section 248)]
of subchapter B.
(5) Net capital gains.--There shall be allowed as a
deduction the net capital gain for the taxable year,
minus the taxes imposed by this subtitle attributable
to such net capital gain. The taxes attributable to
such net capital gain shall be an amount equal to the
difference between--
(A) the taxes imposed by this subtitle
(except the tax imposed by this part) for such
year, and
(B) such taxes computed for such year without
including such excess in taxable income.
(6) Expenses and depreciation applicable to property
of the taxpayer.--The aggregate of the deductions
allowed under section 162 (relating to trade or
business expenses) and section 167 (relating to
depreciation), which are allocable to the operation and
maintenance of property owned or operated by the
corporation, shall be allowed only in an amount equal
to the rent or other compensation received for the use
of, or the right to use, the property, unless it is
established (under regulations prescribed by the
Secretary) to the satisfaction of the Secretary--
(A) that the rent or other compensation
received was the highest obtainable, or, if
none was received, that none was obtainable;
(B) that the property was held in the course
of a business carried on bona fide for profit;
and
(C) either that there was reasonable
expectation that the operation of the property
would result in a profit, or that the property
was necessary to the conduct of the business.
(7) Special rule for capital gains and losses of
foreign corporations.--In the case of a foreign
corporation, paragraph (5) shall be applied by taking
into account only gains and losses which are
effectively connected with the conduct of a trade or
business within the United States and are not exempt
from tax under treaty.
(c) Certain foreign corporations.--In the case of a foreign
corporation all of the outstanding stock of which during the
last half of the taxable year is owned by nonresident alien
individuals (whether directly or indirectly through foreign
estates, foreign trusts, foreign partnerships, or other foreign
corporations), the taxable income for purposes of subsection
(a) shall be the income which constitutes personal holding
company income under section 543(a)(7), reduced by the
deductions attributable to such income, and adjusted, with
respect to such income, in the manner provided in subsection
(b).
* * * * * * *
Subchapter K--Partners and Partnerships
* * * * * * *
PART I--DETERMINATION OF TAX LIABILITY
* * * * * * *
[Sec. 709. Treatment of organization and syndication fees.]
Sec. 709. Treatment of syndication fees.
* * * * * * *
[SEC. 709. TREATMENT OF ORGANIZATION AND SYNDICATION FEES.
[(a) General rule.--Except as provided in subsection (b), no
deduction shall be allowed under this chapter to the
partnership or to any partner for any amounts paid or incurred
to organize a partnership or to promote the sale of (or to
sell) an interest in such partnership.
[(b) Deduction of organization fees.--
[(1) Allowance of deduction.--If a partnership elects
the application of this subsection (in accordance with
regulations prescribed by the Secretary) with respect
to any organizational expenses--
[(A) the partnership shall be allowed a
deduction for the taxable year in which the
partnership begins business in an amount equal
to the lesser of--
[(i) the amount of organizational
expenses with respect to the
partnership, or
[(ii) $5,000, reduced (but not below
zero) by the amount by which such
organizational expenses exceed $50,000,
and
[(B) the remainder of such organizational
expenses shall be allowed as a deduction
ratably over the 180-month period beginning
with the month in which the partnership begins
business.
[(2) Dispositions before close of amortization
period.--In any case in which a partnership is
liquidated before the end of the period to which
paragraph (1)(B) applies, any deferred expenses
attributable to the partnership which were not allowed
as a deduction by reason of this section may be
deducted to the extent allowable under section 165.
[(3) Organizational expenses defined.--The
organizational expenses to which paragraph (1) applies,
are expenditures which--
[(A) are incident to the creation of the
partnership;
[(B) are chargeable to capital account; and
[(C) are of a character which, if expended
incident to the creation of a partnership
having an ascertainable life, would be
amortized over such life.]
SEC. 709. TREATMENT OF SYNDICATION FEES.
No deduction shall be allowed under this chapter to a
partnership or to any partner of the partnership for any
amounts paid or incurred to promote the sale of (or to sell) an
interest in the partnership.
* * * * * * *
Subchapter L--Insurance Companies
* * * * * * *
PART II--OTHER INSURANCE COMPANIES
* * * * * * *
SEC. 834. DETERMINATION OF TAXABLE INVESTMENT INCOME.
(a) General rule.--For purposes of section 831(b), the term
``taxable investment income'' means the gross investment
income, minus the deductions provided in subsection (c).
(b) Gross investment income.--For purposes of subsection (a),
the term ``gross investment income'' means the sum of the
following:
(1) The gross amount of income during the taxable
year from--
(A) interest, dividends, rents, and
royalties,
(B) the entering into of any lease, mortgage,
or other instrument or agreement from which the
insurance company derives interest, rents, or
royalties,
(C) the alteration or termination of any
instrument or agreement described in
subparagraph (B), and
(D) gains from sales or exchanges of capital
assets to the extent provided in subchapter P
(relating to capital gains and losses).
(2) The gross income during the taxable year from any
trade or business (other than an insurance business)
carried on by the insurance company, or by a
partnership of which the insurance company is a
partner. In computing gross income under this
paragraph, there shall be excluded any item described
in paragraph (1).
(c) Deductions.--In computing taxable investment income, the
following deductions shall be allowed:
(1) Tax-free interest.--The amount of interest which
under section 103 is excluded for the taxable year from
gross income.
(2) Investment expenses.--Investment expenses paid or
accrued during the taxable year. If any general
expenses are in part assigned to or included in the
investment expenses, the total deduction under this
paragraph shall not exceed one-fourth of 1 percent of
the mean of the book value of the invested assets held
at the beginning and end of the taxable year plus one-
fourth of the amount by which taxable investment income
(computed without any deduction for investment expenses
allowed by this paragraph, for tax-free interest
allowed by paragraph (1), or for dividends received
allowed by paragraph (7)), exceeds 3 3/4 percent of the
book value of the mean of the invested assets held at
the beginning and end of the taxable year.
(3) Real estate expenses.--Taxes (as provided in
section 164), and other expenses, paid or accrued
during the taxable year exclusively on or with respect
to the real estate owned by the company. No deduction
shall be allowed under this paragraph for any amount
paid out for new buildings, or for permanent
improvements or betterments made to increase the value
of any property.
(4) Depreciation.--The depreciation deduction allowed
by section 167.
(5) Interest paid or accrued.--All interest paid or
accrued within the taxable year on indebtedness, except
on indebtedness incurred or continued to purchase or
carry obligations the interest on which is wholly
exempt from taxation under this subtitle.
(6) Capital losses.--Capital losses to the extent
provided in subchapter P (sec. 1201 and following) plus
losses from capital assets sold or exchanged in order
to obtain funds to meet abnormal insurance losses and
to provide for the payment of dividends and similar
distributions to policyholders. Capital assets shall be
considered as sold or exchanged in order to obtain
funds to meet abnormal insurance losses and to provide
for the payment of dividends and similar distributions
to policyholders to the extent that the gross receipts
from their sale or exchange are not greater than the
excess, if any, for the taxable year of the sum of
dividends and similar distributions paid to
policyholders, losses paid, and expenses paid over the
sum of the items described in subsection (b) (other
than paragraph (1)(D) thereof) and net premiums
received. In the application of section 1212 for
purposes of this section, the net capital loss for the
taxable year shall be the amount by which losses for
such year from sales or exchanges of capital assets
exceeds the sum of the gains from such sales or
exchanges and whichever of the following amounts is the
lesser:
(A) the taxable investment income (computed
without regard to gains or losses from sales or
exchanges of capital assets); or
(B) losses from the sale or exchange of
capital assets sold or exchanged to obtain
funds to meet abnormal insurance losses and to
provide for the payment of dividends and
similar distributions to policyholders.
(7) Special deductions.--The special deductions
allowed by part VIII [(except section 248)] of
subchapter B (sec. 241 and following, relating to
dividends received). In applying section 246(b)
(relating to limitation on aggregate amount of
deductions for dividends received) for purposes of this
paragraph, the reference in such section to ``taxable
income'' shall be treated as a reference to ``taxable
investment income''.
(8) Trade or business deductions.--The deductions
allowed by this subtitle (without regard to this part)
which are attributable to any trade or business (other
than an insurance business) carried on by the insurance
company, or by a partnership of which the insurance
company is a partner; except that for purposes of this
paragraph--
(A) any item, to the extent attributable to
the carrying on of the insurance business,
shall not be taken into account, and
(B) the deduction for net operating losses
provided in section 172 shall not be allowed.
(9) Depletion.--The deduction allowed by section 611
(relating to depletion).
(d) Other applicable rules.--
(1) Rental value of real estate.--The deduction under
subsection (c)(3) or (4) on account of any real estate
owned and occupied in whole or in part by a mutual
insurance company subject to the tax imposed by section
831 shall be limited to an amount which bears the same
ratio to such deduction (computed without regard to
this paragraph) as the rental value of the space not so
occupied bears to the rental value of the entire
property.
(2) Amortization of premium and accrual of
discount.--The gross amount of income during the
taxable year from interest and the deduction provided
in subsection (c)(1) shall each be decreased to reflect
the appropriate amortization of premium and increased
to reflect the appropriate accrual of discount
attributable to the taxable year on bonds, notes,
debentures, or other evidences of indebtedness held by
a mutual insurance company subject to the tax imposed
by section 831. Such amortization and accrual shall be
determined--
(A) in accordance with the method regularly
employed by such company, if such method is
reasonable, and
(B) in all other cases, in accordance with
regulations prescribed by the Secretary.
No accrual of discount shall be required under this
paragraph on any bond (as defined in section 171(d))
except in the case of discount which is original issue
discount (as defined in section 1273).
(3) Double deductions.--Nothing in this part shall
permit the same item to be deducted more than once.
(e) Definitions.--For purposes of this part--
(1) Net premiums.--The term ``net premiums'' means
gross premiums (including deposits and assessments)
written or received on insurance contracts during the
taxable year less return premiums and premiums paid or
incurred for reinsurance. Amounts returned where the
amount is not fixed in the insurance contract but
depends on the experience of the company or the
discretion of the management shall not be included in
return premiums but shall be treated as dividends to
policyholders under paragraph (2).
(2) Dividends to policyholders.--The term ``dividends
to policyholders'' means dividends and similar
distributions paid or declared to policyholders. For
purposes of the preceding sentence, the term ``paid or
declared'' shall be construed according to the method
regularly employed in keeping the books of the
insurance company.
* * * * * * *
Subchapter M--Regulated Investment Companies and Real Estate Investment
Trusts
* * * * * * *
PART I--REGULATED INVESTMENT COMPANIES
* * * * * * *
SEC. 852. TAXATION OF REGULATED INVESTMENT COMPANIES AND THEIR
SHAREHOLDERS.
(a) Requirements applicable to regulated investment
companies.--The provisions of this part (other than subsection
(c) of this section) shall not be applicable to a regulated
investment company for a taxable year unless--
(1) the deduction for dividends paid during the
taxable year (as defined in section 561, but without
regard to capital gain dividends) equals or exceeds the
sum of--
(A) 90 percent of its investment company
taxable income for the taxable year determined
without regard to subsection (b)(2)(D); and
(B) 90 percent of the excess of (i) its
interest income excludable from gross income
under section 103(a) over (ii) its deductions
disallowed under sections 265 and 171(a)(2),
and
(2) either--
(A) the provisions of this part applied to
the investment company for all taxable years
ending on or after November 8, 1983, or
(B) as of the close of the taxable year, the
investment company has no earnings and profits
accumulated in any taxable year to which the
provisions of this part (or the corresponding
provisions of prior law) did not apply to it.
The Secretary may waive the requirements of paragraph (1) for
any taxable year if the regulated investment company
establishes to the satisfaction of the Secretary that it was
unable to meet such requirements by reason of distributions
previously made to meet the requirements of section 4982.
(b) Method of taxation of companies and shareholders.--
(1) Imposition of tax on regulated investment
companies.--There is hereby imposed for each taxable
year upon the investment company taxable income of
every regulated investment company a tax computed as
provided in section 11, as though the investment
company taxable income were the taxable income referred
to in section 11.
(2) Investment company taxable income.--The
investment company taxable income shall be the taxable
income of the regulated investment company adjusted as
follows:
(A) There shall be excluded the amount of the
net capital gain, if any.
(B) The net operating loss deduction provided
in section 172 shall not be allowed.
(C) The deductions for corporations provided
in part VIII [(except section 248)] in
subchapter B (section 241 and following,
relating to the deduction for dividends
received, etc.) shall not be allowed.
(D) The deduction for dividends paid (as
defined in section 561) shall be allowed, but
shall be computed without regard to capital
gain dividends and exempt-interest dividends.
(E) The taxable income shall be computed
without regard to section 443(b) (relating to
computation of tax on change of annual
accounting period).
(F) The taxable income shall be computed
without regard to section 454(b) (relating to
short-term obligations issued on a discount
basis) if the company so elects in a manner
prescribed by the Secretary.
(G) There shall be deducted an amount equal
to the tax imposed by subsections (d)(2) and
(i) of section 851 for the taxable year.
(3) Capital gains.--
(A) Imposition of tax.--There is hereby
imposed for each taxable year in the case of
every regulated investment company a tax,
determined as provided in section 11(b), on the
excess, if any, of the net capital gain over
the deduction for dividends paid (as defined in
section 561) determined with reference to
capital gain dividends only.
(B) Treatment of capital gain dividends by
shareholders.--A capital gain dividend shall be
treated by the shareholders as a gain from the
sale or exchange of a capital asset held for
more than 1 year.
(C) Definition of capital gain dividend.--For
purposes of this part--
(i) In general.--Except as provided
in clause (ii), a capital gain dividend
is any dividend, or part thereof, which
is reported by the company as a capital
gain dividend in written statements
furnished to its shareholders.
(ii) Excess reported amounts.--If the
aggregate reported amount with respect
to the company for any taxable year
exceeds the net capital gain of the
company for such taxable year, a
capital gain dividend is the excess
of--
(I) the reported capital gain
dividend amount, over
(II) the excess reported
amount which is allocable to
such reported capital gain
dividend amount.
(iii) Allocation of excess reported
amount.--
(I) In general.--Except as
provided in subclause (II), the
excess reported amount (if any)
which is allocable to the
reported capital gain dividend
amount is that portion of the
excess reported amount which
bears the same ratio to the
excess reported amount as the
reported capital gain dividend
amount bears to the aggregate
reported amount.
(II) Special rule for
noncalendar year taxpayers.--In
the case of any taxable year
which does not begin and end in
the same calendar year, if the
post-December reported amount
equals or exceeds the excess
reported amount for such
taxable year, subclause (I)
shall be applied by
substituting ``post-December
reported amount'' for
``aggregate reported amount''
and no excess reported amount
shall be allocated to any
dividend paid on or before
December 31 of such taxable
year.
(iv) Definitions.--For purposes of
this subparagraph--
(I) Reported capital gain
dividend amount.--The term
``reported capital gain
dividend amount'' means the
amount reported to its
shareholders under clause (i)
as a capital gain dividend.
(II) Excess reported
amount.--The term ``excess
reported amount'' means the
excess of the aggregate
reported amount over the net
capital gain of the company for
the taxable year.
(III) Aggregate reported
amount.--The term ``aggregate
reported amount'' means the
aggregate amount of dividends
reported by the company under
clause (i) as capital gain
dividends for the taxable year
(including capital gain
dividends paid after the close
of the taxable year described
in section 855).
(IV) Post-December reported
amount.--The term ``post-
December reported amount''
means the aggregate reported
amount determined by taking
into account only dividends
paid after December 31 of the
taxable year.
(v) Adjustment for determinations.--
If there is an increase in the excess
described in subparagraph (A) for the
taxable year which results from a
determination (as defined in section
860(e)), the company may, subject to
the limitations of this subparagraph,
increase the amount of capital gain
dividends reported under clause (i).
(vi) Special rule for losses late in
the calendar year.--For special rule
for certain losses after October 31,
see paragraph (8).
(D) Treatment by shareholders of
undistributed capital gains.--
(i) Every shareholder of a regulated
investment company at the close of the
company's taxable year shall include,
in computing his long-term capital
gains in his return for his taxable
year in which the last day of the
company's taxable year falls, such
amount as the company shall designate
in respect of such shares in a written
notice mailed to its shareholders at
any time prior to the expiration of 60
days after close of its taxable year,
but the amount so includible by any
shareholder shall not exceed that part
of the amount subjected to tax in
subparagraph (A) which he would have
received if all of such amount had been
distributed as capital gain dividends
by the company to the holders of such
shares at the close of its taxable
year.
(ii) For purposes of this title,
every such shareholder shall be deemed
to have paid, for his taxable year
under clause (i), the tax imposed by
subparagraph (A) on the amounts
required by this subparagraph to be
included in respect of such shares in
computing his long-term capital gains
for that year; and such shareholder
shall be allowed credit or refund, as
the case may be, for the tax so deemed
to have been paid by him.
(iii) The adjusted basis of such
shares in the hands of the shareholder
shall be increased, with respect to the
amounts required by this subparagraph
to be included in computing his long-
term capital gains, by the difference
between the amount of such includible
gains and the tax deemed paid by such
shareholder in respect of such shares
under clause (ii).
(iv) In the event of such designation
the tax imposed by subparagraph (A)
shall be paid by the regulated
investment company within 30 days after
close of its taxable year.
(v) The earnings and profits of such
regulated investment company, and the
earnings and profits of any such
shareholder which is a corporation,
shall be appropriately adjusted in
accordance with regulations prescribed
by the Secretary.
(E) Certain distributions.--In the case of a
distribution to which section 897 does not
apply by reason of the second sentence of
section 897(h)(1), the amount of such
distribution which would be included in
computing long-term capital gains for the
shareholder under subparagraph (B) or (D)
(without regard to this subparagraph)--
(i) shall not be included in
computing such shareholder's long-term
capital gains, and
(ii) shall be included in such
shareholder's gross income as a
dividend from the regulated investment
company.
(4) Loss on sale or exchange of stock held 6 months
or less.--
(A) Loss attributable to capital gain
dividend.--If--
(i) subparagraph (B) or (D) of
paragraph (3) provides that any amount
with respect to any share is to be
treated as long-term capital gain, and
(ii) such share is held by the
taxpayer for 6 months or less,
then any loss (to the extent not disallowed
under subparagraph (B)) on the sale or exchange
of such share shall, to the extent of the
amount described in clause (i), be treated as a
long-term capital loss.
(B) Loss attributable to exempt-interest
dividend.--If--
(i) a shareholder of a regulated
investment company receives an exempt-
interest dividend with respect to any
share, and
(ii) such share is held by the
taxpayer for 6 months or less,
then any loss on the sale or exchange of such
share shall, to the extent of the amount of
such exempt-interest dividend, be disallowed.
(C) Determination of holding periods.--For
purposes of this paragraph, in determining the
period for which the taxpayer has held any
share of stock--
(i) the rules of paragraphs (3) and
(4) of section 246(c) shall apply, and
(ii) there shall not be taken into
account any day which is more than 6
months after the date on which such
share becomes ex-dividend.
(D) Losses incurred under a periodic
liquidation plan.--To the extent provided in
regulations, subparagraphs (A) and (B) shall
not apply to losses incurred on the sale or
exchange of shares of stock in a regulated
investment company pursuant to a plan which
provides for the periodic liquidation of such
shares.
(E) Exception to holding period requirement
for certain regularly declared exempt-interest
dividends.--
(i) Daily dividend companies.--Except
as otherwise provided by regulations,
subparagraph (B) shall not apply with
respect to a regular dividend paid by a
regulated investment company which
declares exempt-interest dividends on a
daily basis in an amount equal to at
least 90 percent of its net tax-exempt
interest and distributes such dividends
on a monthly or more frequent basis.
(ii) Authority to shorten required
holding period with respect to other
companies.--In the case of a regulated
investment company (other than a
company described in clause (i)) which
regularly distributes at least 90
percent of its net tax-exempt interest,
the Secretary may by regulations
prescribe that subparagraph (B) (and
subparagraph (C) to the extent it
relates to subparagraph (B)) shall be
applied on the basis of a holding
period requirement shorter than 6
months; except that such shorter
holding period requirement shall not be
shorter than the greater of 31 days or
the period between regular
distributions of exempt-interest
dividends.
(5) Exempt-interest dividends.--If, at the close of
each quarter of its taxable year, at least 50 percent
of the value (as defined in section 851(c)(4)) of the
total assets of the regulated investment company
consists of obligations described in section 103(a),
such company shall be qualified to pay exempt-interest
dividends, as defined herein, to its shareholders.
(A) Definition of exempt-interest dividend.--
(i) In general.--Except as provided
in clause (ii), an exempt-interest
dividend is any dividend or part
thereof (other than a capital gain
dividend) paid by a regulated
investment company and reported by the
company as an exempt-interest dividend
in written statements furnished to its
shareholders.
(ii) Excess reported amounts.--If the
aggregate reported amount with respect
to the company for any taxable year
exceeds the exempt interest of the
company for such taxable year, an
exempt-interest dividend is the excess
of--
(I) the reported exempt-
interest dividend amount, over
(II) the excess reported
amount which is allocable to
such reported exempt-interest
dividend amount.
(iii) Allocation of excess reported
amount.--
(I) In general.--Except as
provided in subclause (II), the
excess reported amount (if any)
which is allocable to the
reported exempt-interest
dividend amount is that portion
of the excess reported amount
which bears the same ratio to
the excess reported amount as
the reported exempt-interest
dividend amount bears to the
aggregate reported amount.
(II) Special rule for
noncalendar year taxpayers.--In
the case of any taxable year
which does not begin and end in
the same calendar year, if the
post-December reported amount
equals or exceeds the excess
reported amount for such
taxable year, subclause (I)
shall be applied by
substituting ``post-December
reported amount'' for
``aggregate reported amount''
and no excess reported amount
shall be allocated to any
dividend paid on or before
December 31 of such taxable
year.
(iv) Definitions.--For purposes of
this subparagraph--
(I) Reported exempt-interest
dividend amount.--The term
``reported exempt-interest
dividend amount'' means the
amount reported to its
shareholders under clause (i)
as an exempt-interest dividend.
(II) Excess reported
amount.--The term ``excess
reported amount'' means the
excess of the aggregate
reported amount over the exempt
interest of the company for the
taxable year.
(III) Aggregate reported
amount.--The term ``aggregate
reported amount'' means the
aggregate amount of dividends
reported by the company under
clause (i) as exempt-interest
dividends for the taxable year
(including exempt-interest
dividends paid after the close
of the taxable year described
in section 855).
(IV) Post-December reported
amount.--The term ``post-
December reported amount''
means the aggregate reported
amount determined by taking
into account only dividends
paid after December 31 of the
taxable year.
(V) Exempt interest.--The
term ``exempt interest'' means,
with respect to any regulated
investment company, the excess
of the amount of interest
excludable from gross income
under section 103(a) over the
amounts disallowed as
deductions under sections 265
and 171(a)(2).
(B) Treatment of exempt-interest dividends by
shareholders.--An exempt-interest dividend
shall be treated by the shareholders for all
purposes of this subtitle as an item of
interest excludable from gross income under
section 103(a). Such purposes include but are
not limited to--
(i) the determination of gross income
and taxable income,
(ii) the determination of
distributable net income under
subchapter J,
(iii) the allowance of, or
calculation of the amount of, any
credit or deduction, and
(iv) the determination of the basis
in the hands of any shareholder of any
share of stock of the company.
(6) Section 311(b) not to apply to certain
distributions.--Section 311(b) shall not apply to any
distribution by a regulated investment company to which
this part applies, if such distribution is in
redemption of its stock upon the demand of the
shareholder.
(7) Time certain dividends taken into account.--For
purposes of this title, any dividend declared by a
regulated investment company in October, November, or
December of any calendar year and payable to
shareholders of record on a specified date in such a
month shall be deemed--
(A) to have been received by each shareholder
on December 31 of such calendar year, and
(B) to have been paid by such company on
December 31 of such calendar year (or, if
earlier, as provided in section 855).
The preceding sentence shall apply only if such
dividend is actually paid by the company during January
of the following calendar year.
(8) Elective deferral of certain late-year losses.--
(A) In general.--Except as otherwise provided
by the Secretary, a regulated investment
company may elect for any taxable year to treat
any portion of any qualified late-year loss for
such taxable year as arising on the first day
of the following taxable year for purposes of
this title.
(B) Qualified late-year loss.--For purposes
of this paragraph, the term ``qualified late-
year loss'' means--
(i) any post-October capital loss,
and
(ii) any late-year ordinary loss.
(C) Post-October capital loss.--For purposes
of this paragraph, the term ``post-October
capital loss'' means--
(i) any net capital loss attributable
to the portion of the taxable year
after October 31, or
(ii) if there is no such loss--
(I) any net long-term capital
loss attributable to such
portion of the taxable year, or
(II) any net short-term
capital loss attributable to
such portion of the taxable
year.
(D) Late-year ordinary loss.--For purposes of
this paragraph, the term ``late-year ordinary
loss'' means the sum of any post-October
specified loss and any post-December ordinary
loss.
(E) Post-October specified loss.--For
purposes of this paragraph, the term ``post-
October specified loss'' means the excess (if
any) of--
(i) the specified losses (as defined
in section 4982(e)(5)(B)(ii))
attributable to the portion of the
taxable year after October 31, over
(ii) the specified gains (as defined
in section 4982(e)(5)(B)(i))
attributable to such portion of the
taxable year.
(F) Post-December ordinary loss.--For
purposes of this paragraph, the term ``post-
December ordinary loss'' means the excess (if
any) of--
(i) the ordinary losses not described
in subparagraph (E)(i) and attributable
to the portion of the taxable year
after December 31, over
(ii) the ordinary income not
described in subparagraph (E)(ii) and
attributable to such portion of the
taxable year.
(G) Special rule for companies determining
required capital gain distributions on taxable
year basis.--In the case of a company to which
an election under section 4982(e)(4) applies--
(i) if such company's taxable year
ends with the month of November, the
amount of qualified late-year losses
(if any) shall be computed without
regard to any income, gain, or loss
described in subparagraphs (C) and (E),
and
(ii) if such company's taxable year
ends with the month of December,
subparagraph (A) shall not apply.
(9) Dividends treated as received by company on ex-
dividend date.--For purposes of this title, if a
regulated investment company is the holder of record of
any share of stock on the record date for any dividend
payable with respect to such stock, such dividend shall
be included in gross income by such company as of the
later of--
(A) the date such share became ex-dividend
with respect to such dividend, or
(B) the date such company acquired such
share.
(c) Earnings and profits.--
(1) Treatment of nondeductible items.--
(A) Net capital loss.--If a regulated
investment company has a net capital loss for
any taxable year--
(i) such net capital loss shall not
be taken into account for purposes of
determining the company's earnings and
profits, and
(ii) any capital loss arising on the
first day of the next taxable year by
reason of clause (ii) or (iii) of
section 1212(a)(3)(A) shall be treated
as so arising for purposes of
determining earnings and profits.
(B) Other nondeductible items.--
(i) In general.--The earnings and
profits of a regulated investment
company for any taxable year (but not
its accumulated earnings and profits)
shall not be reduced by any amount
which is not allowable as a deduction
(other than by reason of section 265 or
171(a)(2)) in computing its taxable
income for such taxable year.
(ii) Coordination with treatment of
net capital losses.--Clause (i) shall
not apply to a net capital loss to
which subparagraph (A) applies.
(2) Coordination with tax on undistributed income.--
For purposes of applying this chapter to distributions
made by a regulated investment company with respect to
any calendar year, the earnings and profits of such
company shall be determined without regard to any net
capital loss attributable to the portion of the taxable
year after October 31, without regard to any late-year
ordinary loss (as defined in subsection (b)(8)(D)),
without regard to any capital loss arising on the first
day of the taxable year by reason of clauses (ii) and
(iii) of section 1212(a)(3)(A), and with such other
adjustments as the Secretary may prescribe. The
preceding sentence shall apply--
(A) only to the extent that the amount
distributed by the company with respect to the
calendar year does not exceed the required
distribution for such calendar year (as
determined under section 4982 by substituting
``100 percent'' for each percentage set forth
in section 4982(b)(1)), and
(B) except as provided in regulations, only
if an election under section 4982(e)(4) is not
in effect with respect to such company.
(3) Distributions to meet requirements of subsection
(a)(2)(B).--Any distribution which is made in order to
comply with the requirements of subsection (a)(2)(B)--
(A) shall be treated for purposes of this
subsection and subsection (a)(2)(B) as made
from earnings and profits which, but for the
distribution, would result in a failure to meet
such requirements (and allocated to such
earnings on a first-in, first-out basis), and
(B) to the extent treated under subparagraph
(A) as made from accumulated earnings and
profits, shall not be treated as a distribution
for purposes of subsection (b)(2)(D) and
section 855.
(4) Regulated investment company.--For purposes of
this subsection, the term ``regulated investment
company'' includes a domestic corporation which is a
regulated investment company determined without regard
to the requirements of subsection (a).
(d) Distributions in redemption of interests in unit
investment trusts.--In the case of a unit investment trust--
(1) which is registered under the Investment Company
Act of 1940 (15 U.S.C. 80a-1 and following) and issues
periodic payment plan certificates (as defined in such
Act), and
(2) substantially all of the assets of which consist
of securities issued by a management company (as
defined in such Act), section 562(c) (relating to
preferential dividends) shall not apply to a
distribution by such trust to a holder of an interest
in such trust in redemption of part or all of such
interest, with respect to the capital gain net income
of such trust attributable to such redemption.
(e) Procedures similar to deficiency dividend procedures made
applicable.--
(1) In general.--If--
(A) there is a determination that the
provisions of this part do not apply to an
investment company for any taxable year
(hereinafter in this subsection referred to as
the ``non-RIC year''), and
(B) such investment company meets the
distribution requirements of paragraph (2) with
respect to the non-RIC year,
for purposes of applying subsection (a)(2) to
subsequent taxable years, the provisions of this part
shall be treated as applying to such investment company
for the non-RIC year. If the determination under
subparagraph (A) is solely as a result of the failure
to meet the requirements of subsection (a)(2), the
preceding sentence shall also apply for purposes of
applying subsection (a)(2) to the non-RIC year and the
amount referred to in paragraph (2)(A)(i) shall be the
portion of the accumulated earnings and profits which
resulted in such failure.
(2) Distribution requirements.--
(A) In general.--The distribution
requirements of this paragraph are met with
respect to any non-RIC year if, within the 90-
day period beginning on the date of the
determination (or within such longer period as
the Secretary may permit), the investment
company makes 1 or more qualified designated
distributions and the amount of such
distributions is not less than the excess of--
(i) the portion of the accumulated
earnings and profits of the investment
company (as of the date of the
determination) which are attributable
to the non-RIC year, over
(ii) any interest payable under
paragraph (3).
(B) Qualified designated distribution.--For
purposes of this paragraph, the term
``qualified designated distribution'' means any
distribution made by the investment company
if--
(i) section 301 applies to such
distribution, and
(ii) such distribution is designated
(at such time and in such manner as the
Secretary shall by regulations
prescribe) as being taken into account
under this paragraph with respect to
the non-RIC year.
(C) Effect on dividends paid deduction.--Any
qualified designated distribution shall not be
included in the amount of dividends paid for
purposes of computing the dividends paid
deduction for any taxable year.
(3) Interest charge.--
(A) In general.--If paragraph (1) applies to
any non-RIC year of an investment company, such
investment company shall pay interest at the
underpayment rate established under section
6621--
(i) on an amount equal to 50 percent
of the amount referred to in paragraph
(2)(A)(i),
(ii) for the period--
(I) which begins on the last
day prescribed for payment of
the tax imposed for the non-RIC
year (determined without regard
to extensions), and
(II) which ends on the date
the determination is made.
(B) Coordination with subtitle F.--Any
interest payable under subparagraph (A) may be
assessed and collected at any time during the
period during which any tax imposed for the
taxable year in which the determination is made
may be assessed and collected.
(4) Provision not to apply in the case of fraud.--The
provisions of this subsection shall not apply if the
determination contains a finding that the failure to
meet any requirement of this part was due to fraud with
intent to evade tax.
(5) Determination.--For purposes of this subsection,
the term ``determination'' has the meaning given to
such term by section 860(e). Such term also includes a
determination by the investment company filed with the
Secretary that the provisions of this part do not apply
to the investment company for a taxable year.
(f) Treatment of certain load charges.--
(1) In general.--If--
(A) the taxpayer incurs a load charge in
acquiring stock in a regulated investment
company and, by reason of incurring such charge
or making such acquisition, the taxpayer
acquires a reinvestment right,
(B) such stock is disposed of before the 91st
day after the date on which such stock was
acquired, and
(C) the taxpayer acquires, during the period
beginning on the date of the disposition
referred to in subparagraph (B) and ending on
January 31 of the calendar year following the
calendar year that includes the date of such
disposition, stock in such regulated investment
company or in another regulated investment
company and the otherwise applicable load
charge is reduced by reason of the reinvestment
right,
the load charge referred to in subparagraph (A) (to the
extent it does not exceed the reduction referred to in
subparagraph (C)) shall not be taken into account for
purposes of determining the amount of gain or loss on
the disposition referred to in subparagraph (B). To the
extent such charge is not taken into account in
determining the amount of such gain or loss, such
charge shall be treated as incurred in connection with
the acquisition referred to in subparagraph (C)
(including for purposes of reapplying this paragraph).
(2) Definitions and special rules.--For purposes of
this subsection--
(A) Load charge.--The term ``load charge''
means any sales or similar charge incurred by a
person in acquiring stock of a regulated
investment company. Such term does not include
any charge incurred by reason of the
reinvestment of a dividend.
(B) Reinvestment right.--The term
``reinvestment right'' means any right to
acquire stock of 1 or more regulated investment
companies without the payment of a load charge
or with the payment of a reduced charge.
(C) Nonrecognition transactions.--If the
taxpayer acquires stock in a regulated
investment company from another person in a
transaction in which gain or loss is not
recognized, the taxpayer shall succeed to the
treatment of such other person under this
subsection.
(g) Special rules for fund of funds.--
(1) In general.--In the case of a qualified fund of
funds--
(A) such fund shall be qualified to pay
exempt-interest dividends to its shareholders
without regard to whether such fund satisfies
the requirements of the first sentence of
subsection (b)(5), and
(B) such fund may elect the application of
section 853 (relating to foreign tax credit
allowed to shareholders) without regard to the
requirement of subsection (a)(1) thereof.
(2) Qualified fund of funds.--For purposes of this
subsection, the term ``qualified fund of funds'' means
a regulated investment company if (at the close of each
quarter of the taxable year) at least 50 percent of the
value of its total assets is represented by interests
in other regulated investment companies.
* * * * * * *
PART II--REAL ESTATE INVESTMENT TRUSTS
* * * * * * *
SEC. 857. TAXATION OF REAL ESTATE INVESTMENT TRUSTS AND THEIR
BENEFICIARIES.
(a) Requirements applicable to real estate investment
trusts.--The provisions of this part (other than subsection (d)
of this section and subsection (g) of section 856) shall not
apply to a real estate investment trust for a taxable year
unless--
(1) the deduction for dividends paid during the
taxable year (as defined in section 561, but determined
without regard to capital gains dividends) equals or
exceeds--
(A) the sum of--
(i) 90 percent of the real estate
investment trust taxable income for the
taxable year (determined without regard
to the deduction for dividends paid (as
defined in section 561) and by
excluding any net capital gain); and
(ii) 90 percent of the excess of the
net income from foreclosure property
over the tax imposed on such income by
subsection (b)(4)(A); minus
(B) any excess noncash income (as determined
under subsection (e)); and
(2) either--
(A) the provisions of this part apply to the
real estate investment trust for all taxable
years beginning after February 28, 1986, or
(B) as of the close of the taxable year, the
real estate investment trust has no earnings
and profits accumulated in any non-REIT year.
For purposes of the preceding sentence, the term ``non-REIT
year'' means any taxable year to which the provisions of this
part did not apply with respect to the entity. The Secretary
may waive the requirements of paragraph (1) for any taxable
year if the real estate investment trust establishes to the
satisfaction of the Secretary that it was unable to meet such
requirements by reason of distributions previously made to meet
the requirements of section 4981.
(b) Method of taxation of real estate investment trusts and
holders of shares or certificates of beneficial interest.--
(1) Imposition of tax on real estate investment
trusts.--There is hereby imposed for each taxable year
on the real estate investment trust taxable income of
every real estate investment trust a tax computed as
provided in section 11, as though the real estate
investment trust taxable income were the taxable income
referred to in section 11.
(2) Real estate investment trust taxable income.--For
purposes of this part, the term ``real estate
investment trust taxable income'' means the taxable
income of the real estate investment trust, adjusted as
follows:
(A) The deductions for corporations provided
in part VIII [(except section 248)] of
subchapter B (section 241 and following,
relating to the deduction for dividends
received, etc.) shall not be allowed.
(B) The deduction for dividends paid (as
defined in section 561) shall be allowed, but
shall be computed without regard to that
portion of such deduction which is attributable
to the amount excluded under subparagraph (D).
(C) The taxable income shall be computed
without regard to section 443(b) (relating to
computation of tax on change of annual
accounting period).
(D) There shall be excluded an amount equal
to the net income from foreclosure property.
(E) There shall be deducted an amount equal
to the tax imposed by paragraphs (5) and (7) of
this subsection, section 856(c)(7)(C), and
section 856(g)(5) for the taxable year.
(F) There shall be excluded an amount equal
to any net income derived from prohibited
transactions.
(3) Capital gains.--
(A) Treatment of capital gain dividends by
shareholders.--A capital gain dividend shall be
treated by the shareholders or holders of
beneficial interests as a gain from the sale or
exchange of a capital asset held for more than
1 year.
(B) Definition of capital gain dividend.--For
purposes of this part, a capital gain dividend
is any dividend, or part thereof, which is
designated by the real estate investment trust
as a capital gain dividend in a written notice
mailed to its shareholders or holders of
beneficial interests at any time before the
expiration of 30 days after the close of its
taxable year (or mailed to its shareholders or
holders of beneficial interests with its annual
report for the taxable year); except that, if
there is an increase in the excess described in
subparagraph (A)(ii) of this paragraph for such
year which results from a determination (as
defined in section 860(e)), such designation
may be made with respect to such increase at
any time before the expiration of 120 days
after the date of such determination. If the
aggregate amount so designated with respect to
a taxable year of the trust (including capital
gain dividends paid after the close of the
taxable year described in section 858) is
greater than the net capital gain of the
taxable year, the portion of each distribution
which shall be a capital gain dividend shall be
only that proportion of the amount so
designated which such net capital gain bears to
the aggregate amount so designated. For
purposes of this subparagraph, the amount of
the net capital gain for any taxable year which
is not a calendar year shall be determined
without regard to any net capital loss
attributable to transactions after December 31
of such year, and any such net capital loss
shall be treated as arising on the 1st day of
the next taxable year. To the extent provided
in regulations, the preceding sentence shall
apply also for purposes of computing the
taxable income of the real estate investment
trust.
(C) Treatment by shareholders of
undistributed capital gains.--
(i) Every shareholder of a real
estate investment trust at the close of
the trust's taxable year shall include,
in computing his long-term capital
gains in his return for his taxable
year in which the last day of the
trust's taxable year falls, such amount
as the trust shall designate in respect
of such shares in a written notice
mailed to its shareholders at any time
prior to the expiration of 60 days
after the close of its taxable year (or
mailed to its shareholders or holders
of beneficial interests with its annual
report for the taxable year), but the
amount so includible by any shareholder
shall not exceed that part of the
amount subjected to tax in paragraph
(1) which he would have received if all
of such amount had been distributed as
capital gain dividends by the trust to
the holders of such shares at the close
of its taxable year.
(ii) For purposes of this title,
every such shareholder shall be deemed
to have paid, for his taxable year
under clause (i), the tax imposed by
paragraph (1) on undistributed capital
gain on the amounts required by this
subparagraph to be included in respect
of such shares in computing his long-
term capital gains for that year; and
such shareholders shall be allowed
credit or refund as the case may be,
for the tax so deemed to have been paid
by him.
(iii) The adjusted basis of such
shares in the hands of the holder shall
be increased with respect to the
amounts required by this subparagraph
to be included in computing his long-
term capital gains, by the difference
between the amount of such includible
gains and the tax deemed paid by such
shareholder in respect of such shares
under clause (ii).
(iv) In the event of such
designation, the tax imposed by
paragraph (1) on undistributed capital
gain shall be paid by the real estate
investment trust within 30 days after
the close of its taxable year.
(v) The earnings and profits of such
real estate investment trust, and the
earnings and profits of any such
shareholder which is a corporation,
shall be appropriately adjusted in
accordance with regulations prescribed
by the Secretary.
(vi) As used in this subparagraph,
the terms ``shares'' and
``shareholders'' shall include
beneficial interests and holders of
beneficial interests, respectively.
(D) Coordination with net operating loss
provisions.--For purposes of section 172, if a
real estate investment trust pays capital gain
dividends during any taxable year, the amount
of the net capital gain for such taxable year
(to the extent such gain does not exceed the
amount of such capital gain dividends) shall be
excluded in determining--
(i) the net operating loss for the
taxable year, and
(ii) the amount of the net operating
loss of any prior taxable year which
may be carried through such taxable
year under section 172(b)(2) to a
succeeding taxable year.
(E) Certain distributions.--In the case of a
shareholder of a real estate investment trust
to whom section 897 does not apply by reason of
the second sentence of section 897(h)(1) or
subparagraph (A)(ii) or (C) of section
897(k)(2), the amount which would be included
in computing long-term capital gains for such
shareholder under subparagraph (A) or (C)
(without regard to this subparagraph)--
(i) shall not be included in
computing such shareholder's long-term
capital gains, and
(ii) shall be included in such
shareholder's gross income as a
dividend from the real estate
investment trust.
(F) Undistributed capital gain.--For purposes
of this paragraph, the term ``undistributed
capital gain'' means the excess of the net
capital gain over the deduction for dividends
paid (as defined in section 561) determined
with reference to capital gain dividends only.
(4) Income from foreclosure property.--
(A) Imposition of tax.--A tax is hereby
imposed for each taxable year on the net income
from foreclosure property of every real estate
investment trust. Such tax shall be computed by
multiplying the net income from foreclosure
property by the highest rate of tax specified
in section 11(b).
(B) Net income from foreclosure property.--
For purposes of this part, the term ``net
income from foreclosure property'' means the
excess of--
(i) gain (including any foreign
currency gain, as defined in section
988(b)(1)) from the sale or other
disposition of foreclosure property
described in section 1221(a)(1) and the
gross income for the taxable year
derived from foreclosure property (as
defined in section 856(e)), but only to
the extent such gross income is not
described in (or, in the case of
foreign currency gain, not attributable
to gross income described in) section
856(c)(3) other than subparagraph (F)
thereof, over
(ii) the deductions allowed by this
chapter which are directly connected
with the production of the income
referred to in clause (i).
(5) Imposition of tax in case of failure to meet
certain requirements.--If section 856(c)(6) applies to
a real estate investment trust for any taxable year,
there is hereby imposed on such trust a tax in an
amount equal to the greater of--
(A) the excess of--
(i) 95 percent of the gross income
(excluding gross income from prohibited
transactions) of the real estate
investment trust, over
(ii) the amount of such gross income
which is derived from sources referred
to in section 856(c)(2); or
(B) the excess of--
(i) 75 percent of the gross income
(excluding gross income from prohibited
transactions) of the real estate
investment trust, over
(ii) the amount of such gross income
which is derived from sources referred
to in section 856(c)(3),
multiplied by a fraction the numerator of which
is the real estate investment trust taxable
income for the taxable year (determined without
regard to the deductions provided in paragraphs
(2)(B) and (2)(E), without regard to any net
operating loss deduction, and by excluding any
net capital gain) and the denominator of which
is the gross income for the taxable year
(excluding gross income from prohibited
transactions; gross income and gain from
foreclosure property (as defined in section
856(e), but only to the extent such gross
income and gain is not described in
subparagraph (A), (B), (C), (D), (E), or (G) of
section 856(c)(3)); long-term capital gain; and
short-term capital gain to the extent of any
short-term capital loss).
(6) Income from prohibited transactions.--
(A) Imposition of tax.--There is hereby
imposed for each taxable year of every real
estate investment trust a tax equal to 100
percent of the net income derived from
prohibited transactions.
(B) Definitions.--For purposes of this part--
(i) the term ``net income derived
from prohibited transactions'' means
the excess of the gain (including any
foreign currency gain, as defined in
section 988(b)(1)) from prohibited
transactions over the deductions
(including any foreign currency loss,
as defined in section 988(b)(2))
allowed by this chapter which are
directly connected with prohibited
transactions;
(ii) in determining the amount of the
net income derived from prohibited
transactions, there shall not be taken
into account any item attributable to
any prohibited transaction for which
there was a loss; and
(iii) the term ``prohibited
transaction'' means a sale or other
disposition of property described in
section 1221(a)(1) which is not
foreclosure property.
(C) Certain sales not to constitute
prohibited transactions.--For purposes of this
part, the term ``prohibited transaction'' does
not include a sale of property which is a real
estate asset (as defined in section
856(c)(5)(B)) if--
(i) the trust has held the property
for not less than 2 years;
(ii) aggregate expenditures made by
the trust, or any partner of the trust,
during the 2-year period preceding the
date of sale which are includible in
the basis of the property do not exceed
30 percent of the net selling price of
the property;
(iii)(I) during the taxable year the
trust does not make more than 7 sales
of property (other than sales of
foreclosure property or sales to which
section 1033 applies), or (II) the
aggregate adjusted bases (as determined
for purposes of computing earnings and
profits) of property (other than sales
of foreclosure property or sales to
which section 1033 applies) sold during
the taxable year does not exceed 10
percent of the aggregate bases (as so
determined) of all of the assets of the
trust as of the beginning of the
taxable year, or (III) the fair market
value of property (other than sales of
foreclosure property or sales to which
section 1033 applies) sold during the
taxable year does not exceed 10 percent
of the fair market value of all of the
assets of the trust as of the beginning
of the taxable year, or (IV) the trust
satisfies the requirements of subclause
(II) applied by substituting ``20
percent'' for ``10 percent'' and the 3-
year average adjusted bases percentage
for the taxable year (as defined in
subparagraph (G)) does not exceed 10
percent, or (V) the trust satisfies the
requirements of subclause (III) applied
by substituting ``20 percent'' for ``10
percent'' and the 3-year average fair
market value percentage for the taxable
year (as defined in subparagraph (H))
does not exceed 10 percent;
(iv) in the case of property, which
consists of land or improvements, not
acquired through foreclosure (or deed
in lieu of foreclosure), or lease
termination, the trust has held the
property for not less than 2 years for
production of rental income; and
(v) if the requirement of clause
(iii)(I) is not satisfied,
substantially all of the marketing and
development expenditures with respect
to the property were made through an
independent contractor (as defined in
section 856(d)(3)) from whom the trust
itself does not derive or receive any
income or a taxable REIT subsidiary.
(D) Certain sales not to constitute
prohibited transactions.--For purposes of this
part, the term ``prohibited transaction'' does
not include a sale of property which is a real
estate asset (as defined in section
856(c)(5)(B)) if--
(i) the trust held the property for
not less than 2 years in connection
with the trade or business of producing
timber,
(ii) the aggregate expenditures made
by the trust, or a partner of the
trust, during the 2-year period
preceding the date of sale which--
(I) are includible in the
basis of the property (other
than timberland acquisition
expenditures), and
(II) are directly related to
operation of the property for
the production of timber or for
the preservation of the
property for use as timberland,
do not exceed 30 percent of the net
selling price of the property,
(iii) the aggregate expenditures made
by the trust, or a partner of the
trust, during the 2-year period
preceding the date of sale which--
(I) are includible in the
basis of the property (other
than timberland acquisition
expenditures), and
(II) are not directly related
to operation of the property
for the production of timber,
or for the preservation of the
property for use as timberland,
do not exceed 5 percent of the net
selling price of the property,
(iv)(I) during the taxable year the
trust does not make more than 7 sales
of property (other than sales of
foreclosure property or sales to which
section 1033 applies), or
(II) the aggregate adjusted
bases (as determined for
purposes of computing earnings
and profits) of property (other
than sales of foreclosure
property or sales to which
section 1033 applies) sold
during the taxable year does
not exceed 10 percent of the
aggregate bases (as so
determined) of all of the
assets of the trust as of the
beginning of the taxable year,
or
(III) the fair market value
of property (other than sales
of foreclosure property or
sales to which section 1033
applies) sold during the
taxable year does not exceed 10
percent of the fair market
value of all of the assets of
the trust as of the beginning
of the taxable year, or
(IV) the trust satisfies the
requirements of subclause (II)
applied by substituting ``20
percent'' for ``10 percent''
and the 3-year average adjusted
bases percentage for the
taxable year (as defined in
subparagraph (G)) does not
exceed 10 percent, or
(V) the trust satisfies the
requirements of subclause (III)
applied by substituting ``20
percent'' for ``10 percent''
and the 3-year average fair
market value percentage for the
taxable year (as defined in
subparagraph (H)) does not
exceed 10 percent,
(v) in the case that the requirement
of clause (iv)(I) is not satisfied,
substantially all of the marketing
expenditures with respect to the
property were made through an
independent contractor (as defined in
section 856(d)(3)) from whom the trust
itself does not derive or receive any
income, or a taxable REIT subsidiary,
and
(vi) the sales price of the property
sold by the trust is not based in whole
or in part on income or profits,
including income or profits derived
from the sale or operation of such
property.
(E) Special rules.--In applying subparagraphs
(C) and (D) the following special rules apply:
(i) The holding period of property
acquired through foreclosure (or deed
in lieu of foreclosure), or termination
of the lease, includes the period for
which the trust held the loan which
such property secured, or the lease of
such property.
(ii) In the case of a property
acquired through foreclosure (or deed
in lieu of foreclosure), or termination
of a lease, expenditures made by, or
for the account of, the mortgagor or
lessee after default became imminent
will be regarded as made by the trust.
(iii) Expenditures (including
expenditures regarded as made directly
by the trust, or indirectly by any
partner of the trust, under clause
(ii)) will not be taken into account if
they relate to foreclosure property and
did not cause the property to lose its
status as foreclosure property.
(iv) Expenditures will not be taken
into account if they are made solely to
comply with standards or requirements
of any government or governmental
authority having relevant jurisdiction,
or if they are made to restore the
property as a result of losses arising
from fire, storm or other casualty.
(v) The term ``expenditures'' does
not include advances on a loan made by
the trust.
(vi) The sale of more than one
property to one buyer as part of one
transaction constitutes one sale.
(vii) The term ``sale'' does not
include any transaction in which the
net selling price is less than $10,000.
(F) No inference with respect to treatment as
inventory property.--The determination of
whether property is described in section
1221(a)(1) shall be made without regard to this
paragraph.
(G) 3-year average adjusted bases
percentage.--The term ``3-year average adjusted
bases percentage'' means, with respect to any
taxable year, the ratio (expressed as a
percentage) of--
(i) the aggregate adjusted bases (as
determined for purposes of computing
earnings and profits) of property
(other than sales of foreclosure
property or sales to which section 1033
applies) sold during the 3 taxable year
period ending with such taxable year,
divided by
(ii) the sum of the aggregate
adjusted bases (as so determined) of
all of the assets of the trust as of
the beginning of each of the 3 taxable
years which are part of the period
referred to in clause (i).
(H) 3-year average fair market value
percentage.--The term ``3-year average fair
market value percentage'' means, with respect
to any taxable year, the ratio (expressed as a
percentage) of--
(i) the fair market value of property
(other than sales of foreclosure
property or sales to which section 1033
applies) sold during the 3 taxable year
period ending with such taxable year,
divided by
(ii) the sum of the fair market value
of all of the assets of the trust as of
the beginning of each of the 3 taxable
years which are part of the period
referred to in clause (i).
(I) Sales of property that are not a
prohibited transaction.--In the case of a sale
on or before the termination date, the sale of
property which is not a prohibited transaction
through the application of subparagraph (D)
shall be considered property held for
investment or for use in a trade or business
and not property described in section
1221(a)(1) for all purposes of this subtitle.
For purposes of the preceding sentence, the
reference to subparagraph (D) shall be a
reference to such subparagraph as in effect on
the day before the enactment of the Housing
Assistance Tax Act of 2008, as modified by
subparagraph (G) as so in effect.
(J) Termination date.--For purposes of this
paragraph, the term ``termination date'' has
the meaning given such term by section
856(c)(10).
(7) Income from redetermined rents, redetermined
deductions, and excess interest.--
(A) Imposition of tax.--There is hereby
imposed for each taxable year of the real
estate investment trust a tax equal to 100
percent of redetermined rents, redetermined
deductions, excess interest, and redetermined
TRS service income.
(B) Redetermined rents.--
(i) In general.--The term
``redetermined rents'' means rents from
real property (as defined in section
856(d)) to the extent the amount of the
rents would (but for subparagraph (F))
be reduced on distribution,
apportionment, or allocation under
section 482 to clearly reflect income
as a result of services furnished or
rendered by a taxable REIT subsidiary
of the real estate investment trust to
a tenant of such trust.
(ii) Exception for de minimis
amounts.--Clause (i) shall not apply to
amounts described in section
856(d)(7)(A) with respect to a property
to the extent such amounts do not
exceed the one percent threshold
described in section 856(d)(7)(B) with
respect to such property.
(iii) Exception for comparably priced
services.--Clause (i) shall not apply
to any service rendered by a taxable
REIT subsidiary of a real estate
investment trust to a tenant of such
trust if--
(I) such subsidiary renders a
significant amount of similar
services to persons other than
such trust and tenants of such
trust who are unrelated (within
the meaning of section
856(d)(8)(F)) to such
subsidiary, trust, and tenants,
but
(II) only to the extent the
charge for such service so
rendered is substantially
comparable to the charge for
the similar services rendered
to persons referred to in
subclause (I).
(iv) Exception for certain separately
charged services.--Clause (i) shall not
apply to any service rendered by a
taxable REIT subsidiary of a real
estate investment trust to a tenant of
such trust if--
(I) the rents paid to the
trust by tenants (leasing at
least 25 percent of the net
leasable space in the trust's
property) who are not receiving
such service from such
subsidiary are substantially
comparable to the rents paid by
tenants leasing comparable
space who are receiving such
service from such subsidiary,
and
(II) the charge for such
service from such subsidiary is
separately stated.
(v) Exception for certain services
based on subsidiary's income from the
services.--Clause (i) shall not apply
to any service rendered by a taxable
REIT subsidiary of a real estate
investment trust to a tenant of such
trust if the gross income of such
subsidiary from such service is not
less than 150 percent of such
subsidiary's direct cost in furnishing
or rendering the service.
(vi) Exceptions granted by
secretary.--The Secretary may waive the
tax otherwise imposed by subparagraph
(A) if the trust establishes to the
satisfaction of the Secretary that
rents charged to tenants were
established on an arms' length basis
even though a taxable REIT subsidiary
of the trust provided services to such
tenants.
(C) Redetermined deductions.--The term
``redetermined deductions'' means deductions
(other than redetermined rents) of a taxable
REIT subsidiary of a real estate investment
trust to the extent the amount of such
deductions would (but for subparagraph (F)) be
decreased on distribution, apportionment, or
allocation under section 482 to clearly reflect
income as between such subsidiary and such
trust.
(D) Excess interest.--The term ``excess
interest'' means any deductions for interest
payments by a taxable REIT subsidiary of a real
estate investment trust to such trust to the
extent that the interest payments are in excess
of a rate that is commercially reasonable.
(E) Redetermined TRS service income.--
(i) In general.--The term
``redetermined TRS service income''
means gross income of a taxable REIT
subsidiary of a real estate investment
trust attributable to services provided
to, or on behalf of, such trust (less
deductions properly allocable thereto)
to the extent the amount of such income
(less such deductions) would (but for
subparagraph (F)) be increased on
distribution, apportionment, or
allocation under section 482.
(ii) Coordination with redetermined
rents.--Clause (i) shall not apply with
respect to gross income attributable to
services furnished or rendered to a
tenant of the real estate investment
trust (or to deductions properly
allocable thereto).
(F) Coordination with section 482.--The
imposition of tax under subparagraph (A) shall
be in lieu of any distribution, apportionment,
or allocation under section 482.
(G) Regulatory authority.--The Secretary
shall prescribe such regulations as may be
necessary or appropriate to carry out the
purposes of this paragraph. Until the Secretary
prescribes such regulations, real estate
investment trusts and their taxable REIT
subsidiaries may base their allocations on any
reasonable method.
(8) Loss on sale or exchange of stock held 6 months
or less.--
(A) In general.--If--
(i) subparagraph (B) or (D) of
paragraph (3) provides that any amount
with respect to any share or beneficial
interest is to be treated as a long-
term capital gain, and
(ii) the taxpayer has held such share
or interest for 6 months or less,
then any loss on the sale or exchange of such
share or interest shall, to the extent of the
amount described in clause (i), be treated as a
long-term capital loss.
(B) Determination of holding periods.--For
purposes of this paragraph, in determining the
period for which the taxpayer has held any
share of stock or beneficial interest--
(i) the rules of paragraphs (3) and
(4) of section 246(c) shall apply, and
(ii) there shall not be taken into
account any day which is more than 6
months after the date on which such
share or interest becomes ex-dividend.
(C) Exception for losses incurred under
periodic liquidation plans.--To the extent
provided in regulations, subparagraph (A) shall
not apply to any loss incurred on the sale or
exchange of shares of stock of, or beneficial
interest in, a real estate investment trust
pursuant to a plan which provides for the
periodic liquidation of such shares or
interests.
(9) Time certain dividends taken into account.--For
purposes of this title, any dividend declared by a real
estate investment trust in October, November, or
December of any calendar year and payable to
shareholders of record on a specified date in such a
month shall be deemed--
(A) to have been received by each shareholder
on December 31 of such calendar year, and
(B) to have been paid by such trust on
December 31 of such calendar year (or, if
earlier, as provided in section 858).
The preceding sentence shall apply only if such
dividend is actually paid by the company during January
of the following calendar year.
(c) Restrictions applicable to dividends received from real
estate investment trusts.--
(1) Section 243.--For purposes of section 243
(relating to deductions for dividends received by
corporations), a dividend received from a real estate
investment trust which meets the requirements of this
part shall not be considered a dividend.
(2) Section ( 1)(h)(11)
(A) In general.--In any case in which--
(i) a dividend is received from a
real estate investment trust (other
than a capital gain dividend), and
(ii) such trust meets the
requirements of section 856(a) for the
taxable year during which it paid such
dividend,
then, in computing qualified dividend income,
there shall be taken into account only that
portion of such dividend designated by the real
estate investment trust.
(B) Limitation.--The aggregate amount which
may be designated as qualified dividend income
under subparagraph (A) shall not exceed the sum
of--
(i) the qualified dividend income of
the trust for the taxable year,
(ii) the excess of--
(I) the sum of the real
estate investment trust taxable
income computed under section
857(b)(2) for the preceding
taxable year and the income
subject to tax by reason of the
application of the regulations
under section 337(d) for such
preceding taxable year, over
(II) the sum of the taxes
imposed on the trust for such
preceding taxable year under
section 857(b)(1) and by reason
of the application of such
regulations, and
(iii) the amount of any earnings and
profits which were distributed by the
trust for such taxable year and
accumulated in a taxable year with
respect to which this part did not
apply.
(C) Notice to shareholders.--The amount of
any distribution by a real estate investment
trust which may be taken into account as
qualified dividend income shall not exceed the
amount so designated by the trust in a written
notice to its shareholders mailed not later
than 60 days after the close of its taxable
year.
(D) Qualified dividend income.--For purposes
of this paragraph, the term ``qualified
dividend income'' has the meaning given such
term by section 1(h)(11)(B).
(d) Earnings and profits.--
(1) In general.--The earnings and profits of a real
estate investment trust for any taxable year (but not
its accumulated earnings) shall not be reduced by any
amount which--
(A) is not allowable in computing its taxable
income for such taxable year, and
(B) was not allowable in computing its
taxable income for any prior taxable year.
(2) Coordination with tax on undistributed income.--A
real estate investment trust shall be treated as having
sufficient earnings and profits to treat as a dividend
any distribution (other than in a redemption to which
section 302(a) applies) which is treated as a dividend
by such trust. The preceding sentence shall not apply
to the extent that the amount distributed during any
calendar year by the trust exceeds the required
distribution for such calendar year (as determined
under section 4981).
(3) Distributions to meet requirements of subsection
(a)(2)(B).--Any distribution which is made in order to
comply with the requirements of subsection (a)(2)(B)--
(A) shall be treated for purposes of this
subsection and subsection (a)(2)(B) as made
from earnings and profits which, but for the
distribution, would result in a failure to meet
such requirements (and allocated to such
earnings on a first-in, first-out basis), and
(B) to the extent treated under subparagraph
(A) as made from accumulated earnings and
profits, shall not be treated as a distribution
for purposes of subsection (b)(2)(B) and
section 858.
(4) Real estate investment trust.--For purposes of
this subsection, the term ``real estate investment
trust'' includes a domestic corporation, trust, or
association which is a real estate investment trust
determined without regard to the requirements of
subsection (a).
(5) Special rules for determining earnings and
profits for purposes of the deduction for dividends
paid.--For special rules for determining the earnings
and profits of a real estate investment trust for
purposes of the deduction for dividends paid, see
section 562(e)(1).
(e) Excess noncash income.--
(1) In general.--For purposes of subsection
(a)(1)(B), the term ``excess noncash income'' means the
excess (if any) of--
(A) the amount determined under paragraph (2)
for the taxable year, over
(B) 5 percent of the real estate investment
trust taxable income for the taxable year
determined without regard to the deduction for
dividends paid (as defined in section 561) and
by excluding any net capital gain.
(2) Determination of amount.--The amount determined
under this paragraph for the taxable year is the sum
of--
(A) the amount (if any) by which--
(i) the amounts includible in gross
income under section 467 (relating to
certain payments for the use of
property or services), exceed
(ii) the amounts which would have
been includible in gross income without
regard to such section,
(B) any income on the disposition of a real
estate asset if--
(i) there is a determination (as
defined in section 860(e)) that such
income is not eligible for
nonrecognition under section 1031, and
(ii) failure to meet the requirements
of section 1031 was due to reasonable
cause and not to willful neglect,
(C) the amount (if any) by which--
(i) the amounts includible in gross
income with respect to instruments to
which section 860E(a) or 1272 applies,
exceed
(ii) the amount of money and the fair
market value of other property received
during the taxable year under such
instruments, and
(D) amounts includible in income by reason of
cancellation of indebtedness.
(f) Real estate investment trusts to ascertain ownership.--
(1) In general.--Each real estate investment trust
shall each taxable year comply with regulations
prescribed by the Secretary for the purposes of
ascertaining the actual ownership of the outstanding
shares, or certificates of beneficial interest, of such
trust.
(2) Failure to comply.--
(A) In general.--If a real estate investment
trust fails to comply with the requirements of
paragraph (1) for a taxable year, such trust
shall pay (on notice and demand by the
Secretary and in the same manner as tax) a
penalty of $25,000.
(B) Intentional disregard.--If any failure
under paragraph (1) is due to intentional
disregard of the requirement under paragraph
(1), the penalty under subparagraph (A) shall
be $50,000.
(C) Failure to comply after notice.--The
Secretary may require a real estate investment
trust to take such actions as the Secretary
determines appropriate to ascertain actual
ownership if the trust fails to meet the
requirements of paragraph (1). If the trust
fails to take such actions, the trust shall pay
(on notice and demand by the Secretary and in
the same manner as tax) an additional penalty
equal to the penalty determined under
subparagraph (A) or (B), whichever is
applicable.
(D) Reasonable cause.--No penalty shall be
imposed under this paragraph with respect to
any failure if it is shown that such failure is
due to reasonable cause and not to willful
neglect.
(g) Limitations on designation of dividends.--
(1) Overall limitation.--The aggregate amount of
dividends designated by a real estate investment trust
under subsections (b)(3)(C) and (c)(2)(A) with respect
to any taxable year may not exceed the dividends paid
by such trust with respect to such year. For purposes
of the preceding sentence, dividends paid after the
close of the taxable year described in section 858
shall be treated as paid with respect to such year.
(2) Proportionality.--The Secretary may prescribe
regulations or other guidance requiring the
proportionality of the designation of particular types
of dividends among shares or beneficial interests of a
real estate investment trust.
(h) Cross reference.--For provisions relating to excise tax
based on certain real estate investment trust taxable income
not distributed during the taxable year, see section 4981.
* * * * * * *
Subchapter P--Capital Gains and Losses
* * * * * * *
PART I--TREATMENT OF CAPITAL GAINS
* * * * * * *
SEC. 1202. PARTIAL EXCLUSION FOR GAIN FROM CERTAIN SMALL BUSINESS
STOCK.
(a) Exclusion.--
(1) In general.--In the case of a taxpayer other than
a corporation, gross income shall not include 50
percent of any gain from the sale or exchange of
qualified small business stock held for more than 5
years.
(2) Empowerment zone businesses.--
(A) In general.--In the case of qualified
small business stock acquired after the date of
the enactment of this paragraph in a
corporation which is a qualified business
entity (as defined in section 1397C(b)) during
substantially all of the taxpayer's holding
period for such stock, paragraph (1) shall be
applied by substituting ``60 percent'' for ``50
percent''.
(B) Certain rules to apply.--Rules similar to
the rules of paragraphs (5) and (7) of section
1400B(b) (as in effect before its repeal) shall
apply for purposes of this paragraph.
(C) Gain after 2018 not qualified.--
Subparagraph (A) shall not apply to gain
attributable to periods after December 31,
2018.
(D) Treatment of DC zone.--The District of
Columbia Enterprise Zone shall not be treated
as an empowerment zone for purposes of this
paragraph.
(3) Special rules for 2009 and certain periods in
2010.--In the case of qualified small business stock
acquired after the date of the enactment of this
paragraph and on or before the date of the enactment of
the Creating Small Business Jobs Act of 2010--
(A) paragraph (1) shall be applied by
substituting ``75 percent'' for ``50 percent'',
and
(B) paragraph (2) shall not apply.
In the case of any stock which would be described in
the preceding sentence (but for this sentence), the
acquisition date for purposes of this subsection shall
be the first day on which such stock was held by the
taxpayer determined after the application of section
1223.
(4) 100 percent exclusion for stock acquired during
certain periods in 2010 and thereafter.--In the case of
qualified small business stock acquired after the date
of the enactment of the Creating Small Business Jobs
Act of 2010--
(A) paragraph (1) shall be applied by
substituting ``100 percent'' for ``50
percent'',
(B) paragraph (2) shall not apply, and
(C) paragraph (7) of section 57(a) shall not
apply.
In the case of any stock which would be described in
the preceding sentence (but for this sentence), the
acquisition date for purposes of this subsection shall
be the first day on which such stock was held by the
taxpayer determined after the application of section
1223.
(b) Per-issuer limitation on taxpayer's eligible gain.--
(1) In general.--If the taxpayer has eligible gain
for the taxable year from 1 or more dispositions of
stock issued by any corporation, the aggregate amount
of such gain from dispositions of stock issued by such
corporation which may be taken into account under
subsection (a) for the taxable year shall not exceed
the greater of--
(A) $10,000,000 reduced by the aggregate
amount of eligible gain taken into account by
the taxpayer under subsection (a) for prior
taxable years and attributable to dispositions
of stock issued by such corporation, or
(B) 10 times the aggregate adjusted bases of
qualified small business stock issued by such
corporation and disposed of by the taxpayer
during the taxable year.
For purposes of subparagraph (B), the adjusted basis of
any stock shall be determined without regard to any
addition to basis after the date on which such stock
was originally issued.
(2) Eligible gain.--For purposes of this subsection,
the term ``eligible gain'' means any gain from the sale
or exchange of qualified small business stock held for
more than 5 years.
(3) Treatment of married individuals.--
(A) Separate returns.--In the case of a
separate return by a married individual,
paragraph (1)(A) shall be applied by
substituting ``$5,000,000'' for
``$10,000,000''.
(B) Allocation of exclusion.--In the case of
any joint return, the amount of gain taken into
account under subsection (a) shall be allocated
equally between the spouses for purposes of
applying this subsection to subsequent taxable
years.
(C) Marital status.--For purposes of this
subsection, marital status shall be determined
under section 7703.
(c) Qualified small business stock.--For purposes of this
section--
(1) In general.--Except as otherwise provided in this
section, the term ``qualified small business stock''
means any stock in a C corporation which is originally
issued after the date of the enactment of the Revenue
Reconciliation Act of 1993, if--
(A) as of the date of issuance, such
corporation is a qualified small business, and
(B) except as provided in subsections (f) and
(h), such stock is acquired by the taxpayer at
its original issue (directly or through an
underwriter)--
(i) in exchange for money or other
property (not including stock), or
(ii) as compensation for services
provided to such corporation (other
than services performed as an
underwriter of such stock).
(2) Active business requirement; etc.
(A) In general.--Stock in a corporation shall
not be treated as qualified small business
stock unless, during substantially all of the
taxpayer's holding period for such stock, such
corporation meets the active business
requirements of subsection (e) and such
corporation is a C corporation.
(B) Special rule for certain small business
investment companies.--
(i) Waiver of active business
requirement.--Notwithstanding any
provision of subsection (e), a
corporation shall be treated as meeting
the active business requirements of
such subsection for any period during
which such corporation qualifies as a
specialized small business investment
company.
(ii) Specialized small business
investment company.--For purposes of
clause (i), the term ``specialized
small business investment company''
means any eligible corporation (as
defined in subsection (e)(4)) which is
licensed to operate under section
301(d) of the Small Business Investment
Act of 1958 (as in effect on May 13,
1993).
(3) Certain purchases by corporation of its own
stock.--
(A) Redemptions from taxpayer or related
person.--Stock acquired by the taxpayer shall
not be treated as qualified small business
stock if, at any time during the 4-year period
beginning on the date 2 years before the
issuance of such stock, the corporation issuing
such stock purchased (directly or indirectly)
any of its stock from the taxpayer or from a
person related (within the meaning of section
267(b) or 707(b)) to the taxpayer.
(B) Significant redemptions.--Stock issued by
a corporation shall not be treated as qualified
business stock if, during the 2-year period
beginning on the date 1 year before the
issuance of such stock, such corporation made 1
or more purchases of its stock with an
aggregate value (as of the time of the
respective purchases) exceeding 5 percent of
the aggregate value of all of its stock as of
the beginning of such 2-year period.
(C) Treatment of certain transactions.--If
any transaction is treated under section 304(a)
as a distribution in redemption of the stock of
any corporation, for purposes of subparagraphs
(A) and (B), such corporation shall be treated
as purchasing an amount of its stock equal to
the amount treated as such a distribution under
section 304(a).
(d) Qualified small business.--For purposes of this section--
(1) In general.--The term ``qualified small
business'' means any domestic corporation which is a C
corporation if--
(A) the aggregate gross assets of such
corporation (or any predecessor thereof) at all
times on or after the date of the enactment of
the Revenue Reconciliation Act of 1993 and
before the issuance did not exceed $50,000,000,
(B) the aggregate gross assets of such
corporation immediately after the issuance
(determined by taking into account amounts
received in the issuance) do not exceed
$50,000,000, and
(C) such corporation agrees to submit such
reports to the Secretary and to shareholders as
the Secretary may require to carry out the
purposes of this section.
(2) Aggregate gross assets.--
(A) In general.--For purposes of paragraph
(1), the term ``aggregate gross assets'' means
the amount of cash and the aggregate adjusted
bases of other property held by the
corporation.
(B) Treatment of contributed property.--For
purposes of subparagraph (A), the adjusted
basis of any property contributed to the
corporation (or other property with a basis
determined in whole or in part by reference to
the adjusted basis of property so contributed)
shall be determined as if the basis of the
property contributed to the corporation
(immediately after such contribution) were
equal to its fair market value as of the time
of such contribution.
(3) Aggregation rules.--
(A) In general.--All corporations which are
members of the same parent-subsidiary
controlled group shall be treated as 1
corporation for purposes of this subsection.
(B) Parent-subsidiary controlled group.--For
purposes of subparagraph (A), the term
``parent-subsidiary controlled group'' means
any controlled group of corporations as defined
in section 1563(a)(1), except that--
(i) ``more than 50 percent'' shall be
substituted for ``at least 80 percent''
each place it appears in section
1563(a)(1), and
(ii) section 1563(a)(4) shall not
apply.
(e) Active business requirement.--
(1) In general.--For purposes of subsection (c)(2),
the requirements of this subsection are met by a
corporation for any period if during such period--
(A) at least 80 percent (by value) of the
assets of such corporation are used by such
corporation in the active conduct of 1 or more
qualified trades or businesses, and
(B) such corporation is an eligible
corporation.
(2) Special rule for certain activities.--For
purposes of paragraph (1), if, in connection with any
future qualified trade or business, a corporation is
engaged in--
(A) start-up activities described in [section
195(c)(1)(A)] section 195(d)(1)(A),
(B) activities resulting in the payment or
incurring of expenditures which may be treated
as research and experimental expenditures under
section 174, or
(C) activities with respect to in-house
research expenses described in section
41(b)(4),
assets used in such activities shall be treated as used
in the active conduct of a qualified trade or business.
Any determination under this paragraph shall be made
without regard to whether a corporation has any gross
income from such activities at the time of the
determination.
(3) Qualified trade or business.--For purposes of
this subsection, the term ``qualified trade or
business'' means any trade or business other than--
(A) any trade or business involving the
performance of services in the fields of
health, law, engineering, architecture,
accounting, actuarial science, performing arts,
consulting, athletics, financial services,
brokerage services, or any trade or business
where the principal asset of such trade or
business is the reputation or skill of 1 or
more of its employees,
(B) any banking, insurance, financing,
leasing, investing, or similar business,
(C) any farming business (including the
business of raising or harvesting trees),
(D) any business involving the production or
extraction of products of a character with
respect to which a deduction is allowable under
section 613 or 613A, and
(E) any business of operating a hotel, motel,
restaurant, or similar business.
(4) Eligible corporation.--For purposes of this
subsection, the term ``eligible corporation'' means any
domestic corporation; except that such term shall not
include--
(A) a DISC or former DISC,
(B) a regulated investment company, real
estate investment trust, or REMIC, and
(C) a cooperative.
(5) Stock in other corporations.--
(A) Look-thru in case of subsidiaries.--For
purposes of this subsection, stock and debt in
any subsidiary corporation shall be disregarded
and the parent corporation shall be deemed to
own its ratable share of the subsidiary's
assets, and to conduct its ratable share of the
subsidiary's activities.
(B) Portfolio stock or securities.--A
corporation shall be treated as failing to meet
the requirements of paragraph (1) for any
period during which more than 10 percent of the
value of its assets (in excess of liabilities)
consists of stock or securities in other
corporations which are not subsidiaries of such
corporation (other than assets described in
paragraph (6)).
(C) Subsidiary.--For purposes of this
paragraph, a corporation shall be considered a
subsidiary if the parent owns more than 50
percent of the combined voting power of all
classes of stock entitled to vote, or more than
50 percent in value of all outstanding stock,
of such corporation.
(6) Working capital.--For purposes of paragraph
(1)(A), any assets which--
(A) are held as a part of the reasonably
required working capital needs of a qualified
trade or business of the corporation, or
(B) are held for investment and are
reasonably expected to be used within 2 years
to finance research and experimentation in a
qualified trade or business or increases in
working capital needs of a qualified trade or
business,
shall be treated as used in the active conduct of a
qualified trade or business. For periods after the
corporation has been in existence for at least 2 years,
in no event may more than 50 percent of the assets of
the corporation qualify as used in the active conduct
of a qualified trade or business by reason of this
paragraph.
(7) Maximum real estate holdings.--A corporation
shall not be treated as meeting the requirements of
paragraph (1) for any period during which more than 10
percent of the total value of its assets consists of
real property which is not used in the active conduct
of a qualified trade or business. For purposes of the
preceding sentence, the ownership of, dealing in, or
renting of real property shall not be treated as the
active conduct of a qualified trade or business.
(8) Computer software royalties.--For purposes of
paragraph (1), rights to computer software which
produces active business computer software royalties
(within the meaning of section 543(d)(1)) shall be
treated as an asset used in the active conduct of a
trade or business.
(f) Stock acquired on conversion of other stock.--If any
stock in a corporation is acquired solely through the
conversion of other stock in such corporation which is
qualified small business stock in the hands of the taxpayer--
(1) the stock so acquired shall be treated as
qualified small business stock in the hands of the
taxpayer, and
(2) the stock so acquired shall be treated as having
been held during the period during which the converted
stock was held.
(g) Treatment of pass-thru entities.--
(1) In general.--If any amount included in gross
income by reason of holding an interest in a pass-thru
entity meets the requirements of paragraph (2)--
(A) such amount shall be treated as gain
described in subsection (a), and
(B) for purposes of applying subsection (b),
such amount shall be treated as gain from a
disposition of stock in the corporation issuing
the stock disposed of by the pass-thru entity
and the taxpayer's proportionate share of the
adjusted basis of the pass-thru entity in such
stock shall be taken into account.
(2) Requirements.--An amount meets the requirements
of this paragraph if--
(A) such amount is attributable to gain on
the sale or exchange by the pass-thru entity of
stock which is qualified small business stock
in the hands of such entity (determined by
treating such entity as an individual) and
which was held by such entity for more than 5
years, and
(B) such amount is includible in the gross
income of the taxpayer by reason of the holding
of an interest in such entity which was held by
the taxpayer on the date on which such pass-
thru entity acquired such stock and at all
times thereafter before the disposition of such
stock by such pass-thru entity.
(3) Limitation based on interest originally held by
taxpayer.--Paragraph (1) shall not apply to any amount
to the extent such amount exceeds the amount to which
paragraph (1) would have applied if such amount were
determined by reference to the interest the taxpayer
held in the pass-thru entity on the date the qualified
small business stock was acquired.
(4) Pass-thru entity.--For purposes of this
subsection, the term ``pass-thru entity'' means--
(A) any partnership,
(B) any S corporation,
(C) any regulated investment company, and
(D) any common trust fund.
(h) Certain tax-free and other transfers.--For purposes of
this section--
(1) In general.--In the case of a transfer described
in paragraph (2), the transferee shall be treated as--
(A) having acquired such stock in the same
manner as the transferor, and
(B) having held such stock during any
continuous period immediately preceding the
transfer during which it was held (or treated
as held under this subsection) by the
transferor.
(2) Description of transfers.--A transfer is
described in this subsection if such transfer is--
(A) by gift,
(B) at death, or
(C) from a partnership to a partner of stock
with respect to which requirements similar to
the requirements of subsection (g) are met at
the time of the transfer (without regard to the
5-year holding period requirement).
(3) Certain rules made applicable.--Rules similar to
the rules of section 1244(d)(2) shall apply for
purposes of this section.
(4) Incorporations and reorganizations involving
nonqualified stock.--
(A) In general.--In the case of a transaction
described in section 351 or a reorganization
described in section 368, if qualified small
business stock is exchanged for other stock
which would not qualify as qualified small
business stock but for this subparagraph, such
other stock shall be treated as qualified small
business stock acquired on the date on which
the exchanged stock was acquired.
(B) Limitation.--This section shall apply to
gain from the sale or exchange of stock treated
as qualified small business stock by reason of
subparagraph (A) only to the extent of the gain
which would have been recognized at the time of
the transfer described in subparagraph (A) if
section 351 or 368 had not applied at such
time. The preceding sentence shall not apply if
the stock which is treated as qualified small
business stock by reason of subparagraph (A) is
issued by a corporation which (as of the time
of the transfer described in subparagraph (A))
is a qualified small business.
(C) Successive application.--For purposes of
this paragraph, stock treated as qualified
small business stock under subparagraph (A)
shall be so treated for subsequent transactions
or reorganizations, except that the limitation
of subparagraph (B) shall be applied as of the
time of the first transfer to which such
limitation applied (determined after the
application of the second sentence of
subparagraph (B)).
(D) Control test.--In the case of a
transaction described in section 351, this
paragraph shall apply only if, immediately
after the transaction, the corporation issuing
the stock owns directly or indirectly stock
representing control (within the meaning of
section 368(c)) of the corporation whose stock
was exchanged.
(i) Basis rules.--For purposes of this section--
(1) Stock exchanged for property.--In the case where
the taxpayer transfers property (other than money or
stock) to a corporation in exchange for stock in such
corporation--
(A) such stock shall be treated as having
been acquired by the taxpayer on the date of
such exchange, and
(B) the basis of such stock in the hands of
the taxpayer shall in no event be less than the
fair market value of the property exchanged.
(2) Treatment of contributions to capital.--If the
adjusted basis of any qualified small business stock is
adjusted by reason of any contribution to capital after
the date on which such stock was originally issued, in
determining the amount of the adjustment by reason of
such contribution, the basis of the contributed
property shall in no event be treated as less than its
fair market value on the date of the contribution.
(j) Treatment of certain short positions.--
(1) In general.--If the taxpayer has an offsetting
short position with respect to any qualified small
business stock, subsection (a) shall not apply to any
gain from the sale or exchange of such stock unless--
(A) such stock was held by the taxpayer for
more than 5 years as of the first day on which
there was such a short position, and
(B) the taxpayer elects to recognize gain as
if such stock were sold on such first day for
its fair market value.
(2) Offsetting short position.--For purposes of
paragraph (1), the taxpayer shall be treated as having
an offsetting short position with respect to any
qualified small business stock if--
(A) the taxpayer has made a short sale of
substantially identical property,
(B) the taxpayer has acquired an option to
sell substantially identical property at a
fixed price, or
(C) to the extent provided in regulations,
the taxpayer has entered into any other
transaction which substantially reduces the
risk of loss from holding such qualified small
business stock.
For purposes of the preceding sentence, any reference
to the taxpayer shall be treated as including a
reference to any person who is related (within the
meaning of section 267(b) or 707(b)) to the taxpayer.
(k) Regulations.--The Secretary shall prescribe such
regulations as may be appropriate to carry out the purposes of
this section, including regulations to prevent the avoidance of
the purposes of this section through split-ups, shell
corporations, partnerships, or otherwise.
* * * * * * *
Subchapter S--Tax Treatment of S Corporations and Their Shareholders
* * * * * * *
PART I--IN GENERAL
* * * * * * *
SEC. 1363. EFFECT OF ELECTION ON CORPORATION.
(a) General rule.--Except as otherwise provided in this
subchapter, an S corporation shall not be subject to the taxes
imposed by this chapter.
(b) Computation of corporation's taxable income.--The taxable
income of an S corporation shall be computed in the same manner
as in the case of an individual, except that--
(1) the items described in section 1366(a)(1)(A)
shall be separately stated,
(2) the deductions referred to in section 703(a)(2)
shall not be allowed to the corporation, and
[(3) section 248 shall apply, and]
[(4)] (3) section 291 shall apply if the S
corporation (or any predecessor) was a C corporation
for any of the 3 immediately preceding taxable years.
(c) Elections of the S corporation.--
(1) In general.--Except as provided in paragraph (2),
any election affecting the computation of items derived
from an S corporation shall be made by the corporation.
(2) Exceptions.--In the case of an S corporation,
elections under the following provisions shall be made
by each shareholder separately--
(A) section 617 (relating to deduction and
recapture of certain mining exploration
expenditures), and
(B) section 901 (relating to taxes of foreign
countries and possessions of the United
States).
(d) Recapture of LIFO benefits.--
(1) In general.--If--
(A) an S corporation was a C corporation for
the last taxable year before the first taxable
year for which the election under section
1362(a) was effective, and
(B) the corporation inventoried goods under
the LIFO method for such last taxable year,
the LIFO recapture amount shall be included in the
gross income of the corporation for such last taxable
year (and appropriate adjustments to the basis of
inventory shall be made to take into account the amount
included in gross income under this paragraph).
(2) Additional tax payable in installments.--
(A) In general.--Any increase in the tax
imposed by this chapter by reason of this
subsection shall be payable in 4 equal
installments.
(B) Date for payment of installments.--The
first installment under subparagraph (A) shall
be paid on or before the due date (determined
without regard to extensions) for the return of
the tax imposed by this chapter for the last
taxable year for which the corporation was a C
corporation and the 3 succeeding installments
shall be paid on or before the due date (as so
determined) for the corporation's return for
the 3 succeeding taxable years.
(C) No interest for period of extension.--
Notwithstanding section 6601(b), for purposes
of section 6601, the date prescribed for the
payment of each installment under this
paragraph shall be determined under this
paragraph.
(3) LIFO recapture amount.--For purposes of this
subsection, the term ``LIFO recapture amount'' means
the amount (if any) by which--
(A) the inventory amount of the inventory
asset under the first-in, first-out method
authorized by section 471, exceeds
(B) the inventory amount of such assets under
the LIFO method.
For purposes of the preceding sentence, inventory
amounts shall be determined as of the close of the last
taxable year referred to in paragraph (1).
(4) Other definitions.--For purposes of this
subsection--
(A) LIFO method.--The term ``LIFO method''
means the method authorized by section 472.
(B) Inventory assets.--The term ``inventory
assets'' means stock in trade of the
corporation, or other property of a kind which
would properly be included in the inventory of
the corporation if on hand at the close of the
taxable year.
(C) Method of determining inventory amount.--
The inventory amount of assets under a method
authorized by section 471 shall be determined--
(i) if the corporation uses the
retail method of valuing inventories
under section 472, by using such
method, or
(ii) if clause (i) does not apply, by
using cost or market, whichever is
lower.
(D) Not treated as member of affiliated
group.--Except as provided in regulations, the
corporation referred to in paragraph (1) shall
not be treated as a member of an affiliated
group with respect to the amount included in
gross income under paragraph (1).
(5) Special rule.--Sections 1367(a)(2)(D) and
1371(c)(1) shall not apply with respect to any increase
in the tax imposed by reason of this subsection.
* * * * * * *
PART III--SPECIAL RULES
* * * * * * *
SEC. 1375. TAX IMPOSED WHEN PASSIVE INVESTMENT INCOME OF CORPORATION
HAVING ACCUMULATED EARNINGS AND PROFITS EXCEEDS 25
PERCENT OF GROSS RECEIPTS.
(a) General rule.--If for the taxable year an S corporation
has--
(1) accumulated earnings and profits at the close of
such taxable year, and
(2) gross receipts more than 25 percent of which are
passive investment income,
then there is hereby imposed a tax on the income of such
corporation for such taxable year. Such tax shall be computed
by multiplying the excess net passive income by the highest
rate of tax specified in section 11(b).
(b) Definitions.--For purposes of this section--
(1) Excess net passive income.--
(A) In general.--Except as provided in
subparagraph (B), the term ``excess net passive
income'' means an amount which bears the same
ratio to the net passive income for the taxable
year as--
(i) the amount by which the passive
investment income for the taxable year
exceeds 25 percent of the gross
receipts for the taxable year, bears to
(ii) the passive investment income
for the taxable year.
(B) Limitation.--The amount of the excess net
passive income for any taxable year shall not
exceed the amount of the corporation's taxable
income for such taxable year as determined
under section 63(a)--
(i) without regard to the deductions
allowed by part VIII of subchapter B
[(other than the deduction allowed by
section 248, relating to organization
expenditures)], and
(ii) without regard to the deduction
under section 172.
(2) Net passive income.--The term ``net passive
income'' means--
(A) passive investment income, reduced by
(B) the deductions allowable under this
chapter which are directly connected with the
production of such income (other than
deductions allowable under section 172 and part
VIII of subchapter B).
(3) Passive investment income, etc..--The terms
``passive investment income'' and ``gross receipts''
have the same respective meanings as when used in
paragraph (3) of section 1362(d).
(4) Coordination with section 1374.--Notwithstanding
paragraph (3), the amount of passive investment income
shall be determined by not taking into account any
recognized built-in gain or loss of the S corporation
for any taxable year in the recognition period. Terms
used in the preceding sentence shall have the same
respective meanings as when used in section 1374.
(c) Credits not allowable.--No credit shall be allowed under
part IV of subchapter A of this chapter (other than section 34)
against the tax imposed by subsection (a).
(d) Waiver of tax in certain cases.--If the S corporation
establishes to the satisfaction of the Secretary that--
(1) it determined in good faith that it had no
accumulated earnings and profits at the close of a
taxable year, and
(2) during a reasonable period of time after it was
determined that it did have accumulated earnings and
profits at the close of such taxable year such earnings
and profits were distributed,
the Secretary may waive the tax imposed by subsection (a) for
such taxable year.
* * * * * * *
VII. DISSENTING VIEWS
Democrats believe in American innovation and
entrepreneurship. Democrats support small businesses who are
the backbone of our economy. My Democratic colleagues and I
would have enthusiastically and actively participated in the
construction of bipartisan legislation to help small businesses
deduct more of their startup costs. We are interested in
helping idea incubators attract capital in an efficient way.
But that is not the process that the majority adopted. This
exercise, capped off by what appears to be a dead-on-arrival
reception in the Senate, told us how serious the majority is
about making law. The Republicans are driving these bills down
a road to nowhere. If they were serious about helping small
business and innovative startups, they surely would not have
treated these provisions like an afterthought to their 2017 tax
bill. We can and should work together to ensure that small
businesses and innovative startups have the tools to not just
survive but actually thrive in this economy. We can and should
do so in a fiscally responsible manner that does not further
add to the deficit. We can and should be better.
Richard E. Neal,
Ranking Member.
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