CHAPTER 1 - NORMAL TAXES AND SURTAXES

Title 26 > CHAPTER 1

Sections (944)

§ 1 Tax imposed

(a) Married individuals filing joint returns and surviving spouses There is hereby imposed on the taxable income of— every married individual (as defined in section 7703) who makes a single return jointly with his spouse under section 6013, and every surviving spouse (as defined in section 2(a)), a tax determined in accordance with the following table: If taxable income is: The tax is: Not over $36, 90015$ 36,900 but not over $89, 150$ 5,535, plus 28% of the excess over $36, 900. O v er$ 89,150 but not over $140, 000$ 20,165, plus 31% of the excess over $89, 150. O v er$ 140,000 but not over $250, 000$ 35,928.50, plus 36% of the excess over $140, 000. O v er$ 250,000 $75, 528.50, pl u s 39.6$ 250,000.

(b) Heads of households There is hereby imposed on the taxable income of every head of a household (as defined in section 2(b)) a tax determined in accordance with the following table: If taxable income is: The tax is: Not over $29, 60015$ 29,600 but not over $76, 400$ 4,440, plus 28% of the excess over $29, 600. O v er$ 76,400 but not over $127, 500$ 17,544, plus 31% of the excess over $76, 400. O v er$ 127,500 but not over $250, 000$ 33,385, plus 36% of the excess over $127, 500. O v er$ 250,000 $77, 485, pl u s 39.6$ 250,000.

(c) Unmarried individuals (other than surviving spouses and heads of households) There is hereby imposed on the taxable income of every individual (other than a surviving spouse as defined in section 2(a) or the head of a household as defined in section 2(b)) who is not a married individual (as defined in section 7703) a tax determined in accordance with the following table: If taxable income is: The tax is: Not over $22, 10015$ 22,100 but not over $53, 500$ 3,315, plus 28% of the excess over $22, 100. O v er$ 53,500 but not over $115, 000$ 12,107, plus 31% of the excess over $53, 500. O v er$ 115,000 but not over $250, 000$ 31,172, plus 36% of the excess over $115, 000. O v er$ 250,000 $79, 772, pl u s 39.6$ 250,000.

(d) Married individuals filing separate returns There is hereby imposed on the taxable income of every married individual (as defined in section 7703) who does not make a single return jointly with his spouse under section 6013, a tax determined in accordance with the following table: If taxable income is: The tax is: Not over $18, 45015$ 18,450 but not over $44, 575$ 2,767.50, plus 28% of the excess over $18, 450. O v er$ 44,575 but not over $70, 000$ 10,082.50, plus 31% of the excess over $44, 575. O v er$ 70,000 but not over $125, 000$ 17,964.25, plus 36% of the excess over $70, 000. O v er$ 125,000 $37, 764.25, pl u s 39.6$ 125,000.

(e) Estates and trusts There is hereby imposed on the taxable income of— every estate, and every trust, taxable under this subsection a tax determined in accordance with the following table: If taxable income is: The tax is: Not over $1, 50015$ 1,500 but not over $3, 500$ 225, plus 28% of the excess over $1, 500. O v er$ 3,500 but not over $5, 500$ 785, plus 31% of the excess over $3, 500. O v er$ 5,500 but not over $7, 500$ 1,405, plus 36% of the excess over $5, 500. O v er$ 7,500 $2, 125, pl u s 39.6$ 7,500.

(f) Phaseout of marriage penalty in 15-percent bracket; adjustments in tax tables so that inflation will not result in tax increases Not later than December 15 of 1993, and each subsequent calendar year, the Secretary shall prescribe tables which shall apply in lieu of the tables contained in subsections (a), (b), (c), (d), and (e) with respect to taxable years beginning in the succeeding calendar year. The table which under paragraph (1) is to apply in lieu of the table contained in subsection (a), (b), (c), (d), or (e), as the case may be, with respect to taxable years beginning in any calendar year shall be prescribed— except as provided in paragraph (8), by increasing the minimum and maximum dollar amounts for each bracket for which a tax is imposed under such table by the cost-of-living adjustment for such calendar year, determined— except as provided in clause (ii), by substituting “1992” for “2016” in paragraph (3)(A)(ii), and in the case of adjustments to the dollar amounts at which the 36 percent rate bracket begins or at which the 39.6 percent rate bracket begins, by substituting “1993” for “2016” in paragraph (3)(A)(ii), by not changing the rate applicable to any rate bracket as adjusted under subparagraph (A), and by adjusting the amounts setting forth the tax to the extent necessary to reflect the adjustments in the rate brackets. For purposes of this subsection— The cost-of-living adjustment for any calendar year is the percentage (if any) by which— the C-CPI-U for the preceding calendar year, exceeds the CPI for calendar year 2016, multiplied by the amount determined under subparagraph (B). The amount determined under this clause is the amount obtained by dividing— the C-CPI-U for calendar year 2016, by the CPI for calendar year 2016. For purposes of any provision of this title which provides for the substitution of a year after 2016 for “2016” in subparagraph (A)(ii), subparagraph (A) shall be applied by substituting “the C-CPI-U for calendar year 2016” for “the CPI for calendar year 2016” and all that follows in clause (ii) thereof. For purposes of paragraph (3), the CPI for any calendar year is the average of the Consumer Price Index as of the close of the 12-month period ending on August 31 of such calendar year. For purposes of paragraph (4), the term “Consumer Price Index” means the last Consumer Price Index for all-urban consumers published by the Department of Labor. For purposes of the preceding sentence, the revision of the Consumer Price Index which is most consistent with the Consumer Price Index for calendar year 1986 shall be used. For purposes of this subsection— The term “C-CPI-U” means the Chained Consumer Price Index for All Urban Consumers (as published by the Bureau of Labor Statistics of the Department of Labor). The values of the Chained Consumer Price Index for All Urban Consumers taken into account for purposes of determining the cost-of-living adjustment for any calendar year under this subsection shall be the latest values so published as of the date on which such Bureau publishes the initial value of the Chained Consumer Price Index for All Urban Consumers for the month of August for the preceding calendar year. The C-CPI-U for any calendar year is the average of the C-CPI-U as of the close of the 12-month period ending on August 31 of such calendar year. If any increase determined under paragraph (2)(A), section 63(c)(4), section 68(b)(2) 1 or section 151(d)(4) is not a multiple of $50, s u c hin cre a ses ha ll b ero u n d e d t o t h e n e x tl o w es t m u lt i pl eo f$ 50. In the case of a married individual filing a separate return, subparagraph (A) (other than with respect to sections 63(c)(4) and 151(d)(4)(A)) shall be applied by substituting “ $25” f or “$ 50” each place it appears. With respect to taxable years beginning after December 31, 2003 , in prescribing the tables under paragraph (1)— the maximum taxable income in the 15-percent rate bracket in the table contained in subsection (a) (and the minimum taxable income in the next higher taxable income bracket in such table) shall be 200 percent of the maximum taxable income in the 15-percent rate bracket in the table contained in subsection (c) (after any other adjustment under this subsection), and the comparable taxable income amounts in the table contained in subsection (d) shall be ½ of the amounts determined under subparagraph (A).

(g) Certain unearned income of children taxed as if parent’s income In the case of any child to whom this subsection applies, the tax imposed by this section shall be equal to the greater of— the tax imposed by this section without regard to this subsection, or the sum of— the tax which would be imposed by this section if the taxable income of such child for the taxable year were reduced by the net unearned income of such child, plus such child’s share of the allocable parental tax. This subsection shall apply to any child for any taxable year if— such child— has not attained age 18 before the close of the taxable year, or has attained age 18 before the close of the taxable year and meets the age requirements of section 152(c)(3) (determined without regard to subparagraph (B) thereof), and whose earned income (as defined in section 911(d)(2)) for such taxable year does not exceed one-half of the amount of the individual’s support (within the meaning of section 152(c)(1)(D) after the application of section 152(f)(5) (without regard to subparagraph (A) thereof)) for such taxable year, either parent of such child is alive at the close of the taxable year, and such child does not file a joint return for the taxable year. For purposes of this subsection— The term “allocable parental tax” means the excess of— the tax which would be imposed by this section on the parent’s taxable income if such income included the net unearned income of all children of the parent to whom this subsection applies, over the tax imposed by this section on the parent without regard to this subsection. For purposes of clause (i), net unearned income of all children of the parent shall not be taken into account in computing any exclusion, deduction, or credit of the parent. A child’s share of any allocable parental tax of a parent shall be equal to an amount which bears the same ratio to the total allocable parental tax as the child’s net unearned income bears to the aggregate net unearned income of all children of such parent to whom this subsection applies. Except as provided in regulations, if the parent does not have the same taxable year as the child, the allocable parental tax shall be determined on the basis of the taxable year of the parent ending in the child’s taxable year. For purposes of this subsection— The term “net unearned income” means the excess of— the portion of the adjusted gross income for the taxable year which is not attributable to earned income (as defined in section 911(d)(2)), over the sum of— the amount in effect for the taxable year under section 63(c)(5)(A) (relating to limitation on standard deduction in the case of certain dependents), plus the greater of the amount described in subclause (I) or, if the child itemizes his deductions for the taxable year, the amount of the itemized deductions allowed by this chapter for the taxable year which are directly connected with the production of the portion of adjusted gross income referred to in clause (i). The amount of the net unearned income for any taxable year shall not exceed the individual’s taxable income for such taxable year. For purposes of this subsection, in the case of any child who is a beneficiary of a qualified disability trust (as defined in section 642(b)(2)(C)(ii)), any amount included in the income of such child under sections 652 and 662 during a taxable year shall be considered earned income of such child for such taxable year. For purposes of this subsection, the parent whose taxable income shall be taken into account shall be— in the case of parents who are not married (within the meaning of section 7703), the custodial parent (within the meaning of section 152(e)) of the child, and in the case of married individuals filing separately, the individual with the greater taxable income. The parent of any child to whom this subsection applies for any taxable year shall provide the TIN of such parent to such child and such child shall include such TIN on the child’s return of tax imposed by this section for such taxable year. If— any child to whom this subsection applies has gross income for the taxable year only from interest and dividends (including Alaska Permanent Fund dividends), such gross income is more than the amount described in paragraph (4)(A)(ii)(I) and less than 10 times the amount so described, no estimated tax payments for such year are made in the name and TIN of such child, and no amount has been deducted and withheld under section 3406, and the parent of such child (as determined under paragraph (5)) elects the application of subparagraph (B), such child shall be treated (other than for purposes of this paragraph) as having no gross income for such year and shall not be required to file a return under section 6012. In the case of a parent making the election under this paragraph— the gross income of each child to whom such election applies (to the extent the gross income of such child exceeds twice the amount described in paragraph (4)(A)(ii)(I)) shall be included in such parent’s gross income for the taxable year, the tax imposed by this section for such year with respect to such parent shall be the amount equal to the sum of— the amount determined under this section after the application of clause (i), plus for each such child, 10 percent of the lesser of the amount described in paragraph (4)(A)(ii)(I) or the excess of the gross income of such child over the amount so described, and any interest which is an item of tax preference under section 57(a)(5) of the child shall be treated as an item of tax preference of such parent (and not of such child). The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this paragraph.

(h) Maximum capital gains rate If a taxpayer has a net capital gain for any taxable year, the tax imposed by this section for such taxable year shall not exceed the sum of— a tax computed at the rates and in the same manner as if this subsection had not been enacted on the greater of— taxable income reduced by the net capital gain; or the lesser of— the amount of taxable income taxed at a rate below 25 percent; or taxable income reduced by the adjusted net capital gain; 0 percent of so much of the adjusted net capital gain (or, if less, taxable income) as does not exceed the excess (if any) of— the amount of taxable income which would (without regard to this paragraph) be taxed at a rate below 25 percent, over the taxable income reduced by the adjusted net capital gain; 15 percent of the lesser of— so much of the adjusted net capital gain (or, if less, taxable income) as exceeds the amount on which a tax is determined under subparagraph (B), or the excess of— the amount of taxable income which would (without regard to this paragraph) be taxed at a rate below 39.6 percent, over the sum of the amounts on which a tax is determined under subparagraphs (A) and (B), 20 percent of the adjusted net capital gain (or, if less, taxable income) in excess of the sum of the amounts on which tax is determined under subparagraphs (B) and (C), 25 percent of the excess (if any) of— the unrecaptured section 1250 gain (or, if less, the net capital gain (determined without regard to paragraph (11))), over the excess (if any) of— the sum of the amount on which tax is determined under subparagraph (A) plus the net capital gain, over taxable income; and 28 percent of the amount of taxable income in excess of the sum of the amounts on which tax is determined under the preceding subparagraphs of this paragraph. For purposes of this subsection, the net capital gain for any taxable year shall be reduced (but not below zero) by the amount which the taxpayer takes into account as investment income under section 163(d)(4)(B)(iii). For purposes of this subsection, the term “adjusted net capital gain” means the sum of— net capital gain (determined without regard to paragraph (11)) reduced (but not below zero) by the sum of— unrecaptured section 1250 gain, and 28-percent rate gain, plus qualified dividend income (as defined in paragraph (11)). For purposes of this subsection, the term “28-percent rate gain” means the excess (if any) of— the sum of— collectibles gain; and section 1202 gain, over the sum of— collectibles loss; the net short-term capital loss; and the amount of long-term capital loss carried under section 1212(b)(1)(B) to the taxable year. For purposes of this subsection— The terms “collectibles gain” and “collectibles loss” mean gain or loss (respectively) from the sale or exchange of a collectible (as defined in section 408(m) without regard to paragraph (3) thereof) which is a capital asset held for more than 1 year but only to the extent such gain is taken into account in computing gross income and such loss is taken into account in computing taxable income. For purposes of subparagraph (A), any gain from the sale of an interest in a partnership, S corporation, or trust which is attributable to unrealized appreciation in the value of collectibles shall be treated as gain from the sale or exchange of a collectible. Rules similar to the rules of section 751 shall apply for purposes of the preceding sentence. For purposes of this subsection— The term “unrecaptured section 1250 gain” means the excess (if any) of— the amount of long-term capital gain (not otherwise treated as ordinary income) which would be treated as ordinary income if section 1250(b)(1) included all depreciation and the applicable percentage under section 1250(a) were 100 percent, over the excess (if any) of— the amount described in paragraph (4)(B); over the amount described in paragraph (4)(A). The amount described in subparagraph (A)(i) from sales, exchanges, and conversions described in section 1231(a)(3)(A) for any taxable year shall not exceed the net section 1231 gain (as defined in section 1231(c)(3)) for such year. For purposes of this subsection, the term “section 1202 gain” means the excess of— the gain which would be excluded from gross income under section 1202 but for the percentage limitation in section 1202(a), over the gain excluded from gross income under section 1202. If any amount is treated as ordinary income under section 1231(c), such amount shall be allocated among the separate categories of net section 1231 gain (as defined in section 1231(c)(3)) in such manner as the Secretary may by forms or regulations prescribe. The Secretary may prescribe such regulations as are appropriate (including regulations requiring reporting) to apply this subsection in the case of sales and exchanges by pass-thru entities and of interests in such entities. For purposes of this subsection, the term “pass-thru entity” means— a regulated investment company; a real estate investment trust; an S corporation; a partnership; an estate or trust; a common trust fund; and a qualified electing fund (as defined in section 1295). For purposes of this subsection, the term “net capital gain” means net capital gain (determined without regard to this paragraph) increased by qualified dividend income. For purposes of this paragraph— The term “qualified dividend income” means dividends received during the taxable year from— domestic corporations, and qualified foreign corporations. Such term shall not include— any dividend from a corporation which for the taxable year of the corporation in which the distribution is made, or the preceding taxable year, is a corporation exempt from tax under section 501 or 521, any amount allowed as a deduction under section 591 (relating to deduction for dividends paid by mutual savings banks, etc.), and any dividend described in section 404(k). Such term shall not include any dividend on any share of stock— with respect to which the holding period requirements of section 246(c) are not met (determined by substituting in section 246(c) “60 days” for “45 days” each place it appears and by substituting “121-day period” for “91-day period”), or to the extent that the taxpayer is under an obligation (whether pursuant to a short sale or otherwise) to make related payments with respect to positions in substantially similar or related property. Except as otherwise provided in this paragraph, the term “qualified foreign corporation” means any foreign corporation if— such corporation is incorporated in a possession of the United States, or such corporation is eligible for benefits of a comprehensive income tax treaty with the United States which the Secretary determines is satisfactory for purposes of this paragraph and which includes an exchange of information program. A foreign corporation not otherwise treated as a qualified foreign corporation under clause (i) shall be so treated with respect to any dividend paid by such corporation if the stock with respect to which such dividend is paid is readily tradable on an established securities market in the United States. Such term shall not include— any foreign corporation which for the taxable year of the corporation in which the dividend was paid, or the preceding taxable year, is a passive foreign investment company (as defined in section 1297), and any corporation which first becomes a surrogate foreign corporation (as defined in section 7874(a)(2)(B)) after the date of the enactment of this subclause, other than a foreign corporation which is treated as a domestic corporation under section 7874(b). Rules similar to the rules of section 904(b)(2)(B) shall apply with respect to the dividend rate differential under this paragraph. Qualified dividend income shall not include any amount which the taxpayer takes into account as investment income under section 163(d)(4)(B). If a taxpayer to whom this section applies receives, with respect to any share of stock, qualified dividend income from 1 or more dividends which are extraordinary dividends (within the meaning of section 1059(c)), any loss on the sale or exchange of such share shall, to the extent of such dividends, be treated as long-term capital loss. A dividend received from a regulated investment company or a real estate investment trust shall be subject to the limitations prescribed in sections 854 and 857.

(i) Rate reductions after 2000 In the case of taxable years beginning after December 31, 2000 — the rate of tax under subsections (a), (b), (c), and (d) on taxable income not over the initial bracket amount shall be 10 percent, and the 15 percent rate of tax shall apply only to taxable income over the initial bracket amount but not over the maximum dollar amount for the 15-percent rate bracket. For purposes of this paragraph, the initial bracket amount is— $14, 000 in t h ec a seo f s u b sec t i o n (a),$ 10,000 in the case of subsection (b), and ½ the amount applicable under clause (i) (after adjustment, if any, under subparagraph (C)) in the case of subsections (c) and (d). In prescribing the tables under subsection (f) which apply with respect to taxable years beginning in calendar years after 2003— the cost-of-living adjustment shall be determined under subsection (f)(3) by substituting “2002” for “2016” in subparagraph (A)(ii) thereof, and the adjustments under clause (i) shall not apply to the amount referred to in subparagraph (B)(iii). If any amount after adjustment under the preceding sentence is not a multiple of $50, s u c ham o u n t s ha ll b ero u n d e d t o t h e n e x tl o w es t m u lt i pl eo f$ 50. The tables under subsections (a), (b), (c), (d), and (e) shall be applied— by substituting “25%” for “28%” each place it appears (before the application of subparagraph (B)), by substituting “28%” for “31%” each place it appears, and by substituting “33%” for “36%” each place it appears. In the case of taxable years beginning after December 31, 2012 — the rate of tax under subsections (a), (b), (c), and (d) on a taxpayer’s taxable income in the highest rate bracket shall be 35 percent to the extent such income does not exceed an amount equal to the excess of— the applicable threshold, over the dollar amount at which such bracket begins, and the 39.6 percent rate of tax under such subsections shall apply only to the taxpayer’s taxable income in such bracket in excess of the amount to which clause (i) applies. For purposes of this paragraph, the term “applicable threshold” means— $450, 000 in t h ec a seo f s u b sec t i o n (a),$ 425,000 in the case of subsection (b), $400,000 in the case of subsection (c), and ½ the amount applicable under clause (i) (after adjustment, if any, under subparagraph (C)) in the case of subsection (d). For purposes of this paragraph, with respect to taxable years beginning in calendar years after 2013, each of the dollar amounts under clauses (i), (ii), and (iii) of subparagraph (B) shall be adjusted in the same manner as under paragraph (1)(C)(i), except that subsection (f)(3)(A)(ii) shall be applied by substituting “2012” for “2016”. The Secretary shall adjust the tables prescribed under subsection (f) to carry out this subsection.

(j) Modifications for taxable years beginning after 2017 In the case of a taxable year beginning after December 31, 2017 — subsection (i) shall not apply, and this section (other than subsection (i)) shall be applied as provided in paragraphs (2) through (6). The following table shall be applied in lieu of the table contained in subsection (a): If taxable income is: The tax is: Not over $19, 05010$ 19,050 but not over $77, 400$ 1,905, plus 12% of the excess over $19, 050. O v er$ 77,400 but not over $165, 000$ 8,907, plus 22% of the excess over $77, 400. O v er$ 165,000 but not over $315, 000$ 28,179, plus 24% of the excess over $165, 000. O v er$ 315,000 but not over $400, 000$ 64,179, plus 32% of the excess over $315, 000. O v er$ 400,000 but not over $600, 000$ 91,379, plus 35% of the excess over $400, 000. O v er$ 600,000 $161, 379, pl u s 37$ 600,000. The following table shall be applied in lieu of the table contained in subsection (b): If taxable income is: The tax is: Not over $13, 60010$ 13,600 but not over $51, 800$ 1,360, plus 12% of the excess over $13, 600. O v er$ 51,800 but not over $82, 500$ 5,944, plus 22% of the excess over $51, 800. O v er$ 82,500 but not over $157, 500$ 12,698, plus 24% of the excess over $82, 500. O v er$ 157,500 but not over $200, 000$ 30,698, plus 32% of the excess over $157, 500. O v er$ 200,000 but not over $500, 000$ 44,298, plus 35% of the excess over $200, 000. O v er$ 500,000 $149, 298, pl u s 37$ 500,000. The following table shall be applied in lieu of the table contained in subsection (c): If taxable income is: The tax is: Not over $9, 52510$ 9,525 but not over $38, 700$ 952.50, plus 12% of the excess over $9, 525. O v er$ 38,700 but not over $82, 500$ 4,453.50, plus 22% of the excess over $38, 700. O v er$ 82,500 but not over $157, 500$ 14,089.50, plus 24% of the excess over $82, 500. O v er$ 157,500 but not over $200, 000$ 32,089.50, plus 32% of the excess over $157, 500. O v er$ 200,000 but not over $500, 000$ 45,689.50, plus 35% of the excess over $200, 000. O v er$ 500,000 $150, 689.50, pl u s 37$ 500,000. The following table shall be applied in lieu of the table contained in subsection (d): If taxable income is: The tax is: Not over $9, 52510$ 9,525 but not over $38, 700$ 952.50, plus 12% of the excess over $9, 525. O v er$ 38,700 but not over $82, 500$ 4,453.50, plus 22% of the excess over $38, 700. O v er$ 82,500 but not over $157, 500$ 14,089.50, plus 24% of the excess over $82, 500. O v er$ 157,500 but not over $200, 000$ 32,089.50, plus 32% of the excess over $157, 500. O v er$ 200,000 but not over $300, 000$ 45,689.50, plus 35% of the excess over $200, 000. O v er$ 300,000 $80, 689.50, pl u s 37$ 300,000. The following table shall be applied in lieu of the table contained in subsection (e): If taxable income is: The tax is: Not over $2, 55010$ 2,550 but not over $9, 150$ 255, plus 24% of the excess over $2, 550. O v er$ 9,150 but not over $12, 500$ 1,839, plus 35% of the excess over $9, 150. O v er$ 12,500 $3, 011.50, pl u s 37$ 12,500. Any reference in this title to a rate of tax under subsection (c) shall be treated as a reference to the corresponding rate bracket under subparagraph (C) of this paragraph, except that the reference in section 3402(q)(1) to the third lowest rate of tax applicable under subsection (c) shall be treated as a reference to the fourth lowest rate of tax under subparagraph (C). The tables contained in paragraph (2) shall apply without adjustment for taxable years beginning after December 31, 2017 , and before January 1, 2019 . For taxable years beginning after December 31, 2018 , the Secretary shall prescribe tables which shall apply in lieu of the tables contained in paragraph (2) in the same manner as under paragraphs (1) and (2) of subsection (f) (applied without regard to clauses (i) and (ii) of subsection (f)(2)(A)), except that in prescribing such tables— solely for purposes of determining the dollar amounts at which any rate bracket higher than 12 percent ends and at which any rate bracket higher than 22 percent begins, subsection (f)(3) shall be applied by substituting “calendar year 2017” for “calendar year 2016” in subparagraph (A)(ii) thereof, subsection (f)(7)(B) shall apply to any unmarried individual other than a surviving spouse or head of household, and subsection (f)(8) shall not apply. Section 1(h)(1) shall be applied— by substituting “below the maximum zero rate amount” for “which would (without regard to this paragraph) be taxed at a rate below 25 percent” in subparagraph (B)(i), and by substituting “below the maximum 15-percent rate amount” for “which would (without regard to this paragraph) be taxed at a rate below 39.6 percent” in subparagraph (C)(ii)(I). For purposes of applying section 1(h) with the modifications described in subparagraph (A)— The maximum zero rate amount shall be— in the case of a joint return or surviving spouse, $77, 200, in t h ec a seo f anin d i v i d u a lw h o i s ah e a d o f h o u se h o l d (a s d e f in e d in sec t i o n 2 (b)),$ 51,700, in the case of any other individual (other than an estate or trust), an amount equal to ½ of the amount in effect for the taxable year under subclause (I), and in the case of an estate or trust, $2, 600. T h e ma x im u m 15 - p erce n t r a t e am o u n t s ha ll b e — in t h ec a seo f aj o in t re t u r n ors u r v i v in g s p o u se,$ 479,000 (½ such amount in the case of a married individual filing a separate return), in the case of an individual who is the head of a household (as defined in section 2(b)), $452, 400, in t h ec a seo f an yo t h er in d i v i d u a l (o t h er t hanan es t a t eor t r u s t),$ 425,800, and in the case of an estate or trust, $12, 700. I n t h ec a seo f an y t a x ab l eye a r b e g innin g a f t er 2018, e a c h o f t h e d o ll a r am o u n t s in c l a u ses (i) an d (ii) o f s u b p a r a g r a p h (B) s ha ll b e in cre a se d b y anam o u n t e q u a lt o — s u c h d o ll a r am o u n t, m u lt i pl i e d b y t h ecos t - o f - l i v in g a d j u s t m e n t d e t er min e d u n d ers u b sec t i o n (f) (3) f or t h ec a l e n d a rye a r in w hi c h t h e t a x ab l eye a r b e g in s, d e t er min e d b ys u b s t i t u t in g “ c a l e n d a rye a r 2017” f or “ c a l e n d a rye a r 2016” in s u b p a r a g r a p h (A) (ii) t h ereo f . I f an y in cre a se u n d er t hi ss u b p a r a g r a p hi s n o t am u lt i pl eo f$ 50, such increase shall be rounded to the next lowest multiple of $50. Section 15 shall not apply to any change in a rate of tax by reason of this subsection.

“Notwithstanding any provision of this Act [see Tables for classifications] not contained in this title [see Short Title of 1986 Amendment note above], any provision of this Act (not contained in this title) which— imposes any tax, premium, or fee, establishes any trust fund, or authorizes amounts to be expended from any trust fund, shall have no force or effect.”

“If any figure in any table— which is set forth in section 1 of the Internal Revenue Code of 1986 [formerly I.R.C. 1954] (as amended by section 101 of the Economic Recovery Tax Act of 1981 [ Pub. L. 97–34, title I, § 101 , Aug. 13, 1981 , 95 Stat. 176 ], and which applies to married individuals filing separately or to estates and trusts, differs by not more than 50 cents from the correct amount under the formula used in constructing such table, such figure is hereby corrected to the correct amount.” [See 1982 Amendment note above.]

“For purposes of any amendment made by any provision of this Act [see Tables for classification] (other than this title)— which contains a term the meaning of which is defined in or modified by any provision of this title, and which has an effective date earlier than the effective date of the provision of this title defining or modifying such term, that definition or modification shall be considered to take effect as of such earlier effective date.”

§ 2 Definitions and special rules

(a) Definition of surviving spouse For purposes of section 1, the term “surviving spouse” means a taxpayer— whose spouse died during either of his two taxable years immediately preceding the taxable year, and who maintains as his home a household which constitutes for the taxable year the principal place of abode (as a member of such household) of a dependent (i) who (within the meaning of section 152, determined without regard to subsections (b)(1), (b)(2), and (d)(1)(B) thereof) is a son, stepson, daughter, or stepdaughter of the taxpayer, and (ii) with respect to whom the taxpayer is entitled to a deduction for the taxable year under section 151. For purposes of this paragraph, an individual shall be considered as maintaining a household only if over half of the cost of maintaining the household during the taxable year is furnished by such individual. Notwithstanding paragraph (1), for purposes of section 1 a taxpayer shall not be considered to be a surviving spouse— if the taxpayer has remarried at any time before the close of the taxable year, or unless, for the taxpayer’s taxable year during which his spouse died, a joint return could have been made under the provisions of section 6013 (without regard to subsection (a)(3) thereof). If an individual was in a missing status (within the meaning of section 6013(f)(3)) as a result of service in a combat zone (as determined for purposes of section 112) and if such individual remains in such status until the date referred to in subparagraph (A) or (B), then, for purposes of paragraph (1)(A), the date on which such individual died shall be treated as the earlier of the date determined under subparagraph (A) or the date determined under subparagraph (B): the date on which the determination is made under section 556 of title 37 of the United States Code or under section 5566 of title 5 of such Code (whichever is applicable) that such individual died while in such missing status, or except in the case of the combat zone designated for purposes of the Vietnam conflict, the date which is 2 years after the date designated under section 112 as the date of termination of combatant activities in that zone.

(b) Definition of head of household For purposes of this subtitle, an individual shall be considered a head of a household if, and only if, such individual is not married at the close of his taxable year, is not a surviving spouse (as defined in subsection (a)), and either— maintains as his home a household which constitutes for more than one-half of such taxable year the principal place of abode, as a member of such household, of— a qualifying child of the individual (as defined in section 152(c), determined without regard to section 152(e)), but not if such child— is married at the close of the taxpayer’s taxable year, and is not a dependent of such individual by reason of section 152(b)(2) or 152(b)(3), or both, or any other person who is a dependent of the taxpayer, if the taxpayer is entitled to a deduction for the taxable year for such person under section 151, or maintains a household which constitutes for such taxable year the principal place of abode of the father or mother of the taxpayer, if the taxpayer is entitled to a deduction for the taxable year for such father or mother under section 151. For purposes of this paragraph, an individual shall be considered as maintaining a household only if over half of the cost of maintaining the household during the taxable year is furnished by such individual. For purposes of this subsection— an individual who is legally separated from his spouse under a decree of divorce or of separate maintenance shall not be considered as married; a taxpayer shall be considered as not married at the close of his taxable year if at any time during the taxable year his spouse is a nonresident alien; and a taxpayer shall be considered as married at the close of his taxable year if his spouse (other than a spouse described in subparagraph (B)) died during the taxable year. Notwithstanding paragraph (1), for purposes of this subtitle a taxpayer shall not be considered to be a head of a household— if at any time during the taxable year he is a nonresident alien; or by reason of an individual who would not be a dependent for the taxable year but for— subparagraph (H) of section 152(d)(2), or paragraph (3) of section 152(d).

(c) Certain married individuals living apart For purposes of this part, an individual shall be treated as not married at the close of the taxable year if such individual is so treated under the provisions of section 7703(b).

(d) Nonresident aliens In the case of a nonresident alien individual, the taxes imposed by sections 1 and 55 shall apply only as provided by section 871 or 877.

(e) Cross reference For definition of taxable income, see section 63.

§ 3 Tax tables for individuals

(a) Imposition of tax table tax In lieu of the tax imposed by section 1, there is hereby imposed for each taxable year on the taxable income of every individual— who does not itemize his deductions for the taxable year, and whose taxable income for such taxable year does not exceed the ceiling amount, a tax determined under tables, applicable to such taxable year, which shall be prescribed by the Secretary and which shall be in such form as he determines appropriate. In the table so prescribed, the amounts of the tax shall be computed on the basis of the rates prescribed by section 1. For purposes of paragraph (1), the term “ceiling amount” means, with respect to any taxpayer, the amount (not less than $20,000) determined by the Secretary for the tax rate category in which such taxpayer falls. The Secretary may provide that this section shall apply also for any taxable year to individuals who itemize their deductions. Any tables prescribed under the preceding sentence shall be on the basis of taxable income.

(b) Section inapplicable to certain individuals This section shall not apply to— an individual making a return under section 443(a)(1) for a period of less than 12 months on account of a change in annual accounting period, and an estate or trust.

(c) Tax treated as imposed by section 1 For purposes of this title, the tax imposed by this section shall be treated as tax imposed by section 1.

(d) Taxable income Whenever it is necessary to determine the taxable income of an individual to whom this section applies, the taxable income shall be determined under section 63.

(e) Cross reference For computation of tax by Secretary, see section 6014.

[§ 4 Repealed. Pub. L. 94–455, title V, § 501(b)(1), Oct. 4, 1976, 90 Stat. 1558]

§ 5 Cross references relating to tax on individuals

(a) Other rates of tax on individuals, etc. For rates of tax on nonresident aliens, see section 871. For doubling of tax on citizens of certain foreign countries, see section 891. For rate of withholding in the case of nonresident aliens, see section 1441. For alternative minimum tax, see section 55.

(b) Special limitations on tax For limitation on tax in case of income of members of Armed Forces, astronauts, and victims of certain terrorist attacks on death, see section 692. For computation of tax where taxpayer restores substantial amount held under claim of right, see section 1341.

§ 11 Tax imposed

(a) Corporations in general A tax is hereby imposed for each taxable year on the taxable income of every corporation.

(b) Amount of tax The amount of the tax imposed by subsection (a) shall be 21 percent of taxable income.

(c) Exceptions Subsection (a) shall not apply to a corporation subject to a tax imposed by— section 594 (relating to mutual savings banks conducting life insurance business), subchapter L (sec. 801 and following, relating to insurance companies), or subchapter M (sec. 851 and following, relating to regulated investment companies and real estate investment trusts).

(d) Foreign corporations In the case of a foreign corporation, the taxes imposed by subsection (a) and section 55 shall apply only as provided by section 882.

§ 12 Cross references relating to tax on corporations

For tax on the unrelated business income of certain charitable and other corporations exempt from tax under this chapter, see section 511. For accumulated earnings tax and personal holding company tax, see parts I and II of subchapter G (sec. 531 and following). For doubling of tax on corporations of certain foreign countries, see section 891. For rate of withholding in case of foreign corporations, see section 1442. For alternative minimum tax, see section 55. ( Aug. 16, 1954, ch. 736 , 68A Stat. 11 ; Pub. L. 88–272, title II, § 234(b)(4) , Feb. 26, 1964 , 78 Stat. 115 ; Pub. L. 91–172, title III, § 301(b)(3) , Dec. 30, 1969 , 83 Stat. 585 ; Pub. L. 94–12, title III, § 303(c)(2) , Mar. 29, 1975 , 89 Stat. 44 ; Pub. L. 95–600, title III, § 301(b)(1) , Nov. 6, 1978 , 92 Stat. 2820 ; Pub. L. 98–369, div. A, title IV, § 474(r)(29)(E) , July 18, 1984 , 98 Stat. 844 ; Pub. L. 99–514, title VII, § 701(e)(4)(B) , Oct. 22, 1986 , 100 Stat. 2343 ; Pub. L. 115–97, title I , §§ 12001(b)(12), 13001(b)(2)(B), Dec. 22, 2017 , 131 Stat. 2094 , 2096; Pub. L. 117–169, title I, § 10101(a)(4)(D) , Aug. 16, 2022 , 136 Stat. 1822 .)

§ 15 Effect of changes

(a) General rule If any rate of tax imposed by this chapter changes, and if the taxable year includes the effective date of the change (unless that date is the first day of the taxable year), then— tentative taxes shall be computed by applying the rate for the period before the effective date of the change, and the rate for the period on and after such date, to the taxable income for the entire taxable year; and the tax for such taxable year shall be the sum of that proportion of each tentative tax which the number of days in each period bears to the number of days in the entire taxable year.

(b) Repeal of tax For purposes of subsection (a)— if a tax is repealed, the repeal shall be considered a change of rate; and the rate for the period after the repeal shall be zero.

(c) Effective date of change For purposes of subsections (a) and (b)— if the rate changes for taxable years “beginning after” or “ending after” a certain date, the following day shall be considered the effective date of the change; and if a rate changes for taxable years “beginning on or after” a certain date, that date shall be considered the effective date of the change.

(d) Section not to apply to inflation adjustments This section shall not apply to any change in rates under subsection (f) of section 1 (relating to adjustments in tax tables so that inflation will not result in tax increases).

(e) References to highest rate If the change referred to in subsection (a) involves a change in the highest rate of tax imposed by section 1 or 11(b), any reference in this chapter to such highest rate (other than in a provision imposing a tax by reference to such rate) shall be treated as a reference to the weighted average of the highest rates before and after the change determined on the basis of the respective portions of the taxable year before the date of the change and on or after the date of the change.

(f) Rate reductions enacted by Economic Growth and Tax Relief Reconciliation Act of 2001 This section shall not apply to any change in rates under subsection (i) of section 1 (relating to rate reductions after 2000).

§ 21 Expenses for household and dependent care services necessary for gainful employment

(a) Allowance of credit In the case of an individual for which there are 1 or more qualifying individuals (as defined in subsection (b)(1)) with respect to such individual, there shall be allowed as a credit against the tax imposed by this chapter for the taxable year an amount equal to the applicable percentage of the employment-related expenses (as defined in subsection (b)(2)) paid by such individual during the taxable year. For purposes of paragraph (1), the term “applicable percentage” means 50 percent— reduced (but not below 35 percent) by 1 percentage point for each $2, 000 or f r a c t i o n t h ereo f b y w hi c h t h e t a x p a yer ’ s a d j u s t e d g ross in co m e f or t h e t a x ab l eye a re x cee d s$ 15,000, and further reduced (but not below 20 percent) by 1 percentage point for each $2, 000 ($ 4,000 in the case of a joint return) or fraction thereof by which the taxpayer’s adjusted gross income for the taxable year exceeds $75, 000 ($ 150,000 in the case of a joint return).

(b) Definitions of qualifying individual and employment-related expenses For purposes of this section— The term “qualifying individual” means— a dependent of the taxpayer (as defined in section 152(a)(1)) who has not attained age 13, a dependent of the taxpayer (as defined in section 152, determined without regard to subsections (b)(1), (b)(2), and (d)(1)(B)) who is physically or mentally incapable of caring for himself or herself and who has the same principal place of abode as the taxpayer for more than one-half of such taxable year, or the spouse of the taxpayer, if the spouse is physically or mentally incapable of caring for himself or herself and who has the same principal place of abode as the taxpayer for more than one-half of such taxable year. The term “employment-related expenses” means amounts paid for the following expenses, but only if such expenses are incurred to enable the taxpayer to be gainfully employed for any period for which there are 1 or more qualifying individuals with respect to the taxpayer: expenses for household services, and expenses for the care of a qualifying individual. Such term shall not include any amount paid for services outside the taxpayer’s household at a camp where the qualifying individual stays overnight. Employment-related expenses described in subparagraph (A) which are incurred for services outside the taxpayer’s household shall be taken into account only if incurred for the care of— a qualifying individual described in paragraph (1)(A), or a qualifying individual (not described in paragraph (1)(A)) who regularly spends at least 8 hours each day in the taxpayer’s household. Employment-related expenses described in subparagraph (A) which are incurred for services provided outside the taxpayer’s household by a dependent care center (as defined in subparagraph (D)) shall be taken into account only if— such center complies with all applicable laws and regulations of a State or unit of local government, and the requirements of subparagraph (B) are met. For purposes of this paragraph, the term “dependent care center” means any facility which— provides care for more than six individuals (other than individuals who reside at the facility), and receives a fee, payment, or grant for providing services for any of the individuals (regardless of whether such facility is operated for profit).

(c) Dollar limit on amount creditable The amount of the employment-related expenses incurred during any taxable year which may be taken into account under subsection (a) shall not exceed— $3, 000 i f t h ere i s 1 q u a l i f y in g in d i v i d u a lw i t h res p ec tt o t h e t a x p a yer f ors u c h t a x ab l eye a r, or$ 6,000 if there are 2 or more qualifying individuals with respect to the taxpayer for such taxable year. The amount determined under paragraph (1) or (2) (whichever is applicable) shall be reduced by the aggregate amount excludable from gross income under section 129 for the taxable year.

(d) Earned income limitation Except as otherwise provided in this subsection, the amount of the employment-related expenses incurred during any taxable year which may be taken into account under subsection (a) shall not exceed— in the case of an individual who is not married at the close of such year, such individual’s earned income for such year, or in the case of an individual who is married at the close of such year, the lesser of such individual’s earned income or the earned income of his spouse for such year. In the case of a spouse who is a student or a qualifying individual described in subsection (b)(1)(C), for purposes of paragraph (1), such spouse shall be deemed for each month during which such spouse is a full-time student at an educational institution, or is such a qualifying individual, to be gainfully employed and to have earned income of not less than— $250 i f s u b sec t i o n (c) (1) a ppl i es f or t h e t a x ab l eye a r, or$ 500 if subsection (c)(2) applies for the taxable year. In the case of any husband and wife, this paragraph shall apply with respect to only one spouse for any one month.

(e) Special rules For purposes of this section— An individual shall not be treated as having the same principal place of abode of the taxpayer if at any time during the taxable year of the taxpayer the relationship between the individual and the taxpayer is in violation of local law. If the taxpayer is married at the close of the taxable year, the credit shall be allowed under subsection (a) only if the taxpayer and his spouse file a joint return for the taxable year. An individual legally separated from his spouse under a decree of divorce or of separate maintenance shall not be considered as married. If— an individual who is married and who files a separate return— maintains as his home a household which constitutes for more than one-half of the taxable year the principal place of abode of a qualifying individual, and furnishes over half of the cost of maintaining such household during the taxable year, and during the last 6 months of such taxable year such individual’s spouse is not a member of such household, such individual shall not be considered as married. If— section 152(e) applies to any child with respect to any calendar year, and such child is under the age of 13 or is physically or mentally incapable of caring for himself, in the case of any taxable year beginning in such calendar year, such child shall be treated as a qualifying individual described in subparagraph (A) or (B) of subsection (b)(1) (whichever is appropriate) with respect to the custodial parent (as defined in section 152(e)(4)(A)), and shall not be treated as a qualifying individual with respect to the noncustodial parent. No credit shall be allowed under subsection (a) for any amount paid by the taxpayer to an individual— with respect to whom, for the taxable year, a deduction under section 151(c) (relating to deduction for personal exemptions for dependents) is allowable either to the taxpayer or his spouse, or who is a child of the taxpayer (within the meaning of section 152(f)(1)) who has not attained the age of 19 at the close of the taxable year. For purposes of this paragraph, the term “taxable year” means the taxable year of the taxpayer in which the service is performed. The term “student” means an individual who during each of 5 calendar months during the taxable year is a full-time student at an educational organization. The term “educational organization” means an educational organization described in section 170(b)(1)(A)(ii). No credit shall be allowed under subsection (a) for any amount paid to any person unless— the name, address, and taxpayer identification number of such person are included on the return claiming the credit, or if such person is an organization described in section 501(c)(3) and exempt from tax under section 501(a), the name and address of such person are included on the return claiming the credit. In the case of a failure to provide the information required under the preceding sentence, the preceding sentence shall not apply if it is shown that the taxpayer exercised due diligence in attempting to provide the information so required. No credit shall be allowed under this section with respect to any qualifying individual unless the TIN of such individual is included on the return claiming the credit.

(f) Regulations The Secretary shall prescribe such regulations as may be necessary to carry out the purposes of this section.

(g) Special rules for 2021 In the case of any taxable year beginning after December 31, 2020 , and before January 1, 2022 — If the taxpayer (in the case of a joint return, either spouse) has a principal place of abode in the United States (determined as provided in section 32) for more than one-half of the taxable year, the credit allowed under subsection (a) shall be treated as a credit allowed under subpart C (and not allowed under this subpart). Subsection (c) shall be applied— by substituting “ $8, 000” f or “$ 3,000” in paragraph (1) thereof, and by substituting “ $16, 000” f or “$ 6,000” in paragraph (2) thereof. Subsection (a)(2) shall be applied— by substituting “50 percent” for “35 percent”, and by substituting “ $125, 000” f or “$ 15,000”. Subsection (a)(2) shall be applied by substituting “the phaseout percentage” for “20 percent”. The term “phaseout percentage” means 20 percent reduced (but not below zero) by 1 percentage point for each $2, 000 (or f r a c t i o n t h ereo f) b y w hi c h t h e t a x p a yer ’ s a d j u s t e d g ross in co m e f or t h e t a x ab l eye a re x cee d s$ 400,000.

(h) Application of credit in possessions The Secretary shall pay to each possession of the United States with a mirror code tax system amounts equal to the loss (if any) to that possession by reason of the application of this section (determined without regard to this subsection) with respect to taxable years beginning in or with 2021. Such amounts shall be determined by the Secretary based on information provided by the government of the respective possession. The Secretary shall pay to each possession of the United States which does not have a mirror code tax system amounts estimated by the Secretary as being equal to the aggregate benefits that would have been provided to residents of such possession by reason of this section with respect to taxable years beginning in or with 2021 if a mirror code tax system had been in effect in such possession. The preceding sentence shall not apply unless the respective possession has a plan, which has been approved by the Secretary, under which such possession will promptly distribute such payments to its residents. In the case of any taxable year beginning in or with 2021, no credit shall be allowed under this section to any individual— to whom a credit is allowable against taxes imposed by a possession with a mirror code tax system by reason of this section, or who is eligible for a payment under a plan described in paragraph (2). For purposes of this subsection, the term “mirror code tax system” means, with respect to any possession of the United States, the income tax system of such possession if the income tax liability of the residents of such possession under such system is determined by reference to the income tax laws of the United States as if such possession were the United States. For purposes of section 1324 of title 31 , United States Code, the payments under this subsection shall be treated in the same manner as a refund due from a credit provision referred to in subsection (b)(2) of such section.

§ 22 Credit for the elderly and the permanently and totally disabled

(a) General rule In the case of a qualified individual, there shall be allowed as a credit against the tax imposed by this chapter for the taxable year an amount equal to 15 percent of such individual’s section 22 amount for such taxable year.

(b) Qualified individual For purposes of this section, the term “qualified individual” means any individual— who has attained age 65 before the close of the taxable year, or who retired on disability before the close of the taxable year and who, when he retired, was permanently and totally disabled.

(c) Section 22 amount For purposes of subsection (a)— An individual’s section 22 amount for the taxable year shall be the applicable initial amount determined under paragraph (2), reduced as provided in paragraph (3) and in subsection (d). Except as provided in subparagraph (B), the initial amount shall be— $5, 000 in t h ec a seo f a s in g l e in d i v i d u a l, or aj o in t re t u r n w h ereo n l yo n es p o u se i s a q u a l i f i e d in d i v i d u a l,$ 7,500 in the case of a joint return where both spouses are qualified individuals, or $3, 750 in t h ec a seo f ama rr i e d in d i v i d u a l f i l in g a se p a r a t ere t u r n . I n t h ec a seo f a q u a l i f i e d in d i v i d u a lw h o ha s n o t a tt ain e d a g e 65 b e f ore t h ec l oseo f t h e t a x ab l eye a r, e x ce pt a s p ro v i d e d in c l a u se (ii), t h e ini t ia l am o u n t s ha ll n o t e x cee d t h e d i s abi l i t y in co m e f or t h e t a x ab l eye a r . I n t h ec a seo f aj o in t re t u r n w h ere b o t h s p o u ses a re q u a l i f i e d in d i v i d u a l s an d a tl e a s t o n es p o u se ha s n o t a tt ain e d a g e 65 b e f ore t h ec l oseo f t h e t a x ab l eye a r — i f b o t h s p o u ses ha v e n o t a tt ain e d a g e 65 b e f ore t h ec l oseo f t h e t a x ab l eye a r, t h e ini t ia l am o u n t s ha ll n o t e x cee d t h es u m o f s u c h s p o u ses ’ d i s abi l i t y in co m e, or i f o n es p o u se ha s a tt ain e d a g e 65 b e f ore t h ec l oseo f t h e t a x ab l eye a r, t h e ini t ia l am o u n t s ha ll n o t e x cee d t h es u m o f$ 5,000 plus the disability income for the taxable year of the spouse who has not attained age 65 before the close of the taxable year. For purposes of this subparagraph, the term “disability income” means the aggregate amount includable in the gross income of the individual for the taxable year under section 72 or 105(a) to the extent such amount constitutes wages (or payments in lieu of wages) for the period during which the individual is absent from work on account of permanent and total disability. The reduction under this paragraph is an amount equal to the sum of the amounts received by the individual (or, in the case of a joint return, by either spouse) as a pension or annuity or as a disability benefit— which is excluded from gross income and payable under— title II of the Social Security Act, the Railroad Retirement Act of 1974, or a law administered by the Department of Veterans Affairs, or which is excluded from gross income under any provision of law not contained in this title. No reduction shall be made under clause (i)(III) for any amount described in section 104(a)(4). For purposes of subparagraph (A), any amount treated as a social security benefit under section 86(d)(3) shall be treated as a disability benefit received under title II of the Social Security Act.

(d) Adjusted gross income limitation If the adjusted gross income of the taxpayer exceeds— $7, 500 in t h ec a seo f a s in g l e in d i v i d u a l,$ 10,000 in the case of a joint return, or $5, 000 in t h ec a seo f ama rr i e d in d i v i d u a l f i l in g a se p a r a t ere t u r n, t h esec t i o n 22 am o u n t s ha ll b ere d u ce d b yo n e - ha l f o f t h ee x cesso f t h e a d j u s t e d g ross in co m eo v er$ 7,500, $10, 000, or$ 5,000, as the case may be.

(e) Definitions and special rules For purposes of this section— Except in the case of a husband and wife who live apart at all times during the taxable year, if the taxpayer is married at the close of the taxable year, the credit provided by this section shall be allowed only if the taxpayer and his spouse file a joint return for the taxable year. Marital status shall be determined under section 7703. An individual is permanently and totally disabled if he is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months. An individual shall not be considered to be permanently and totally disabled unless he furnishes proof of the existence thereof in such form and manner, and at such times, as the Secretary may require.

(f) Nonresident alien ineligible for credit No credit shall be allowed under this section to any nonresident alien.

§ 23 Adoption expenses

(a) Allowance of credit In the case of an individual, there shall be allowed as a credit against the tax imposed by this chapter the amount of the qualified adoption expenses paid or incurred by the taxpayer. The credit under paragraph (1) with respect to any expense shall be allowed— in the case of any expense paid or incurred before the taxable year in which such adoption becomes final, for the taxable year following the taxable year during which such expense is paid or incurred, and in the case of an expense paid or incurred during or after the taxable year in which such adoption becomes final, for the taxable year in which such expense is paid or incurred. In the case of an adoption of a child with special needs which becomes final during a taxable year, the taxpayer shall be treated as having paid during such year qualified adoption expenses with respect to such adoption in an amount equal to the excess (if any) of $10, 000 o v er t h e a gg re g a t e q u a l i f i e d a d o pt i o n e x p e n ses a c t u a ll y p ai d or in c u rre d b y t h e t a x p a yer w i t h res p ec tt os u c ha d o pt i o n d u r in g s u c h t a x ab l eye a r an d a llp r i or t a x ab l eye a rs . S o m u c h o f t h ecre d i t a ll o w e d u n d er p a r a g r a p h (1) a s d oes n o t e x cee d$ 5,000 shall be treated as a credit allowed under subpart C and not as a credit allowed under this subpart.

(b) Limitations The aggregate amount of qualified adoption expenses which may be taken into account under subsection (a) for all taxable years with respect to the adoption of a child by the taxpayer shall not exceed $10, 000. T h e am o u n t a ll o w ab l e a s a cre d i t u n d ers u b sec t i o n (a) f or an y t a x ab l eye a r (d e t er min e d w i t h o u t re g a r d t os u b sec t i o n (c)) s ha ll b ere d u ce d (b u t n o t b e l o w zero) b y anam o u n tw hi c hb e a rs t h es am er a t i o t o t h e am o u n t so a ll o w ab l e (d e t er min e d w i t h o u t re g a r d t o t hi s p a r a g r a p hb u tw i t h re g a r d t o p a r a g r a p h (1)) a s — t h e am o u n t (i f an y) b y w hi c h t h e t a x p a yer ’ s a d j u s t e d g ross in co m ee x cee d s$ 150,000, bears to $40,000. For purposes of subparagraph (A), adjusted gross income shall be determined without regard to sections 911, 931, and 933. No credit shall be allowed under subsection (a) for any expense for which a deduction or credit is allowed under any other provision of this chapter. No credit shall be allowed under subsection (a) for any expense to the extent that funds for such expense are received under any Federal, State, or local program.

(c) Carryforwards of unused credit If the portion of the credit allowable under subsection (a) which is allowed under this subpart for any taxable year exceeds the limitation imposed by section 26(a) for such taxable year reduced by the sum of the credits allowable under this subpart (other than this section and section 25D), such excess shall be carried to the succeeding taxable year and added to the portion of the credit allowable under subsection (a) which is allowed under this subpart for such taxable year. No credit may be carried forward under this subsection to any taxable year following the fifth taxable year after the taxable year in which the credit arose. For purposes of the preceding sentence, credits shall be treated as used on a first-in first-out basis.

(d) Definitions For purposes of this section— The term “qualified adoption expenses” means reasonable and necessary adoption fees, court costs, attorney fees, and other expenses— which are directly related to, and the principal purpose of which is for, the legal adoption of an eligible child by the taxpayer, which are not incurred in violation of State or Federal law or in carrying out any surrogate parenting arrangement, which are not expenses in connection with the adoption by an individual of a child who is the child of such individual’s spouse, and which are not reimbursed under an employer program or otherwise. The term “eligible child” means any individual who— has not attained age 18, or is physically or mentally incapable of caring for himself. The term “child with special needs” means any child if— a State or Indian tribal government has determined that the child cannot or should not be returned to the home of his parents, such State or Indian tribal government has determined that there exists with respect to the child a specific factor or condition (such as his ethnic background, age, or membership in a minority or sibling group, or the presence of factors such as medical conditions or physical, mental, or emotional handicaps) because of which it is reasonable to conclude that such child cannot be placed with adoptive parents without providing adoption assistance, and such child is a citizen or resident of the United States (as defined in section 217(h)(3)).

(e) Special rules for foreign adoptions In the case of an adoption of a child who is not a citizen or resident of the United States (as defined in section 217(h)(3))— subsection (a) shall not apply to any qualified adoption expense with respect to such adoption unless such adoption becomes final, and any such expense which is paid or incurred before the taxable year in which such adoption becomes final shall be taken into account under this section as if such expense were paid or incurred during such year.

(f) Filing requirements Rules similar to the rules of paragraphs (2), (3), and (4) of section 21(e) shall apply for purposes of this section. No credit shall be allowed under this section with respect to any eligible child unless the taxpayer includes (if known) the name, age, and TIN of such child on the return of tax for the taxable year. The Secretary may, in lieu of the information referred to in subparagraph (A), require other information meeting the purposes of subparagraph (A), including identification of an agent assisting with the adoption.

(g) Basis adjustments For purposes of this subtitle, if a credit is allowed under this section for any expenditure with respect to any property, the increase in the basis of such property which would (but for this subsection) result from such expenditure shall be reduced by the amount of the credit so allowed.

(h) Adjustments for inflation In the case of a taxable year beginning after December 31, 2002 , each of the dollar amounts in paragraphs (3) and (4) of subsection (a) and paragraphs (1) and (2)(A)(i) of subsection (b) shall be increased by an amount equal to— such dollar amount, multiplied by the cost-of-living adjustment determined under section 1(f)(3) for the calendar year in which the taxable year begins, determined by substituting “calendar year 2001” for “calendar year 2016” in subparagraph (A)(ii) thereof. If any amount as increased under paragraph (1) is not a multiple of $10, s u c ham o u n t s ha ll b ero u n d e d t o t h e n e a res t m u lt i pl eo f$ 10. In the case of the dollar amount in subsection (a)(4), paragraph (1) shall be applied— by substituting “2025” for “2002” in the matter preceding subparagraph (A), and by substituting “calendar year 2024” for “calendar year 2001” in subparagraph (B) thereof.

(i) Regulations The Secretary shall prescribe such regulations as may be appropriate to carry out this section and section 137, including regulations which treat unmarried individuals who pay or incur qualified adoption expenses with respect to the same child as 1 taxpayer for purposes of applying the dollar amounts in subsections (a)(3) and (b)(1) of this section and in section 137(b)(1).

“If— any provision amended or repealed by the amendments made by subsection (b) or (d) [see Tables for classification] applied to— any transaction occurring before the date of the enactment of this Act [ Mar. 23, 2018 ], any property acquired before such date of enactment, or any item of income, loss, deduction, or credit taken into account before such date of enactment, and the treatment of such transaction, property, or item under such provision would (without regard to the amendments or repeals made by such subsection) affect the liability for tax for periods ending after such date of enactment, nothing in the amendments or repeals made by this section [see Tables for classification] shall be construed to affect the treatment of such transaction, property, or item for purposes of determining liability for tax for periods ending after such date of enactment.”

§ 24 Child tax credit

(a) Allowance of credit There shall be allowed as a credit against the tax imposed by this chapter for the taxable year with respect to each qualifying child of the taxpayer for which the taxpayer is allowed a deduction under section 151 an amount equal to $1,000.

(b) Limitations The amount of the credit allowable under subsection (a) shall be reduced (but not below zero) by $50 f ore a c h$ 1,000 (or fraction thereof) by which the taxpayer’s modified adjusted gross income exceeds the threshold amount. For purposes of the preceding sentence, the term “modified adjusted gross income” means adjusted gross income increased by any amount excluded from gross income under section 911, 931, or 933. For purposes of paragraph (1), the term “threshold amount” means— $110, 000 in t h ec a seo f aj o in t re t u r n,$ 75,000 in the case of an individual who is not married, and $55,000 in the case of a married individual filing a separate return. For purposes of this paragraph, marital status shall be determined under section 7703.

(c) Qualifying child For purposes of this section— The term “qualifying child” means a qualifying child of the taxpayer (as defined in section 152(c)) who has not attained age 17. The term “qualifying child” shall not include any individual who would not be a dependent if subparagraph (A) of section 152(b)(3) were applied without regard to all that follows “resident of the United States”.

(d) Portion of credit refundable The aggregate credits allowed to a taxpayer under subpart C shall be increased by the lesser of— the credit which would be allowed under this section without regard to this subsection and the limitation under section 26(a) or the amount by which the aggregate amount of credits allowed by this subpart (determined without regard to this subsection) would increase if the limitation imposed by section 26(a) were increased by the greater of— 15 percent of so much of the taxpayer’s earned income (within the meaning of section 32) which is taken into account in computing taxable income for the taxable year as exceeds $3,000, or in the case of a taxpayer with 3 or more qualifying children, the excess (if any) of— the taxpayer’s social security taxes for the taxable year, over the credit allowed under section 32 for the taxable year. The amount of the credit allowed under this subsection shall not be treated as a credit allowed under this subpart and shall reduce the amount of credit otherwise allowable under subsection (a) without regard to section 26(a). For purposes of subparagraph (B), any amount excluded from gross income by reason of section 112 shall be treated as earned income which is taken into account in computing taxable income for the taxable year. For purposes of paragraph (1)— The term “social security taxes” means, with respect to any taxpayer for any taxable year— the amount of the taxes imposed by sections 3101 and 3201(a) on amounts received by the taxpayer during the calendar year in which the taxable year begins, 50 percent of the taxes imposed by section 1401 on the self-employment income of the taxpayer for the taxable year, and 50 percent of the taxes imposed by section 3211(a) on amounts received by the taxpayer during the calendar year in which the taxable year begins. The term “social security taxes” shall not include any taxes to the extent the taxpayer is entitled to a special refund of such taxes under section 6413(c). Any amounts paid pursuant to an agreement under section 3121( l ) (relating to agreements entered into by American employers with respect to foreign affiliates) which are equivalent to the taxes referred to in subparagraph (A)(i) shall be treated as taxes referred to in such subparagraph. Paragraph (1) shall not apply to any taxpayer for any taxable year if such taxpayer elects to exclude any amount from gross income under section 911 for such taxable year.

(e) Identification requirements No credit shall be allowed under this section to a taxpayer with respect to any qualifying child unless the taxpayer includes the name and taxpayer identification number of such qualifying child on the return of tax for the taxable year and such taxpayer identification number was issued on or before the due date for filing such return. No credit shall be allowed under this section if the taxpayer identification number of the taxpayer was issued after the due date for filing the return for the taxable year.

(f) Taxable year must be full taxable year Except in the case of a taxable year closed by reason of the death of the taxpayer, no credit shall be allowable under this section in the case of a taxable year covering a period of less than 12 months.

(g) Restrictions on taxpayers who improperly claimed credit in prior year No credit shall be allowed under this section for any taxable year in the disallowance period. For purposes of subparagraph (A), the disallowance period is— the period of 10 taxable years after the most recent taxable year for which there was a final determination that the taxpayer’s claim of credit under this section was due to fraud, and the period of 2 taxable years after the most recent taxable year for which there was a final determination that the taxpayer’s claim of credit under this section was due to reckless or intentional disregard of rules and regulations (but not due to fraud). In the case of a taxpayer who is denied credit under this section for any taxable year as a result of the deficiency procedures under subchapter B of chapter 63, no credit shall be allowed under this section for any subsequent taxable year unless the taxpayer provides such information as the Secretary may require to demonstrate eligibility for such credit.

(h) Special rules for taxable years beginning after 2017 In the case of a taxable year beginning after December 31, 2017 , this section shall be applied as provided in paragraphs (2) through (7). Subsection (a) shall be applied by substituting “ $2, 200” f or “$ 1,000”. In lieu of the amount determined under subsection (b)(2), the threshold amount shall be $400, 000 in t h ec a seo f aj o in t re t u r n ($ 200,000 in any other case). The credit determined under subsection (a) (after the application of paragraph (2)) shall be increased by $500 f ore a c h d e p e n d e n t o f t h e t a x p a yer (a s d e f in e d in sec t i o n 152) o t h er t hana q u a l i f y in g c hi l dd escr ib e d in s u b sec t i o n (c) . S u b p a r a g r a p h (A) s ha ll n o t a ppl y w i t h res p ec tt o an y in d i v i d u a lw h o w o u l d n o t b e a d e p e n d e n t i f s u b p a r a g r a p h (A) o f sec t i o n 152 (b) (3) w ere a ppl i e d w i t h o u t re g a r d t o a llt ha t f o ll o w s “ res i d e n t o f t h e U ni t e d St a t es ”. I n t h ec a seo f an y q u a l i f y in g c hi l d w i t h res p ec tt o w h o ma cre d i t i s n o t a ll o w e d u n d er t hi ssec t i o nb yre a so n o f p a r a g r a p h (7), s u c h c hi l d s ha ll b e t re a t e d a s a d e p e n d e n tt o w h o m s u b p a r a g r a p h (A) a ppl i es . T h e am o u n t d e t er min e d u n d ers u b sec t i o n (d) (1) (A) w i t h res p ec tt o an y q u a l i f y in g c hi l d s ha ll n o t e x cee d$ 1,400, and such subsection shall be applied without regard to paragraph (4) of this subsection. Subsection (d)(1)(B)(i) shall be applied by substituting “ $2, 500” f or “$ 3,000”. No credit shall be allowed under this section to a taxpayer with respect to any qualifying child unless the taxpayer includes on the return of tax for the taxable year— the taxpayer’s social security number (or, in the case of a joint return, the social security number of at least 1 spouse), and the social security number of such qualifying child. For purposes of this paragraph, the term “social security number” means a social security number issued to an individual by the Social Security Administration, but only if the social security number is issued— to a citizen of the United States or pursuant to subclause (I) (or that portion of subclause (III) that relates to subclause (I)) of section 205(c)(2)(B)(i) of the Social Security Act, and before the due date for such return.

(i) Inflation adjustments In the case of a taxable year beginning after 2024, the $1, 400 am o u n t in s u b sec t i o n (h) (5) s ha ll b e in cre a se d b y anam o u n t e q u a lt o — s u c h d o ll a r am o u n t, m u lt i pl i e d b y t h ecos t - o f - l i v in g a d j u s t m e n t d e t er min e d u n d ersec t i o n 1 (f) (3) f or t h ec a l e n d a rye a r in w hi c h t h e t a x ab l eye a r b e g in s, d e t er min e d b ys u b s t i t u t in g “2017” f or “2016” in s u b p a r a g r a p h (A) (ii) t h ereo f . I n t h ec a seo f a t a x ab l eye a r b e g innin g a f t er 2025, t h e$ 2,200 amount in subsection (h)(2) shall be increased by an amount equal to— such dollar amount, multiplied by the cost-of-living adjustment determined under section 1(f)(3) for the calendar year in which the taxable year begins, determined by substituting “2024” for “2016” in subparagraph (A)(ii) thereof. If any increase under this subsection is not a multiple of $100, s u c hin cre a ses ha ll b ero u n d e d t o t h e n e x tl o w es t m u lt i pl eo f$ 100.

(j) Reconciliation of credit and advance credit The amount of the credit allowed under this section to any taxpayer for any taxable year shall be reduced (but not below zero) by the aggregate amount of payments made under section 7527A to such taxpayer during such taxable year. Any failure to so reduce the credit shall be treated as arising out of a mathematical or clerical error and assessed according to section 6213(b)(1). If the aggregate amount of payments under section 7527A to the taxpayer during the taxable year exceeds the amount of the credit allowed under this section to such taxpayer for such taxable year (determined without regard to paragraph (1)), the tax imposed by this chapter for such taxable year shall be increased by the amount of such excess. Any failure to so increase the tax shall be treated as arising out of a mathematical or clerical error and assessed according to section 6213(b)(1). In the case of a taxpayer whose modified adjusted gross income (as defined in subsection (b)) for the taxable year does not exceed 200 percent of the applicable income threshold, the amount of the increase determined under subparagraph (A) with respect to such taxpayer for such taxable year shall be reduced (but not below zero) by the safe harbor amount. In the case of a taxpayer whose modified adjusted gross income (as defined in subsection (b)) for the taxable year exceeds the applicable income threshold, the safe harbor amount otherwise in effect under clause (i) shall be reduced by the amount which bears the same ratio to such amount as such excess bears to the applicable income threshold. For purposes of this subparagraph, the term “applicable income threshold” means— $60, 000 in t h ec a seo f aj o in t re t u r n ors u r v i v in g s p o u se (a s d e f in e d in sec t i o n 2 (a)),$ 50,000 in the case of a head of household, and $40, 000 inan yo t h erc a se . F or p u r p oseso f t hi ss u b p a r a g r a p h, t h e t er m “ s a f e ha r b or am o u n t ” m e an s, w i t h res p ec tt o an y t a x ab l eye a r, t h e p ro d u c t o f —$ 2,000, multiplied by the excess (if any) of the number of qualified children taken into account in determining the annual advance amount with respect to the taxpayer under section 7527A with respect to months beginning in such taxable year, over the number of qualified children taken into account in determining the credit allowed under this section for such taxable year.

(k) Application of credit in possessions The Secretary shall pay to each possession of the United States with a mirror code tax system amounts equal to the loss (if any) to that possession by reason of the application of this section (determined without regard to this subsection) with respect to taxable years beginning after 2020. Such amounts shall be determined by the Secretary based on information provided by the government of the respective possession. No credit shall be allowed under this section for any taxable year to any individual to whom a credit is allowable against taxes imposed by a possession of the United States with a mirror code tax system by reason of the application of this section in such possession for such taxable year. For purposes of this paragraph, the term “mirror code tax system” means, with respect to any possession of the United States, the income tax system of such possession if the income tax liability of the residents of such possession under such system is determined by reference to the income tax laws of the United States as if such possession were the United States. For application of refundable credit to residents of Puerto Rico, see subsection (i)(1). For nonapplication of advance payment to residents of Puerto Rico, see section 7527A(e)(4)(A). In the case of any bona fide resident of Puerto Rico (within the meaning of section 937(a)) for any taxable year beginning after December 31, 2021 — the credit determined under this section shall be allowable to such resident, and subsection (d)(1)(B)(ii) shall be applied without regard to the phrase “in the case of a taxpayer with 3 or more qualifying children”. The Secretary shall pay to American Samoa amounts estimated by the Secretary as being equal to the aggregate benefits that would have been provided to residents of American Samoa by reason of the application of this section for taxable years beginning after 2020 if the provisions of this section had been in effect in American Samoa (applied as if American Samoa were the United States and without regard to the application of this section to bona fide residents of Puerto Rico under subsection (i)(1)). Subparagraph (A) shall not apply unless American Samoa has a plan, which has been approved by the Secretary, under which American Samoa will promptly distribute such payments to its residents. In the case of a taxable year with respect to which a plan is approved under subparagraph (B), this section (other than this subsection) shall not apply to any individual eligible for a distribution under such plan. In the case of a taxable year with respect to which a plan is not approved under subparagraph (B)— if such taxable year begins in 2021, subsection (i)(1) shall be applied by substituting “bona fide resident of Puerto Rico or American Samoa” for “bona fide resident of Puerto Rico”, and if such taxable year begins after December 31, 2021 , rules similar to the rules of paragraph (2)(B) shall apply with respect to bona fide residents of American Samoa (within the meaning of section 937(a)). For purposes of section 1324 of title 31 , United States Code, the payments under this subsection shall be treated in the same manner as a refund due from a credit provision referred to in subsection (b)(2) of such section.

§ 25 Interest on certain home mortgages

(a) Allowance of credit There shall be allowed as a credit against the tax imposed by this chapter for the taxable year an amount equal to the product of— the certificate credit rate, and the interest paid or accrued by the taxpayer during the taxable year on the remaining principal of the certified indebtedness amount. If the certificate credit rate exceeds 20 percent, the amount of the credit allowed to the taxpayer under paragraph (1) for any taxable year shall not exceed $2,000. If 2 or more persons hold interests in any residence, the limitation of subparagraph (A) shall be allocated among such persons in proportion to their respective interests in the residence.

(b) Certificate credit rate; certified indebtedness amount For purposes of this section— The term “certificate credit rate” means the rate of the credit allowable by this section which is specified in the mortgage credit certificate. The term “certified indebtedness amount” means the amount of indebtedness which is— incurred by the taxpayer— to acquire the principal residence of the taxpayer, as a qualified home improvement loan (as defined in section 143(k)(4)) with respect to such residence, or as a qualified rehabilitation loan (as defined in section 143(k)(5)) with respect to such residence, and specified in the mortgage credit certificate.

(c) Mortgage credit certificate; qualified mortgage credit certificate program For purposes of this section— The term “mortgage credit certificate” means any certificate which— is issued under a qualified mortgage credit certificate program by the State or political subdivision having the authority to issue a qualified mortgage bond to provide financing on the principal residence of the taxpayer, is issued to the taxpayer in connection with the acquisition, qualified rehabilitation, or qualified home improvement of the taxpayer’s principal residence, specifies— the certificate credit rate, and the certified indebtedness amount, and is in such form as the Secretary may prescribe. The term “qualified mortgage credit certificate program” means any program— which is established by a State or political subdivision thereof for any calendar year for which it is authorized to issue qualified mortgage bonds, under which the issuing authority elects (in such manner and form as the Secretary may prescribe) not to issue an amount of private activity bonds which it may otherwise issue during such calendar year under section 146, under which the indebtedness certified by mortgage credit certificates meets the requirements of the following subsections of section 143 (as modified by subparagraph (B) of this paragraph): subsection (c) (relating to residence requirements), subsection (d) (relating to 3-year requirement), subsection (e) (relating to purchase price requirement), subsection (f) (relating to income requirements), subsection (h) (relating to portion of loans required to be placed in targeted areas), and paragraph (1) of subsection (i) (relating to other requirements), under which no mortgage credit certificate may be issued with respect to any residence any of the financing of which is provided from the proceeds of a qualified mortgage bond or a qualified veterans’ mortgage bond, except to the extent provided in regulations, which is not limited to indebtedness incurred from particular lenders, except to the extent provided in regulations, which provides that a mortgage credit certificate is not transferrable, and if the issuing authority allocates a block of mortgage credit certificates for use in connection with a particular development, which requires the developer to furnish to the issuing authority and the homebuyer a certificate that the price for the residence is no higher than it would be without the use of a mortgage credit certificate. Under regulations, rules similar to the rules of subparagraphs (B) and (C) of section 143(a)(2) shall apply to the requirements of this subparagraph. Under regulations prescribed by the Secretary, in applying section 143 for purposes of subclauses (II), (IV), and (V) of subparagraph (A)(iii)— each qualified mortgage certificate credit program shall be treated as a separate issue, the product determined by multiplying— the certified indebtedness amount of each mortgage credit certificate issued under such program, by the certificate credit rate specified in such certificate, shall be treated as proceeds of such issue and the sum of such products shall be treated as the total proceeds of such issue, and paragraph (1) of section 143(d) shall be applied by substituting “100 percent” for “95 percent or more”. Clause (iii) shall not apply if the issuing authority submits a plan to the Secretary for administering the 95-percent requirement of section 143(d)(1) and the Secretary is satisfied that such requirement will be met under such plan.

(d) Determination of certificate credit rate For purposes of this section— The certificate credit rate specified in any mortgage credit certificate shall not be less than 10 percent or more than 50 percent. In the case of each qualified mortgage credit certificate program, the sum of the products determined by multiplying— the certified indebtedness amount of each mortgage credit certificate issued under such program, by the certificate credit rate with respect to such certificate, shall not exceed 25 percent of the nonissued bond amount. For purposes of subparagraph (A), the term “nonissued bond amount” means, with respect to any qualified mortgage credit certificate program, the amount of qualified mortgage bonds which the issuing authority is otherwise authorized to issue and elects not to issue under subsection (c)(2)(A)(ii).

(e) Special rules and definitions For purposes of this section— If the credit allowable under subsection (a) for any taxable year exceeds the applicable tax limit for such taxable year, such excess shall be a carryover to each of the 3 succeeding taxable years and, subject to the limitations of subparagraph (B), shall be added to the credit allowable by subsection (a) for such succeeding taxable year. The amount of the unused credit which may be taken into account under subparagraph (A) for any taxable year shall not exceed the amount (if any) by which the applicable tax limit for such taxable year exceeds the sum of— the credit allowable under subsection (a) for such taxable year determined without regard to this paragraph, and the amounts which, by reason of this paragraph, are carried to such taxable year and are attributable to taxable years before the unused credit year. For purposes of this paragraph, the term “applicable tax limit” means the limitation imposed by section 26(a) for the taxable year reduced by the sum of the credits allowable under this subpart (other than this section and sections 23 and 25D). Subsection (a) shall not apply to any indebtedness if all the requirements of subsection (c)(1), (d), (e), (f), and (i) of section 143 and clauses (iv), (v), and (vii) of subsection (c)(2)(A), were not in fact met with respect to such indebtedness. Except to the extent provided in regulations, the requirements described in the preceding sentence shall be treated as met if there is a certification, under penalty of perjury, that such requirements are met. Except as provided in subparagraph (B), a mortgage credit certificate shall be treated as in effect with respect to interest attributable to the period— beginning on the date such certificate is issued, and ending on the earlier of the date on which— the certificate is revoked by the issuing authority, or the residence to which such certificate relates ceases to be the principal residence of the individual to whom the certificate relates. A certificate shall not apply to any indebtedness which is incurred after the close of the second calendar year following the calendar year for which the issuing authority made the applicable election under subsection (c)(2)(A)(ii). Any issuing authority which revokes any mortgage credit certificate shall notify the Secretary of such revocation at such time and in such manner as the Secretary shall prescribe by regulations. The Secretary may prescribe regulations which allow the administrator of a mortgage credit certificate program to reissue a mortgage credit certificate specifying a certified mortgage indebtedness that replaces the outstanding balance of the certified mortgage indebtedness specified on the original certificate to any taxpayer to whom the original certificate was issued, under such terms and conditions as the Secretary determines are necessary to ensure that the amount of the credit allowable under subsection (a) with respect to such reissued certificate is equal to or less than the amount of credit which would be allowable under subsection (a) with respect to the original certificate for any taxable year ending after such reissuance. At least 90 days before any mortgage credit certificate is to be issued after a qualified mortgage credit certificate program, the issuing authority shall provide reasonable public notice of— the eligibility requirements for such certificate, the methods by which such certificates are to be issued, and such other information as the Secretary may require. No credit shall be allowed under subsection (a) for any interest paid or accrued to a person who is a related person to the taxpayer (within the meaning of section 144(a)(3)(A)). The term “principal residence” has the same meaning as when used in section 121. The term “qualified rehabilitation” has the meaning given such term by section 143(k)(5)(B). The term “qualified home improvement” means an alteration, repair, or improvement described in section 143(k)(4). The term “qualified mortgage bond” has the meaning given such term by section 143(a)(1). For purposes of this section, the term “single family residence” includes any manufactured home which has a minimum of 400 square feet of living space and a minimum width in excess of 102 inches and which is of a kind customarily used at a fixed location. Nothing in the preceding sentence shall be construed as providing that such a home will be taken into account in making determinations under section 143.

(f) Reduction in aggregate amount of qualified mortgage bonds which may be issued where certain requirements not met If for any calendar year any mortgage credit certificate program which satisfies procedural requirements with respect to volume limitations prescribed by the Secretary fails to meet the requirements of paragraph (2) of subsection (d), such requirements shall be treated as satisfied with respect to any certified indebtedness of such program, but the applicable State ceiling under subsection (d) of section 146 for the State in which such program operates shall be reduced by 1.25 times the correction amount with respect to such failure. Such reduction shall be applied to such State ceiling for the calendar year following the calendar year in which the Secretary determines the correction amount with respect to such failure. For purposes of paragraph (1), the term “correction amount” means an amount equal to the excess credit amount divided by 0.25. For purposes of subparagraph (A)(ii), the term “excess credit amount” means the excess of— the credit amount for any mortgage credit certificate program, over the amount which would have been the credit amount for such program had such program met the requirements of paragraph (2) of subsection (d). For purposes of clause (i), the term “credit amount” means the sum of the products determined under clauses (i) and (ii) of subsection (d)(2)(A). In the case of a State having one or more constitutional home rule cities (within the meaning of section 146(d)(3)(C)), the reduction in the State ceiling by reason of paragraph (1) shall be allocated to the constitutional home rule city, or to the portion of the State not within such city, whichever caused the reduction. The provisions of this subsection shall not apply in any case in which there is a certification program which is designed to ensure that the requirements of this section are met and which meets such requirements as the Secretary may by regulations prescribe. The Secretary may waive the application of paragraph (1) in any case in which he determines that the failure is due to reasonable cause.

(g) Reporting requirements Each person who makes a loan which is a certified indebtedness amount under any mortgage credit certificate shall file a report with the Secretary containing— the name, address, and social security account number of the individual to which the certificate was issued, the certificate’s issuer, date of issue, certified indebtedness amount, and certificate credit rate, and such other information as the Secretary may require by regulations. Each person who issues a mortgage credit certificate shall file a report showing such information as the Secretary shall by regulations prescribe. Any such report shall be filed at such time and in such manner as the Secretary may require by regulations.

(h) Regulations; contracts The Secretary shall prescribe such regulations as may be necessary to carry out the purposes of this section, including regulations which may require recipients of mortgage credit certificates to pay a reasonable processing fee to defray the expenses incurred in administering the program. The Secretary is authorized to enter into contracts with any person to provide services in connection with the administration of this section.

(i) Recapture of portion of Federal subsidy from use of mortgage credit certificates For provisions increasing the tax imposed by this chapter to recapture a portion of the Federal subsidy from the use of mortgage credit certificates, see section 143(m).

§ 25A American Opportunity and Lifetime Learning credits

(a) Allowance of credit In the case of an individual, there shall be allowed as a credit against the tax imposed by this chapter for the taxable year the amount equal to the sum of— the American Opportunity Tax Credit, plus the Lifetime Learning Credit.

(b) American Opportunity Tax Credit In the case of any eligible student for whom an election is in effect under this section for any taxable year, the American Opportunity Tax Credit is an amount equal to the sum of— 100 percent of so much of the qualified tuition and related expenses paid by the taxpayer during the taxable year (for education furnished to the eligible student during any academic period beginning in such taxable year) as does not exceed $2, 000, pl u s 25 p erce n t o f s u c h e x p e n sesso p ai d a se x cee d s$ 2,000 but does not exceed $4,000. An election to have this section apply with respect to any eligible student for purposes of the American Opportunity Tax Credit under subsection (a)(1) may not be made for any taxable year if such an election (by the taxpayer or any other individual) is in effect with respect to such student for any 4 prior taxable years. The American Opportunity Tax Credit under subsection (a)(1) shall not be allowed for a taxable year with respect to the qualified tuition and related expenses of an individual unless such individual is an eligible student for at least one academic period which begins during such year. The American Opportunity Tax Credit under subsection (a)(1) shall not be allowed for a taxable year with respect to the qualified tuition and related expenses of an eligible student if the student has completed (before the beginning of such taxable year) the first 4 years of postsecondary education at an eligible educational institution. The American Opportunity Tax Credit under subsection (a)(1) shall not be allowed for qualified tuition and related expenses for the enrollment or attendance of a student for any academic period if such student has been convicted of a Federal or State felony offense consisting of the possession or distribution of a controlled substance before the end of the taxable year with or within which such period ends. For purposes of this subsection, the term “eligible student” means, with respect to any academic period, a student who— meets the requirements of section 484(a)(1) of the Higher Education Act of 1965 ( 20 U.S.C. 1091(a)(1) ), as in effect on the date of the enactment of this section, and is carrying at least ½ the normal full-time work load for the course of study the student is pursuing. No American Opportunity Tax Credit shall be allowed under this section for any taxable year in the disallowance period. For purposes of subparagraph (A), the disallowance period is— the period of 10 taxable years after the most recent taxable year for which there was a final determination that the taxpayer’s claim of the American Opportunity Tax Credit under this section was due to fraud, and the period of 2 taxable years after the most recent taxable year for which there was a final determination that the taxpayer’s claim of the American Opportunity Tax Credit under this section was due to reckless or intentional disregard of rules and regulations (but not due to fraud). In the case of a taxpayer who is denied the American Opportunity Tax Credit under this section for any taxable year as a result of the deficiency procedures under subchapter B of chapter 63, no American Opportunity Tax Credit shall be allowed under this section for any subsequent taxable year unless the taxpayer provides such information as the Secretary may require to demonstrate eligibility for such credit.

(c) Lifetime Learning Credit The Lifetime Learning Credit for any taxpayer for any taxable year is an amount equal to 20 percent of so much of the qualified tuition and related expenses paid by the taxpayer during the taxable year (for education furnished during any academic period beginning in such taxable year) as does not exceed $10,000. The qualified tuition and related expenses with respect to an individual who is an eligible student for whom a 1 American Opportunity Tax Credit under subsection (a)(1) is allowed for the taxable year shall not be taken into account under this subsection. For purposes of paragraph (1), qualified tuition and related expenses shall include expenses described in subsection (f)(1) with respect to any course of instruction at an eligible educational institution to acquire or improve job skills of the individual.

(d) Limitations based on modified adjusted gross income The American Opportunity Tax Credit and the Lifetime Learning Credit shall each (determined without regard to this paragraph) be reduced (but not below zero) by the amount which bears the same ratio to each such credit (as so determined) as— the excess of— the taxpayer’s modified adjusted gross income for such taxable year, over $80, 000 ($ 160,000 in the case of a joint return), bears to $10, 000 ($ 20,000 in the case of a joint return). For purposes of this subsection, the term “modified adjusted gross income” means the adjusted gross income of the taxpayer for the taxable year increased by any amount excluded from gross income under section 911, 931, or 933.

(e) Election not to have section apply A taxpayer may elect not to have this section apply with respect to the qualified tuition and related expenses of an individual for any taxable year.

(f) Definitions For purposes of this section— The term “qualified tuition and related expenses” means tuition and fees required for the enrollment or attendance of— the taxpayer, the taxpayer’s spouse, or any dependent of the taxpayer with respect to whom the taxpayer is allowed a deduction under section 151, at an eligible educational institution for courses of instruction of such individual at such institution. Such term does not include expenses with respect to any course or other education involving sports, games, or hobbies, unless such course or other education is part of the individual’s degree program. Such term does not include student activity fees, athletic fees, insurance expenses, or other expenses unrelated to an individual’s academic course of instruction. For purposes of determining the American Opportunity Tax Credit, subparagraph (A) shall be applied by substituting “tuition, fees, and course materials” for “tuition and fees”. The term “eligible educational institution” means an institution— which is described in section 481 of the Higher Education Act of 1965 ( 20 U.S.C. 1088 ), as in effect on the date of the enactment of this section, and which is eligible to participate in a program under title IV of such Act.

(g) Special rules No credit shall be allowed under subsection (a) to an individual unless the individual includes on the return of tax for the taxable year— such individual’s social security number, and in the case of a credit with respect to the qualified tuition and related expenses of an individual other than the taxpayer or the taxpayer’s spouse, the name and social security number of such individual. No American Opportunity Tax Credit shall be allowed under this section unless the taxpayer includes the employer identification number of any institution to which the taxpayer paid qualified tuition and related expenses taken into account under this section on the return of tax for the taxable year. For purposes of this paragraph, the term “social security number” shall have the meaning given such term in section 24(h)(7). The amount of qualified tuition and related expenses otherwise taken into account under subsection (a) with respect to an individual for an academic period shall be reduced (before the application of subsections (b), (c), and (d)) by the sum of any amounts paid for the benefit of such individual which are allocable to such period as— a qualified scholarship which is excludable from gross income under section 117, an educational assistance allowance under chapter 30, 31, 32, 34, or 35 of title 38, United States Code, or under chapter 1606 of title 10, United States Code, and a payment (other than a gift, bequest, devise, or inheritance within the meaning of section 102(a)) for such individual’s educational expenses, or attributable to such individual’s enrollment at an eligible educational institution, which is excludable from gross income under any law of the United States. If a deduction under section 151 with respect to an individual is allowed to another taxpayer for a taxable year beginning in the calendar year in which such individual’s taxable year begins— no credit shall be allowed under subsection (a) to such individual for such individual’s taxable year, qualified tuition and related expenses paid by such individual during such individual’s taxable year shall be treated for purposes of this section as paid by such other taxpayer, and a statement described in paragraph (8) and received by such individual shall be treated as received by the taxpayer. If qualified tuition and related expenses are paid by the taxpayer during a taxable year for an academic period which begins during the first 3 months following such taxable year, such academic period shall be treated for purposes of this section as beginning during such taxable year. No credit shall be allowed under this section for any expense for which a deduction is allowed under any other provision of this chapter. If the taxpayer is a married individual (within the meaning of section 7703), this section shall apply only if the taxpayer and the taxpayer’s spouse file a joint return for the taxable year. If the taxpayer is a nonresident alien individual for any portion of the taxable year, this section shall apply only if such individual is treated as a resident alien of the United States for purposes of this chapter by reason of an election under subsection (g) or (h) of section 6013. Except as otherwise provided by the Secretary, no credit shall be allowed under this section unless the taxpayer receives a statement furnished under section 6050S(d) which contains all of the information required by paragraph (2) thereof.

([(h) Repealed. Pub. L. 116–260, div. EE, title I, § 104(a)(2), Dec. 27, 2020, 134 Stat. 3041]

(i) Portion of American Opportunity Tax Credit made refundable Forty percent of so much of the credit allowed under subsection (a) as is attributable to the American Opportunity Tax Credit (determined after application of subsection (d) and without regard to this paragraph 2 and section 26(a)) shall be treated as a credit allowable under subpart C (and not allowed under subsection (a)). The preceding sentence shall not apply to any taxpayer for any taxable year if such taxpayer is a child to whom subsection (g) of section 1 applies for such taxable year.

(j) Regulations The Secretary may prescribe such regulations as may be necessary or appropriate to carry out this section, including regulations providing for a recapture of the credit allowed under this section in cases where there is a refund in a subsequent taxable year of any amount which was taken into account in determining the amount of such credit.

§ 25B Elective deferrals and IRA contributions by certain individuals

(a) Allowance of credit In the case of an eligible individual, there shall be allowed as a credit against the tax imposed by this subtitle for the taxable year an amount equal to the applicable percentage of so much of the qualified retirement savings contributions of the eligible individual for the taxable year as do not exceed $2,000.

(b) Applicable percentage For purposes of this section— In the case of a joint return, the applicable percentage is— if the adjusted gross income of the taxpayer is not over $30, 000, 50 p erce n t, i f t h e a d j u s t e d g ross in co m eo f t h e t a x p a yer i so v er$ 30,000 but not over $32, 500, 20 p erce n t, i f t h e a d j u s t e d g ross in co m eo f t h e t a x p a yer i so v er$ 32,500 but not over $50, 000, 10 p erce n t, an d i f t h e a d j u s t e d g ross in co m eo f t h e t a x p a yer i so v er$ 50,000, zero percent. In the case of— a head of household, the applicable percentage shall be determined under paragraph (1) except that such paragraph shall be applied by substituting for each dollar amount therein (as adjusted under paragraph (3)) a dollar amount equal to 75 percent of such dollar amount, and any taxpayer not described in paragraph (1) or subparagraph (A), the applicable percentage shall be determined under paragraph (1) except that such paragraph shall be applied by substituting for each dollar amount therein (as adjusted under paragraph (3)) a dollar amount equal to 50 percent of such dollar amount. In the case of any taxable year beginning in a calendar year after 2006, each of the dollar amounts in paragraph (1) shall be increased by an amount equal to— such dollar amount, multiplied by the cost-of-living adjustment determined under section 1(f)(3) for the calendar year in which the taxable year begins, determined by substituting “calendar year 2005” for “calendar year 2016” in subparagraph (A)(ii) thereof. Any increase determined under the preceding sentence shall be rounded to the nearest multiple of $500.

(c) Eligible individual For purposes of this section— The term “eligible individual” means any individual if such individual has attained the age of 18 as of the close of the taxable year. The term “eligible individual” shall not include— any individual with respect to whom a deduction under section 151 is allowed to another taxpayer for a taxable year beginning in the calendar year in which such individual’s taxable year begins, and any individual who is a student (as defined in section 152(f)(2)).

(d) Qualified retirement savings contributions For purposes of this section— The term “qualified retirement savings contributions” means, with respect to any taxable year, the sum of— the amount of contributions made by the eligible individual during such taxable year to the ABLE account (within the meaning of section 529A) of which such individual is the designated beneficiary, and in the case of any taxable year beginning before January 1, 2027 — the amount of the qualified retirement contributions (as defined in section 219(e)) made by the eligible individual, the amount of— any elective deferrals (as defined in section 402(g)(3)) of such individual, and any elective deferral of compensation by such individual under an eligible deferred compensation plan (as defined in section 457(b)) of an eligible employer described in section 457(e)(1)(A), and the amount of voluntary employee contributions by such individual to any qualified retirement plan (as defined in section 4974(c)). The qualified retirement savings contributions determined under paragraph (1) shall be reduced (but not below zero) by the aggregate distributions received by the individual during the testing period from any entity of a type to which contributions under paragraph (1) may be made. The preceding sentence shall not apply to the portion of any distribution which is not includible in gross income by reason of a trustee-to-trustee transfer or a rollover distribution. For purposes of subparagraph (A), the testing period, with respect to a taxable year, is the period which includes— such taxable year, the 2 preceding taxable years, and the period after such taxable year and before the due date (including extensions) for filing the return of tax for such taxable year. There shall not be taken into account under subparagraph (A)— any distribution referred to in section 72(p), 401(k)(8), 401(m)(6), 402(g)(2), 404(k), or 408(d)(4), and any distribution to which section 408A(d)(3) applies. For purposes of determining distributions received by an individual under subparagraph (A) for any taxable year, any distribution received by the spouse of such individual shall be treated as received by such individual if such individual and spouse file a joint return for such taxable year and for the taxable year during which the spouse receives the distribution.

(e) Adjusted gross income For purposes of this section, adjusted gross income shall be determined without regard to sections 911, 931, and 933.

(f) Investment in the contract Notwithstanding any other provision of law, a qualified retirement savings contribution shall not fail to be included in determining the investment in the contract for purposes of section 72 by reason of the credit under this section.

§ 25C Energy efficient home improvement credit

(a) Allowance of credit In the case of an individual, there shall be allowed as a credit against the tax imposed by this chapter for the taxable year an amount equal to 30 percent of the sum of— the amount paid or incurred by the taxpayer for qualified energy efficiency improvements installed during such taxable year, the amount of the residential energy property expenditures paid or incurred by the taxpayer during such taxable year, and the amount paid or incurred by the taxpayer during the taxable year for home energy audits.

(b) Limitations The credit allowed under this section with respect to any taxpayer for any taxable year shall not exceed $1, 200. T h ecre d i t a ll o w e d u n d er t hi ssec t i o nb yre a so n o f s u b sec t i o n (a) (2) w i t h res p ec tt o an y t a x p a yer f or an y t a x ab l eye a rs ha ll n o t e x cee d, w i t h res p ec tt o an y i t e m o f q u a l i f i e d e n er g y p ro p er t y,$ 600. The credit allowed under this section by reason of subsection (a)(1) with respect to any taxpayer for any taxable year shall not exceed, in the aggregate with respect to all exterior windows and skylights, $600. T h ecre d i t a ll o w e d u n d er t hi ssec t i o nb yre a so n o f s u b sec t i o n (a) (1) w i t h res p ec tt o an y t a x p a yer f or an y t a x ab l eye a rs ha ll n o t e x cee d —$ 250 in the case of any exterior door, and $500 in t h e a gg re g a t e w i t h res p ec tt o a ll e x t er i or d oors . N o tw i t h s t an d in g p a r a g r a p h s (1) an d (2), t h ecre d i t a ll o w e d u n d er t hi ssec t i o nb yre a so n o f s u b sec t i o n (a) (2) w i t h res p ec tt o an y t a x p a yer f or an y t a x ab l eye a rs ha ll n o t, in t h e a gg re g a t e, e x cee d$ 2,000 with respect to amounts paid or incurred for property described in clauses (i) and (ii) of subsection (d)(2)(A) and in subsection (d)(2)(B). The amount of the credit allowed under this section by reason of subsection (a)(3) shall not exceed $150. No credit shall be allowed under this section by reason of subsection (a)(3) unless the taxpayer includes with the taxpayer’s return of tax such information or documentation as the Secretary may require.

(c) Qualified energy efficiency improvements For purposes of this section— The term “qualified energy efficiency improvements” means any energy efficient building envelope component, if— such component is installed in or on a dwelling unit located in the United States and owned and used by the taxpayer as the taxpayer’s principal residence (within the meaning of section 121), the original use of such component commences with the taxpayer, and such component reasonably can be expected to remain in use for at least 5 years. The term “energy efficient building envelope component” means a building envelope component which meets— in the case of an exterior window or skylight, Energy Star most efficient certification requirements, in the case of an exterior door, applicable Energy Star requirements, and in the case of any other component, the prescriptive criteria for such component established by the most recent International Energy Conservation Code standard in effect as of the beginning of the calendar year which is 2 years prior to the calendar year in which such component is placed in service. The term “building envelope component” means— any insulation material or system, including air sealing material or system, which is specifically and primarily designed to reduce the heat loss or gain of a dwelling unit when installed in or on such dwelling unit, exterior windows (including skylights), and exterior doors. The term “dwelling unit” includes a manufactured home which conforms to Federal Manufactured Home Construction and Safety Standards (part 3280 of title 24, Code of Federal Regulations).

(d) Residential energy property expenditures For purposes of this section— The term “residential energy property expenditures” means expenditures made by the taxpayer for qualified energy property which is— installed on or in connection with a dwelling unit located in the United States and used as a residence by the taxpayer, and originally placed in service by the taxpayer. Such term includes expenditures for labor costs properly allocable to the onsite preparation, assembly, or original installation of the property. The term “qualified energy property” means any of the following: Any of the following which meet or exceed the highest efficiency tier (not including any advanced tier) established by the Consortium for Energy Efficiency which is in effect as of the beginning of the calendar year in which the property is placed in service: An electric or natural gas heat pump water heater. An electric or natural gas heat pump. A central air conditioner. A natural gas, propane, or oil water heater. A natural gas, propane, or oil furnace or hot water boiler. A biomass stove or boiler which— uses the burning of biomass fuel to heat a dwelling unit located in the United States and used as a residence by the taxpayer, or to heat water for use in such a dwelling unit, and has a thermal efficiency rating of at least 75 percent (measured by the higher heating value of the fuel). Any oil furnace or hot water boiler which— meets or exceeds 2021 Energy Star efficiency criteria, and is rated by the manufacturer for use with fuel blends at least 20 percent of the volume of which consists of an eligible fuel. Any improvement to, or replacement of, a panelboard, sub-panelboard, branch circuits, or feeders which— is installed in a manner consistent with the National Electric Code, has a load capacity of not less than 200 amps, is installed in conjunction with— any qualified energy efficiency improvements, or any qualified energy property described in subparagraphs (A) through (C) for which a credit is allowed under this section for expenditures with respect to such property, and enables the installation and use of any property described in subclause (I) or (II) of clause (iii). For purposes of paragraph (2), the term “eligible fuel” means— biodiesel and renewable diesel (within the meaning of section 40A), second generation biofuel (within the meaning of section 40), and transportation fuel (as defined in section 45Z(d)(5)).

(e) Home energy audits For purposes of this section, the term “home energy audit” means an inspection and written report with respect to a dwelling unit located in the United States and owned or used by the taxpayer as the taxpayer’s principal residence (within the meaning of section 121) which— identifies the most significant and cost-effective energy efficiency improvements with respect to such dwelling unit, including an estimate of the energy and cost savings with respect to each such improvement, and is conducted and prepared by a home energy auditor that meets the certification or other requirements specified by the Secretary in regulations or other guidance (as prescribed by the Secretary not later than 365 days after the date of the enactment of this subsection).

(f) Special rules For purposes of this section— Rules similar to the rules under paragraphs (4), (5), (6), (7), and (8) of section 25D(e) shall apply. Any expenditure otherwise qualifying as an expenditure under this section shall not be treated as failing to so qualify merely because such expenditure was made with respect to two or more dwelling units. In the case of any expenditure described in subparagraph (A), the amount of the credit allowable under subsection (a) shall (subject to paragraph (1)) be computed separately with respect to the amount of the expenditure made for each dwelling unit. For purposes of determining the amount of expenditures made by any individual with respect to any property, there shall not be taken into account expenditures which are made from subsidized energy financing (as defined in section 48(a)(4)(C)).

(h) Product identification number requirement No credit shall be allowed under subsection (a) with respect to any item of specified property placed in service after December 31, 2024 , unless— such item is produced by a qualified manufacturer, and the taxpayer includes the qualified product identification number of such item on the return of tax for the taxable year. For purposes of this section, the term “qualified product identification number” means, with respect to any item of specified property, the product identification number assigned to such item by the qualified manufacturer pursuant to the methodology referred to in paragraph (3). For purposes of this section, the term “qualified manufacturer” means any manufacturer of specified property which enters into an agreement with the Secretary which provides that such manufacturer will— assign a product identification number to each item of specified property produced by such manufacturer utilizing a methodology that will ensure that such number (including any alphanumeric) is unique to each such item (by utilizing numbers or letters which are unique to such manufacturer or by such other method as the Secretary may provide), label such item with such number in such manner as the Secretary may provide, and make periodic written reports to the Secretary (at such times and in such manner as the Secretary may provide) of the product identification numbers so assigned and including such information as the Secretary may require with respect to the item of specified property to which such number was so assigned. For purposes of this subsection, the term “specified property” means any qualified energy property and any property described in subparagraph (B) or (C) of subsection (c)(3).

(i) Termination This section shall not apply with respect to any property placed in service after December 31, 2025 .

§ 25D Residential clean energy credit

(a) Allowance of credit In the case of an individual, there shall be allowed as a credit against the tax imposed by this chapter for the taxable year an amount equal to the sum of the applicable percentages of— the qualified solar electric property expenditures, the qualified solar water heating property expenditures, the qualified fuel cell property expenditures, the qualified small wind energy property expenditures, the qualified geothermal heat pump property expenditures, and the qualified battery storage technology expenditures, made by the taxpayer during such year.

(b) Limitations In the case of any qualified fuel cell property expenditure, the credit allowed under subsection (a) (determined without regard to subsection (c)) for any taxable year shall not exceed $500 with respect to each half kilowatt of capacity of the qualified fuel cell property (as defined in section 48(c)(1)) to which such expenditure relates. No credit shall be allowed under this section for an item of property described in subsection (d)(1) unless such property is certified for performance by the non-profit Solar Rating Certification Corporation or a comparable entity endorsed by the government of the State in which such property is installed.

(c) Carryforward of unused credit If the credit allowable under subsection (a) exceeds the limitation imposed by section 26(a) for such taxable year reduced by the sum of the credits allowable under this subpart (other than this section), such excess shall be carried to the succeeding taxable year and added to the credit allowable under subsection (a) for such succeeding taxable year.

(d) Definitions For purposes of this section— The term “qualified solar water heating property expenditure” means an expenditure for property to heat water for use in a dwelling unit located in the United States and used as a residence by the taxpayer if at least half of the energy used by such property for such purpose is derived from the sun. The term “qualified solar electric property expenditure” means an expenditure for property which uses solar energy to generate electricity for use in a dwelling unit located in the United States and used as a residence by the taxpayer. The term “qualified fuel cell property expenditure” means an expenditure for qualified fuel cell property (as defined in section 48(c)(1), without regard to subparagraph (D) thereof) installed on or in connection with a dwelling unit located in the United States and used as a principal residence (within the meaning of section 121) by the taxpayer. The term “qualified small wind energy property expenditure” means an expenditure for property which uses a wind turbine to generate electricity for use in connection with a dwelling unit located in the United States and used as a residence by the taxpayer. The term “qualified geothermal heat pump property expenditure” means an expenditure for qualified geothermal heat pump property installed on or in connection with a dwelling unit located in the United States and used as a residence by the taxpayer. The term “qualified geothermal heat pump property” means any equipment which— uses the ground or ground water as a thermal energy source to heat the dwelling unit referred to in subparagraph (A) or as a thermal energy sink to cool such dwelling unit, and meets the requirements of the Energy Star program which are in effect at the time that the expenditure for such equipment is made. The term “qualified battery storage technology expenditure” means an expenditure for battery storage technology which— is installed in connection with a dwelling unit located in the United States and used as a residence by the taxpayer, and has a capacity of not less than 3 kilowatt hours.

(e) Special rules For purposes of this section— Expenditures for labor costs properly allocable to the onsite preparation, assembly, or original installation of the property described in subsection (d) and for piping or wiring to interconnect such property to the dwelling unit shall be taken into account for purposes of this section. No expenditure relating to a solar panel or other property installed as a roof (or portion thereof) shall fail to be treated as property described in paragraph (1) or (2) of subsection (d) solely because it constitutes a structural component of the structure on which it is installed. Expenditures which are properly allocable to a swimming pool, hot tub, or any other energy storage medium which has a function other than the function of such storage shall not be taken into account for purposes of this section. In the case of any dwelling unit with respect to which qualified fuel cell property expenditures are made and which is jointly occupied and used during any calendar year as a residence by two or more individuals, the following rules shall apply: The maximum amount of such expenditures which may be taken into account under subsection (a) by all such individuals with respect to such dwelling unit during such calendar year shall be $1,667 in the case of each half kilowatt of capacity of qualified fuel cell property (as defined in section 48(c)(1)) with respect to which such expenditures relate. The expenditures allocated to any individual for the taxable year in which such calendar year ends shall be an amount equal to the lesser of— the amount of expenditures made by such individual with respect to such dwelling during such calendar year, or the maximum amount of such expenditures set forth in subparagraph (A) multiplied by a fraction— the numerator of which is the amount of such expenditures with respect to such dwelling made by such individual during such calendar year, and the denominator of which is the total expenditures made by all such individuals with respect to such dwelling during such calendar year. In the case of an individual who is a tenant-stockholder (as defined in section 216) in a cooperative housing corporation (as defined in such section), such individual shall be treated as having made his tenant-stockholder’s proportionate share (as defined in section 216(b)(3)) of any expenditures of such corporation. In the case of an individual who is a member of a condominium management association with respect to a condominium which the individual owns, such individual shall be treated as having made the individual’s proportionate share of any expenditures of such association. For purposes of this paragraph, the term “condominium management association” means an organization which meets the requirements of paragraph (1) of section 528(c) (other than subparagraph (E) thereof) with respect to a condominium project substantially all of the units of which are used as residences. If less than 80 percent of the use of an item is for nonbusiness purposes, only that portion of the expenditures for such item which is properly allocable to use for nonbusiness purposes shall be taken into account. Except as provided in subparagraph (B), an expenditure with respect to an item shall be treated as made when the original installation of the item is completed. In the case of an expenditure in connection with the construction or reconstruction of a structure, such expenditure shall be treated as made when the original use of the constructed or reconstructed structure by the taxpayer begins.

(f) Basis adjustments For purposes of this subtitle, if a credit is allowed under this section for any expenditure with respect to any property, the increase in the basis of such property which would (but for this subsection) result from such expenditure shall be reduced by the amount of the credit so allowed.

(g) Applicable percentage For purposes of subsection (a), the applicable percentage shall be— in the case of property placed in service after December 31, 2016 , and before January 1, 2020 , 30 percent, in the case of property placed in service after December 31, 2019 , and before January 1, 2022 , 26 percent, and in the case of property placed in service after December 31, 2021 , 30 percent.

(h) Termination The credit allowed under this section shall not apply with respect to any expenditures made after December 31, 2025 .

§ 25E Previously-owned clean vehicles

(a) Allowance of credit In the case of a qualified buyer who during a taxable year places in service a previously-owned clean vehicle, there shall be allowed as a credit against the tax imposed by this chapter for the taxable year an amount equal to the lesser of— $4,000, or the amount equal to 30 percent of the sale price with respect to such vehicle.

(b) Limitation based on modified adjusted gross income No credit shall be allowed under subsection (a) for any taxable year if— the lesser of— the modified adjusted gross income of the taxpayer for such taxable year, or the modified adjusted gross income of the taxpayer for the preceding taxable year, exceeds the threshold amount. For purposes of paragraph (1)(B), the threshold amount shall be— in the case of a joint return or a surviving spouse (as defined in section 2(a)), $150, 000, in t h ec a seo f ah e a d o f h o u se h o l d (a s d e f in e d in sec t i o n 2 (b)),$ 112,500, and in the case of a taxpayer not described in subparagraph (A) or (B), $75,000. For purposes of this subsection, the term “modified adjusted gross income” means adjusted gross income increased by any amount excluded from gross income under section 911, 931, or 933.

(c) Definitions For purposes of this section— The term “previously-owned clean vehicle” means, with respect to a taxpayer, a motor vehicle— the model year of which is at least 2 years earlier than the calendar year in which the taxpayer acquires such vehicle, the original use of which commences with a person other than the taxpayer, which is acquired by the taxpayer in a qualified sale, and which— meets the requirements of subparagraphs (C), (D), (E), (F), and (H) (except for clause (iv) thereof) of section 30D(d)(1), or is a motor vehicle which— satisfies the requirements under subparagraphs (A) and (B) of section 30B(b)(3), and has a gross vehicle weight rating of less than 14,000 pounds. The term “qualified sale” means a sale of a motor vehicle— by a dealer (as defined in section 30D(g)(8)), for a sale price which does not exceed $25,000, and which is the first transfer since the date of the enactment of this section to a qualified buyer other than the person with whom the original use of such vehicle commenced. The term “qualified buyer” means, with respect to a sale of a motor vehicle, a taxpayer— who is an individual, who purchases such vehicle for use and not for resale, with respect to whom no deduction is allowable with respect to another taxpayer under section 151, and who has not been allowed a credit under this section for any sale during the 3-year period ending on the date of the sale of such vehicle. The terms “motor vehicle” and “capacity” have the meaning given such terms in paragraphs (2) and (4) of section 30D(d), respectively.

(d) VIN number requirement No credit shall be allowed under subsection (a) with respect to any vehicle unless the taxpayer includes the vehicle identification number of such vehicle on the return of tax for the taxable year.

(e) Application of certain rules For purposes of this section, rules similar to the rules of section 30D(f) (without regard to paragraph (10) or (11) thereof) shall apply for purposes of this section.

(f) Transfer of credit Rules similar to the rules of section 30D(g) shall apply.

(g) Termination No credit shall be allowed under this section with respect to any vehicle acquired after September 30, 2025 .

§ 25F Qualified elementary and secondary education scholarships

(a) Allowance of credit In the case of an individual who is a citizen or resident of the United States (within the meaning of section 7701(a)(9)), there shall be allowed as a credit against the tax imposed by this chapter for the taxable year an amount equal to the aggregate amount of qualified contributions made by the taxpayer during the taxable year.

(b) Limitations The credit allowed under subsection (a) to any taxpayer for any taxable year shall not exceed $1,700. The amount allowed as a credit under subsection (a) for a taxable year shall be reduced by the amount allowed as a credit on any State tax return of the taxpayer for qualified contributions made by the taxpayer during the taxable year.

(c) Definitions For purposes of this section— The term “covered State” means one of the States, or the District of Columbia, that, for a calendar year, voluntarily elects to participate under this section and to identify scholarship granting organizations in the State, in accordance with subsection (g). The term “eligible student” means an individual who— is a member of a household with an income which, for the calendar year prior to the date of the application for a scholarship, is not greater than 300 percent of the area median gross income (as such term is used in section 42), and is eligible to enroll in a public elementary or secondary school. The term “qualified contribution” means a charitable contribution of cash to a scholarship granting organization that uses the contribution to fund scholarships for eligible students solely within the State in which the organization is listed pursuant to subsection (g). The term “qualified elementary or secondary education expense” means any expense of an eligible student which is described in section 530(b)(3)(A). The term “scholarship granting organization” means any organization— which— is described in section 501(c)(3) and exempt from tax under section 501(a), and is not a private foundation, which prevents the co-mingling of qualified contributions with other amounts by maintaining one or more separate accounts exclusively for qualified contributions, which satisfies the requirements of subsection (d), and which is included on the list submitted for the applicable covered State under subsection (g) for the applicable year.

(d) Requirements for scholarship granting organizations An organization meets the requirements of this subsection if— such organization provides scholarships to 10 or more students who do not all attend the same school, such organization spends not less than 90 percent of the income of the organization on scholarships for eligible students, such organization does not provide scholarships for any expenses other than qualified elementary or secondary education expenses, such organization provides a scholarship to eligible students with a priority for— students awarded a scholarship the previous school year, and after application of clause (i), any eligible students who have a sibling who was awarded a scholarship from such organization, such organization does not earmark or set aside contributions for scholarships on behalf of any particular student, and such organization— verifies the annual household income and family size of eligible students who apply for scholarships to ensure such students meet the requirement of subsection (c)(2)(A), and limits the awarding of scholarships to eligible students who are a member of a household for which the income does not exceed the amount established under subsection (c)(2)(A). A scholarship granting organization may not award a scholarship to any disqualified person. For purposes of this paragraph, a disqualified person shall be determined pursuant to rules similar to the rules of section 4946.

(e) Denial of double benefit Any qualified contribution for which a credit is allowed under this section shall not be taken into account as a charitable contribution for purposes of section 170.

(f) Carryforward of unused credit If the credit allowable under subsection (a) for any taxable year exceeds the limitation imposed by section 26(a) for such taxable year reduced by the sum of the credits allowable under this subpart (other than this section, section 23, and section 25D), such excess shall be carried to the succeeding taxable year and added to the credit allowable under subsection (a) for such taxable year. No credit may be carried forward under this subsection to any taxable year following the fifth taxable year after the taxable year in which the credit arose. For purposes of the preceding sentence, credits shall be treated as used on a first-in first-out basis.

(g) State list of scholarship granting organizations Not later than January 1 of each calendar year (or, with respect to the first calendar year for which this section applies, as early as practicable), a State that voluntarily elects to participate under this section shall provide to the Secretary a list of the scholarship granting organizations that meet the requirements described in subsection (c)(5) and are located in the State. The election under this paragraph shall be made by the Governor of the State or by such other individual, agency, or entity as is designated under State law to make such elections on behalf of the State with respect to Federal tax benefits. Each list submitted under paragraph (1) shall include a certification that the individual, agency, or entity submitting such list on behalf of the State has the authority to perform this function.

(h) Regulations and guidance The Secretary shall issue such regulations or other guidance as the Secretary determines necessary to carry out the purposes of this section, including regulations or other guidance— providing for enforcement of the requirements under subsections (d) and (g), and with respect to recordkeeping or information reporting for purposes of administering the requirements of this section.

§ 26 Limitation based on tax liability; definition of tax liability

(a) Limitation based on amount of tax The aggregate amount of credits allowed by this subpart for the taxable year shall not exceed the sum of— the taxpayer’s regular tax liability for the taxable year reduced by the foreign tax credit allowable under section 27, and the tax imposed by section 55(a) for the taxable year.

(b) Regular tax liability For purposes of this part— The term “regular tax liability” means the tax imposed by this chapter for the taxable year. For purposes of paragraph (1), any tax imposed by any of the following provisions shall not be treated as tax imposed by this chapter: section 55 (relating to minimum tax), section 59A (relating to base erosion and anti-abuse tax), subsection (m)(5)(B), (q), (t), or (v) of section 72 (relating to additional taxes on certain distributions), section 143(m) (relating to recapture of proration of Federal subsidy from use of mortgage bonds and mortgage credit certificates), section 530(d)(4) (relating to additional tax on certain distributions from Coverdell education savings accounts), section 531 (relating to accumulated earnings tax), section 541 (relating to personal holding company tax), section 1351(d)(1) (relating to recoveries of foreign expropriation losses), section 1374 (relating to tax on certain built-in gains of S corporations), section 1375 (relating to tax imposed when passive investment income of corporation having subchapter C earnings and profits exceeds 25 percent of gross receipts), subparagraph (A) of section 7518(g)(6) (relating to nonqualified withdrawals from capital construction funds taxed at highest marginal rate), sections 871(a) and 881 (relating to certain income of nonresident aliens and foreign corporations), section 860E(e) (relating to taxes with respect to certain residual interests), section 884 (relating to branch profits tax), sections 453( l )(3) and 453A(c) (relating to interest on certain deferred tax liabilities), Repealed. Pub. L. 115–141, div. U, title IV, § 401(b)(2) , Mar. 23, 2018 , 132 Stat. 1201 .] section 220(f)(4) (relating to additional tax on Archer MSA distributions not used for qualified medical expenses), section 138(c)(2) (relating to penalty for distributions from Medicare Advantage MSA not used for qualified medical expenses if minimum balance not maintained), sections 106(e)(3)(A)(ii), 223(b)(8)(B)(i)(II), and 408(d)(9)(D)(i)(II) (relating to certain failures to maintain high deductible health plan coverage), section 170( o )(3)(B) (relating to recapture of certain deductions for fractional gifts), section 223(f)(4) (relating to additional tax on health savings account distributions not used for qualified medical expenses), subsections (a)(1)(B)(i) and (b)(4)(A) of section 409A (relating to interest and additional tax with respect to certain deferred compensation), section 36(f) (relating to recapture of homebuyer credit), section 457A(c)(1)(B) (relating to determinability of amounts of compensation), section 529A(c)(3)(A) (relating to additional tax on ABLE account distributions not used for qualified disability expenses), and section 24(j)(2) (relating to excess advance payments).

(c) Tentative minimum tax For purposes of this part, the term “tentative minimum tax” means the amount determined under section 55(b)(1).

§ 27 Taxes of foreign countries and possessions of the United States

The amount of taxes imposed by foreign countries and possessions of the United States shall be allowed as a credit against the tax imposed by this chapter to the extent provided in section 901 1 ( Aug. 16, 1954, ch. 736 , 68A Stat. 13 , § 33; Pub. L. 94–455, title X, § 1051(a) , Oct. 4, 1976 , 90 Stat. 1643 ; renumbered § 27, Pub. L. 98–369, div. A, title IV, § 471(c) , July 18, 1984 , 98 Stat. 826 ; Pub. L. 115–141, div. U, title IV, § 401(d)(1)(A) , Mar. 23, 2018 , 132 Stat. 1206 .)

[§ 28 Renumbered § 45C]

[§ 29 Renumbered § 45K]

[§ 30 Repealed. Pub. L. 113–295, div. A, title II, § 221(a)(2)(A), Dec. 19, 2014, 128 Stat. 4037]

[§ 30A Repealed. Pub. L. 115–141, div. U, title IV, § 401(d)(1)(B), Mar. 23, 2018, 132 Stat. 1206]

§ 30B Alternative motor vehicle credit

(a) Allowance of credit There shall be allowed as a credit against the tax imposed by this chapter for the taxable year an amount equal to the sum of— the new qualified fuel cell motor vehicle credit determined under subsection (b), the new advanced lean burn technology motor vehicle credit determined under subsection (c), the new qualified hybrid motor vehicle credit determined under subsection (d), the new qualified alternative fuel motor vehicle credit determined under subsection (e), and the plug-in conversion credit determined under subsection (i).

(b) New qualified fuel cell motor vehicle credit For purposes of subsection (a), the new qualified fuel cell motor vehicle credit determined under this subsection with respect to a new qualified fuel cell motor vehicle placed in service by the taxpayer during the taxable year is— $8, 000 ($ 4,000 in the case of a vehicle placed in service after December 31, 2009 ), if such vehicle has a gross vehicle weight rating of not more than 8,500 pounds, $10, 000, i f s u c h v e hi c l e ha s a g ross v e hi c l e w e i g h t r a t in g o f m ore t han 8, 500 p o u n d s b u t n o t m ore t han 14, 000 p o u n d s,$ 20,000, if such vehicle has a gross vehicle weight rating of more than 14,000 pounds but not more than 26,000 pounds, and $40, 000, i f s u c h v e hi c l e ha s a g ross v e hi c l e w e i g h t r a t in g o f m ore t han 26, 000 p o u n d s . T h e am o u n t d e t er min e d u n d er p a r a g r a p h (1) (A) w i t h res p ec tt o an e wq u a l i f i e df u e l ce ll m o t or v e hi c l e w hi c hi s a p a sse n g er a u t o m o bi l eor l i g h tt r u c k s ha ll b e in cre a se d b y —$ 1,000, if such vehicle achieves at least 150 percent but less than 175 percent of the 2002 model year city fuel economy, $1, 500, i f s u c h v e hi c l e a c hi e v es a tl e a s t 175 p erce n t b u tl ess t han 200 p erce n t o f t h e 2002 m o d e l ye a rc i t y f u e l eco n o m y,$ 2,000, if such vehicle achieves at least 200 percent but less than 225 percent of the 2002 model year city fuel economy, $2, 500, i f s u c h v e hi c l e a c hi e v es a tl e a s t 225 p erce n t b u tl ess t han 250 p erce n t o f t h e 2002 m o d e l ye a rc i t y f u e l eco n o m y,$ 3,000, if such vehicle achieves at least 250 percent but less than 275 percent of the 2002 model year city fuel economy, $3, 500, i f s u c h v e hi c l e a c hi e v es a tl e a s t 275 p erce n t b u tl ess t han 300 p erce n t o f t h e 2002 m o d e l ye a rc i t y f u e l eco n o m y, an d$ 4,000, if such vehicle achieves at least 300 percent of the 2002 model year city fuel economy. For purposes of subparagraph (A), the 2002 model year city fuel economy with respect to a vehicle shall be determined in accordance with the following tables: In the case of a passenger automobile: If vehicle inertia weight class is: The 2002 model year city fuel economy is: 1,500 or 1,750 lbs 45.2 mpg 2,000 lbs 39.6 mpg 2,250 lbs 35.2 mpg 2,500 lbs 31.7 mpg 2,750 lbs 28.8 mpg 3,000 lbs 26.4 mpg 3,500 lbs 22.6 mpg 4,000 lbs 19.8 mpg 4,500 lbs 17.6 mpg 5,000 lbs 15.9 mpg 5,500 lbs 14.4 mpg 6,000 lbs 13.2 mpg 6,500 lbs 12.2 mpg 7,000 to 8,500 lbs 11.3 mpg. In the case of a light truck: If vehicle inertia weight class is: The 2002 model year city fuel economy is: 1,500 or 1,750 lbs 39.4 mpg 2,000 lbs 35.2 mpg 2,250 lbs 31.8 mpg 2,500 lbs 29.0 mpg 2,750 lbs 26.8 mpg 3,000 lbs 24.9 mpg 3,500 lbs 21.8 mpg 4,000 lbs 19.4 mpg 4,500 lbs 17.6 mpg 5,000 lbs 16.1 mpg 5,500 lbs 14.8 mpg 6,000 lbs 13.7 mpg 6,500 lbs 12.8 mpg 7,000 to 8,500 lbs 12.1 mpg. For purposes of subparagraph (B), the term “vehicle inertia weight class” has the same meaning as when defined in regulations prescribed by the Administrator of the Environmental Protection Agency for purposes of the administration of title II of the Clean Air Act ( 42 U.S.C. 7521 et seq.). For purposes of this subsection, the term “new qualified fuel cell motor vehicle” means a motor vehicle— which is propelled by power derived from 1 or more cells which convert chemical energy directly into electricity by combining oxygen with hydrogen fuel which is stored on board the vehicle in any form and may or may not require reformation prior to use, which, in the case of a passenger automobile or light truck, has received on or after the date of the enactment of this section a certificate that such vehicle meets or exceeds the Bin 5 Tier II emission level established in regulations prescribed by the Administrator of the Environmental Protection Agency under section 202(i) of the Clean Air Act for that make and model year vehicle, the original use of which commences with the taxpayer, which is acquired for use or lease by the taxpayer and not for resale, and which is made by a manufacturer.

(c) New advanced lean burn technology motor vehicle credit For purposes of subsection (a), the new advanced lean burn technology motor vehicle credit determined under this subsection for the taxable year is the credit amount determined under paragraph (2) with respect to a new advanced lean burn technology motor vehicle placed in service by the taxpayer during the taxable year. The credit amount determined under this paragraph shall be determined in accordance with the following table: In the case of a vehicle which achieves a fuel economy (expressed as a percentage of the 2002 model year city fuel economy) of— The credit amount is— At least 125 percent but less than 150 percent $400 A tl e a s t 150 p erce n t b u tl ess t han 175 p erce n t$ 800 At least 175 percent but less than 200 percent $1, 200 A tl e a s t 200 p erce n t b u tl ess t han 225 p erce n t$ 1,600 At least 225 percent but less than 250 percent $2, 000 A tl e a s t 250 p erce n t$ 2,400. For purposes of clause (i), the 2002 model year city fuel economy with respect to a vehicle shall be determined on a gasoline gallon equivalent basis as determined by the Administrator of the Environmental Protection Agency using the tables provided in subsection (b)(2)(B) with respect to such vehicle. The amount determined under subparagraph (A) with respect to a new advanced lean burn technology motor vehicle shall be increased by the conservation credit amount determined in accordance with the following table: In the case of a vehicle which achieves a lifetime fuel savings (expressed in gallons of gasoline) of— The conservation credit amount is— At least 1,200 but less than 1,800 $250 A tl e a s t 1, 800 b u tl ess t han 2, 400$ 500 At least 2,400 but less than 3,000 $750 A tl e a s t 3, 000$ 1,000. For purposes of this subsection, the term “new advanced lean burn technology motor vehicle” means a passenger automobile or a light truck— with an internal combustion engine which— is designed to operate primarily using more air than is necessary for complete combustion of the fuel, incorporates direct injection, achieves at least 125 percent of the 2002 model year city fuel economy, for 2004 and later model vehicles, has received a certificate that such vehicle meets or exceeds— in the case of a vehicle having a gross vehicle weight rating of 6,000 pounds or less, the Bin 5 Tier II emission standard established in regulations prescribed by the Administrator of the Environmental Protection Agency under section 202(i) of the Clean Air Act for that make and model year vehicle, and in the case of a vehicle having a gross vehicle weight rating of more than 6,000 pounds but not more than 8,500 pounds, the Bin 8 Tier II emission standard which is so established, the original use of which commences with the taxpayer, which is acquired for use or lease by the taxpayer and not for resale, and which is made by a manufacturer. For purposes of this subsection, the term “lifetime fuel savings” means, in the case of any new advanced lean burn technology motor vehicle, an amount equal to the excess (if any) of— 120,000 divided by the 2002 model year city fuel economy for the vehicle inertia weight class, over 120,000 divided by the city fuel economy for such vehicle.

(d) New qualified hybrid motor vehicle credit For purposes of subsection (a), the new qualified hybrid motor vehicle credit determined under this subsection for the taxable year is the credit amount determined under paragraph (2) with respect to a new qualified hybrid motor vehicle placed in service by the taxpayer during the taxable year. In the case of a new qualified hybrid motor vehicle which is a passenger automobile or light truck and which has a gross vehicle weight rating of not more than 8,500 pounds, the amount determined under this paragraph is the sum of the amounts determined under clauses (i) and (ii). The amount determined under this clause is the amount which would be determined under subsection (c)(2)(A) if such vehicle were a vehicle referred to in such subsection. The amount determined under this clause is the amount which would be determined under subsection (c)(2)(B) if such vehicle were a vehicle referred to in such subsection. In the case of any new qualified hybrid motor vehicle to which subparagraph (A) does not apply, the amount determined under this paragraph is the amount equal to the applicable percentage of the qualified incremental hybrid cost of the vehicle as certified under clause (v). For purposes of clause (i), the applicable percentage is— 20 percent if the vehicle achieves an increase in city fuel economy relative to a comparable vehicle of at least 30 percent but less than 40 percent, 30 percent if the vehicle achieves such an increase of at least 40 percent but less than 50 percent, and 40 percent if the vehicle achieves such an increase of at least 50 percent. For purposes of this subparagraph, the qualified incremental hybrid cost of any vehicle is equal to the amount of the excess of the manufacturer’s suggested retail price for such vehicle over such price for a comparable vehicle, to the extent such amount does not exceed— $7, 500, i f s u c h v e hi c l e ha s a g ross v e hi c l e w e i g h t r a t in g o f n o t m ore t han 14, 000 p o u n d s,$ 15,000, if such vehicle has a gross vehicle weight rating of more than 14,000 pounds but not more than 26,000 pounds, and $30,000, if such vehicle has a gross vehicle weight rating of more than 26,000 pounds. For purposes of this subparagraph, the term “comparable vehicle” means, with respect to any new qualified hybrid motor vehicle, any vehicle which is powered solely by a gasoline or diesel internal combustion engine and which is comparable in weight, size, and use to such vehicle. A certification described in clause (i) shall be made by the manufacturer and shall be determined in accordance with guidance prescribed by the Secretary. Such guidance shall specify procedures and methods for calculating fuel economy savings and incremental hybrid costs. For purposes of this subsection— The term “new qualified hybrid motor vehicle” means a motor vehicle— which draws propulsion energy from onboard sources of stored energy which are both— an internal combustion or heat engine using consumable fuel, and a rechargeable energy storage system, which, in the case of a vehicle to which paragraph (2)(A) applies, has received a certificate of conformity under the Clean Air Act and meets or exceeds the equivalent qualifying California low emission vehicle standard under section 243(e)(2) of the Clean Air Act for that make and model year, and in the case of a vehicle having a gross vehicle weight rating of 6,000 pounds or less, the Bin 5 Tier II emission standard established in regulations prescribed by the Administrator of the Environmental Protection Agency under section 202(i) of the Clean Air Act for that make and model year vehicle, and in the case of a vehicle having a gross vehicle weight rating of more than 6,000 pounds but not more than 8,500 pounds, the Bin 8 Tier II emission standard which is so established, which has a maximum available power of at least— 4 percent in the case of a vehicle to which paragraph (2)(A) applies, 10 percent in the case of a vehicle which has a gross vehicle weight rating of more than 8,500 pounds and not more than 14,000 pounds, and 15 percent in the case of a vehicle in excess of 14,000 pounds, which, in the case of a vehicle to which paragraph (2)(B) applies, has an internal combustion or heat engine which has received a certificate of conformity under the Clean Air Act as meeting the emission standards set in the regulations prescribed by the Administrator of the Environmental Protection Agency for 2004 through 2007 model year diesel heavy duty engines or ottocycle heavy duty engines, as applicable, the original use of which commences with the taxpayer, which is acquired for use or lease by the taxpayer and not for resale, and which is made by a manufacturer. Such term shall not include any vehicle which is not a passenger automobile or light truck if such vehicle has a gross vehicle weight rating of less than 8,500 pounds. For purposes of subparagraph (A)(i)(I), the term “consumable fuel” means any solid, liquid, or gaseous matter which releases energy when consumed by an auxiliary power unit. In the case of a vehicle to which paragraph (2)(A) applies, the term “maximum available power” means the maximum power available from the rechargeable energy storage system, during a standard 10 second pulse power or equivalent test, divided by such maximum power and the SAE net power of the heat engine. In the case of a vehicle to which paragraph (2)(B) applies, the term “maximum available power” means the maximum power available from the rechargeable energy storage system, during a standard 10 second pulse power or equivalent test, divided by the vehicle’s total traction power. For purposes of the preceding sentence, the term “total traction power” means the sum of the peak power from the rechargeable energy storage system and the heat engine peak power of the vehicle, except that if such storage system is the sole means by which the vehicle can be driven, the total traction power is the peak power of such storage system. Any vehicle with respect to which a credit is allowable under section 30D (determined without regard to subsection (c) thereof) shall not be taken into account under this section.

(e) New qualified alternative fuel motor vehicle credit Except as provided in paragraph (5), the new qualified alternative fuel motor vehicle credit determined under this subsection is an amount equal to the applicable percentage of the incremental cost of any new qualified alternative fuel motor vehicle placed in service by the taxpayer during the taxable year. For purposes of paragraph (1), the applicable percentage with respect to any new qualified alternative fuel motor vehicle is— 50 percent, plus 30 percent, if such vehicle— has received a certificate of conformity under the Clean Air Act and meets or exceeds the most stringent standard available for certification under the Clean Air Act for that make and model year vehicle (other than a zero emission standard), or has received an order certifying the vehicle as meeting the same requirements as vehicles which may be sold or leased in California and meets or exceeds the most stringent standard available for certification under the State laws of California (enacted in accordance with a waiver granted under section 209(b) of the Clean Air Act) for that make and model year vehicle (other than a zero emission standard). For purposes of the preceding sentence, in the case of any new qualified alternative fuel motor vehicle which weighs more than 14,000 pounds gross vehicle weight rating, the most stringent standard available shall be such standard available for certification on the date of the enactment of the Energy Tax Incentives Act of 2005. For purposes of this subsection, the incremental cost of any new qualified alternative fuel motor vehicle is equal to the amount of the excess of the manufacturer’s suggested retail price for such vehicle over such price for a gasoline or diesel fuel motor vehicle of the same model, to the extent such amount does not exceed— $5, 000, i f s u c h v e hi c l e ha s a g ross v e hi c l e w e i g h t r a t in g o f n o t m ore t han 8, 500 p o u n d s,$ 10,000, if such vehicle has a gross vehicle weight rating of more than 8,500 pounds but not more than 14,000 pounds, $25, 000, i f s u c h v e hi c l e ha s a g ross v e hi c l e w e i g h t r a t in g o f m ore t han 14, 000 p o u n d s b u t n o t m ore t han 26, 000 p o u n d s, an d$ 40,000, if such vehicle has a gross vehicle weight rating of more than 26,000 pounds. For purposes of this subsection— The term “new qualified alternative fuel motor vehicle” means any motor vehicle— which is only capable of operating on an alternative fuel, the original use of which commences with the taxpayer, which is acquired by the taxpayer for use or lease, but not for resale, and which is made by a manufacturer. The term “alternative fuel” means compressed natural gas, liquefied natural gas, liquefied petroleum gas, hydrogen, and any liquid at least 85 percent of the volume of which consists of methanol. In the case of a mixed-fuel vehicle placed in service by the taxpayer during the taxable year, the credit determined under this subsection is an amount equal to— in the case of a 75/25 mixed-fuel vehicle, 70 percent of the credit which would have been allowed under this subsection if such vehicle was a qualified alternative fuel motor vehicle, and in the case of a 90/10 mixed-fuel vehicle, 90 percent of the credit which would have been allowed under this subsection if such vehicle was a qualified alternative fuel motor vehicle. For purposes of this subsection, the term “mixed-fuel vehicle” means any motor vehicle described in subparagraph (C) or (D) of paragraph (3), which— is certified by the manufacturer as being able to perform efficiently in normal operation on a combination of an alternative fuel and a petroleum-based fuel, either— has received a certificate of conformity under the Clean Air Act, or has received an order certifying the vehicle as meeting the same requirements as vehicles which may be sold or leased in California and meets or exceeds the low emission vehicle standard under section 88.105–94 of title 40, Code of Federal Regulations, for that make and model year vehicle, the original use of which commences with the taxpayer, which is acquired by the taxpayer for use or lease, but not for resale, and which is made by a manufacturer. For purposes of this subsection, the term “75/25 mixed-fuel vehicle” means a mixed-fuel vehicle which operates using at least 75 percent alternative fuel and not more than 25 percent petroleum-based fuel. For purposes of this subsection, the term “90/10 mixed-fuel vehicle” means a mixed-fuel vehicle which operates using at least 90 percent alternative fuel and not more than 10 percent petroleum-based fuel.

(f) Limitation on number of new qualified hybrid and advanced lean-burn technology vehicles eligible for credit In the case of a qualified vehicle sold during the phaseout period, only the applicable percentage of the credit otherwise allowable under subsection (c) or (d) shall be allowed. For purposes of this subsection, the phaseout period is the period beginning with the second calendar quarter following the calendar quarter which includes the first date on which the number of qualified vehicles manufactured by the manufacturer of the vehicle referred to in paragraph (1) sold for use in the United States after December 31, 2005 , is at least 60,000. For purposes of paragraph (1), the applicable percentage is— 50 percent for the first 2 calendar quarters of the phaseout period, 25 percent for the 3d and 4th calendar quarters of the phaseout period, and 0 percent for each calendar quarter thereafter. For purposes of this subsection, all persons treated as a single employer under subsection (a) or (b) of section 52 or subsection (m) or ( o ) of section 414 shall be treated as a single manufacturer. For purposes of subparagraph (A), in applying subsections (a) and (b) of section 52 to this section, section 1563 shall be applied without regard to subsection (b)(2)(C) thereof. For purposes of this subsection, the term “qualified vehicle” means any new qualified hybrid motor vehicle (described in subsection (d)(2)(A)) and any new advanced lean burn technology motor vehicle.

(g) Application with other credits So much of the credit which would be allowed under subsection (a) for any taxable year (determined without regard to this subsection) that is attributable to property of a character subject to an allowance for depreciation shall be treated as a credit listed in section 38(b) for such taxable year (and not allowed under subsection (a)). For purposes of this title, the credit allowed under subsection (a) for any taxable year (determined after application of paragraph (1)) shall be treated as a credit allowable under subpart A for such taxable year.

(h) Other definitions and special rules For purposes of this section— The term “motor vehicle” means any vehicle which is manufactured primarily for use on public streets, roads, and highways (not including a vehicle operated exclusively on a rail or rails) and which has at least 4 wheels. The city fuel economy with respect to any vehicle shall be measured in a manner which is substantially similar to the manner city fuel economy is measured in accordance with procedures under part 600 of subchapter Q of chapter I of title 40, Code of Federal Regulations, as in effect on the date of the enactment of this section. The terms “automobile”, “passenger automobile”, “medium duty passenger vehicle”, “light truck”, and “manufacturer” have the meanings given such terms in regulations prescribed by the Administrator of the Environmental Protection Agency for purposes of the administration of title II of the Clean Air Act ( 42 U.S.C. 7521 et seq.). For purposes of this subtitle, the basis of any property for which a credit is allowable under subsection (a) shall be reduced by the amount of such credit so allowed (determined without regard to subsection (g)). The amount of any deduction or other credit allowable under this chapter— for any incremental cost taken into account in computing the amount of the credit determined under subsection (e) shall be reduced by the amount of such credit attributable to such cost, and with respect to a vehicle described under subsection (b) or (c), shall be reduced by the amount of credit allowed under subsection (a) for such vehicle for the taxable year (determined without regard to subsection (g)). In the case of a vehicle whose use is described in paragraph (3) or (4) of section 50(b) and which is not subject to a lease, the person who sold such vehicle to the person or entity using such vehicle shall be treated as the taxpayer that placed such vehicle in service, but only if such person clearly discloses to such person or entity in a document the amount of any credit allowable under subsection (a) with respect to such vehicle (determined without regard to subsection (g)). For purposes of subsection (g), property to which this paragraph applies shall be treated as of a character subject to an allowance for depreciation. No credit shall be allowable under subsection (a) with respect to any property referred to in section 50(b)(1) or with respect to the portion of the cost of any property taken into account under section 179. The Secretary shall, by regulations, provide for recapturing the benefit of any credit allowable under subsection (a) with respect to any property which ceases to be property eligible for such credit (including recapture in the case of a lease period of less than the economic life of a vehicle). No credit shall be allowed under subsection (a) for any vehicle if the taxpayer elects to not have this section apply to such vehicle. Unless otherwise provided in this section, a motor vehicle shall not be considered eligible for a credit under this section unless such vehicle is in compliance with— the applicable provisions of the Clean Air Act for the applicable make and model year of the vehicle (or applicable air quality provisions of State law in the case of a State which has adopted such provision under a waiver under section 209(b) of the Clean Air Act), and the motor vehicle safety provisions of sections 30101 through 30169 of title 49, United States Code.

([(i) Repealed. Pub. L. 117–169, title I, § 13401(i)(2)(B), Aug. 16, 2022, 136 Stat. 1961]

(j) Regulations Except as provided in paragraph (2), the Secretary shall promulgate such regulations as necessary to carry out the provisions of this section. The Secretary of the Treasury, in coordination with the Secretary of Transportation and the Administrator of the Environmental Protection Agency, shall prescribe such regulations as necessary to determine whether a motor vehicle meets the requirements to be eligible for a credit under this section.

(k) Termination This section shall not apply to any property purchased after— in the case of a new qualified fuel cell motor vehicle (as described in subsection (b)), December 31, 2021 , in the case of a new advanced lean burn technology motor vehicle (as described in subsection (c)) or a new qualified hybrid motor vehicle (as described in subsection (d)(2)(A)), December 31, 2010 , in the case of a new qualified hybrid motor vehicle (as described in subsection (d)(2)(B)), December 31, 2009 , and in the case of a new qualified alternative fuel vehicle (as described in subsection (e)), December 31, 2010 .

§ 30C Alternative fuel vehicle refueling property credit

(a) Credit allowed There shall be allowed as a credit against the tax imposed by this chapter for the taxable year an amount equal to 30 percent (6 percent in the case of property of a character subject to depreciation) of the cost of any qualified alternative fuel vehicle refueling property placed in service by the taxpayer during the taxable year.

(b) Limitation The credit allowed under subsection (a) with respect to any single item of qualified alternative fuel vehicle refueling property placed in service by the taxpayer during the taxable year shall not exceed— $100, 000 in t h ec a seo f an ys u c hi t e m o f p ro p er t yo f a c ha r a c t ers u bj ec tt o ana ll o w an ce f or d e p rec ia t i o n, an d$ 1,000 in any other case.

(c) Qualified alternative fuel vehicle refueling property For purposes of this section— The term “qualified alternative fuel vehicle refueling property” has the same meaning as the term “qualified clean-fuel vehicle refueling property” would have under section 179A if— paragraph (1) of section 179A(d) did not apply to property installed on property which is used as the principal residence (within the meaning of section 121) of the taxpayer, and only the following were treated as clean-burning fuels for purposes of section 179A(d): Any fuel at least 85 percent of the volume of which consists of one or more of the following: ethanol, natural gas, compressed natural gas, liquified natural gas, liquefied petroleum gas, or hydrogen. Any mixture— which consists of two or more of the following: biodiesel (as defined in section 40A(d)(1)), diesel fuel (as defined in section 4083(a)(3)), or kerosene, and at least 20 percent of the volume of which consists of biodiesel (as so defined) determined without regard to any kerosene in such mixture. Electricity. Any transportation fuel (as defined in section 45Z(d)(5)). Property shall not fail to be treated as qualified alternative fuel vehicle refueling property solely because such property— is capable of charging the battery of a motor vehicle propelled by electricity, and allows discharging electricity from such battery to an electric load external to such motor vehicle. Property shall not be treated as qualified alternative fuel vehicle refueling property unless such property is placed in service in an eligible census tract. For purposes of this paragraph, the term “eligible census tract” means any population census tract which— is described in section 45D(e), or is not an urban area. For purposes of clause (i)(II), the term “urban area” means a census tract (as defined by the Bureau of the Census) which, according to the most recent decennial census, has been designated as an urban area by the Secretary of Commerce.

(d) Application with other credits So much of the credit which would be allowed under subsection (a) for any taxable year (determined without regard to this subsection) that is attributable to property of a character subject to an allowance for depreciation shall be treated as a credit listed in section 38(b) for such taxable year (and not allowed under subsection (a)). The credit allowed under subsection (a) (after the application of paragraph (1)) for any taxable year shall not exceed the excess (if any) of— the regular tax liability (as defined in section 26(b)) reduced by the sum of the credits allowable under subpart A and section 27, over the tentative minimum tax for the taxable year.

(e) Special rules For purposes of this section— For purposes of this subtitle, the basis of any property for which a credit is allowable under subsection (a) shall be reduced by the amount of such credit so allowed (determined without regard to subsection (d)). In the case of any qualified alternative fuel vehicle refueling property the use of which is described in paragraph (3) or (4) of section 50(b) and which is not subject to a lease, the person who sold such property to the person or entity using such property shall be treated as the taxpayer that placed such property in service, but only if such person clearly discloses to such person or entity in a document the amount of any credit allowable under subsection (a) with respect to such property (determined without regard to subsection (d)). For purposes of subsection (d), property to which this paragraph applies shall be treated as of a character subject to an allowance for depreciation. No credit shall be allowable under subsection (a) with respect to any property referred to in section 50(b)(1) or with respect to the portion of the cost of any property taken into account under section 179. No credit shall be allowed under subsection (a) for any property if the taxpayer elects not to have this section apply to such property. Rules similar to the rules of section 179A(e)(4) shall apply. For purposes of this section, any reference to section 179A shall be treated as a reference to such section as in effect immediately before its repeal.

(f) Special rule for electric charging stations for certain vehicles with 2 or 3 wheels For purposes of this section— The term “qualified alternative fuel vehicle refueling property” includes any property described in subsection (c) for the recharging of a motor vehicle described in paragraph (2), but only if such property— meets the requirements of subsection (a)(2), 1 and is of a character subject to depreciation. A motor vehicle is described in this paragraph if the motor vehicle— is manufactured primarily for use on public streets, roads, or highways (not including a vehicle operated exclusively on a rail or rails), has 2 or 3 wheels, and is propelled by electricity.

(g) Wage and apprenticeship requirements In the case of any qualified alternative fuel vehicle refueling project which satisfies the requirements of subparagraph (C), the amount of the credit determined under subsection (a) for any qualified alternative fuel vehicle refueling property of a character subject to an allowance for depreciation which is part of such project shall be equal to such amount (determined without regard to this sentence) multiplied by 5. For purposes of this subsection, the term “qualified alternative fuel vehicle refueling project” means a project consisting of one or more properties that are part of a single project. A project meets the requirements of this subparagraph if it is one of the following: A project the construction of which begins prior to the date that is 60 days after the Secretary publishes guidance with respect to the requirements of paragraphs (2)(A) and (3). A project which satisfies the requirements of paragraphs (2)(A) and (3). The requirements described in this subparagraph with respect to any qualified alternative fuel vehicle refueling project are that the taxpayer shall ensure that any laborers and mechanics employed by the taxpayer or any contractor or subcontractor in the construction of any qualified alternative fuel vehicle refueling property which is part of such project shall be paid wages at rates not less than the prevailing rates for construction, alteration, or repair of a similar character in the locality in which such project is located as most recently determined by the Secretary of Labor, in accordance with subchapter IV of chapter 31 of title 40, United States Code. Rules similar to the rules of section 45(b)(7)(B) shall apply. Rules similar to the rules of section 45(b)(8) shall apply. The Secretary shall issue such regulations or other guidance as the Secretary determines necessary to carry out the purposes of this subsection, including regulations or other guidance which provides for requirements for recordkeeping or information reporting for purposes of administering the requirements of this subsection.

(h) Regulations The Secretary shall prescribe such regulations as necessary to carry out the provisions of this section.

(i) Termination This section shall not apply to any property placed in service after June 30, 2026 .

§ 30D Clean vehicle credit

(a) Allowance of credit There shall be allowed as a credit against the tax imposed by this chapter for the taxable year an amount equal to the sum of the credit amounts determined under subsection (b) with respect to each new clean vehicle placed in service by the taxpayer during the taxable year.

(b) Per vehicle dollar limitation The amount determined under this subsection with respect to any new clean vehicle is the sum of the amounts determined under paragraphs (2) and (3) with respect to such vehicle. In the case of a vehicle with respect to which the requirement described in subsection (e)(1)(A) is satisfied, the amount determined under this paragraph is $3, 750. I n t h ec a seo f a v e hi c l e w i t h res p ec tt o w hi c h t h ere q u i re m e n t d escr ib e d in s u b sec t i o n (e) (2) (A) i ss a t i s f i e d, t h e am o u n t d e t er min e d u n d er t hi s p a r a g r a p hi s$ 3,750.

(c) Application with other credits So much of the credit which would be allowed under subsection (a) for any taxable year (determined without regard to this subsection) that is attributable to property of a character subject to an allowance for depreciation shall be treated as a credit listed in section 38(b) for such taxable year (and not allowed under subsection (a)). For purposes of this title, the credit allowed under subsection (a) for any taxable year (determined after application of paragraph (1)) shall be treated as a credit allowable under subpart A for such taxable year.

(d) New clean vehicle For purposes of this section— The term “new clean vehicle” means a motor vehicle— the original use of which commences with the taxpayer, which is acquired for use or lease by the taxpayer and not for resale, which is made by a qualified manufacturer, which is treated as a motor vehicle for purposes of title II of the Clean Air Act, which has a gross vehicle weight rating of less than 14,000 pounds, which is propelled to a significant extent by an electric motor which draws electricity from a battery which— has a capacity of not less than 7 kilowatt hours, and is capable of being recharged from an external source of electricity, the final assembly of which occurs within North America, and for which the person who sells any vehicle to the taxpayer furnishes a report to the taxpayer and to the Secretary, at such time and in such manner as the Secretary shall provide, containing— the name and taxpayer identification number of the taxpayer, the vehicle identification number of the vehicle, unless, in accordance with any applicable rules promulgated by the Secretary of Transportation, the vehicle is not assigned such a number, the battery capacity of the vehicle, verification that original use of the vehicle commences with the taxpayer, the maximum credit under this section allowable to the taxpayer with respect to the vehicle, and in the case of a taxpayer who makes an election under subsection (g)(1), any amount described in subsection (g)(2)(C) which has been provided to such taxpayer. The term “motor vehicle” means any vehicle which is manufactured primarily for use on public streets, roads, and highways (not including a vehicle operated exclusively on a rail or rails) and which has at least 4 wheels. The term “qualified manufacturer” means any manufacturer (within the meaning of the regulations prescribed by the Administrator of the Environmental Protection Agency for purposes of the administration of title II of the Clean Air Act ( 42 U.S.C. 7521 et seq.)) which enters into a written agreement with the Secretary under which such manufacturer agrees to make periodic written reports to the Secretary (at such times and in such manner as the Secretary may provide) providing vehicle identification numbers and such other information related to each vehicle manufactured by such manufacturer as the Secretary may require. The term “capacity” means, with respect to any battery, the quantity of electricity which the battery is capable of storing, expressed in kilowatt hours, as measured from a 100 percent state of charge to a 0 percent state of charge. For purposes of paragraph (1)(G), the term “final assembly” means the process by which a manufacturer produces a new clean vehicle at, or through the use of, a plant, factory, or other place from which the vehicle is delivered to a dealer or importer with all component parts necessary for the mechanical operation of the vehicle included with the vehicle, whether or not the component parts are permanently installed in or on the vehicle. For purposes of this section, the term “new clean vehicle” shall include any new qualified fuel cell motor vehicle (as defined in section 30B(b)(3)) which meets the requirements under subparagraphs (G) and (H) of paragraph (1). For purposes of this section, the term “new clean vehicle” shall not include— any vehicle placed in service after December 31, 2024 , with respect to which any of the applicable critical minerals contained in the battery of such vehicle (as described in subsection (e)(1)(A)) were extracted, processed, or recycled by a foreign entity of concern (as defined in section 40207(a)(5) of the Infrastructure Investment and Jobs Act ( 42 U.S.C. 18741(a)(5) )), or any vehicle placed in service after December 31, 2023 , with respect to which any of the components contained in the battery of such vehicle (as described in subsection (e)(2)(A)) were manufactured or assembled by a foreign entity of concern (as so defined).

(e) Critical mineral and battery component requirements The requirement described in this subparagraph with respect to a vehicle is that, with respect to the battery from which the electric motor of such vehicle draws electricity, the percentage of the value of the applicable critical minerals (as defined in section 45X(c)(6)) contained in such battery that were— extracted or processed— in the United States, or in any country with which the United States has a free trade agreement in effect, or recycled in North America, is equal to or greater than the applicable percentage (as certified by the qualified manufacturer, in such form or manner as prescribed by the Secretary). For purposes of subparagraph (A), the applicable percentage shall be— in the case of a vehicle placed in service after the date on which the proposed guidance described in paragraph (3)(B) is issued by the Secretary and before January 1, 2024 , 40 percent, in the case of a vehicle placed in service during calendar year 2024, 50 percent, in the case of a vehicle placed in service during calendar year 2025, 60 percent, and in the case of a vehicle placed in service during calendar year 2026, 70 percent. The requirement described in this subparagraph with respect to a vehicle is that, with respect to the battery from which the electric motor of such vehicle draws electricity, the percentage of the value of the components contained in such battery that were manufactured or assembled in North America is equal to or greater than the applicable percentage (as certified by the qualified manufacturer, in such form or manner as prescribed by the Secretary). For purposes of subparagraph (A), the applicable percentage shall be— in the case of a vehicle placed in service after the date on which the proposed guidance described in paragraph (3)(B) is issued by the Secretary and before January 1, 2024 , 50 percent, in the case of a vehicle placed in service during calendar year 2024 or 2025, 60 percent, and in the case of a vehicle placed in service during calendar year 2026, 70 percent. The Secretary shall issue such regulations or other guidance as the Secretary determines necessary to carry out the purposes of this subsection, including regulations or other guidance which provides for requirements for recordkeeping or information reporting for purposes of administering the requirements of this subsection. Not later than December 31, 2022 , the Secretary shall issue proposed guidance with respect to the requirements under this subsection.

(f) Special rules For purposes of this subtitle, the basis of any property for which a credit is allowable under subsection (a) shall be reduced by the amount of such credit so allowed (determined without regard to subsection (c)). The amount of any deduction or other credit allowable under this chapter for a vehicle for which a credit is allowable under subsection (a) shall be reduced by the amount of credit allowed under such subsection for such vehicle (determined without regard to subsection (c)). No credit shall be allowable under subsection (a) with respect to any property referred to in section 50(b)(1). The Secretary shall, by regulations, provide for recapturing the benefit of any credit allowable under subsection (a) with respect to any property which ceases to be property eligible for such credit. No credit shall be allowed under subsection (a) for any vehicle if the taxpayer elects to not have this section apply to such vehicle. A vehicle shall not be considered eligible for a credit under this section unless such vehicle is in compliance with— the applicable provisions of the Clean Air Act for the applicable make and model year of the vehicle (or applicable air quality provisions of State law in the case of a State which has adopted such provision under a waiver under section 209(b) of the Clean Air Act), and the motor vehicle safety provisions of sections 30101 through 30169 of title 49, United States Code. In the case of any vehicle, the credit described in subsection (a) shall only be allowed once with respect to such vehicle, as determined based upon the vehicle identification number of such vehicle, including any vehicle with respect to which the taxpayer elects the application of subsection (g). No credit shall be allowed under this section with respect to any vehicle unless the taxpayer includes the vehicle identification number of such vehicle on the return of tax for the taxable year. No credit shall be allowed under subsection (a) for any taxable year if— the lesser of— the modified adjusted gross income of the taxpayer for such taxable year, or the modified adjusted gross income of the taxpayer for the preceding taxable year, exceeds the threshold amount. For purposes of subparagraph (A)(ii), the threshold amount shall be— in the case of a joint return or a surviving spouse (as defined in section 2(a)), $300, 000, in t h ec a seo f ah e a d o f h o u se h o l d (a s d e f in e d in sec t i o n 2 (b)),$ 225,000, and in the case of a taxpayer not described in clause (i) or (ii), $150, 000. F or p u r p oseso f t hi s p a r a g r a p h, t h e t er m “ m o d i f i e d a d j u s t e d g ross in co m e ” m e an s a d j u s t e d g ross in co m e in cre a se d b y an y am o u n t e x c l u d e df ro m g ross in co m e u n d ersec t i o n 911, 931, or 933. N ocre d i t s ha ll b e a ll o w e d u n d ers u b sec t i o n (a) f or a v e hi c l e w i t haman u f a c t u rer ’ ss ugg es t e d re t ai lp r i ce in e x cesso f t h e a ppl i c ab l e l imi t a t i o n . F or p u r p oseso f s u b p a r a g r a p h (A), t h e a ppl i c ab l e l imi t a t i o n f ore a c h v e hi c l ec l a ss i f i c a t i o ni s a s f o ll o w s : I n t h ec a seo f a v an,$ 80,000. In the case of a sport utility vehicle, $80, 000. I n t h ec a seo f a p i c k u pt r u c k,$ 80,000. In the case of any other vehicle, $55,000. For purposes of this paragraph, the Secretary shall prescribe such regulations or other guidance as the Secretary determines necessary for determining vehicle classifications using criteria similar to that employed by the Environmental Protection Agency and the Department of the Energy to determine size and class of vehicles.

(g) Transfer of credit Subject to such regulations or other guidance as the Secretary determines necessary, if the taxpayer who acquires a new clean vehicle elects the application of this subsection with respect to such vehicle, the credit which would (but for this subsection) be allowed to such taxpayer with respect to such vehicle shall be allowed to the eligible entity specified in such election (and not to such taxpayer). For purposes of this subsection, the term “eligible entity” means, with respect to the vehicle for which the credit is allowed under subsection (a), the dealer which sold such vehicle to the taxpayer and has— subject to paragraph (4), registered with the Secretary for purposes of this paragraph, at such time, and in such form and manner, as the Secretary may prescribe, prior to the election described in paragraph (1) and not later than at the time of such sale, disclosed to the taxpayer purchasing such vehicle— the manufacturer’s suggested retail price, the value of the credit allowed and any other incentive available for the purchase of such vehicle, and the amount provided by the dealer to such taxpayer as a condition of the election described in paragraph (1), not later than at the time of such sale, made payment to such taxpayer (whether in cash or in the form of a partial payment or down payment for the purchase of such vehicle) in an amount equal to the credit otherwise allowable to such taxpayer, and with respect to any incentive otherwise available for the purchase of a vehicle for which a credit is allowed under this section, including any incentive in the form of a rebate or discount provided by the dealer or manufacturer, ensured that— the availability or use of such incentive shall not limit the ability of a taxpayer to make an election described in paragraph (1), and such election shall not limit the value or use of such incentive. An election described in paragraph (1) shall be made by the taxpayer not later than the date on which the vehicle for which the credit is allowed under subsection (a) is purchased. Upon determination by the Secretary that a dealer has failed to comply with the requirements described in paragraph (2), the Secretary may revoke the registration (as described in subparagraph (A) of such paragraph) of such dealer. With respect to any payment described in paragraph (2)(C), such payment— shall not be includible in the gross income of the taxpayer, and with respect to the dealer, shall not be deductible under this title. In the case of any election under paragraph (1) with respect to any vehicle— the requirements of paragraphs (1) and (2) of subsection (f) shall apply to the taxpayer who acquired the vehicle in the same manner as if the credit determined under this section with respect to such vehicle were allowed to such taxpayer, paragraph (6) of such subsection shall not apply, and the requirement of paragraph (9) of such subsection (f) shall be treated as satisfied if the eligible entity provides the vehicle identification number of such vehicle to the Secretary in such manner as the Secretary may provide. The Secretary shall establish a program to make advance payments to any eligible entity in an amount equal to the cumulative amount of the credits allowed under subsection (a) with respect to any vehicles sold by such entity for which an election described in paragraph (1) has been made. Rules similar to the rules of section 6417(d)(6) shall apply for purposes of this paragraph. For purposes of section 1324 of title 31 , United States Code, the payments under subparagraph (A) shall be treated in the same manner as a refund due from a credit provision referred to in subsection (b)(2) of such section. For purposes of this subsection, the term “dealer” means a person licensed by a State, the District of Columbia, the Commonwealth of Puerto Rico, any other territory or possession of the United States, an Indian tribal government, or any Alaska Native Corporation (as defined in section 3 of the Alaska Native Claims Settlement Act ( 43 U.S.C. 1602(m) ) 1 to engage in the sale of vehicles. For purposes of this subsection, the term “Indian tribal government” means the recognized governing body of any Indian or Alaska Native tribe, band, nation, pueblo, village, community, component band, or component reservation, individually identified (including parenthetically) in the list published most recently as of the date of enactment of this subsection pursuant to section 104 of the Federally Recognized Indian Tribe List Act of 1994 ( 25 U.S.C. 5131 ). In the case of any taxpayer who has made an election described in paragraph (1) with respect to a new clean vehicle and received a payment described in paragraph (2)(C) from an eligible entity, if the credit under subsection (a) would otherwise (but for this subsection) not be allowable to such taxpayer pursuant to the application of subsection (f)(10), the tax imposed on such taxpayer under this chapter for the taxable year in which such vehicle was placed in service shall be increased by the amount of the payment received by such taxpayer.

(h) Termination No credit shall be allowed under this section with respect to any vehicle acquired after September 30, 2025 .

“Solely for purposes of the application of section 30D of the Internal Revenue Code of 1986, in the case of a taxpayer that— after December 31, 2021 , and before the date of enactment of this Act [ Aug. 16, 2022 ], purchased, or entered into a written binding contract to purchase, a new qualified plug-in electric drive motor vehicle (as defined in section 30D(d)(1) of the Internal Revenue Code of 1986, as in effect on the day before the date of enactment of this Act), and placed such vehicle in service on or after the date of enactment of this Act, such taxpayer may elect (at such time, and in such form and manner, as the Secretary of the Treasury, or the Secretary’s delegate, may prescribe) to treat such vehicle as having been placed in service on the day before the date of enactment of this Act.”

§ 31 Tax withheld on wages

(a) Wage withholding for income tax purposes The amount withheld as tax under chapter 24 shall be allowed to the recipient of the income as a credit against the tax imposed by this subtitle. The amount so withheld during any calendar year shall be allowed as a credit for the taxable year beginning in such calendar year. If more than one taxable year begins in a calendar year, such amount shall be allowed as a credit for the last taxable year so beginning.

(b) Credit for special refunds of social security tax The Secretary may prescribe regulations providing for the crediting against the tax imposed by this subtitle of the amount determined by the taxpayer or the Secretary to be allowable under section 6413(c) as a special refund of tax imposed on wages. The amount allowed as a credit under such regulations shall, for purposes of this subtitle, be considered an amount withheld at source as tax under section 3402. Any amount to which paragraph (1) applies shall be allowed as a credit for the taxable year beginning in the calendar year during which the wages were received. If more than one taxable year begins in the calendar year, such amount shall be allowed as a credit for the last taxable year so beginning.

(c) Special rule for backup withholding Any credit allowed by subsection (a) for any amount withheld under section 3406 shall be allowed for the taxable year of the recipient of the income in which the income is received.

§ 32 Earned income

(a) Allowance of credit In the case of an eligible individual, there shall be allowed as a credit against the tax imposed by this subtitle for the taxable year an amount equal to the credit percentage of so much of the taxpayer’s earned income for the taxable year as does not exceed the earned income amount. The amount of the credit allowable to a taxpayer under paragraph (1) for any taxable year shall not exceed the excess (if any) of— the credit percentage of the earned income amount, over the phaseout percentage of so much of the adjusted gross income (or, if greater, the earned income) of the taxpayer for the taxable year as exceeds the phaseout amount.

(b) Percentages and amounts For purposes of subsection (a)— The credit percentage and the phaseout percentage shall be determined as follows: In the case of an eligible individual with: The credit percentage is: The phaseout percentage is: 1 qualifying child 34 15.98 2 qualifying children 40 21.06 3 or more qualifying children 45 21.06 No qualifying children 7.65 7.65 Subject to subparagraph (B), the earned income amount and the phaseout amount shall be determined as follows: In the case of an eligible individual with: The earned income amount is: The phaseout amount is: 1 qualifying child $6, 330$ 11,610 2 or more qualifying children $8, 890$ 11,610 No qualifying children $4, 220$ 5,280 In the case of a joint return filed by an eligible individual and such individual’s spouse, the phaseout amount determined under subparagraph (A) shall be increased by $5,000.

(c) Definitions and special rules For purposes of this section— The term “eligible individual” means— any individual who has a qualifying child for the taxable year, or any other individual who does not have a qualifying child for the taxable year, if— such individual’s principal place of abode is in the United States for more than one-half of such taxable year, such individual (or, if the individual is married, either the individual or the individual’s spouse) has attained age 25 but not attained age 65 before the close of the taxable year, and such individual is not a dependent for whom a deduction is allowable under section 151 to another taxpayer for any taxable year beginning in the same calendar year as such taxable year. If an individual is the qualifying child of a taxpayer for any taxable year of such taxpayer beginning in a calendar year, such individual shall not be treated as an eligible individual for any taxable year of such individual beginning in such calendar year. The term “eligible individual” does not include any individual who claims the benefits of section 911 (relating to citizens or residents living abroad) for the taxable year. The term “eligible individual” shall not include any individual who is a nonresident alien individual for any portion of the taxable year unless such individual is treated for such taxable year as a resident of the United States for purposes of this chapter by reason of an election under subsection (g) or (h) of section 6013. No credit shall be allowed under this section to an eligible individual who does not include on the return of tax for the taxable year— such individual’s taxpayer identification number, and if the individual is married, the taxpayer identification number of such individual’s spouse. The term “earned income” means— wages, salaries, tips, and other employee compensation, but only if such amounts are includible in gross income for the taxable year, plus the amount of the taxpayer’s net earnings from self-employment for the taxable year (within the meaning of section 1402(a)), but such net earnings shall be determined with regard to the deduction allowed to the taxpayer by section 164(f). For purposes of subparagraph (A)— the earned income of an individual shall be computed without regard to any community property laws, no amount received as a pension or annuity shall be taken into account, no amount to which section 871(a) applies (relating to income of nonresident alien individuals not connected with United States business) shall be taken into account, no amount received for services provided by an individual while the individual is an inmate at a penal institution shall be taken into account, no amount described in subparagraph (A) received for service performed in work activities as defined in paragraph (4) or (7) of section 407(d) of the Social Security Act to which the taxpayer is assigned under any State program under part A of title IV of such Act shall be taken into account, but only to the extent such amount is subsidized under such State program, and a taxpayer may elect to treat amounts excluded from gross income by reason of section 112 as earned income. The term “qualifying child” means a qualifying child of the taxpayer (as defined in section 152(c), determined without regard to paragraph (1)(D) thereof and section 152(e)). The term “qualifying child” shall not include an individual who is married as of the close of the taxpayer’s taxable year unless the taxpayer is entitled to a deduction under section 151 for such taxable year with respect to such individual (or would be so entitled but for section 152(e)). For purposes of subparagraph (A), the requirements of section 152(c)(1)(B) shall be met only if the principal place of abode is in the United States. A qualifying child shall not be taken into account under subsection (b) unless the taxpayer includes the name, age, and TIN of the qualifying child on the return of tax for the taxable year. The Secretary may prescribe other methods for providing the information described in clause (i). For purposes of paragraphs (1)(A)(ii)(I) and (3)(C), the principal place of abode of a member of the Armed Forces of the United States shall be treated as in the United States during any period during which such member is stationed outside the United States while serving on extended active duty with the Armed Forces of the United States. For purposes of the preceding sentence, the term “extended active duty” means any period of active duty pursuant to a call or order to such duty for a period in excess of 90 days or for an indefinite period.

(d) Married individuals In the case of an individual who is married, this section shall apply only if a joint return is filed for the taxable year under section 6013. For purposes of this section— Except as provided in subparagraph (B), marital status shall be determined under section 7703(a). An individual shall not be treated as married if such individual— is married (as determined under section 7703(a)) and does not file a joint return for the taxable year, resides with a qualifying child of the individual for more than one-half of such taxable year, and during the last 6 months of such taxable year, does not have the same principal place of abode as the individual’s spouse, or has a decree, instrument, or agreement (other than a decree of divorce) described in section 121(d)(3)(C) with respect to the individual’s spouse and is not a member of the same household with the individual’s spouse by the end of the taxable year.

(e) Taxable year must be full taxable year Except in the case of a taxable year closed by reason of the death of the taxpayer, no credit shall be allowable under this section in the case of a taxable year covering a period of less than 12 months.

(f) Amount of credit to be determined under tables The amount of the credit allowed by this section shall be determined under tables prescribed by the Secretary. The tables prescribed under paragraph (1) shall reflect the provisions of subsections (a) and (b) and shall have income brackets of not greater than $50 e a c h — f ore a r n e d in co m e b e tw ee n$ 0 and the amount of earned income at which the credit is phased out under subsection (b), and for adjusted gross income between the dollar amount at which the phaseout begins under subsection (b) and the amount of adjusted gross income at which the credit is phased out under subsection (b).

([(g) Repealed. Pub. L. 111–226, title II, § 219(a)(2), Aug. 10, 2010, 124 Stat. 2403]

([(h) Repealed. Pub. L. 107–16, title III, § 303(c), June 7, 2001, 115 Stat. 55]

(i) Denial of credit for individuals having excessive investment income No credit shall be allowed under subsection (a) for the taxable year if the aggregate amount of disqualified income of the taxpayer for the taxable year exceeds $10,000. For purposes of paragraph (1), the term “disqualified income” means— interest or dividends to the extent includible in gross income for the taxable year, interest received or accrued during the taxable year which is exempt from tax imposed by this chapter, the excess (if any) of— gross income from rents or royalties not derived in the ordinary course of a trade or business, over the sum of— the deductions (other than interest) which are clearly and directly allocable to such gross income, plus interest deductions properly allocable to such gross income, the capital gain net income (as defined in section 1222) of the taxpayer for such taxable year, and the excess (if any) of— the aggregate income from all passive activities for the taxable year (determined without regard to any amount included in earned income under subsection (c)(2) or described in a preceding subparagraph), over the aggregate losses from all passive activities for the taxable year (as so determined). For purposes of subparagraph (E), the term “passive activity” has the meaning given such term by section 469.

(j) Inflation adjustments In the case of any taxable year beginning after 2015 (2021 in the case of the dollar amount in subsection (i)(1)), each of the dollar amounts in subsections (b)(2) and (i)(1) shall be increased by an amount equal to— such dollar amount, multiplied by the cost-of-living adjustment determined under section 1(f)(3) for the calendar year in which the taxable year begins, determined by substituting in subparagraph (A)(ii) thereof— in the case of amounts in subsection (b)(2)(A), “calendar year 1995” for “calendar year 2016”, in the case of the $5, 000 am o u n t in s u b sec t i o n (b) (2) (B), “ c a l e n d a rye a r 2008” f or “ c a l e n d a rye a r 2016”, an d in t h ec a seo f t h e$ 10,000 amount in subsection (i)(1), “calendar year 2020” for “calendar year 2016”. If any dollar amount in subsection (b)(2)(A) (after being increased under subparagraph (B) thereof), after being increased under paragraph (1), is not a multiple of $10, s u c h d o ll a r am o u n t s ha ll b ero u n d e d t o t h e n e a res t m u lt i pl eo f$ 10. If the dollar amount in subsection (i)(1), after being increased under paragraph (1), is not a multiple of $50, s u c ham o u n t s ha ll b ero u n d e d t o t h e n e x tl o w es t m u lt i pl eo f$ 50.

(k) Restrictions on taxpayers who improperly claimed credit in prior year No credit shall be allowed under this section for any taxable year in the disallowance period. For purposes of paragraph (1), the disallowance period is— the period of 10 taxable years after the most recent taxable year for which there was a final determination that the taxpayer’s claim of credit under this section was due to fraud, and the period of 2 taxable years after the most recent taxable year for which there was a final determination that the taxpayer’s claim of credit under this section was due to reckless or intentional disregard of rules and regulations (but not due to fraud). In the case of a taxpayer who is denied credit under this section for any taxable year as a result of the deficiency procedures under subchapter B of chapter 63, no credit shall be allowed under this section for any subsequent taxable year unless the taxpayer provides such information as the Secretary may require to demonstrate eligibility for such credit.

(l) Coordination with certain means-tested programs For purposes of— the United States Housing Act of 1937, title V of the Housing Act of 1949, section 101 of the Housing and Urban Development Act of 1965, sections 221(d)(3), 235, and 236 of the National Housing Act, and the Food and Nutrition Act of 2008, any refund made to an individual (or the spouse of an individual) by reason of this section shall not be treated as income (and shall not be taken into account in determining resources for the month of its receipt and the following month).

(m) Identification numbers Solely for purposes of subsections (c)(1)(E) and (c)(3)(D), a taxpayer identification number means a social security number issued to an individual by the Social Security Administration (other than a social security number issued pursuant to clause (II) (or that portion of clause (III) that relates to clause (II)) of section 205(c)(2)(B)(i) of the Social Security Act) on or before the due date for filing the return for the taxable year.

(n) Special rules for individuals without qualifying children In the case of any taxable year beginning after December 31, 2020 , and before January 1, 2022 — Subsection (c)(1)(A)(ii)(II) shall be applied by substituting “the applicable minimum age” for “age 25”. For purposes of this paragraph, the term “applicable minimum age” means— except as otherwise provided in this subparagraph, age 19, in the case of a specified student (other than a qualified former foster youth or a qualified homeless youth), age 24, and in the case of a qualified former foster youth or a qualified homeless youth, age 18. For purposes of this paragraph, the term “specified student” means, with respect to any taxable year, an individual who is an eligible student (as defined in section 25A(b)(3)) during at least 5 calendar months during the taxable year. For purposes of this paragraph, the term “qualified former foster youth” means an individual who— on or after the date that such individual attained age 14, was in foster care provided under the supervision or administration of an entity administering (or eligible to administer) a plan under part B or part E of title IV of the Social Security Act (without regard to whether Federal assistance was provided with respect to such child under such part E), and provides (in such manner as the Secretary may provide) consent for entities which administer a plan under part B or part E of title IV of the Social Security Act to disclose to the Secretary information related to the status of such individual as a qualified former foster youth. For purposes of this paragraph, the term “qualified homeless youth” means, with respect to any taxable year, an individual who certifies, in a manner as provided by the Secretary, that such individual is either an unaccompanied youth who is a homeless child or youth, or is unaccompanied, at risk of homelessness, and self-supporting. Subsection (c)(1)(A)(ii)(II) shall be applied without regard to the phrase “but not attained age 65”. The table contained in subsection (b)(1) shall be applied by substituting “15.3” for “7.65” each place it appears therein. The table contained in subsection (b)(2)(A) shall be applied— by substituting “ $9, 820” f or “$ 4,220”, and by substituting “ $11, 610” f or “$ 5,280”. Subsection (j) shall not apply to any dollar amount specified in this paragraph.

§ 33 Tax withheld at source on nonresident aliens and foreign corporations

There shall be allowed as a credit against the tax imposed by this subtitle the amount of tax withheld at source under subchapter A of chapter 3 (relating to withholding of tax on nonresident aliens and on foreign corporations). ( Aug. 16, 1954, ch. 736 , 68A Stat. 13 , § 32; renumbered § 33 and amended Pub. L. 98–369, div. A, title IV , §§ 471(c), 474(j), July 18, 1984 , 98 Stat. 826 , 832.)

§ 34 Certain uses of gasoline and special fuels

(a) General rule There shall be allowed as a credit against the tax imposed by this subtitle for the taxable year an amount equal to the sum of the amounts payable to the taxpayer— under section 6420 (determined without regard to section 6420(g)), under section 6421 (determined without regard to section 6421(i)), and under section 6427 (determined without regard to section 6427(k)).

(b) Exception Credit shall not be allowed under subsection (a) for any amount payable under section 6421 or 6427, if a claim for such amount is timely filed and, under section 6421(i) or 6427(k), is payable under such section.

§ 35 Health insurance costs of eligible individuals

(a) In general In the case of an individual, there shall be allowed as a credit against the tax imposed by subtitle A an amount equal to 72.5 percent of the amount paid by the taxpayer for coverage of the taxpayer and qualifying family members under qualified health insurance for eligible coverage months beginning in the taxable year.

(b) Eligible coverage month For purposes of this section— The term “eligible coverage month” means any month if— as of the first day of such month, the taxpayer— is an eligible individual, is covered by qualified health insurance, the premium for which is paid by the taxpayer, does not have other specified coverage, and is not imprisoned under Federal, State, or local authority, and such month begins more than 90 days after the date of the enactment of the Trade Act of 2002, and before January 1, 2022 . In the case of a joint return, the requirements of paragraph (1)(A) shall be treated as met with respect to any month if at least 1 spouse satisfies such requirements.

(c) Eligible individual For purposes of this section— The term “eligible individual” means— an eligible TAA recipient, an eligible alternative TAA recipient, and an eligible PBGC pension recipient. Except as provided in subparagraph (B), the term “eligible TAA recipient” means, with respect to any month, any individual who is receiving for any day of such month a trade readjustment allowance under chapter 2 of title II of the Trade Act of 1974 or who would be eligible to receive such allowance if section 231 of such Act were applied without regard to subsection (a)(3)(B) of such section. An individual shall continue to be treated as an eligible TAA recipient during the first month that such individual would otherwise cease to be an eligible TAA recipient by reason of the preceding sentence. In the case of any eligible coverage month beginning after the date of the enactment of this paragraph, the term “eligible TAA recipient” means, with respect to any month, any individual who— is receiving for any day of such month a trade readjustment allowance under chapter 2 of title II of the Trade Act of 1974, would be eligible to receive such allowance except that such individual is in a break in training provided under a training program approved under section 236 of such Act that exceeds the period specified in section 233(e) of such Act, but is within the period for receiving such allowances provided under section 233(a) of such Act, or is receiving unemployment compensation (as defined in section 85(b)) for any day of such month and who would be eligible to receive such allowance for such month if section 231 of such Act were applied without regard to subsections (a)(3)(B) and (a)(5) thereof. An individual shall continue to be treated as an eligible TAA recipient during the first month that such individual would otherwise cease to be an eligible TAA recipient by reason of the preceding sentence. The term “eligible alternative TAA recipient” means, with respect to any month, any individual who— is a worker described in section 246(a)(3)(B) of the Trade Act of 1974 who is participating in the program established under section 246(a)(1) of such Act, and is receiving a benefit for such month under section 246(a)(2) of such Act. An individual shall continue to be treated as an eligible alternative TAA recipient during the first month that such individual would otherwise cease to be an eligible alternative TAA recipient by reason of the preceding sentence. The term “eligible PBGC pension recipient” means, with respect to any month, any individual who— has attained age 55 as of the first day of such month, and is receiving a benefit for such month any portion of which is paid by the Pension Benefit Guaranty Corporation under title IV of the Employee Retirement Income Security Act of 1974.

(d) Qualifying family member For purposes of this section— The term “qualifying family member” means— the taxpayer’s spouse, and any dependent of the taxpayer with respect to whom the taxpayer is entitled to a deduction under section 151(c). Such term does not include any individual who has other specified coverage. If section 152(e) applies to any child with respect to any calendar year, in the case of any taxable year beginning in such calendar year, such child shall be treated as described in paragraph (1)(B) with respect to the custodial parent (as defined in section 152(e)(4)(A)) and not with respect to the noncustodial parent.

(e) Qualified health insurance For purposes of this section— The term “qualified health insurance” means any of the following: Coverage under a COBRA continuation provision (as defined in section 9832(d)(1)). State-based continuation coverage provided by the State under a State law that requires such coverage. Coverage offered through a qualified State high risk pool (as defined in section 2744(c)(2) of the Public Health Service Act). Coverage under a health insurance program offered for State employees. Coverage under a State-based health insurance program that is comparable to the health insurance program offered for State employees. Coverage through an arrangement entered into by a State and— a group health plan (including such a plan which is a multiemployer plan as defined in section 3(37) of the Employee Retirement Income Security Act of 1974), an issuer of health insurance coverage, an administrator, or an employer. Coverage offered through a State arrangement with a private sector health care coverage purchasing pool. Coverage under a State-operated health plan that does not receive any Federal financial participation. Coverage under a group health plan that is available through the employment of the eligible individual’s spouse. In the case of any eligible individual and such individual’s qualifying family members, coverage under individual health insurance (other than coverage enrolled in through an Exchange established under the Patient Protection and Affordable Care Act). For purposes of this subparagraph, the term “individual health insurance” means any insurance which constitutes medical care offered to individuals other than in connection with a group health plan and does not include Federal- or State-based health insurance coverage. Coverage under an employee benefit plan funded by a voluntary employees’ beneficiary association (as defined in section 501(c)(9)) established pursuant to an order of a bankruptcy court, or by agreement with an authorized representative, as provided in section 1114 of title 11 , United States Code. The term “qualified health insurance” does not include any coverage described in subparagraphs (B) through (H) of paragraph (1) unless the State involved has elected to have such coverage treated as qualified health insurance under this section and such coverage meets the following requirements: Each qualifying individual is guaranteed enrollment if the individual pays the premium for enrollment or provides a qualified health insurance costs credit eligibility certificate described in section 7527 and pays the remainder of such premium. No pre-existing condition limitations are imposed with respect to any qualifying individual. The total premium (as determined without regard to any subsidies) with respect to a qualifying individual may not be greater than the total premium (as so determined) for a similarly situated individual who is not a qualifying individual. Benefits under the coverage are the same as (or substantially similar to) the benefits provided to similarly situated individuals who are not qualifying individuals. For purposes of this paragraph, the term “qualifying individual” means— an eligible individual for whom, as of the date on which the individual seeks to enroll in the coverage described in subparagraphs (B) through (H) of paragraph (1), the aggregate of the periods of creditable coverage (as defined in section 9801(c)) is 3 months or longer and who, with respect to any month, meets the requirements of clauses (iii) and (iv) of subsection (b)(1)(A); and the qualifying family members of such eligible individual. The term “qualified health insurance” shall not include— a flexible spending or similar arrangement, and any insurance if substantially all of its coverage is of excepted benefits described in section 9832(c).

(f) Other specified coverage For purposes of this section, an individual has other specified coverage for any month if, as of the first day of such month— Such individual is covered under any insurance which constitutes medical care (except insurance substantially all of the coverage of which is of excepted benefits described in section 9832(c)) under any health plan maintained by any employer (or former employer) of the taxpayer or the taxpayer’s spouse and at least 50 percent of the cost of such coverage (determined under section 4980B) is paid or incurred by the employer. In the case of an eligible alternative TAA recipient, such individual is either— eligible for coverage under any qualified health insurance (other than insurance described in subparagraph (A), (B), or (F) of subsection (e)(1)) under which at least 50 percent of the cost of coverage (determined under section 4980B(f)(4)) is paid or incurred by an employer (or former employer) of the taxpayer or the taxpayer’s spouse, or covered under any such qualified health insurance under which any portion of the cost of coverage (as so determined) is paid or incurred by an employer (or former employer) of the taxpayer or the taxpayer’s spouse. For purposes of subparagraphs (A) and (B), the cost of coverage shall be treated as paid or incurred by an employer to the extent the coverage is in lieu of a right to receive cash or other qualified benefits under a cafeteria plan (as defined in section 125(d)). Such individual— is entitled to benefits under part A of title XVIII of the Social Security Act or is enrolled under part B of such title, or is enrolled in the program under title XIX or XXI of such Act (other than under section 1928 of such Act). Such individual— is enrolled in a health benefits plan under chapter 89 of title 5, United States Code, or is entitled to receive benefits under chapter 55 of title 10, United States Code.

(g) Special rules With respect to any taxable year, the amount which would (but for this subsection) be allowed as a credit to the taxpayer under subsection (a) shall be reduced (but not below zero) by the aggregate amount paid on behalf of such taxpayer under section 7527 for months beginning in such taxable year. Amounts taken into account under subsection (a) shall not be taken into account in determining any deduction allowed under section 162( l ) or 213. Amounts distributed from an Archer MSA (as defined in section 220(d)) or from a health savings account (as defined in section 223(d)) shall not be taken into account under subsection (a). No credit shall be allowed under this section to any individual with respect to whom a deduction under section 151 is allowable to another taxpayer for a taxable year beginning in the calendar year in which such individual’s taxable year begins. The spouse of the taxpayer shall not be treated as a qualifying family member for purposes of subsection (a), if— the taxpayer is married at the close of the taxable year, the taxpayer and the taxpayer’s spouse are both eligible individuals during the taxable year, and the taxpayer files a separate return for the taxable year. Rules similar to the rules of paragraphs (3) and (4) of section 21(e) shall apply for purposes of this section. For purposes of this section, rules similar to the rules of section 213(d)(6) shall apply with respect to any contract for qualified health insurance under which amounts are payable for coverage of an individual other than the taxpayer and qualifying family members. For purposes of this section— Payments made by the Secretary on behalf of any individual under section 7527 (relating to advance payment of credit for health insurance costs of eligible individuals) shall be treated as having been made by the taxpayer on the first day of the month for which such payment was made. Payments made by the taxpayer for eligible coverage months shall be treated as having been made by the taxpayer on the first day of the month for which such payment was made. In the case of an assistance eligible individual who receives premium assistance for continuation coverage under section 9501(a)(1) of the American Rescue Plan Act of 2021 for any month during the taxable year, such individual shall not be treated as an eligible individual, a certified individual, or a qualifying family member for purposes of this section or section 7527 with respect to such month. In the case of any month which would be an eligible coverage month with respect to an eligible individual but for subsection (f)(2)(A), such month shall be treated as an eligible coverage month with respect to such eligible individual solely for purposes of determining the amount of the credit under this section with respect to any qualifying family members of such individual (and any advance payment of such credit under section 7527). This subparagraph shall only apply with respect to the first 24 months after such eligible individual is first entitled to the benefits described in subsection (f)(2)(A). In the case of the finalization of a divorce between an eligible individual and such individual’s spouse, such spouse shall be treated as an eligible individual for purposes of this section and section 7527 for a period of 24 months beginning with the date of such finalization, except that the only qualifying family members who may be taken into account with respect to such spouse are those individuals who were qualifying family members immediately before such finalization. In the case of the death of an eligible individual— any spouse of such individual (determined at the time of such death) shall be treated as an eligible individual for purposes of this section and section 7527 for a period of 24 months beginning with the date of such death, except that the only qualifying family members who may be taken into account with respect to such spouse are those individuals who were qualifying family members immediately before such death, and any individual who was a qualifying family member of the decedent immediately before such death (or, in the case of an individual to whom paragraph (4) applies, the taxpayer to whom the deduction under section 151 is allowable) shall be treated as an eligible individual for purposes of this section and section 7527 for a period of 24 months beginning with the date of such death, except that in determining the amount of such credit only such qualifying family member may be taken into account. This section shall not apply to any taxpayer for any eligible coverage month unless such taxpayer elects the application of this section for such month. Except as the Secretary may provide— an election to have this section apply for any eligible coverage month in a taxable year shall be made not later than the due date (including extensions) for the return of tax for the taxable year; and any election for this section to apply for an eligible coverage month shall apply for all subsequent eligible coverage months in the taxable year and, once made, shall be irrevocable with respect to such months. An eligible coverage month to which the election under paragraph (11) applies shall not be treated as a coverage month (as defined in section 36B(c)(2)) for purposes of section 36B with respect to the taxpayer. In the case of a taxpayer who makes the election under paragraph (11) with respect to any eligible coverage month in a taxable year or on behalf of whom any advance payment is made under section 7527 with respect to any month in such taxable year— the tax imposed by this chapter for the taxable year shall be increased by the excess, if any, of— the sum of any advance payments made on behalf of the taxpayer under section 1412 of the Patient Protection and Affordable Care Act and section 7527 for months during such taxable year, over the sum of the credits allowed under this section (determined without regard to paragraph (1)) and section 36B (determined without regard to subsection (f)(1) thereof) for such taxable year; and section 36B(f)(2) shall not apply with respect to such taxpayer for such taxable year, except that if such taxpayer received any advance payments under section 7527 for any month in such taxable year and is later allowed a credit under section 36B for such taxable year, then the amount determined under clause (i) shall be substituted for the amount determined under section 36B(f)(2). The Secretary may prescribe such regulations and other guidance as may be necessary or appropriate to carry out this section, section 6050T, and section 7527.

§ 36 First-time homebuyer credit

(a) Allowance of credit In the case of an individual who is a first-time homebuyer of a principal residence in the United States during a taxable year, there shall be allowed as a credit against the tax imposed by this subtitle for such taxable year an amount equal to 10 percent of the purchase price of the residence.

(b) Limitations Except as otherwise provided in this paragraph, the credit allowed under subsection (a) shall not exceed $8, 000. I n t h ec a seo f ama rr i e d in d i v i d u a l f i l in g a se p a r a t ere t u r n, s u b p a r a g r a p h (A) s ha ll b e a ppl i e d b ys u b s t i t u t in g “$ 4,000” for “ $8, 000”. I f tw oor m ore in d i v i d u a l s w h o a re n o t ma rr i e d p u rc ha se a p r in c i p a l res i d e n ce, t h e am o u n t o f t h ecre d i t a ll o w e d u n d ers u b sec t i o n (a) s ha ll b e a ll oc a t e d am o n g s u c hin d i v i d u a l s in s u c hmann er a s t h e S ecre t a ry ma y p rescr ib e, e x ce ptt ha tt h e t o t a l am o u n t o f t h ecre d i t s a ll o w e d t o a ll s u c hin d i v i d u a l ss ha ll n o t e x cee d$ 8,000. In the case of a taxpayer to whom a credit under subsection (a) is allowed by reason of subsection (c)(6), subparagraphs (A), (B), and (C) shall be applied by substituting “ $6, 500” f or “$ 8,000” and “ $3, 250” f or “$ 4,000”. The amount allowable as a credit under subsection (a) (determined without regard to this paragraph) for the taxable year shall be reduced (but not below zero) by the amount which bears the same ratio to the amount which is so allowable as— the excess (if any) of— the taxpayer’s modified adjusted gross income for such taxable year, over $125, 000 ($ 225,000 in the case of a joint return), bears to $20, 000. F or p u r p oseso f s u b p a r a g r a p h (A), t h e t er m “ m o d i f i e d a d j u s t e d g ross in co m e ” m e an s t h e a d j u s t e d g ross in co m eo f t h e t a x p a yer f or t h e t a x ab l eye a r in cre a se d b y an y am o u n t e x c l u d e df ro m g ross in co m e u n d ersec t i o n 911, 931, or 933. N ocre d i t s ha ll b e a ll o w e d u n d ers u b sec t i o n (a) f or t h e p u rc ha seo f an yres i d e n ce i f t h e p u rc ha se p r i ceo f s u c h res i d e n cee x cee d s$ 800,000. No credit shall be allowed under subsection (a) with respect to the purchase of any residence unless the taxpayer has attained age 18 as of the date of such purchase. In the case of any taxpayer who is married (within the meaning of section 7703), the taxpayer shall be treated as meeting the age requirement of the preceding sentence if the taxpayer or the taxpayer’s spouse meets such age requirement.

(c) Definitions For purposes of this section— The term “first-time homebuyer” means any individual if such individual (and if married, such individual’s spouse) had no present ownership interest in a principal residence during the 3-year period ending on the date of the purchase of the principal residence to which this section applies. The term “principal residence” has the same meaning as when used in section 121. The term “purchase” means any acquisition, but only if— the property is not acquired from a person related to the person acquiring such property (or, if married, such individual’s spouse), and the basis of the property in the hands of the person acquiring such property is not determined— in whole or in part by reference to the adjusted basis of such property in the hands of the person from whom acquired, or under section 1014(a) (relating to property acquired from a decedent). A residence which is constructed by the taxpayer shall be treated as purchased by the taxpayer on the date the taxpayer first occupies such residence. The term “purchase price” means the adjusted basis of the principal residence on the date such residence is purchased. A person shall be treated as related to another person if the relationship between such persons would result in the disallowance of losses under section 267 or 707(b) (but, in applying section 267(b) and (c) for purposes of this section, paragraph (4) of section 267(c) shall be treated as providing that the family of an individual shall include only his spouse, ancestors, and lineal descendants). In the case of an individual (and, if married, such individual’s spouse) who has owned and used the same residence as such individual’s principal residence for any 5-consecutive-year period during the 8-year period ending on the date of the purchase of a subsequent principal residence, such individual shall be treated as a first-time homebuyer for purposes of this section with respect to the purchase of such subsequent residence.

(d) Exceptions No credit under subsection (a) shall be allowed to any taxpayer for any taxable year with respect to the purchase of a residence if— the taxpayer is a nonresident alien, the taxpayer disposes of such residence (or such residence ceases to be the principal residence of the taxpayer (and, if married, the taxpayer’s spouse)) before the close of such taxable year, a deduction under section 151 with respect to such taxpayer is allowable to another taxpayer for such taxable year, or the taxpayer fails to attach to the return of tax for such taxable year a properly executed copy of the settlement statement used to complete such purchase.

(e) Reporting If the Secretary requires information reporting under section 6045 by a person described in subsection (e)(2) thereof to verify the eligibility of taxpayers for the credit allowable by this section, the exception provided by section 6045(e) shall not apply.

(f) Recapture of credit Except as otherwise provided in this subsection, if a credit under subsection (a) is allowed to a taxpayer, the tax imposed by this chapter shall be increased by 6⅔ percent of the amount of such credit for each taxable year in the recapture period. If a taxpayer disposes of the principal residence with respect to which a credit was allowed under subsection (a) (or such residence ceases to be the principal residence of the taxpayer (and, if married, the taxpayer’s spouse)) before the end of the recapture period— the tax imposed by this chapter for the taxable year of such disposition or cessation shall be increased by the excess of the amount of the credit allowed over the amounts of tax imposed by paragraph (1) for preceding taxable years, and paragraph (1) shall not apply with respect to such credit for such taxable year or any subsequent taxable year. In the case of the sale of the principal residence to a person who is not related to the taxpayer, the increase in tax determined under paragraph (2) shall not exceed the amount of gain (if any) on such sale. Solely for purposes of the preceding sentence, the adjusted basis of such residence shall be reduced by the amount of the credit allowed under subsection (a) to the extent not previously recaptured under paragraph (1). Paragraphs (1) and (2) shall not apply to any taxable year ending after the date of the taxpayer’s death. Paragraph (2) shall not apply in the case of a residence which is compulsorily or involuntarily converted (within the meaning of section 1033(a)) if the taxpayer acquires a new principal residence during the 2-year period beginning on the date of the disposition or cessation referred to in paragraph (2). Paragraph (2) shall apply to such new principal residence during the recapture period in the same manner as if such new principal residence were the converted residence. In the case of a transfer of a residence to which section 1041(a) applies— paragraph (2) shall not apply to such transfer, and in the case of taxable years ending after such transfer, paragraphs (1) and (2) shall apply to the transferee in the same manner as if such transferee were the transferor (and shall not apply to the transferor). In the case of any credit allowed with respect to the purchase of a principal residence after December 31, 2008 — paragraph (1) shall not apply, and paragraph (2) shall apply only if the disposition or cessation described in paragraph (2) with respect to such residence occurs during the 36-month period beginning on the date of the purchase of such residence by the taxpayer. In the case of the disposition of a principal residence by an individual (or a cessation referred to in paragraph (2)) after December 31, 2008 , in connection with Government orders received by such individual, or such individual’s spouse, for qualified official extended duty service— paragraph (2) and subsection (d)(2) shall not apply to such disposition (or cessation), and if such residence was acquired before January 1, 2009 , paragraph (1) shall not apply to the taxable year in which such disposition (or cessation) occurs or any subsequent taxable year. For purposes of this section, the term “qualified official extended duty service” means service on qualified official extended duty as— a member of the uniformed services, a member of the Foreign Service of the United States, or an employee of the intelligence community. Any term used in this subparagraph which is also used in paragraph (9) of section 121(d) shall have the same meaning as when used in such paragraph. In the case of a credit allowed under subsection (a) with respect to a joint return, half of such credit shall be treated as having been allowed to each individual filing such return for purposes of this subsection. If the tax imposed by this chapter for the taxable year is increased under this subsection, the taxpayer shall, notwithstanding section 6012, be required to file a return with respect to the taxes imposed under this subtitle. For purposes of this subsection, the term “recapture period” means the 15 taxable years beginning with the second taxable year following the taxable year in which the purchase of the principal residence for which a credit is allowed under subsection (a) was made.

(g) Election to treat purchase in prior year In the case of a purchase of a principal residence after December 31, 2008 , a taxpayer may elect to treat such purchase as made on December 31 of the calendar year preceding such purchase for purposes of this section (other than subsections (b)(4), (c), (f)(4)(D), and (h)).

(h) Application of section This section shall only apply to a principal residence purchased by the taxpayer on or after April 9, 2008 , and before May 1, 2010 . In the case of any taxpayer who enters into a written binding contract before May 1, 2010 , to close on the purchase of a principal residence before July 1, 2010 , and who purchases such residence before October 1, 2010 , paragraph (1) shall be applied by substituting “ October 1, 2010 ” for “ May 1, 2010 ”. In the case of any individual who serves on qualified official extended duty service (as defined in section 121(d)(9)(C)(i)) outside the United States for at least 90 days during the period beginning after December 31, 2008 , and ending before May 1, 2010 , and, if married, such individual’s spouse— paragraphs (1) and (2) shall each be applied by substituting “ May 1, 2011 ” for “ May 1, 2010 ”, and paragraph (2) shall be applied by substituting “ July 1, 2011 ” for “ July 1, 2010 ”, and for “ October 1, 2010 ”.

[§ 36A Repealed. Pub. L. 113–295, div. A, title II, § 221(a)(5)(A), Dec. 19, 2014, 128 Stat. 4037]

§ 36B Refundable credit for coverage under a qualified health plan

(a) In general In the case of an applicable taxpayer, there shall be allowed as a credit against the tax imposed by this subtitle for any taxable year an amount equal to the premium assistance credit amount of the taxpayer for the taxable year.

(b) Premium assistance credit amount For purposes of this section— The term “premium assistance credit amount” means, with respect to any taxable year, the sum of the premium assistance amounts determined under paragraph (2) with respect to all coverage months of the taxpayer occurring during the taxable year. The premium assistance amount determined under this subsection with respect to any coverage month is the amount equal to the lesser of— the monthly premiums for such month for 1 or more qualified health plans offered in the individual market within a State which cover the taxpayer, the taxpayer’s spouse, or any dependent (as defined in section 152) of the taxpayer and which were enrolled in through an Exchange established by the State under 1311 1 of the Patient Protection and Affordable Care Act, or the excess (if any) of— the adjusted monthly premium for such month for the applicable second lowest cost silver plan with respect to the taxpayer, over an amount equal to 1/12 of the product of the applicable percentage and the taxpayer’s household income for the taxable year. For purposes of paragraph (2)— Except as provided in clause (ii), the applicable percentage for any taxable year shall be the percentage such that the applicable percentage for any taxpayer whose household income is within an income tier specified in the following table shall increase, on a sliding scale in a linear manner, from the initial premium percentage to the final premium percentage specified in such table for such income tier: In the case of household income (expressed as a percent of poverty line) within the following income tier: The initial premium percentage is— The final premium percentage is— Up to 133% 2.0% 2.0% 133% up to 150% 3.0% 4.0% 150% up to 200% 4.0% 6.3% 200% up to 250% 6.3% 8.05% 250% up to 300% 8.05% 9.5% 300% up to 400% 9.5% 9.5%. Subject to subclause (II), in the case of taxable years beginning in any calendar year after 2014, the initial and final applicable percentages under clause (i) (as in effect for the preceding calendar year after application of this clause) shall be adjusted to reflect the excess of the rate of premium growth for the preceding calendar year over the rate of income growth for the preceding calendar year. Except as provided in subclause (III), in the case of any calendar year after 2018, the percentages described in subclause (I) shall, in addition to the adjustment under subclause (I), be adjusted to reflect the excess (if any) of the rate of premium growth estimated under subclause (I) for the preceding calendar year over the rate of growth in the consumer price index for the preceding calendar year. Subclause (II) shall apply for any calendar year only if the aggregate amount of premium tax credits under this section and cost-sharing reductions under section 1402 of the Patient Protection and Affordable Care Act for the preceding calendar year exceeds an amount equal to 0.504 percent of the gross domestic product for the preceding calendar year. In the case of a taxable year beginning after December 31, 2020 , and before January 1, 2026 — clause (ii) shall not apply for purposes of adjusting premium percentages under this subparagraph, and the following table shall be applied in lieu of the table contained in clause (i): In the case of household income (expressed as a percent of poverty line) within the following income tier: The initial premium percentage is— The final premium percentage is— Up to 150.0 percent 0.0 0.0 150.0 percent up to 200.0 percent 0.0 2.0 200.0 percent up to 250.0 percent 2.0 4.0 250.0 percent up to 300.0 percent 4.0 6.0 300.0 percent up to 400.0 percent 6.0 8.5 400.0 percent and higher 8.5 8.5 The applicable second lowest cost silver plan with respect to any applicable taxpayer is the second lowest cost silver plan of the individual market in the rating area in which the taxpayer resides which— is offered through the same Exchange through which the qualified health plans taken into account under paragraph (2)(A) were offered, and provides— self-only coverage in the case of an applicable taxpayer— whose tax for the taxable year is determined under section 1(c) 2 (relating to unmarried individuals other than surviving spouses and heads of households) and who is not allowed a deduction under section 151 for the taxable year with respect to a dependent, or who is not described in item (aa) but who purchases only self-only coverage, and family coverage in the case of any other applicable taxpayer. If a taxpayer files a joint return and no credit is allowed under this section with respect to 1 of the spouses by reason of subsection (e), the taxpayer shall be treated as described in clause (ii)(I) unless a deduction is allowed under section 151 for the taxable year with respect to a dependent other than either spouse and subsection (e) does not apply to the dependent. The adjusted monthly premium for an applicable second lowest cost silver plan is the monthly premium which would have been charged (for the rating area with respect to which the premiums under paragraph (2)(A) were determined) for the plan if each individual covered under a qualified health plan taken into account under paragraph (2)(A) were covered by such silver plan and the premium was adjusted only for the age of each such individual in the manner allowed under section 2701 of the Public Health Service Act. In the case of a State participating in the wellness discount demonstration project under section 2705(d) of the Public Health Service Act, the adjusted monthly premium shall be determined without regard to any premium discount or rebate under such project. If— a qualified health plan under section 1302(b)(5) of the Patient Protection and Affordable Care Act offers benefits in addition to the essential health benefits required to be provided by the plan, or a State requires a qualified health plan under section 1311(d)(3)(B) of such Act to cover benefits in addition to the essential health benefits required to be provided by the plan, the portion of the premium for the plan properly allocable (under rules prescribed by the Secretary of Health and Human Services) to such additional benefits shall not be taken into account in determining either the monthly premium or the adjusted monthly premium under paragraph (2). For purposes of determining the amount of any monthly premium, if an individual enrolls in both a qualified health plan and a plan described in section 1311(d)(2)(B)(ii)(I) 2 of the Patient Protection and Affordable Care Act for any plan year, the portion of the premium for the plan described in such section that (under regulations prescribed by the Secretary) is properly allocable to pediatric dental benefits which are included in the essential health benefits required to be provided by a qualified health plan under section 1302(b)(1)(J) of such Act shall be treated as a premium payable for a qualified health plan.

(c) Definition and rules relating to applicable taxpayers, coverage months, and qualified health plan For purposes of this section— The term “applicable taxpayer” means, with respect to any taxable year, a taxpayer whose household income for the taxable year equals or exceeds 100 percent but does not exceed 400 percent of an amount equal to the poverty line for a family of the size involved. If the taxpayer is married (within the meaning of section 7703) at the close of the taxable year, the taxpayer shall be treated as an applicable taxpayer only if the taxpayer and the taxpayer’s spouse file a joint return for the taxable year. No credit shall be allowed under this section to any individual with respect to whom a deduction under section 151 is allowable to another taxpayer for a taxable year beginning in the calendar year in which such individual’s taxable year begins. In the case of a taxable year beginning after December 31, 2020 , and before January 1, 2026 , subparagraph (A) shall be applied without regard to “but does not exceed 400 percent”. For purposes of this subsection— The term “coverage month” means, with respect to an applicable taxpayer, any month if— as of the first day of such month the taxpayer, the taxpayer’s spouse, or any dependent of the taxpayer is covered by a qualified health plan described in subsection (b)(2)(A) that was enrolled in through an Exchange established by the State under section 1311 of the Patient Protection and Affordable Care Act, and the premium for coverage under such plan for such month is paid by the taxpayer (or through advance payment of the credit under subsection (a) under section 1412 of the Patient Protection and Affordable Care Act). The term “coverage month” shall not include any month with respect to an individual if for such month the individual is eligible for minimum essential coverage other than eligibility for coverage described in section 5000A(f)(1)(C) (relating to coverage in the individual market). The term “minimum essential coverage” has the meaning given such term by section 5000A(f). For purposes of subparagraph (B)— Except as provided in clause (iii), an employee shall not be treated as eligible for minimum essential coverage if such coverage— consists of an eligible employer-sponsored plan (as defined in section 5000A(f)(2)), and the employee’s required contribution (within the meaning of section 5000A(e)(1)(B)) with respect to the plan exceeds 9.5 percent of the applicable taxpayer’s household income. This clause shall also apply to an individual who is eligible to enroll in the plan by reason of a relationship the individual bears to the employee. Except as provided in clause (iii), an employee shall not be treated as eligible for minimum essential coverage if such coverage consists of an eligible employer-sponsored plan (as defined in section 5000A(f)(2)) and the plan’s share of the total allowed costs of benefits provided under the plan is less than 60 percent of such costs. Clauses (i) and (ii) shall not apply if the employee (or any individual described in the last sentence of clause (i)) is covered under the eligible employer-sponsored plan or the grandfathered health plan. In the case of plan years beginning in any calendar year after 2014, the Secretary shall adjust the 9.5 percent under clause (i)(II) in the same manner as the percentages are adjusted under subsection (b)(3)(A)(ii). The term “qualified health plan” has the meaning given such term by section 1301(a) of the Patient Protection and Affordable Care Act, except that such term shall not include a qualified health plan which is a catastrophic plan described in section 1302(e) of such Act. Such term shall not include any plan enrolled in through an Exchange, unless such Exchange provides a process for pre-enrollment verification through which any applicant may, beginning not later than August 1, verify with the Exchange the applicant’s household income and eligibility for enrollment in such plan for plan years beginning in the subsequent year. Such term shall not include any plan enrolled in during a special enrollment period provided for by an Exchange— on the basis of the relationship of the individual’s expected household income to such a percentage of the poverty line (or such other amount) as is prescribed by the Secretary of Health and Human Services for purposes of such period, and not in connection with the occurrence of an event or change in circumstances specified by the Secretary of Health and Human Services for such purposes. The term “grandfathered health plan” has the meaning given such term by section 1251 of the Patient Protection and Affordable Care Act. The term “coverage month” shall not include any month with respect to an employee (or any spouse or dependent of such employee) if for such month the employee is provided a qualified small employer health reimbursement arrangement which constitutes affordable coverage. In the case of any employee who is provided a qualified small employer health reimbursement arrangement for any coverage month (determined without regard to subparagraph (A)), the credit otherwise allowable under subsection (a) to the taxpayer for such month shall be reduced (but not below zero) by the amount described in subparagraph (C)(i)(II) for such month. For purposes of subparagraph (A), a qualified small employer health reimbursement arrangement shall be treated as constituting affordable coverage for a month if— the excess of— the amount that would be paid by the employee as the premium for such month for self-only coverage under the second lowest cost silver plan offered in the relevant individual health insurance market, over 1 ⁄ 12 of the employee’s permitted benefit (as defined in section 9831(d)(3)(C)) under such arrangement, does not exceed— 1 ⁄ 12 of 9.5 percent of the employee’s household income. For purposes of this paragraph, the term “qualified small employer health reimbursement arrangement” has the meaning given such term by section 9831(d)(2). In the case of an employee who is provided a qualified small employer health reimbursement arrangement for less than an entire year, subparagraph (C)(i)(II) shall be applied by substituting “the number of months during the year for which such arrangement was provided” for “12”. In the case of plan years beginning in any calendar year after 2014, the Secretary shall adjust the 9.5 percent amount under subparagraph (C)(ii) in the same manner as the percentages are adjusted under subsection (b)(3)(A)(ii).

(d) Terms relating to income and families For purposes of this section— The family size involved with respect to any taxpayer shall be equal to the number of individuals for whom the taxpayer is allowed a deduction under section 151 (relating to allowance of deduction for personal exemptions) for the taxable year. The term “household income” means, with respect to any taxpayer, an amount equal to the sum of— the modified adjusted gross income of the taxpayer, plus the aggregate modified adjusted gross incomes of all other individuals who— were taken into account in determining the taxpayer’s family size under paragraph (1), and were required to file a return of tax imposed by section 1 for the taxable year. The term “modified adjusted gross income” means adjusted gross income increased by— any amount excluded from gross income under section 911, any amount of interest received or accrued by the taxpayer during the taxable year which is exempt from tax, and an amount equal to the portion of the taxpayer’s social security benefits (as defined in section 86(d)) which is not included in gross income under section 86 for the taxable year. The term “poverty line” has the meaning given that term in section 2110(c)(5) of the Social Security Act ( 42 U.S.C. 1397jj(c)(5) ). In the case of any qualified health plan offered through an Exchange for coverage during a taxable year beginning in a calendar year, the poverty line used shall be the most recently published poverty line as of the 1st day of the regular enrollment period for coverage during such calendar year.

(e) Rules for individuals not lawfully present If 1 or more individuals for whom a taxpayer is allowed a deduction under section 151 (relating to allowance of deduction for personal exemptions) for the taxable year (including the taxpayer or his spouse) are individuals who are not lawfully present— the aggregate amount of premiums otherwise taken into account under clauses (i) and (ii) of subsection (b)(2)(A) shall be reduced by the portion (if any) of such premiums which is attributable to such individuals, and for purposes of applying this section, the determination as to what percentage a taxpayer’s household income bears to the poverty level for a family of the size involved shall be made under one of the following methods: A method under which— the taxpayer’s family size is determined by not taking such individuals into account, and the taxpayer’s household income is equal to the product of the taxpayer’s household income (determined without regard to this subsection) and a fraction— the numerator of which is the poverty line for the taxpayer’s family size determined after application of subclause (I), and the denominator of which is the poverty line for the taxpayer’s family size determined without regard to subclause (I). A comparable method reaching the same result as the method under clause (i). For purposes of this section, an individual shall be treated as lawfully present only if the individual is, and is reasonably expected to be for the entire period of enrollment for which the credit under this section is being claimed, a citizen or national of the United States or an alien lawfully present in the United States. The Secretary of Health and Human Services, in consultation with the Secretary, shall prescribe rules setting forth the methods by which calculations of family size and household income are made for purposes of this subsection. Such rules shall be designed to ensure that the least burden is placed on individuals enrolling in qualified health plans through an Exchange and taxpayers eligible for the credit allowable under this section.

(f) Reconciliation of credit and advance credit The amount of the credit allowed under this section for any taxable year shall be reduced (but not below zero) by the amount of any advance payment of such credit under section 1412 of the Patient Protection and Affordable Care Act. If the advance payments to a taxpayer under section 1412 of the Patient Protection and Affordable Care Act for a taxable year exceed the credit allowed by this section (determined without regard to paragraph (1)), the tax imposed by this chapter for the taxable year shall be increased by the amount of such excess. Each Exchange (or any person carrying out 1 or more responsibilities of an Exchange under section 1311(f)(3) or 1321(c) of the Patient Protection and Affordable Care Act) shall provide the following information to the Secretary and to the taxpayer with respect to any health plan provided through the Exchange: The level of coverage described in section 1302(d) of the Patient Protection and Affordable Care Act and the period such coverage was in effect. The total premium for the coverage without regard to the credit under this section or cost-sharing reductions under section 1402 of such Act. The aggregate amount of any advance payment of such credit or reductions under section 1412 of such Act. The name, address, and TIN of the primary insured and the name and TIN of each other individual obtaining coverage under the policy. Any information provided to the Exchange, including any change of circumstances, necessary to determine eligibility for, and the amount of, such credit. Information necessary to determine whether a taxpayer has received excess advance payments.

(g) Special rule for individuals who receive unemployment compensation during 2021 For purposes of this section, in the case of a taxpayer who has received, or has been approved to receive, unemployment compensation for any week beginning during 2021, for the taxable year in which such week begins— such taxpayer shall be treated as an applicable taxpayer, and there shall not be taken into account any household income of the taxpayer in excess of 133 percent of the poverty line for a family of the size involved. For purposes of this subsection, the term “unemployment compensation” has the meaning given such term in section 85(b). For purposes of this subsection, a taxpayer shall not be treated as having received (or been approved to receive) unemployment compensation for any week unless such taxpayer provides self-attestation of, and such documentation as the Secretary shall prescribe which demonstrates, such receipt or approval. Paragraph (1)(A) shall not affect the application of subsection (c)(1)(C). Paragraph (1)(B) shall not apply to any determination of household income for purposes of paragraph (2)(C)(i)(II) or (4)(C)(ii) of subsection (c) 5

(h) Regulations The Secretary shall prescribe such regulations as may be necessary to carry out the provisions of this section, including regulations which provide for— the coordination of the credit allowed under this section with the program for advance payment of the credit under section 1412 of the Patient Protection and Affordable Care Act, and the application of subsection (f) where the filing status of the taxpayer for a taxable year is different from such status used for determining the advance payment of the credit.

[§ 36C Renumbered § 23]

§ 37 Overpayments of tax

For credit against the tax imposed by this subtitle for overpayments of tax, see section 6401. ( Aug. 16, 1954, ch. 736 , 68A Stat. 16 , § 38; renumbered § 39, Pub. L. 87–834, § 2(a) , Oct. 16, 1962 , 76 Stat. 962 ; renumbered § 40, Pub. L. 89–44, title VIII, § 809(c) , June 21, 1965 , 79 Stat. 167 ; renumbered § 42, Pub. L. 92–178, title VI, § 601(a) , Dec. 10, 1971 , 85 Stat. 553 ; renumbered § 43, Pub. L. 94–12, title II, § 203(a) , Mar. 29, 1975 , 89 Stat. 29 ; renumbered § 44, Pub. L. 94–12, title II, § 204(a) , Mar. 29, 1975 , 89 Stat. 30 ; renumbered § 45, Pub. L. 94–12, title II, § 208(a) , Mar. 29, 1975 , 89 Stat. 32 ; renumbered § 35, Pub. L. 98–369, div. A, title IV, § 471(c) , July 18, 1984 , 98 Stat. 826 ; renumbered § 36, Pub. L. 107–210, div. A, title II, § 201(a) , Aug. 6, 2002 , 116 Stat. 954 ; renumbered § 37, Pub. L. 110–289, div. C, title I, § 3011(a) , July 30, 2008 , 122 Stat. 2888 .)

§ 38 General business credit

(a) Allowance of credit There shall be allowed as a credit against the tax imposed by this chapter for the taxable year an amount equal to the sum of— the business credit carryforwards carried to such taxable year, the amount of the current year business credit, plus the business credit carrybacks carried to such taxable year.

(b) Current year business credit For purposes of this subpart, the amount of the current year business credit is the sum of the following credits determined for the taxable year: the investment credit determined under section 46, the work opportunity credit determined under section 51(a), the alcohol fuels credit determined under section 40(a), the research credit determined under section 41(a), the low-income housing credit determined under section 42(a), the enhanced oil recovery credit under section 43(a), in the case of an eligible small business (as defined in section 44(b)), the disabled access credit determined under section 44(a), the renewable electricity production credit under section 45(a), the empowerment zone employment credit determined under section 1396(a), the Indian employment credit as determined under section 45A(a), the employer social security credit determined under section 45B(a), the orphan drug credit determined under section 45C(a), the new markets tax credit determined under section 45D(a), in the case of an eligible employer (as defined in section 45E(c)), the small employer pension plan startup cost credit determined under section 45E(a), the employer-provided child care credit determined under section 45F(a), the railroad track maintenance credit determined under section 45G(a), the biodiesel fuels credit determined under section 40A(a), the low sulfur diesel fuel production credit determined under section 45H(a), the marginal oil and gas well production credit determined under section 45I(a), the distilled spirits credit determined under section 5011(a), the advanced nuclear power facility production credit determined under section 45J(a), the nonconventional source production credit determined under section 45K(a), the new energy efficient home credit determined under section 45L(a), the portion of the alternative motor vehicle credit to which section 30B(g)(1) applies, the portion of the alternative fuel vehicle refueling property credit to which section 30C(d)(1) applies, the mine rescue team training credit determined under section 45N(a), in the case of an eligible agricultural business (as defined in section 45O(e)), the agricultural chemicals security credit determined under section 45O(a), the differential wage payment credit determined under section 45P(a), the carbon dioxide sequestration credit determined under section 45Q(a), the portion of the new clean vehicle credit to which section 30D(c)(1) applies, the small employer health insurance credit determined under section 45R, in the case of an eligible employer (as defined in section 45S(c)), the paid family and medical leave credit determined under section 45S(a), in the case of an eligible employer (as defined in section 45T(c)), the retirement auto-enrollment credit determined under section 45T(a), plus the zero-emission nuclear power production credit determined under section 45U(a). the sustainable aviation fuel credit determined under section 40B, the clean hydrogen production credit determined under section 45V(a), the qualified commercial clean vehicle credit determined under section 45W, the advanced manufacturing production credit determined under section 45X(a), the clean electricity production credit determined under section 45Y(a), the clean fuel production credit determined under section 45Z(a), plus in the case of an eligible small employer (as defined in section 45AA(c)), the military spouse retirement plan eligibility credit determined under section 45AA(a).

(c) Limitation based on amount of tax The credit allowed under subsection (a) for any taxable year shall not exceed the excess (if any) of the taxpayer’s net income tax over the greater of— the tentative minimum tax for the taxable year, or 25 percent of so much of the taxpayer’s net regular tax liability as exceeds 50,000,000. For purposes of applying the test under the preceding sentence, rules similar to the rules of paragraphs (2) and (3) of section 448(c) shall apply. For purposes of paragraph (4)(B)(ii), any credit determined under section 41 with respect to a partnership or S corporation shall not be treated as a specified credit by any partner or shareholder unless such partner or shareholder meets the gross receipts test under subparagraph (A) for the taxable year in which such credit is treated as a current year business credit. In the case of a husband or wife who files a separate return, the amount specified under subparagraph (B) of paragraph (1) shall be $12, 500 in l i e u o f$ 25,000. This subparagraph shall not apply if the spouse of the taxpayer has no business credit carryforward or carryback to, and has no current year business credit for, the taxable year of such spouse which ends within or with the taxpayer’s taxable year. In the case of a controlled group, the $25, 000 am o u n t s p ec i f i e d u n d ers u b p a r a g r a p h (B) o f p a r a g r a p h (1) s ha ll b ere d u ce df ore a c h co m p o n e n t m e mb ero f s u c h g ro u p b y a pp or t i o nin g$ 25,000 among the component members of such group in such manner as the Secretary shall by regulations prescribe. For purposes of the preceding sentence, the term “controlled group” has the meaning given to such term by section 1563(a). In the case of a person described in subparagraph (A) or (B) of section 46(e)(1) (as in effect on the day before the date of the enactment of the Revenue Reconciliation Act of 1990), the $25, 000 am o u n t s p ec i f i e d u n d ers u b p a r a g r a p h (B) o f p a r a g r a p h (1) s ha ll e q u a l s u c h p erso n ’ sr a t ab l es ha re (a s d e t er min e d u n d ersec t i o n 46 (e) (2) (a sso in e ff ec t) o f s u c ham o u n t . I n t h ec a seo f an es t a t eor t r u s t, t h e$ 25,000 amount specified under subparagraph (B) of paragraph (1) shall be reduced to an amount which bears the same ratio to $25, 000 a s t h e p or t i o n o f t h e in co m eo f t h ees t a t eor t r u s tw hi c hi s n o t a ll oc a t e d t o b e n e f i c ia r i es b e a rs t o t h e t o t a l in co m eo f t h ees t a t eor t r u s t . I n t h ec a seo f a cor p or a t i o n — t h e f i rs t se n t e n ceo f p a r a g r a p h (1) s ha ll b e a ppl i e d b ys u b s t i t u t in g “25 p erce n t o f t h e t a x p a yer ’ s n e t in co m e t a x a se x cee d s$ 25,000” for “the greater of” and all that follows, paragraph (2)(A) shall be applied without regard to clause (ii)(I) thereof, and paragraph (4)(A) shall be applied without regard to clause (ii)(I) thereof.

(d) Ordering rules For purposes of any provision of this title where it is necessary to ascertain the extent to which the credits determined under any section referred to in subsection (b) are used in a taxable year or as a carryback or carryforward— The order in which such credits are used shall be determined on the basis of the order in which they are listed in subsection (b) as of the close of the taxable year in which the credit is used. The order in which the credits listed in section 46 are used shall be determined on the basis of the order in which such credits are listed in section 46 as of the close of the taxable year in which the credit is used.

“It was the intent of the Congress in providing an investment credit under section 38 of the Internal Revenue Code of 1986 [formerly I.R.C. 1954] and it is the intent of the Congress in repealing the reduction in basis required by section 48(g) of such Code to provide an incentive for modernization and growth of private industry (including that portion thereof which is regulated). Accordingly, Congress does not intend that any agency or instrumentality of the United States having jurisdiction with respect to a taxpayer shall, without the consent of the taxpayer, use— in the case of public utility property (as defined in section 46(c)(3)(B) of the Internal Revenue Code of 1986, more than a proportionate part (determined with reference to the average useful life of the property with respect to which the credit was allowed) of the credit against tax allowed for any taxable year by section 38 of such Code, or in the case of any other property, any credit against tax allowed by section 38 of such Code, to reduce such taxpayer’s Federal income taxes for the purpose of establishing the cost of service of the taxpayer or to accomplish a similar result by any other method.”

§ 39 Carryback and carryforward of unused credits

(a) In general If the sum of the business credit carryforwards to the taxable year plus the amount of the current year business credit for the taxable year exceeds the amount of the limitation imposed by subsection (c) of section 38 for such taxable year (hereinafter in this section referred to as the “unused credit year”), such excess (to the extent attributable to the amount of the current year business credit) shall be— a business credit carryback to the taxable year preceding the unused credit year, and a business credit carryforward to each of the 20 taxable years following the unused credit year, and, subject to the limitations imposed by subsections (b) and (c), shall be taken into account under the provisions of section 38(a) in the manner provided in section 38(a). The entire amount of the unused credit for an unused credit year shall be carried to the earliest of the 21 taxable years to which (by reason of paragraph (1)) such credit may be carried. The amount of the unused credit for the unused credit year shall be carried to each of the other 20 taxable years to the extent that such unused credit may not be taken into account under section 38(a) for a prior taxable year because of the limitations of subsections (b) and (c). Notwithstanding subsection (d), in the case of the marginal oil and gas well production credit— this section shall be applied separately from the business credit (other than the marginal oil and gas well production credit), paragraph (1) shall be applied by substituting “each of the 5 taxable years” for “the taxable year” in subparagraph (A) thereof, and paragraph (2) shall be applied— by substituting “25 taxable years” for “21 taxable years” in subparagraph (A) thereof, and by substituting “24 taxable years” for “20 taxable years” in subparagraph (B) thereof. Notwithstanding subsection (d), in the case of any applicable credit (as defined in section 6417(b))— this section shall be applied separately from the business credit (other than the applicable credit), paragraph (1) shall be applied by substituting “each of the 3 taxable years” for “the taxable year” in subparagraph (A) thereof, and paragraph (2) shall be applied— by substituting “23 taxable years” for “21 taxable years” in subparagraph (A) thereof, and by substituting “22 taxable years” for “20 taxable years” in subparagraph (B) thereof.

(b) Limitation on carrybacks The amount of the unused credit which may be taken into account under section 38(a)(3) for any preceding taxable year shall not exceed the amount by which the limitation imposed by section 38(c) for such taxable year exceeds the sum of— the amounts determined under paragraphs (1) and (2) of section 38(a) for such taxable year, plus the amounts which (by reason of this section) are carried back to such taxable year and are attributable to taxable years preceding the unused credit year.

(c) Limitation on carryforwards The amount of the unused credit which may be taken into account under section 38(a)(1) for any succeeding taxable year shall not exceed the amount by which the limitation imposed by section 38(c) for such taxable year exceeds the sum of the amounts which, by reason of this section, are carried to such taxable year and are attributable to taxable years preceding the unused credit year.

(d) Transitional rule No portion of the unused business credit for any taxable year which is attributable to a credit specified in section 38(b) or any portion thereof may be carried back to any taxable year before the first taxable year for which such specified credit or such portion is allowable (without regard to subsection (a)).

§ 40 Alcohol, etc., used as fuel

(a) General rule For purposes of section 38, the alcohol fuels credit determined under this section for the taxable year is an amount equal to the sum of— the alcohol mixture credit, the alcohol credit, in the case of an eligible small ethanol producer, the small ethanol producer credit, plus the second generation biofuel producer credit.

(b) Definition of alcohol mixture credit, alcohol credit, and small ethanol producer credit For purposes of this section, and except as provided in subsection (h)— The alcohol mixture credit of any taxpayer for any taxable year is 60 cents for each gallon of alcohol used by the taxpayer in the production of a qualified mixture. The term “qualified mixture” means a mixture of alcohol and gasoline or of alcohol and a special fuel which— is sold by the taxpayer producing such mixture to any person for use as a fuel, or is used as a fuel by the taxpayer producing such mixture. Alcohol used in the production of a qualified mixture shall be taken into account— only if the sale or use described in subparagraph (B) is in a trade or business of the taxpayer, and for the taxable year in which such sale or use occurs. No credit shall be allowed under this section with respect to any casual off-farm production of a qualified mixture. The alcohol credit of any taxpayer for any taxable year is 60 cents for each gallon of alcohol which is not in a mixture with gasoline or a special fuel (other than any denaturant) and which during the taxable year— is used by the taxpayer as a fuel in a trade or business, or is sold by the taxpayer at retail to a person and placed in the fuel tank of such person’s vehicle. No credit shall be allowed under subparagraph (A)(i) with respect to any alcohol which was sold in a retail sale described in subparagraph (A)(ii). In the case of any alcohol with a proof which is at least 150 but less than 190, paragraphs (1)(A) and (2)(A) shall be applied by substituting “45 cents” for “60 cents”. The small ethanol producer credit of any eligible small ethanol producer for any taxable year is 10 cents for each gallon of qualified ethanol fuel production of such producer. For purposes of this paragraph, the term “qualified ethanol fuel production” means any alcohol which is ethanol which is produced by an eligible small ethanol producer, and which during the taxable year— is sold by such producer to another person— for use by such other person in the production of a qualified mixture in such other person’s trade or business (other than casual off-farm production), for use by such other person as a fuel in a trade or business, or who sells such ethanol at retail to another person and places such ethanol in the fuel tank of such other person, or is used or sold by such producer for any purpose described in clause (i). The qualified ethanol fuel production of any producer for any taxable year shall not exceed 15,000,000 gallons (determined without regard to any qualified second generation biofuel production). The qualified ethanol fuel production of any producer for any taxable year shall not include any alcohol which is purchased by the producer and with respect to which such producer increases the proof of the alcohol by additional distillation. The adding of any denaturant to alcohol shall not be treated as the production of a mixture. The second generation biofuel producer credit of any taxpayer is an amount equal to the applicable amount for each gallon of qualified second generation biofuel production. For purposes of subparagraph (A), the applicable amount means $1.01, except that such amount shall, in the case of second generation biofuel which is alcohol, be reduced by the sum of— the amount of the credit in effect for such alcohol under subsection (b)(1) (without regard to subsection (b)(3)) at the time of the qualified second generation biofuel production, plus in the case of ethanol, the amount of the credit in effect under subsection (b)(4) at the time of such production. For purposes of this section, the term “qualified second generation biofuel production” means any second generation biofuel which is produced by the taxpayer, and which during the taxable year— is sold by the taxpayer to another person— for use by such other person in the production of a qualified second generation biofuel mixture in such other person’s trade or business (other than casual off-farm production), for use by such other person as a fuel in a trade or business, or who sells such second generation biofuel at retail to another person and places such second generation biofuel in the fuel tank of such other person, or is used or sold by the taxpayer for any purpose described in clause (i). The qualified second generation biofuel production of any taxpayer for any taxable year shall not include any alcohol which is purchased by the taxpayer and with respect to which such producer increases the proof of the alcohol by additional distillation. For purposes of this paragraph, the term “qualified second generation biofuel mixture” means a mixture of second generation biofuel and gasoline or of second generation biofuel and a special fuel which— is sold by the person producing such mixture to any person for use as a fuel, or is used as a fuel by the person producing such mixture. For purposes of this paragraph— The term “second generation biofuel” means any liquid fuel which— is derived by, or from, qualified feedstocks, and meets the registration requirements for fuels and fuel additives established by the Environmental Protection Agency under section 211 of the Clean Air Act ( 42 U.S.C. 7545 ). The term “second generation biofuel” shall not include any alcohol with a proof of less than 150. The determination of the proof of any alcohol shall be made without regard to any added denaturants. The term “second generation biofuel” shall not include any fuel if— more than 4 percent of such fuel (determined by weight) is any combination of water and sediment, the ash content of such fuel is more than 1 percent (determined by weight), or such fuel has an acid number greater than 25. For purposes of this paragraph, the term “qualified feedstock” means— any lignocellulosic or hemicellulosic matter that is available on a renewable or recurring basis, and any cultivated algae, cyanobacteria, or lemna. In the case of fuel which is derived by, or from, feedstock described in subparagraph (F)(ii) and which is sold by the taxpayer to another person for refining by such other person into a fuel which meets the requirements of subparagraph (E)(i)(II) and the refined fuel is not excluded under subparagraph (E)(iii)— such sale shall be treated as described in subparagraph (C)(i), such fuel shall be treated as meeting the requirements of subparagraph (E)(i)(II) and as not being excluded under subparagraph (E)(iii) in the hands of such taxpayer, and except as provided in this subparagraph, such fuel (and any fuel derived from such fuel) shall not be taken into account under subparagraph (C) with respect to the taxpayer or any other person. Rules similar to the rules under subsection (g)(6) shall apply for purposes of this paragraph. No credit shall be determined under this paragraph with respect to any taxpayer unless such taxpayer is registered with the Secretary as a producer of second generation biofuel under section 4101. This paragraph shall apply with respect to qualified second generation biofuel production after December 31, 2008 , and before January 1, 2025 . If this paragraph ceases to apply for any period by reason of clause (i), rules similar to the rules of subsection (e)(2) shall apply.

(c) Coordination with exemption from excise tax The amount of the credit determined under this section with respect to any alcohol shall, under regulations prescribed by the Secretary, be properly reduced to take into account any benefit provided with respect to such alcohol solely by reason of the application of section 4041(b)(2), section 6426, or section 6427(e).

(d) Definitions and special rules For purposes of this section— The term “alcohol” includes methanol and ethanol but does not include— alcohol produced from petroleum, natural gas, or coal (including peat), or alcohol with a proof of less than 150. The determination of the proof of any alcohol shall be made without regard to any added denaturants. The term “special fuel” includes any liquid fuel (other than gasoline) which is suitable for use in an internal combustion engine. If— any credit was determined under this section with respect to alcohol used in the production of any qualified mixture, and any person— separates the alcohol from the mixture, or without separation, uses the mixture other than as a fuel, then there is hereby imposed on such person a tax equal to 60 cents a gallon (45 cents in the case of alcohol with a proof less than 190) for each gallon of alcohol in such mixture. If— any credit was determined under this section with respect to the retail sale of any alcohol, and any person mixes such alcohol or uses such alcohol other than as a fuel, then there is hereby imposed on such person a tax equal to 60 cents a gallon (45 cents in the case of alcohol with a proof less than 190) for each gallon of such alcohol. If— any credit was determined under subsection (a)(3), and any person does not use such fuel for a purpose described in subsection (b)(4)(B), then there is hereby imposed on such person a tax equal to 10 cents a gallon for each gallon of such alcohol. If— any credit is allowed under subsection (a)(4), and any person does not use such fuel for a purpose described in subsection (b)(6)(C), then there is hereby imposed on such person a tax equal to the applicable amount (as defined in subsection (b)(6)(B)) for each gallon of such second generation biofuel. All provisions of law, including penalties, shall, insofar as applicable and not inconsistent with this section, apply in respect of any tax imposed under subparagraph (A), (B), (C), or (D) as if such tax were imposed by section 4081 and not by this chapter. For purposes of determining under subsection (a) the number of gallons of alcohol with respect to which a credit is allowable under subsection (a), the volume of alcohol shall include the volume of any denaturant (including gasoline) which is added under any formulas approved by the Secretary to the extent that such denaturants do not exceed 2 percent of the volume of such alcohol (including denaturants). Under regulations prescribed by the Secretary, rules similar to the rules of subsection (d) of section 52 shall apply. No second generation biofuel producer credit shall be determined under subsection (a) with respect to any second generation biofuel unless such second generation biofuel is produced in the United States and used as a fuel in the United States. For purposes of this subsection, the term “United States” includes any possession of the United States. No credit shall be determined under this section with respect to any alcohol which is produced outside the United States for use as a fuel outside the United States. For purposes of this paragraph, the term “United States” includes any possession of the United States.

(e) Termination This section shall not apply to any sale or use— for any period after December 31, 2011 , or for any period before January 1, 2012 , during which the rates of tax under section 4081(a)(2)(A) are 4.3 cents per gallon. If this section ceases to apply for any period by reason of paragraph (1), no amount attributable to any sale or use before the first day of such period may be carried under section 39 by reason of this section (treating the amount allowed by reason of this section as the first amount allowed by this subpart) to any taxable year beginning after the 3-taxable-year period beginning with the taxable year in which such first day occurs. Paragraph (1) shall not apply to the portion of the credit allowed under this section by reason of subsection (a)(4).

(f) Election to have alcohol fuels credit not apply A taxpayer may elect to have this section not apply for any taxable year. An election under paragraph (1) for any taxable year may be made (or revoked) at any time before the expiration of the 3-year period beginning on the last date prescribed by law for filing the return for such taxable year (determined without regard to extensions). An election under paragraph (1) (or revocation thereof) shall be made in such manner as the Secretary may by regulations prescribe.

(g) Definitions and special rules for eligible small ethanol producer credit For purposes of this section— The term “eligible small ethanol producer” means a person who, at all times during the taxable year, has a productive capacity for alcohol (as defined in subsection (d)(1)(A) without regard to clauses (i) and (ii)) not in excess of 60,000,000 gallons. For purposes of the 15,000,000 gallon limitation under subsection (b)(4)(C) and the 60,000,000 gallon limitation under paragraph (1), all members of the same controlled group of corporations (within the meaning of section 267(f)) and all persons under common control (within the meaning of section 52(b) but determined by treating an interest of more than 50 percent as a controlling interest) shall be treated as 1 person. In the case of a partnership, trust, S corporation, or other pass-thru entity, the limitations contained in subsection (b)(4)(C) and paragraph (1) shall be applied at the entity level and at the partner or similar level. For purposes of this subsection, in the case of a facility in which more than 1 person has an interest, productive capacity shall be allocated among such persons in such manner as the Secretary may prescribe. The Secretary may prescribe such regulations as may be necessary— to prevent the credit provided for in subsection (a)(3) from directly or indirectly benefiting any person with a direct or indirect productive capacity of more than 60,000,000 gallons of alcohol during the taxable year, or to prevent any person from directly or indirectly benefiting with respect to more than 15,000,000 gallons during the taxable year. In the case of a cooperative organization described in section 1381(a), any portion of the credit determined under subsection (a)(3) for the taxable year may, at the election of the organization, be apportioned pro rata among patrons of the organization on the basis of the quantity or value of business done with or for such patrons for the taxable year. An election under clause (i) for any taxable year shall be made on a timely filed return for such year. Such election, once made, shall be irrevocable for such taxable year. Such election shall not take effect unless the organization designates the apportionment as such in a written notice mailed to its patrons during the payment period described in section 1382(d). The amount of the credit not apportioned to patrons pursuant to subparagraph (A) shall be included in the amount determined under subsection (a)(3) for the taxable year of the organization. The amount of the credit apportioned to patrons pursuant to subparagraph (A) shall be included in the amount determined under such subsection for the first taxable year of each patron ending on or after the last day of the payment period (as defined in section 1382(d)) for the taxable year of the organization or, if earlier, for the taxable year of each patron ending on or after the date on which the patron receives notice from the cooperative of the apportionment. If the amount of the credit of the organization determined under such subsection for a taxable year is less than the amount of such credit shown on the return of the organization for such year, an amount equal to the excess of— such reduction, over the amount not apportioned to such patrons under subparagraph (A) for the taxable year, shall be treated as an increase in tax imposed by this chapter on the organization. Such increase shall not be treated as tax imposed by this chapter for purposes of determining the amount of any credit under this chapter or for purposes of section 55.

(h) Reduced credit for ethanol blenders In the case of any alcohol mixture credit or alcohol credit with respect to any sale or use of alcohol which is ethanol during calendar years 2001 through 2011— subsections (b)(1)(A) and (b)(2)(A) shall be applied by substituting “the blender amount” for “60 cents”, subsection (b)(3) shall be applied by substituting “the low-proof blender amount” for “45 cents” and “the blender amount” for “60 cents”, and subparagraphs (A) and (B) of subsection (d)(3) shall be applied by substituting “the blender amount” for “60 cents” and “the low-proof blender amount” for “45 cents”. For purposes of paragraph (1), the blender amount and the low-proof blender amount shall be determined in accordance with the following table: In the case of any sale or use during calendar year: The blender amount is: The low-proof blender amount is: 2001 or 2002 53 cents 39.26 cents 2003 or 2004 52 cents 38.52 cents 2005, 2006, 2007, or 2008 51 cents 37.78 cents 2009 through 2011 45 cents 33.33 cents. In the case of any calendar year beginning after 2008, if the Secretary makes a determination described in subparagraph (B) with respect to all preceding calendar years beginning after 2007, the last row in the table in paragraph (2) shall be applied by substituting “51 cents” for “45 cents”. A determination described in this subparagraph with respect to any calendar year is a determination, in consultation with the Administrator of the Environmental Protection Agency, that an amount less than 7,500,000,000 gallons of ethanol (including cellulosic ethanol) has been produced in or imported into the United States in such year.

§ 40A Biodiesel and renewable diesel used as fuel

(a) General rule For purposes of section 38, the biodiesel fuels credit determined under this section for the taxable year is an amount equal to the sum of— the biodiesel mixture credit, plus the biodiesel credit, plus in the case of an eligible small agri-biodiesel producer, the small agri-biodiesel producer credit.

(b) Definition of biodiesel mixture credit, biodiesel credit, and small agri-biodiesel producer credit For purposes of this section— The biodiesel mixture credit of any taxpayer for any taxable year is $1.00 f ore a c h g a ll o n o f bi o d i ese l u se d b y t h e t a x p a yer in t h e p ro d u c t i o n o f a q u a l i f i e d bi o d i ese l mi x t u re . T h e t er m “ q u a l i f i e d bi o d i ese l mi x t u re ” m e an s ami x t u reo f bi o d i ese l an dd i ese l f u e l (a s d e f in e d in sec t i o n 4083 (a) (3)), d e t er min e d w i t h o u t re g a r d t o an y u seo f k erose n e, w hi c h — i sso l d b y t h e t a x p a yer p ro d u c in g s u c hmi x t u re t o an y p erso n f or u se a s a f u e l, or i s u se d a s a f u e l b y t h e t a x p a yer p ro d u c in g s u c hmi x t u re . B i o d i ese l u se d in t h e p ro d u c t i o n o f a q u a l i f i e d bi o d i ese l mi x t u res ha ll b e t ak e nin t o a cco u n t — o n l y i f t h es a l eor u se d escr ib e d in s u b p a r a g r a p h (B) i s ina t r a d eor b u s in esso f t h e t a x p a yer, an df or t h e t a x ab l eye a r in w hi c h s u c h s a l eor u seocc u rs . N ocre d i t s ha ll b e a ll o w e d u n d er t hi ssec t i o n w i t h res p ec tt o an yc a s u a l o ff - f a r m p ro d u c t i o n o f a q u a l i f i e d bi o d i ese l mi x t u re . T h e bi o d i ese l cre d i t o f an y t a x p a yer f or an y t a x ab l eye a r i s$ 1.00 for each gallon of biodiesel which is not in a mixture with diesel fuel and which during the taxable year— is used by the taxpayer as a fuel in a trade or business, or is sold by the taxpayer at retail to a person and placed in the fuel tank of such person’s vehicle. No credit shall be allowed under subparagraph (A)(i) with respect to any biodiesel which was sold in a retail sale described in subparagraph (A)(ii). No credit shall be allowed under paragraph (1) or (2) of subsection (a) unless the taxpayer obtains a certification (in such form and manner as prescribed by the Secretary) from the producer or importer of the biodiesel which identifies the product produced and the percentage of biodiesel and agri-biodiesel in the product. The small agri-biodiesel producer credit of any eligible small agri-biodiesel producer for any taxable year is 20 cents for each gallon of qualified agri-biodiesel production of such producer. For purposes of this paragraph, the term “qualified agri-biodiesel production” means any agri-biodiesel which is produced by an eligible small agri-biodiesel producer in a manner which complies with the requirements under section 45Z(f)(1)(A)(iii), and which during the taxable year— is sold by such producer to another person— for use by such other person in the production of a qualified biodiesel mixture in such other person’s trade or business (other than casual off-farm production), for use by such other person as a fuel in a trade or business, or who sells such agri-biodiesel at retail to another person and places such agri-biodiesel in the fuel tank of such other person, or is used or sold by such producer for any purpose described in clause (i). The qualified agri-biodiesel production of any producer for any taxable year shall not exceed 15,000,000 gallons. The credit determined under this paragraph with respect to any gallon of fuel shall be in addition to any credit determined under section 45Z with respect to such gallon of fuel.

(c) Coordination with credit against excise tax The amount of the credit determined under this section with respect to any biodiesel shall be properly reduced to take into account any benefit provided with respect to such biodiesel solely by reason of the application of section 6426 or 6427(e).

(d) Definitions and special rules For purposes of this section— The term “biodiesel” means the monoalkyl esters of long chain fatty acids derived from plant or animal matter which meet— the registration requirements for fuels and fuel additives established by the Environmental Protection Agency under section 211 of the Clean Air Act ( 42 U.S.C. 7545 ), and the requirements of the American Society of Testing and Materials D6751. Such term shall not include any liquid with respect to which a credit may be determined under section 40 or 40B. The term “agri-biodiesel” means biodiesel derived solely from virgin oils, including esters derived from virgin vegetable oils from corn, soybeans, sunflower seeds, cottonseeds, canola, crambe, rapeseeds, safflowers, flaxseeds, rice bran, mustard seeds, and camelina, and from animal fats. If— any credit was determined under this section with respect to biodiesel used in the production of any qualified biodiesel mixture, and any person— separates the biodiesel from the mixture, or without separation, uses the mixture other than as a fuel, then there is hereby imposed on such person a tax equal to the product of the rate applicable under subsection (b)(1)(A) and the number of gallons of such biodiesel in such mixture. If— any credit was determined under this section with respect to the retail sale of any biodiesel, and any person mixes such biodiesel or uses such biodiesel other than as a fuel, then there is hereby imposed on such person a tax equal to the product of the rate applicable under subsection (b)(2)(A) and the number of gallons of such biodiesel. If— any credit was determined under subsection (a)(3), and any person does not use such fuel for a purpose described in subsection (b)(4)(B), then there is hereby imposed on such person a tax equal to 10 cents a gallon for each gallon of such agri-biodiesel. All provisions of law, including penalties, shall, insofar as applicable and not inconsistent with this section, apply in respect of any tax imposed under subparagraph (A) or (B) as if such tax were imposed by section 4081 and not by this chapter. Under regulations prescribed by the Secretary, rules similar to the rules of subsection (d) of section 52 shall apply. No credit shall be determined under this section with respect to any biodiesel which is produced outside the United States for use as a fuel outside the United States. For purposes of this paragraph, the term “United States” includes any possession of the United States.

(e) Definitions and special rules for small agri-biodiesel producer credit For purposes of this section— The term “eligible small agri-biodiesel producer” means a person who, at all times during the taxable year, has a productive capacity for agri-biodiesel not in excess of 60,000,000 gallons. For purposes of the 15,000,000 gallon limitation under subsection (b)(4)(C) and the 60,000,000 gallon limitation under paragraph (1), all members of the same controlled group of corporations (within the meaning of section 267(f)) and all persons under common control (within the meaning of section 52(b) but determined by treating an interest of more than 50 percent as a controlling interest) shall be treated as 1 person. In the case of a partnership, trust, S corporation, or other pass-thru entity, the limitations contained in subsection (b)(4)(C) and paragraph (1) shall be applied at the entity level and at the partner or similar level. For purposes of this subsection, in the case of a facility in which more than 1 person has an interest, productive capacity shall be allocated among such persons in such manner as the Secretary may prescribe. The Secretary may prescribe such regulations as may be necessary— to prevent the credit provided for in subsection (a)(3) from directly or indirectly benefiting any person with a direct or indirect productive capacity of more than 60,000,000 gallons of agri-biodiesel during the taxable year, or to prevent any person from directly or indirectly benefiting with respect to more than 15,000,000 gallons during the taxable year. In the case of a cooperative organization described in section 1381(a), any portion of the credit determined under subsection (a)(3) for the taxable year may, at the election of the organization, be apportioned pro rata among patrons of the organization on the basis of the quantity or value of business done with or for such patrons for the taxable year. An election under clause (i) for any taxable year shall be made on a timely filed return for such year. Such election, once made, shall be irrevocable for such taxable year. Such election shall not take effect unless the organization designates the apportionment as such in a written notice mailed to its patrons during the payment period described in section 1382(d). The amount of the credit not apportioned to patrons pursuant to subparagraph (A) shall be included in the amount determined under subsection (a)(3) for the taxable year of the organization. The amount of the credit apportioned to patrons pursuant to subparagraph (A) shall be included in the amount determined under such subsection for the first taxable year of each patron ending on or after the last day of the payment period (as defined in section 1382(d)) for the taxable year of the organization or, if earlier, for the taxable year of each patron ending on or after the date on which the patron receives notice from the cooperative of the apportionment. If the amount of the credit of the organization determined under such subsection for a taxable year is less than the amount of such credit shown on the return of the organization for such year, an amount equal to the excess of— such reduction, over the amount not apportioned to such patrons under subparagraph (A) for the taxable year, shall be treated as an increase in tax imposed by this chapter on the organization. Such increase shall not be treated as tax imposed by this chapter for purposes of determining the amount of any credit under this chapter or for purposes of section 55.

(f) Renewable diesel For purposes of this title— Except as provided in paragraph (2), renewable diesel shall be treated in the same manner as biodiesel. Subsection (b)(4) shall not apply with respect to renewable diesel. The term “renewable diesel” means liquid fuel derived from biomass which meets— the registration requirements for fuels and fuel additives established by the Environmental Protection Agency under section 211 of the Clean Air Act ( 42 U.S.C. 7545 ), and the requirements of the American Society of Testing and Materials D975 or D396, or other equivalent standard approved by the Secretary. Such term shall not include any liquid with respect to which a credit may be determined under section 40. Such term does not include any fuel derived from coprocessing biomass with a feedstock which is not biomass. For purposes of this paragraph, the term “biomass” has the meaning given such term by section 45K(c)(3).

(g) Termination This section shall not apply to any sale or use after December 31, 2024 (or, in the case of the small agri-biodiesel producer credit, any sale or use after December 31, 2026 ).

§ 40B Sustainable aviation fuel credit

(a) In general For purposes of section 38, the sustainable aviation fuel credit determined under this section for the taxable year is, with respect to any sale or use of a qualified mixture which occurs during such taxable year, an amount equal to the product of— the number of gallons of sustainable aviation fuel in such mixture, multiplied by the sum of— $1.25, plus the applicable supplementary amount with respect to such sustainable aviation fuel.

(b) Applicable supplementary amount For purposes of this section, the term “applicable supplementary amount” means, with respect to any sustainable aviation fuel, an amount equal to $0.01 f ore a c h p erce n t a g e p o in t b y w hi c h t h e l i f ecyc l e g ree nh o u se g a se mi ss i o n sre d u c t i o n p erce n t a g e w i t h res p ec tt os u c h f u e l e x cee d s 50 p erce n t . I nn oe v e n t s ha llt h e a ppl i c ab l es u ppl e m e n t a ry am o u n t d e t er min e d u n d er t hi ss u b sec t i o n e x cee d$ 0.50.

(c) Qualified mixture For purposes of this section, the term “qualified mixture” means a mixture of sustainable aviation fuel and kerosene if— such mixture is produced by the taxpayer in the United States, such mixture is used by the taxpayer (or sold by the taxpayer for use) in an aircraft, such sale or use is in the ordinary course of a trade or business of the taxpayer, and the transfer of such mixture to the fuel tank of such aircraft occurs in the United States.

(d) Sustainable aviation fuel For purposes of this section, the term “sustainable aviation fuel” means liquid fuel, the portion of which is not kerosene, which— meets the requirements of— ASTM International Standard D7566, or the Fischer Tropsch provisions of ASTM International Standard D1655, Annex A1, is not derived from coprocessing an applicable material (or materials derived from an applicable material) with a feedstock which is not biomass, is not derived from palm fatty acid distillates or petroleum, and has been certified in accordance with subsection (e) as having a lifecycle greenhouse gas emissions reduction percentage of at least 50 percent. In this subsection— The term “applicable material” means— monoglycerides, diglycerides, and triglycerides, free fatty acids, and fatty acid esters. The term “biomass” has the same meaning given such term in section 45K(c)(3).

(e) Lifecycle greenhouse gas emissions reduction percentage For purposes of this section, the term “lifecycle greenhouse gas emissions reduction percentage” means, with respect to any sustainable aviation fuel, the percentage reduction in lifecycle greenhouse gas emissions achieved by such fuel as compared with petroleum-based jet fuel, as defined in accordance with— the most recent Carbon Offsetting and Reduction Scheme for International Aviation which has been adopted by the International Civil Aviation Organization with the agreement of the United States, or any similar methodology which satisfies the criteria under section 211( o )(1)(H) of the Clean Air Act ( 42 U.S.C. 7545 ( o )(1)(H)), as in effect on the date of enactment of this section.

(f) Registration of sustainable aviation fuel producers No credit shall be allowed under this section with respect to any sustainable aviation fuel unless the producer or importer of such fuel— is registered with the Secretary under section 4101, and provides— certification (in such form and manner as the Secretary shall prescribe) from an unrelated party demonstrating compliance with— any general requirements, supply chain traceability requirements, and information transmission requirements established under the Carbon Offsetting and Reduction Scheme for International Aviation described in paragraph (1) of subsection (e), or in the case of any methodology established under paragraph (2) of such subsection, requirements similar to the requirements described in clause (i), and such other information with respect to such fuel as the Secretary may require for purposes of carrying out this section.

(g) Coordination with credit against excise tax The amount of the credit determined under this section with respect to any sustainable aviation fuel shall, under rules prescribed by the Secretary, be properly reduced to take into account any benefit provided with respect to such sustainable aviation fuel solely by reason of the application of section 6426 or 6427(e).

(h) Termination This section shall not apply to any sale or use after December 31, 2024 .

§ 41 Credit for increasing research activities

(a) General rule For purposes of section 38, the research credit determined under this section for the taxable year shall be an amount equal to the sum of— 20 percent of the excess (if any) of— the qualified research expenses for the taxable year, over the base amount, 20 percent of the basic research payments determined under subsection (e)(1)(A), and 20 percent of the amounts paid or incurred by the taxpayer in carrying on any trade or business of the taxpayer during the taxable year (including as contributions) to an energy research consortium for energy research.

(b) Qualified research expenses For purposes of this section— The term “qualified research expenses” means the sum of the following amounts which are paid or incurred by the taxpayer during the taxable year in carrying on any trade or business of the taxpayer— in-house research expenses, and contract research expenses. The term “in-house research expenses” means— any wages paid or incurred to an employee for qualified services performed by such employee, any amount paid or incurred for supplies used in the conduct of qualified research, and under regulations prescribed by the Secretary, any amount paid or incurred to another person for the right to use computers in the conduct of qualified research. Clause (iii) shall not apply to any amount to the extent that the taxpayer (or any person with whom the taxpayer must aggregate expenditures under subsection (f)(1)) receives or accrues any amount from any other person for the right to use substantially identical personal property. The term “qualified services” means services consisting of— engaging in qualified research, or engaging in the direct supervision or direct support of research activities which constitute qualified research. If substantially all of the services performed by an individual for the taxpayer during the taxable year consists of services meeting the requirements of clause (i) or (ii), the term “qualified services” means all of the services performed by such individual for the taxpayer during the taxable year. The term “supplies” means any tangible property other than— land or improvements to land, and property of a character subject to the allowance for depreciation. The term “wages” has the meaning given such term by section 3401(a). In the case of an employee (within the meaning of section 401(c)(1)), the term “wages” includes the earned income (as defined in section 401(c)(2)) of such employee. The term “wages” shall not include any amount taken into account in determining the work opportunity credit under section 51(a). The term “contract research expenses” means 65 percent of any amount paid or incurred by the taxpayer to any person (other than an employee of the taxpayer) for qualified research. If any contract research expenses paid or incurred during any taxable year are attributable to qualified research to be conducted after the close of such taxable year, such amount shall be treated as paid or incurred during the period during which the qualified research is conducted. Subparagraph (A) shall be applied by substituting “75 percent” for “65 percent” with respect to amounts paid or incurred by the taxpayer to a qualified research consortium for qualified research on behalf of the taxpayer and 1 or more unrelated taxpayers. For purposes of the preceding sentence, all persons treated as a single employer under subsection (a) or (b) of section 52 shall be treated as related taxpayers. The term “qualified research consortium” means any organization which— is described in section 501(c)(3) or 501(c)(6) and is exempt from tax under section 501(a), is organized and operated primarily to conduct scientific research, and is not a private foundation. In the case of amounts paid by the taxpayer to— an eligible small business, an institution of higher education (as defined in section 3304(f)), or an organization which is a Federal laboratory, for qualified research which is energy research, subparagraph (A) shall be applied by substituting “100 percent” for “65 percent”. For purposes of this subparagraph, the term “eligible small business” means a small business with respect to which the taxpayer does not own (within the meaning of section 318) 50 percent or more of— in the case of a corporation, the outstanding stock of the corporation (either by vote or value), and in the case of a small business which is not a corporation, the capital and profits interests of the small business. For purposes of this subparagraph— The term “small business” means, with respect to any calendar year, any person if the annual average number of employees employed by such person during either of the 2 preceding calendar years was 500 or fewer. For purposes of the preceding sentence, a preceding calendar year may be taken into account only if the person was in existence throughout the year. Rules similar to the rules of subparagraphs (B) and (D) of section 220(c)(4) shall apply for purposes of this clause. For purposes of this subparagraph, the term “Federal laboratory” has the meaning given such term by section 4(6) of the Stevenson-Wydler Technology Innovation Act of 1980 ( 15 U.S.C. 3703(6) ), as in effect on the date of the enactment of the Energy Tax Incentives Act of 2005. In the case of in-house research expenses, a taxpayer shall be treated as meeting the trade or business requirement of paragraph (1) if, at the time such in-house research expenses are paid or incurred, the principal purpose of the taxpayer in making such expenditures is to use the results of the research in the active conduct of a future trade or business— of the taxpayer, or of 1 or more other persons who with the taxpayer are treated as a single taxpayer under subsection (f)(1).

(c) Base amount The term “base amount” means the product of— the fixed-base percentage, and the average annual gross receipts of the taxpayer for the 4 taxable years preceding the taxable year for which the credit is being determined (hereinafter in this subsection referred to as the “credit year”). In no event shall the base amount be less than 50 percent of the qualified research expenses for the credit year. Except as otherwise provided in this paragraph, the fixed-base percentage is the percentage which the aggregate qualified research expenses of the taxpayer for taxable years beginning after December 31, 1983 , and before January 1, 1989 , is of the aggregate gross receipts of the taxpayer for such taxable years. The fixed-base percentage shall be determined under this subparagraph if— the first taxable year in which a taxpayer had both gross receipts and qualified research expenses begins after December 31, 1983 , or there are fewer than 3 taxable years beginning after December 31, 1983 , and before January 1, 1989 , in which the taxpayer had both gross receipts and qualified research expenses. In a case to which this subparagraph applies, the fixed-base percentage is— 3 percent for each of the taxpayer’s 1st 5 taxable years beginning after December 31, 1993 , for which the taxpayer has qualified research expenses, in the case of the taxpayer’s 6th such taxable year, ⅙ of the percentage which the aggregate qualified research expenses of the taxpayer for the 4th and 5th such taxable years is of the aggregate gross receipts of the taxpayer for such years, in the case of the taxpayer’s 7th such taxable year, ⅓ of the percentage which the aggregate qualified research expenses of the taxpayer for the 5th and 6th such taxable years is of the aggregate gross receipts of the taxpayer for such years, in the case of the taxpayer’s 8th such taxable year, ½ of the percentage which the aggregate qualified research expenses of the taxpayer for the 5th, 6th, and 7th such taxable years is of the aggregate gross receipts of the taxpayer for such years, in the case of the taxpayer’s 9th such taxable year, ⅔ of the percentage which the aggregate qualified research expenses of the taxpayer for the 5th, 6th, 7th, and 8th such taxable years is of the aggregate gross receipts of the taxpayer for such years, in the case of the taxpayer’s 10th such taxable year, ⅚ of the percentage which the aggregate qualified research expenses of the taxpayer for the 5th, 6th, 7th, 8th, and 9th such taxable years is of the aggregate gross receipts of the taxpayer for such years, and for taxable years thereafter, the percentage which the aggregate qualified research expenses for any 5 taxable years selected by the taxpayer from among the 5th through the 10th such taxable years is of the aggregate gross receipts of the taxpayer for such selected years. The Secretary may prescribe regulations providing that de minimis amounts of gross receipts and qualified research expenses shall be disregarded under clauses (i) and (ii). In no event shall the fixed-base percentage exceed 16 percent. The percentages determined under subparagraphs (A) and (B)(ii) shall be rounded to the nearest 1/100th of 1 percent. At the election of the taxpayer, the credit determined under subsection (a)(1) shall be equal to 14 percent of so much of the qualified research expenses for the taxable year as exceeds 50 percent of the average qualified research expenses for the 3 taxable years preceding the taxable year for which the credit is being determined. The credit under this paragraph shall be determined under this subparagraph if the taxpayer has no qualified research expenses in any one of the 3 taxable years preceding the taxable year for which the credit is being determined. The credit determined under this subparagraph shall be equal to 6 percent of the qualified research expenses for the taxable year. An election under this paragraph shall apply to the taxable year for which made and all succeeding taxable years unless revoked with the consent of the Secretary. Notwithstanding whether the period for filing a claim for credit or refund has expired for any taxable year taken into account in determining the fixed-base percentage, the qualified research expenses taken into account in computing such percentage shall be determined on a basis consistent with the determination of qualified research expenses for the credit year. The Secretary may prescribe regulations to prevent distortions in calculating a taxpayer’s qualified research expenses or gross receipts caused by a change in accounting methods used by such taxpayer between the current year and a year taken into account in computing such taxpayer’s fixed-base percentage. For purposes of this subsection, gross receipts for any taxable year shall be reduced by returns and allowances made during the taxable year. In the case of a foreign corporation, there shall be taken into account only gross receipts which are effectively connected with the conduct of a trade or business within the United States, the Commonwealth of Puerto Rico, or any possession of the United States.

(d) Qualified research defined For purposes of this section— The term “qualified research” means research— with respect to which expenditures are treated as domestic research or experimental expenditures under section 174A, which is undertaken for the purpose of discovering information— which is technological in nature, and the application of which is intended to be useful in the development of a new or improved business component of the taxpayer, and substantially all of the activities of which constitute elements of a process of experimentation for a purpose described in paragraph (3). Such term does not include any activity described in paragraph (4). For purposes of this subsection— Paragraph (1) shall be applied separately with respect to each business component of the taxpayer. The term “business component” means any product, process, computer software, technique, formula, or invention which is to be— held for sale, lease, or license, or used by the taxpayer in a trade or business of the taxpayer. Any plant process, machinery, or technique for commercial production of a business component shall be treated as a separate business component (and not as part of the business component being produced). For purposes of paragraph (1)(C)— Research shall be treated as conducted for a purpose described in this paragraph if it relates to— a new or improved function, performance, or reliability or quality. Research shall in no event be treated as conducted for a purpose described in this paragraph if it relates to style, taste, cosmetic, or seasonal design factors. The term “qualified research” shall not include any of the following: Any research conducted after the beginning of commercial production of the business component. Any research related to the adaptation of an existing business component to a particular customer’s requirement or need. Any research related to the reproduction of an existing business component (in whole or in part) from a physical examination of the business component itself or from plans, blueprints, detailed specifications, or publicly available information with respect to such business component. Any— efficiency survey, activity relating to management function or technique, market research, testing, or development (including advertising or promotions), routine data collection, or routine or ordinary testing or inspection for quality control. Except to the extent provided in regulations, any research with respect to computer software which is developed by (or for the benefit of) the taxpayer primarily for internal use by the taxpayer, other than for use in— an activity which constitutes qualified research (determined with regard to this subparagraph), or a production process with respect to which the requirements of paragraph (1) are met. Any research conducted outside the United States, the Commonwealth of Puerto Rico, or any possession of the United States. Any research in the social sciences, arts, or humanities. Any research to the extent funded by any grant, contract, or otherwise by another person (or governmental entity).

(e) Credit allowable with respect to certain payments to qualified organizations for basic research For purposes of this section— In the case of any taxpayer who makes basic research payments for any taxable year— the amount of basic research payments taken into account under subsection (a)(2) shall be equal to the excess of— such basic research payments, over the qualified organization base period amount, and that portion of such basic research payments which does not exceed the qualified organization base period amount shall be treated as contract research expenses for purposes of subsection (a)(1). For purposes of this subsection— The term “basic research payment” means, with respect to any taxable year, any amount paid in cash during such taxable year by a corporation to any qualified organization for basic research but only if— such payment is pursuant to a written agreement between such corporation and such qualified organization, and such basic research is to be performed by such qualified organization. In the case of a qualified organization described in subparagraph (C) or (D) of paragraph (6), clause (ii) of subparagraph (A) shall not apply. For purposes of this subsection, the term “qualified organization base period amount” means an amount equal to the sum of— the minimum basic research amount, plus the maintenance-of-effort amount. For purposes of this subsection— The term “minimum basic research amount” means an amount equal to the greater of— 1 percent of the average of the sum of amounts paid or incurred during the base period for— any in-house research expenses, and any contract research expenses, or the amounts treated as contract research expenses during the base period by reason of this subsection (as in effect during the base period). Except in the case of a taxpayer which was in existence during a taxable year (other than a short taxable year) in the base period, the minimum basic research amount for any base period shall not be less than 50 percent of the basic research payments for the taxable year for which a determination is being made under this subsection. For purposes of this subsection— The term “maintenance-of-effort amount” means, with respect to any taxable year, an amount equal to the excess (if any) of— an amount equal to— the average of the nondesignated university contributions paid by the taxpayer during the base period, multiplied by the cost-of-living adjustment for the calendar year in which such taxable year begins, over the amount of nondesignated university contributions paid by the taxpayer during such taxable year. For purposes of this paragraph, the term “nondesignated university contribution” means any amount paid by a taxpayer to any qualified organization described in paragraph (6)(A)— for which a deduction was allowable under section 170, and which was not taken into account— in computing the amount of the credit under this section (as in effect during the base period) during any taxable year in the base period, or as a basic research payment for purposes of this section. The cost-of-living adjustment for any calendar year is the cost-of-living adjustment for such calendar year determined under section 1(f)(3), by substituting “calendar year 1987” for “calendar year 2016” in subparagraph (A)(ii) thereof. If the base period of any taxpayer does not end in 1983 or 1984, section 1(f)(3)(A)(ii) shall, for purposes of this paragraph, be applied by substituting the calendar year in which such base period ends for 2016. Such substitution shall be in lieu of the substitution under clause (i). For purposes of this subsection, the term “qualified organization” means any of the following organizations: Any educational organization which— is an institution of higher education (within the meaning of section 3304(f)), and is described in section 170(b)(1)(A)(ii). Any organization not described in subparagraph (A) which— is described in section 501(c)(3) and is exempt from tax under section 501(a), is organized and operated primarily to conduct scientific research, and is not a private foundation. Any organization which— is described in— section 501(c)(3) (other than a private foundation), or section 501(c)(6), is exempt from tax under section 501(a), is organized and operated primarily to promote scientific research by qualified organizations described in subparagraph (A) pursuant to written research agreements, and currently expends— substantially all of its funds, or substantially all of the basic research payments received by it, for grants to, or contracts for basic research with, an organization described in subparagraph (A). Any organization not described in subparagraph (B) or (C) which— is described in section 501(c)(3) and is exempt from tax under section 501(a) (other than a private foundation), is established and maintained by an organization established before July 10, 1981 , which meets the requirements of clause (i), is organized and operated exclusively for the purpose of making grants to organizations described in subparagraph (A) pursuant to written research agreements for purposes of basic research, and makes an election, revocable only with the consent of the Secretary, to be treated as a private foundation for purposes of this title (other than section 4940, relating to excise tax based on investment income). For purposes of this subsection— The term “basic research” means any original investigation for the advancement of scientific knowledge not having a specific commercial objective, except that such term shall not include— basic research conducted outside of the United States, and basic research in the social sciences, arts, or humanities. The term “base period” means the 3-taxable-year period ending with the taxable year immediately preceding the 1st taxable year of the taxpayer beginning after December 31, 1983 . For purposes of determining the amount of credit allowable under subsection (a)(1) for any taxable year, the amount of the basic research payments taken into account under subsection (a)(2)— shall not be treated as qualified research expenses under subsection (a)(1)(A), and shall not be included in the computation of base amount under subsection (a)(1)(B). For purposes of applying subsection (b)(1) to this subsection, any basic research payments shall be treated as an amount paid in carrying on a trade or business of the taxpayer in the taxable year in which it is paid (without regard to the provisions of subsection (b)(3)(B)). The term “corporation” shall not include— an S corporation, a personal holding company (as defined in section 542), or a service organization (as defined in section 414(m)(3)).

(f) Special rules For purposes of this section— In determining the amount of the credit under this section— all members of the same controlled group of corporations shall be treated as a single taxpayer, and the credit (if any) allowable by this section to each such member shall be determined on a proportionate basis to its share of the aggregate of the qualified research expenses, basic research payments, and amounts paid or incurred to energy research consortiums, taken into account by such controlled group for purposes of this section. Under regulations prescribed by the Secretary, in determining the amount of the credit under this section— all trades or businesses (whether or not incorporated) which are under common control shall be treated as a single taxpayer, and the credit (if any) allowable by this section to each such person shall be determined on a proportionate basis to its share of the aggregate of the qualified research expenses, basic research payments, and amounts paid or incurred to energy research consortiums, taken into account by all such persons under common control for purposes of this section. The regulations prescribed under this subparagraph shall be based on principles similar to the principles which apply in the case of subparagraph (A). Under regulations prescribed by the Secretary, rules similar to the rules of subsection (d) of section 52 shall apply. In the case of partnerships, the credit shall be allocated among partners under regulations prescribed by the Secretary. Under regulations prescribed by the Secretary— If a person acquires the major portion of either a trade or business or a separate unit of a trade or business (hereinafter in this paragraph referred to as the “acquired business”) of another person (hereinafter in this paragraph referred to as the “predecessor”), then the amount of qualified research expenses paid or incurred by the acquiring person during the measurement period shall be increased by the amount determined under clause (ii), and the gross receipts of the acquiring person for such period shall be increased by the amount determined under clause (iii). The amount determined under this clause is— for purposes of applying this section for the taxable year in which such acquisition is made, the acquisition year amount, and for purposes of applying this section for any taxable year after the taxable year in which such acquisition is made, the qualified research expenses paid or incurred by the predecessor with respect to the acquired business during the measurement period. The amount determined under this clause is the amount which would be determined under clause (ii) if “the gross receipts of” were substituted for “the qualified research expenses paid or incurred by” each place it appears in clauses (ii) and (iv). For purposes of clause (ii), the acquisition year amount is the amount equal to the product of— the qualified research expenses paid or incurred by the predecessor with respect to the acquired business during the measurement period, and the number of days in the period beginning on the date of the acquisition and ending on the last day of the taxable year in which the acquisition is made, divided by the number of days in the acquiring person’s taxable year. In the case of an acquiring person and a predecessor whose taxable years do not begin on the same date— each reference to a taxable year in clauses (ii) and (iv) shall refer to the appropriate taxable year of the acquiring person, the qualified research expenses paid or incurred by the predecessor, and the gross receipts of the predecessor, during each taxable year of the predecessor any portion of which is part of the measurement period shall be allocated equally among the days of such taxable year, the amount of such qualified research expenses taken into account under clauses (ii) and (iv) with respect to a taxable year of the acquiring person shall be equal to the total of the expenses attributable under subclause (II) to the days occurring during such taxable year, and the amount of such gross receipts taken into account under clause (iii) with respect to a taxable year of the acquiring person shall be equal to the total of the gross receipts attributable under subclause (II) to the days occurring during such taxable year. For purposes of this subparagraph, the term “measurement period” means, with respect to the taxable year of the acquiring person for which the credit is determined, any period of the acquiring person preceding such taxable year which is taken into account for purposes of determining the credit for such year. If the predecessor furnished to the acquiring person such information as is necessary for the application of subparagraph (A), then, for purposes of applying this section for any taxable year ending after such disposition, the amount of qualified research expenses paid or incurred by, and the gross receipts of, the predecessor during the measurement period (as defined in subparagraph (A)(vi), determined by substituting “predecessor” for “acquiring person” each place it appears) shall be reduced by— in the case of the taxable year in which such disposition is made, an amount equal to the product of— the qualified research expenses paid or incurred by, or gross receipts of, the predecessor with respect to the acquired business during the measurement period (as so defined and so determined), and the number of days in the period beginning on the date of acquisition (as determined for purposes of subparagraph (A)(iv)(II)) and ending on the last day of the taxable year of the predecessor in which the disposition is made, divided by the number of days in the taxable year of the predecessor, and in the case of any taxable year ending after the taxable year in which such disposition is made, the amount described in clause (i)(I). If during any of the 3 taxable years following the taxable year in which a disposition to which subparagraph (B) applies occurs, the disposing taxpayer (or a person with whom the taxpayer is required to aggregate expenditures under paragraph (1)) reimburses the acquiring person (or a person required to so aggregate expenditures with such person) for research on behalf of the taxpayer, then the amount of qualified research expenses of the taxpayer for the taxable years taken into account in computing the fixed-base percentage shall be increased by the lesser of— the amount of the decrease under subparagraph (B) which is allocable to taxable years so taken into account, or the product of the number of taxable years so taken into account, multiplied by the amount of the reimbursement described in this subparagraph. In the case of any short taxable year, qualified research expenses and gross receipts shall be annualized in such circumstances and under such methods as the Secretary may prescribe by regulation. The term “controlled group of corporations” has the same meaning given to such term by section 1563(a), except that— “more than 50 percent” shall be substituted for “at least 80 percent” each place it appears in section 1563(a)(1), and the determination shall be made without regard to subsections (a)(4) and (e)(3)(C) of section 1563. The term “energy research consortium” means any organization— which is— described in section 501(c)(3) and is exempt from tax under section 501(a) and is organized and operated primarily to conduct energy research, or organized and operated primarily to conduct energy research in the public interest (within the meaning of section 501(c)(3)), which is not a private foundation, to which at least 5 unrelated persons paid or incurred during the calendar year in which the taxable year of the organization begins amounts (including as contributions) to such organization for energy research, and to which no single person paid or incurred (including as contributions) during such calendar year an amount equal to more than 50 percent of the total amounts received by such organization during such calendar year for energy research. All persons treated as a single employer under subsection (a) or (b) of section 52 shall be treated as related persons for purposes of subparagraph (A)(iii) and as a single person for purposes of subparagraph (A)(iv). For purposes of subsection (a)(3), amounts paid or incurred for any energy research conducted outside the United States, the Commonwealth of Puerto Rico, or any possession of the United States shall not be taken into account. Any amount taken into account under subsection (a)(3) shall not be taken into account under paragraph (1) or (2) of subsection (a). The term “energy research” does not include any research which is not qualified research.

(g) Special rule for pass-thru of credit In the case of an individual who— owns an interest in an unincorporated trade or business, is a partner in a partnership, is a beneficiary of an estate or trust, or is a shareholder in an S corporation, the amount determined under subsection (a) for any taxable year shall not exceed an amount (separately computed with respect to such person’s interest in such trade or business or entity) equal to the amount of tax attributable to that portion of a person’s taxable income which is allocable or apportionable to the person’s interest in such trade or business or entity. If the amount determined under subsection (a) for any taxable year exceeds the limitation of the preceding sentence, such amount may be carried to other taxable years under the rules of section 39; except that the limitation of the preceding sentence shall be taken into account in lieu of the limitation of section 38(c) in applying section 39.

(h) Treatment of credit for qualified small businesses At the election of a qualified small business for any taxable year, section 3111(f) shall apply to the payroll tax credit portion of the credit otherwise determined under subsection (a) for the taxable year and such portion shall not be treated (other than for purposes of section 280C) as a credit determined under subsection (a). For purposes of this subsection, the payroll tax credit portion of the credit determined under subsection (a) with respect to any qualified small business for any taxable year is the least of— the amount specified in the election made under this subsection, the credit determined under subsection (a) for the taxable year (determined before the application of this subsection), or in the case of a qualified small business other than a partnership or S corporation, the amount of the business credit carryforward under section 39 carried from the taxable year (determined before the application of this subsection to the taxable year). For purposes of this subsection— The term “qualified small business” means, with respect to any taxable year— a corporation or partnership, if— the gross receipts (as determined under the rules of section 448(c)(3), without regard to subparagraph (A) thereof) of such entity for the taxable year is less than $5, 000, 000, an d s u c h e n t i t y d i d n o t ha v e g rossrece i pt s (a sso d e t er min e d) f or an y t a x ab l eye a r p rece d in g t h e 5 - t a x ab l e - ye a r p er i o d e n d in g w i t h s u c h t a x ab l eye a r, an d an y p erso n (o t h er t hana cor p or a t i o n or p a r t n ers hi p) w h o m ee t s t h ere q u i re m e n t so f s u b c l a u ses (I) an d (II) o f c l a u se (i), d e t er min e d — b ys u b s t i t u t in g “ p erso n ” f or “ e n t i t y ” e a c h pl a ce i t a pp e a rs, an d b yo n l y t akin g in t o a cco u n tt h e a gg re g a t e g rossrece i pt srece i v e d b ys u c h p erso nin c a rry in g o na llt r a d esor b u s in esseso f s u c h p erso n . S u c h t er m s ha ll n o t in c l u d e an or g ani z a t i o n w hi c hi se x e m pt f ro m t a x a t i o n u n d ersec t i o n 501. A n ye l ec t i o n u n d er t hi ss u b sec t i o n f or an y t a x ab l eye a r — s ha ll s p ec i f y t h e am o u n t o f t h ecre d i tt o w hi c h s u c h e l ec t i o na ppl i es, s ha ll b e ma d eo n or b e f ore t h e d u e d a t e (in c l u d in g e x t e n s i o n s) o f — in t h ec a seo f a q u a l i f i e d s ma ll b u s in ess w hi c hi s a p a r t n ers hi p, t h ere t u r n re q u i re d t o b e f i l e d u n d ersec t i o n 6031, in t h ec a seo f a q u a l i f i e d s ma ll b u s in ess w hi c hi s an S cor p or a t i o n, t h ere t u r n re q u i re d t o b e f i l e d u n d ersec t i o n 6037, an d in t h ec a seo f an yo t h er q u a l i f i e d s ma ll b u s in ess, t h ere t u r n o f t a x f or t h e t a x ab l eye a r, an d ma y b ere v o k e d o n l y w i t h t h eco n se n t o f t h e S ecre t a ry . T h e am o u n t s p ec i f i e d inan ye l ec t i o nma d e u n d er t hi ss u b sec t i o n s ha ll n o t e x cee d$ 250,000. In the case of taxable years beginning after December 31, 2022 , the amount in subclause (I) shall be increased by $250, 000. A p erso nma y n o t mak e an e l ec t i o n u n d er t hi ss u b sec t i o ni f s u c h p erso n (or an yo t h er p erso n t re a t e d a s a s in g l e t a x p a yer w i t h s u c h p erso n u n d er p a r a g r a p h (5) (A)) ha s ma d e an e l ec t i o n u n d er t hi ss u b sec t i o n f or 5 or m ore p rece d in g t a x ab l eye a rs . I n t h ec a seo f a q u a l i f i e d s ma ll b u s in ess w hi c hi s a p a r t n ers hi p or S cor p or a t i o n, t h ee l ec t i o nma d e u n d er t hi ss u b sec t i o n s ha ll b e ma d e a tt h ee n t i t y l e v e l . E x ce pt a s p ro v i d e d in s u b p a r a g r a p h (B), a llp erso n sore n t i t i es t re a t e d a s a s in g l e t a x p a yer u n d ers u b sec t i o n (f) (1) s ha ll b e t re a t e d a s a s in g l e t a x p a yer f or p u r p oseso f t hi ss u b sec t i o n . F or p u r p oseso f t hi ss u b sec t i o nan d sec t i o n 3111 (f) — e a c h o f t h e p erso n s t re a t e d a s a s in g l e t a x p a yer u n d ers u b p a r a g r a p h (A) ma yse p a r a t e l y mak e t h ee l ec t i o n u n d er p a r a g r a p h (1) f or an y t a x ab l eye a r, an d e a c h o f t h e$ 250,000 amounts under paragraph (4)(B)(i) shall be allocated among all persons treated as a single taxpayer under subparagraph (A) in the same manner as under subparagraph (A)(ii) or (B)(ii) of subsection (f)(1), whichever is applicable. The Secretary shall prescribe such regulations as may be necessary to carry out the purposes of this subsection, including— regulations to prevent the avoidance of the purposes of the limitations and aggregation rules under this subsection through the use of successor companies or other means, regulations to minimize compliance and record-keeping burdens under this subsection, and regulations for recapturing the benefit of credits determined under section 3111(f) in cases where there is a subsequent adjustment to the payroll tax credit portion of the credit determined under subsection (a), including requiring amended income tax returns in the cases where there is such an adjustment.

“For purposes of determining— whether any excess credit under old section 44F [now 41] for a taxable year beginning before January 1, 1984 , is allowable as a carryover under new section 30 [now 41], and the period during which new section 30 [now 41] is in effect, new section 30 [now 41] shall be treated as a continuation of old section 44F (and shall apply only to the extent old section 44F would have applied).”

§ 42 Low-income housing credit

(a) In general For purposes of section 38, the amount of the low-income housing credit determined under this section for any taxable year in the credit period shall be an amount equal to— the applicable percentage of the qualified basis of each qualified low-income building.

(b) Applicable percentage: 70 percent present value credit for certain new buildings; 30 percent present value credit for certain other buildings For purposes of this section— The term “applicable percentage” means, with respect to any building, the appropriate percentage prescribed by the Secretary for the earlier of— the month in which such building is placed in service, or at the election of the taxpayer— the month in which the taxpayer and the housing credit agency enter into an agreement with respect to such building (which is binding on such agency, the taxpayer, and all successors in interest) as to the housing credit dollar amount to be allocated to such building, or in the case of any building to which subsection (h)(4)(B) applies, the month in which the tax-exempt obligations are issued. A month may be elected under clause (ii) only if the election is made not later than the 5th day after the close of such month. Such an election, once made, shall be irrevocable. The percentages prescribed by the Secretary for any month shall be percentages which will yield over a 10-year period amounts of credit under subsection (a) which have a present value equal to— 70 percent of the qualified basis of a new building which is not federally subsidized for the taxable year, and 30 percent of the qualified basis of a building not described in clause (i). The present value under subparagraph (B) shall be determined— as of the last day of the 1st year of the 10-year period referred to in subparagraph (B), by using a discount rate equal to 72 percent of the average of the annual Federal mid-term rate and the annual Federal long-term rate applicable under section 1274(d)(1) to the month applicable under clause (i) or (ii) of subparagraph (A) and compounded annually, and by assuming that the credit allowable under this section for any year is received on the last day of such year. In the case of any new building— which is placed in service by the taxpayer after the date of the enactment of this paragraph, and which is not federally subsidized for the taxable year, the applicable percentage shall not be less than 9 percent. In the case of any new or existing building to which paragraph (2) does not apply and which is placed in service by the taxpayer after December 31, 2020 , the applicable percentage shall not be less than 4 percent. For treatment of certain rehabilitation expenditures as separate new buildings, see subsection (e). For determination of applicable percentage for increases in qualified basis after the 1st year of the credit period, see subsection (f)(3). For authority of housing credit agency to limit applicable percentage and qualified basis which may be taken into account under this section with respect to any building, see subsection (h)(7).

(c) Qualified basis; qualified low-income building For purposes of this section— The qualified basis of any qualified low-income building for any taxable year is an amount equal to— the applicable fraction (determined as of the close of such taxable year) of the eligible basis of such building (determined under subsection (d)(5)). For purposes of subparagraph (A), the term “applicable fraction” means the smaller of the unit fraction or the floor space fraction. For purposes of subparagraph (B), the term “unit fraction” means the fraction— the numerator of which is the number of low-income units in the building, and the denominator of which is the number of residential rental units (whether or not occupied) in such building. For purposes of subparagraph (B), the term “floor space fraction” means the fraction— the numerator of which is the total floor space of the low-income units in such building, and the denominator of which is the total floor space of the residential rental units (whether or not occupied) in such building. In the case of a qualified low-income building described in subsection (i)(3)(B)(iii), the qualified basis of such building for any taxable year shall be increased by the lesser of— so much of the eligible basis of such building as is used throughout the year to provide supportive services designed to assist tenants in locating and retaining permanent housing, or 20 percent of the qualified basis of such building (determined without regard to this subparagraph). The term “qualified low-income building” means any building— which is part of a qualified low-income housing project at all times during the period— beginning on the 1st day in the compliance period on which such building is part of such a project, and ending on the last day of the compliance period with respect to such building, and to which the amendments made by section 201(a) of the Tax Reform Act of 1986 apply.

(d) Eligible basis For purposes of this section— The eligible basis of a new building is its adjusted basis as of the close of the 1st taxable year of the credit period. The eligible basis of an existing building is— in the case of a building which meets the requirements of subparagraph (B), its adjusted basis as of the close of the 1st taxable year of the credit period, and zero in any other case. A building meets the requirements of this subparagraph if— the building is acquired by purchase (as defined in section 179(d)(2)), there is a period of at least 10 years between the date of its acquisition by the taxpayer and the date the building was last placed in service, the building was not previously placed in service by the taxpayer or by any person who was a related person with respect to the taxpayer as of the time previously placed in service, and except as provided in subsection (f)(5), a credit is allowable under subsection (a) by reason of subsection (e) with respect to the building. For purposes of subparagraph (A), the adjusted basis of any building shall not include so much of the basis of such building as is determined by reference to the basis of other property held at any time by the person acquiring the building. For purposes of determining under subparagraph (B)(ii) when a building was last placed in service, there shall not be taken into account any placement in service— in connection with the acquisition of the building in a transaction in which the basis of the building in the hands of the person acquiring it is determined in whole or in part by reference to the adjusted basis of such building in the hands of the person from whom acquired, by a person whose basis in such building is determined under section 1014(a) (relating to property acquired from a decedent), by any governmental unit or qualified nonprofit organization (as defined in subsection (h)(5)) if the requirements of subparagraph (B)(ii) are met with respect to the placement in service by such unit or organization and all the income from such property is exempt from Federal income taxation, by any person who acquired such building by foreclosure (or by instrument in lieu of foreclosure) of any purchase-money security interest held by such person if the requirements of subparagraph (B)(ii) are met with respect to the placement in service by such person and such building is resold within 12 months after the date such building is placed in service by such person after such foreclosure, or of a single-family residence by any individual who owned and used such residence for no other purpose than as his principal residence. For purposes of subparagraph (B)(iii), a person (hereinafter in this subclause referred to as the “related person”) is related to any person if the related person bears a relationship to such person specified in section 267(b) or 707(b)(1), or the related person and such person are engaged in trades or businesses under common control (within the meaning of subsections (a) and (b) of section 52). Except as provided in subparagraph (B), the eligible basis of any building shall be reduced by an amount equal to the portion of the adjusted basis of the building which is attributable to residential rental units in the building which are not low-income units and which are above the average quality standard of the low-income units in the building. Subparagraph (A) shall not apply with respect to a residential rental unit in a building which is not a low-income unit if— the excess described in clause (ii) with respect to such unit is not greater than 15 percent of the cost described in clause (ii)(II), and the taxpayer elects to exclude from the eligible basis of such building the excess described in clause (ii) with respect to such unit. The excess described in this clause with respect to any unit is the excess of— the cost of such unit, over the amount which would be the cost of such unit if the average cost per square foot of low-income units in the building were substituted for the cost per square foot of such unit. The Secretary may by regulation provide for the determination of the excess under this clause on a basis other than square foot costs. For purposes of this subsection— Except as provided in subparagraphs (B) and (C), the adjusted basis of any building shall be determined without regard to the adjusted basis of any property which is not residential rental property. The adjusted basis of any building shall be determined by taking into account the adjusted basis of property (of a character subject to the allowance for depreciation) used in common areas or provided as comparable amenities to all residential rental units in such building. The adjusted basis of any building located in a qualified census tract (as defined in paragraph (5)(B)(ii)) shall be determined by taking into account the adjusted basis of property (of a character subject to the allowance for depreciation and not otherwise taken into account) used throughout the taxable year in providing any community service facility. The increase in the adjusted basis of any building which is taken into account by reason of clause (i) shall not exceed the sum of— 25 percent of so much of the eligible basis of the qualified low-income housing project of which it is a part as does not exceed $15,000,000, plus 10 percent of so much of the eligible basis of such project as is not taken into account under subclause (I). For purposes of the preceding sentence, all community service facilities which are part of the same qualified low-income housing project shall be treated as one facility. For purposes of this subparagraph, the term “community service facility” means any facility designed to serve primarily individuals whose income is 60 percent or less of area median income (within the meaning of subsection (g)(1)(B)). The adjusted basis of any building shall be determined without regard to paragraphs (2) and (3) of section 1016(a). The eligible basis of a building shall not include any costs financed with the proceeds of a federally funded grant. In the case of any building located in a qualified census tract or difficult development area which is designated for purposes of this subparagraph— in the case of a new building, the eligible basis of such building shall be 130 percent of such basis determined without regard to this subparagraph, and in the case of an existing building, the rehabilitation expenditures taken into account under subsection (e) shall be 130 percent of such expenditures determined without regard to this subparagraph. The term “qualified census tract” means any census tract which is designated by the Secretary of Housing and Urban Development and, for the most recent year for which census data are available on household income in such tract, either in which 50 percent or more of the households have an income which is less than 60 percent of the area median gross income for such year or which has a poverty rate of at least 25 percent. If the Secretary of Housing and Urban Development determines that sufficient data for any period are not available to apply this clause on the basis of census tracts, such Secretary shall apply this clause for such period on the basis of enumeration districts. The portion of a metropolitan statistical area which may be designated for purposes of this subparagraph shall not exceed an area having 20 percent of the population of such metropolitan statistical area. For purposes of this clause, each metropolitan statistical area shall be treated as a separate area and all nonmetropolitan areas in a State shall be treated as 1 area. The term “difficult development areas” means any area designated by the Secretary of Housing and Urban Development as an area which has high construction, land, and utility costs relative to area median gross income. The portions of metropolitan statistical areas which may be designated for purposes of this subparagraph shall not exceed an aggregate area having 20 percent of the population of such metropolitan statistical areas. A comparable rule shall apply to nonmetropolitan areas. For purposes of this subparagraph— population shall be determined on the basis of the most recent decennial census for which data are available, area median gross income shall be determined in accordance with subsection (g)(4), the term “metropolitan statistical area” has the same meaning as when used in section 143(k)(2)(B), and the term “nonmetropolitan area” means any county (or portion thereof) which is not within a metropolitan statistical area. Any building which is designated by the State housing credit agency as requiring the increase in credit under this subparagraph in order for such building to be financially feasible as part of a qualified low-income housing project shall be treated for purposes of this subparagraph as located in a difficult development area which is designated for purposes of this subparagraph. The preceding sentence shall not apply to any building if paragraph (1) of subsection (h) does not apply to any portion of the eligible basis of such building by reason of paragraph (4) of such subsection. Paragraph (2)(B)(ii) shall not apply to any federally- or State-assisted building. On application by the taxpayer, the Secretary may waive paragraph (2)(B)(ii) with respect to any building acquired from an insured depository institution in default (as defined in section 3 of the Federal Deposit Insurance Act) or from a receiver or conservator of such an institution. For purposes of this paragraph— The term “federally-assisted building” means any building which is substantially assisted, financed, or operated under section 8 of the United States Housing Act of 1937, section 221(d)(3), 221(d)(4), or 236 of the National Housing Act, section 515 of the Housing Act of 1949, or any other housing program administered by the Department of Housing and Urban Development or by the Rural Housing Service of the Department of Agriculture. The term “State-assisted building” means any building which is substantially assisted, financed, or operated under any State law similar in purposes to any of the laws referred to in clause (i). Under regulations prescribed by the Secretary, in the case of a building described in subparagraph (B) (or interest therein) which is acquired by the taxpayer— paragraph (2)(B) shall not apply, but the credit allowable by reason of subsection (a) to the taxpayer for any period after such acquisition shall be equal to the amount of credit which would have been allowable under subsection (a) for such period to the prior owner referred to in subparagraph (B) had such owner not disposed of the building. A building is described in this subparagraph if— a credit was allowed by reason of subsection (a) to any prior owner of such building, and the taxpayer acquired such building before the end of the compliance period for such building with respect to such prior owner (determined without regard to any disposition by such prior owner).

(e) Rehabilitation expenditures treated as separate new building Rehabilitation expenditures paid or incurred by the taxpayer with respect to any building shall be treated for purposes of this section as a separate new building. For purposes of paragraph (1)— The term “rehabilitation expenditures” means amounts chargeable to capital account and incurred for property (or additions or improvements to property) of a character subject to the allowance for depreciation in connection with the rehabilitation of a building. Such term does not include the cost of acquiring any building (or interest therein) or any amount not permitted to be taken into account under paragraph (3) or (4) of subsection (d). Paragraph (1) shall apply to rehabilitation expenditures with respect to any building only if— the expenditures are allocable to 1 or more low-income units or substantially benefit such units, and the amount of such expenditures during any 24-month period meets the requirements of whichever of the following subclauses requires the greater amount of such expenditures: The requirement of this subclause is met if such amount is not less than 20 percent of the adjusted basis of the building (determined as of the 1st day of such period and without regard to paragraphs (2) and (3) of section 1016(a)). The requirement of this subclause is met if the qualified basis attributable to such amount, when divided by the number of low-income units in the building, is $6, 000 or m ore . I n t h ec a seo f ab u i l d in g a c q u i re d b y t h e t a x p a yer f ro ma g o v er nm e n t a l u ni t, a tt h ee l ec t i o n o f t h e t a x p a yer, s u b p a r a g r a p h (A) (ii) (I) s ha ll n o t a ppl y an d t h ecre d i t u n d er t hi ssec t i o n f ors u c h re habi l i t a t i o n e x p e n d i t u ress ha ll b e d e t er min e d u s in g t h e p erce n t a g e a ppl i c ab l e u n d ers u b sec t i o n (b) (2) (B) (ii) . T h e d e t er mina t i o n u n d ers u b p a r a g r a p h (A) s ha ll b e ma d e a so f t h ec l oseo f t h e 1 s tt a x ab l eye a r in t h ecre d i tp er i o d w i t h res p ec tt os u c h e x p e n d i t u res . I n t h ec a seo f an ye x p e n d i t u res w hi c ha re t re a t e d u n d er p a r a g r a p h (4) a s pl a ce d in ser v i ce d u r in g an yc a l e n d a rye a r a f t er 2009, t h e$ 6,000 amount in subparagraph (A)(ii)(II) shall be increased by an amount equal to— such dollar amount, multiplied by the cost-of-living adjustment determined under section 1(f)(3) for such calendar year by substituting “calendar year 2008” for “calendar year 2016” in subparagraph (A)(ii) thereof. Any increase under the preceding sentence which is not a multiple of $100 s ha ll b ero u n d e d t o t h e n e a res t m u lt i pl eo f$ 100. For purposes of applying this section with respect to expenditures which are treated as a separate building by reason of this subsection— such expenditures shall be treated as placed in service at the close of the 24-month period referred to in paragraph (3)(A), and the applicable fraction under subsection (c)(1) shall be the applicable fraction for the building (without regard to paragraph (1)) with respect to which the expenditures were incurred. Nothing in subsection (d)(2) shall prevent a credit from being allowed by reason of this subsection. Rehabilitation expenditures may, at the election of the taxpayer, be taken into account under this subsection or subsection (d)(2)(A)(i) but not under both such subsections. The Secretary may prescribe regulations, consistent with the purposes of this subsection, treating a group of units with respect to which rehabilitation expenditures are incurred as a separate new building.

(f) Definition and special rules relating to credit period For purposes of this section, the term “credit period” means, with respect to any building, the period of 10 taxable years beginning with— the taxable year in which the building is placed in service, or at the election of the taxpayer, the succeeding taxable year, but only if the building is a qualified low-income building as of the close of the 1st year of such period. The election under subparagraph (B), once made, shall be irrevocable. The credit allowable under subsection (a) with respect to any building for the 1st taxable year of the credit period shall be determined by substituting for the applicable fraction under subsection (c)(1) the fraction— the numerator of which is the sum of the applicable fractions determined under subsection (c)(1) as of the close of each full month of such year during which such building was in service, and the denominator of which is 12. Any reduction by reason of subparagraph (A) in the credit allowable (without regard to subparagraph (A)) for the 1st taxable year of the credit period shall be allowable under subsection (a) for the 1st taxable year following the credit period. In the case of any building which was a qualified low-income building as of the close of the 1st year of the credit period, if— as of the close of any taxable year in the compliance period (after the 1st year of the credit period) the qualified basis of such building exceeds the qualified basis of such building as of the close of the 1st year of the credit period, the applicable percentage which shall apply under subsection (a) for the taxable year to such excess shall be the percentage equal to ⅔ of the applicable percentage which (after the application of subsection (h)) would but for this paragraph apply to such basis. A rule similar to the rule of paragraph (2)(A) shall apply to any increase in qualified basis to which subparagraph (A) applies for the 1st year of such increase. If a building (or an interest therein) is disposed of during any year for which credit is allowable under subsection (a), such credit shall be allocated between the parties on the basis of the number of days during such year the building (or interest) was held by each. In any such case, proper adjustments shall be made in the application of subsection (j). The credit period for an existing building shall not begin before the 1st taxable year of the credit period for rehabilitation expenditures with respect to the building. In the case of a building described in clause (ii)— subsection (d)(2)(B)(iv) shall not apply, and the credit period for such building shall not begin before the taxable year which would be the 1st taxable year of the credit period for rehabilitation expenditures with respect to the building under the modifications described in clause (ii)(II). A building is described in this clause if— a waiver is granted under subsection (d)(6)(B) with respect to the acquisition of the building, and a credit would be allowed for rehabilitation expenditures with respect to such building if subsection (e)(3)(A)(ii)(I) did not apply and if the dollar amount in effect under subsection (e)(3)(A)(ii)(II) were two-thirds of such amount.

(g) Qualified low-income housing project For purposes of this section— The term “qualified low-income housing project” means any project for residential rental property if the project meets the requirements of subparagraph (A), (B), or (C) whichever is elected by the taxpayer: The project meets the requirements of this subparagraph if 20 percent or more of the residential units in such project are both rent-restricted and occupied by individuals whose income is 50 percent or less of area median gross income. The project meets the requirements of this subparagraph if 40 percent or more of the residential units in such project are both rent-restricted and occupied by individuals whose income is 60 percent or less of area median gross income. The project meets the minimum requirements of this subparagraph if 40 percent or more (25 percent or more in the case of a project described in section 142(d)(6)) of the residential units in such project are both rent-restricted and occupied by individuals whose income does not exceed the imputed income limitation designated by the taxpayer with respect to the respective unit. For purposes of clause (i)— The taxpayer shall designate the imputed income limitation of each unit taken into account under such clause. The average of the imputed income limitations designated under subclause (I) shall not exceed 60 percent of area median gross income. The designated imputed income limitation of any unit under subclause (I) shall be 20 percent, 30 percent, 40 percent, 50 percent, 60 percent, 70 percent, or 80 percent of area median gross income. Any election under this paragraph, once made, shall be irrevocable. For purposes of this paragraph, any property shall not be treated as failing to be residential rental property merely because part of the building in which such property is located is used for purposes other than residential rental purposes. For purposes of paragraph (1), a residential unit is rent-restricted if the gross rent with respect to such unit does not exceed 30 percent of the imputed income limitation applicable to such unit. For purposes of the preceding sentence, the amount of the income limitation under paragraph (1) applicable for any period shall not be less than such limitation applicable for the earliest period the building (which contains the unit) was included in the determination of whether the project is a qualified low-income housing project. For purposes of subparagraph (A), gross rent— does not include any payment under section 8 of the United States Housing Act of 1937 or any comparable rental assistance program (with respect to such unit or occupants thereof), includes any utility allowance determined by the Secretary after taking into account such determinations under section 8 of the United States Housing Act of 1937, does not include any fee for a supportive service which is paid to the owner of the unit (on the basis of the low-income status of the tenant of the unit) by any governmental program of assistance (or by an organization described in section 501(c)(3) and exempt from tax under section 501(a)) if such program (or organization) provides assistance for rent and the amount of assistance provided for rent is not separable from the amount of assistance provided for supportive services, and does not include any rental payment to the owner of the unit to the extent such owner pays an equivalent amount to the Farmers’ Home Administration under section 515 of the Housing Act of 1949. For purposes of clause (iii), the term “supportive service” means any service provided under a planned program of services designed to enable residents of a residential rental property to remain independent and avoid placement in a hospital, nursing home, or intermediate care facility for the mentally or physically handicapped. In the case of a single-room occupancy unit or a building described in subsection (i)(3)(B)(iii), such term includes any service provided to assist tenants in locating and retaining permanent housing. For purposes of this paragraph, the imputed income limitation applicable to a unit is the income limitation which would apply under paragraph (1) to individuals occupying the unit if the number of individuals occupying the unit were as follows: In the case of a unit which does not have a separate bedroom, 1 individual. In the case of a unit which has 1 or more separate bedrooms, 1.5 individuals for each separate bedroom. In the case of a project with respect to which a credit is allowable by reason of this section and for which financing is provided by a bond described in section 142(a)(7), the imputed income limitation shall apply in lieu of the otherwise applicable income limitation for purposes of applying section 142(d)(4)(B)(ii). Except as provided in clauses (ii), (iii), and (iv), notwithstanding an increase in the income of the occupants of a low-income unit above the income limitation applicable under paragraph (1), such unit shall continue to be treated as a low-income unit if the income of such occupants initially met such income limitation and such unit continues to be rent-restricted. In the case of a project with respect to which the taxpayer elects the requirements of subparagraph (A) or (B) of paragraph (1), if the income of the occupants of the unit increases above 140 percent of the income limitation applicable under paragraph (1), clause (i) shall cease to apply to such unit if any residential rental unit in the building (of a size comparable to, or smaller than, such unit) is occupied by a new resident whose income exceeds such income limitation. In the case of a project with respect to which the taxpayer elects the requirements of subparagraph (C) of paragraph (1), if the income of the occupants of the unit increases above 140 percent of the greater of— 60 percent of area median gross income, or the imputed income limitation designated with respect to the unit under paragraph (1)(C)(ii)(I), clause (i) shall cease to apply to any such unit if any residential rental unit in the building (of a size comparable to, or smaller than, such unit) is occupied by a new resident whose income exceeds the limitation described in clause (v). In the case of a project described in section 142(d)(4)(B), clause (ii) or (iii), whichever is applicable, shall be applied by substituting “170 percent” for “140 percent”, and— in the case of clause (ii), by substituting “any low-income unit in the building is occupied by a new resident whose income exceeds 40 percent of area median gross income” for “any residential rental unit” and all that follows in such clause, and in the case of clause (iii), by substituting “any low-income unit in the building is occupied by a new resident whose income exceeds the lesser of 40 percent of area median gross income or the imputed income limitation designated with respect to such unit under paragraph (1)(C)(ii)(I)” for “any residential rental unit” and all that follows in such clause. For purposes of clause (iii), the limitation described in this clause with respect to any unit is— the imputed income limitation designated with respect to such unit under paragraph (1)(C)(ii)(I), in the case of a unit which was taken into account as a low-income unit prior to becoming vacant, and the imputed income limitation which would have to be designated with respect to such unit under such paragraph in order for the project to continue to meet the requirements of paragraph (1)(C)(ii)(II), in the case of any other unit. If the gross rent with respect to a residential unit exceeds the limitation under subparagraph (A) by reason of the fact that the income of the occupants thereof exceeds the income limitation applicable under paragraph (1), such unit shall, nevertheless, be treated as a rent-restricted unit for purposes of paragraph (1) if— a Federal rental assistance payment described in subparagraph (B)(i) is made with respect to such unit or its occupants, and the sum of such payment and the gross rent with respect to such unit does not exceed the sum of the amount of such payment which would be made and the gross rent which would be payable with respect to such unit if— the income of the occupants thereof did not exceed the income limitation applicable under paragraph (1), and such units were rent-restricted within the meaning of subparagraph (A). The preceding sentence shall apply to any unit only if the result described in clause (ii) is required by Federal statute as of the date of the enactment of this subparagraph and as of the date the Federal rental assistance payment is made. Except as otherwise provided in this paragraph, a building shall be treated as a qualified low-income building only if the project (of which such building is a part) meets the requirements of paragraph (1) not later than the close of the 1st year of the credit period for such building. In determining whether a building (hereinafter in this subparagraph referred to as the “prior building”) is a qualified low-income building, the taxpayer may take into account 1 or more additional buildings placed in service during the 12-month period described in subparagraph (A) with respect to the prior building only if the taxpayer elects to apply clause (ii) with respect to each additional building taken into account. In the case of a building which the taxpayer elects to take into account under clause (i), the period under subparagraph (A) for such building shall end at the close of the 12-month period applicable to the prior building. For purposes of determining the credit period and the compliance period for the prior building, the prior building shall be treated for purposes of this section as placed in service on the most recent date any additional building elected by the taxpayer (with respect to such prior building) was placed in service. A building— other than the 1st building placed in service as part of a project, and other than a building which is placed in service during the 12-month period described in subparagraph (A) with respect to a prior building which becomes a qualified low-income building, shall in no event be treated as a qualified low-income building unless the project is a qualified low-income housing project (without regard to such building) on the date such building is placed in service. For purposes of this section, a project shall be treated as consisting of only 1 building unless, before the close of the 1st calendar year in the project period (as defined in subsection (h)(1)(F)(ii)), each building which is (or will be) part of such project is identified in such form and manner as the Secretary may provide. Paragraphs (2) (other than subparagraph (A) thereof), (3), (4), (5), (6), and (7) of section 142(d), and section 6652(j), shall apply for purposes of determining whether any project is a qualified low-income housing project and whether any unit is a low-income unit; except that, in applying such provisions for such purposes, the term “gross rent” shall have the meaning given such term by paragraph (2)(B) of this subsection. For purposes of this section, the taxpayer may elect to treat any building as not part of a qualified low-income housing project for any period beginning after the compliance period for such building. Property shall not be treated as failing to be residential rental property for purposes of this section merely because the occupant of a residential unit in the project pays (on a voluntary basis) to the lessor a de minimis amount to be held toward the purchase by such occupant of a residential unit in such project if— all amounts so paid are refunded to the occupant on the cessation of his occupancy of a unit in the project, and the purchase of the unit is not permitted until after the close of the compliance period with respect to the building in which the unit is located. Any amount paid to the lessor as described in the preceding sentence shall be included in gross rent under paragraph (2) for purposes of determining whether the unit is rent-restricted. Buildings which would (but for their lack of proximity) be treated as a project for purposes of this section shall be so treated if all of the dwelling units in each of the buildings are rent-restricted (within the meaning of paragraph (2)) residential rental units. On application by the taxpayer, the Secretary may waive— any recapture under subsection (j) in the case of any de minimis error in complying with paragraph (1), or any annual recertification of tenant income for purposes of this subsection, if the entire building is occupied by low-income tenants. A project does not fail to meet the general public use requirement solely because of occupancy restrictions or preferences that favor tenants— with special needs, who are members of a specified group under a Federal program or State program or policy that supports housing for such a specified group, or who are involved in artistic or literary activities.

(h) Limitation on aggregate credit allowable with respect to projects located in a State The amount of the credit determined under this section for any taxable year with respect to any building shall not exceed the housing credit dollar amount allocated to such building under this subsection. Except in the case of an allocation which meets the requirements of subparagraph (C), (D), (E), or (F), an allocation shall be taken into account under subparagraph (A) only if it is made not later than the close of the calendar year in which the building is placed in service. An allocation meets the requirements of this subparagraph if there is a binding commitment (not later than the close of the calendar year in which the building is placed in service) by the housing credit agency to allocate a specified housing credit dollar amount to such building beginning in a specified later taxable year. An allocation meets the requirements of this subparagraph if such allocation is made not later than the close of the calendar year in which ends the taxable year to which it will 1st apply but only to the extent the amount of such allocation does not exceed the limitation under clause (ii). The limitation under this clause is the amount of credit allowable under this section (without regard to this subsection) for a taxable year with respect to an increase in the qualified basis of the building equal to the excess of— the qualified basis of such building as of the close of the 1st taxable year to which such allocation will apply, over the qualified basis of such building as of the close of the 1st taxable year to which the most recent prior housing credit allocation with respect to such building applied. Notwithstanding clause (i), the full amount of the allocation shall be taken into account under paragraph (2). An allocation meets the requirements of this subparagraph if such allocation is made with respect to a qualified building which is placed in service not later than the close of the second calendar year following the calendar year in which the allocation is made. For purposes of clause (i), the term “qualified building” means any building which is part of a project if the taxpayer’s basis in such project (as of the date which is 1 year after the date that the allocation was made) is more than 10 percent of the taxpayer’s reasonably expected basis in such project (as of the close of the second calendar year referred to in clause (i)). Such term does not include any existing building unless a credit is allowable under subsection (e) for rehabilitation expenditures paid or incurred by the taxpayer with respect to such building for a taxable year ending during the second calendar year referred to in clause (i) or the prior taxable year. In the case of a project which includes (or will include) more than 1 building, an allocation meets the requirements of this subparagraph if— the allocation is made to the project for a calendar year during the project period, the allocation only applies to buildings placed in service during or after the calendar year for which the allocation is made, and the portion of such allocation which is allocated to any building in such project is specified not later than the close of the calendar year in which the building is placed in service. For purposes of clause (i), the term “project period” means the period— beginning with the 1st calendar year for which an allocation may be made for the 1st building placed in service as part of such project, and ending with the calendar year the last building is placed in service as part of such project. Any housing credit dollar amount allocated to any building for any calendar year— shall apply to such building for all taxable years in the compliance period ending during or after such calendar year, and shall reduce the aggregate housing credit dollar amount of the allocating agency only for such calendar year. The aggregate housing credit dollar amount which a housing credit agency may allocate for any calendar year is the portion of the State housing credit ceiling allocated under this paragraph for such calendar year to such agency. Except as provided in subparagraphs (D) and (E), the State housing credit ceiling for each calendar year shall be allocated to the housing credit agency of such State. If there is more than 1 housing credit agency of a State, all such agencies shall be treated as a single agency. The State housing credit ceiling applicable to any State for any calendar year shall be an amount equal to the sum of— the unused State housing credit ceiling (if any) of such State for the preceding calendar year, the greater of— $1.75 m u lt i pl i e d b y t h e St a t e p o p u l a t i o n, or$ 2,000,000, the amount of State housing credit ceiling returned in the calendar year, plus the amount (if any) allocated under subparagraph (D) to such State by the Secretary. For purposes of clause (i), the unused State housing credit ceiling for any calendar year is the excess (if any) of the sum of the amounts described in clauses (ii) through (iv) over the aggregate housing credit dollar amount allocated for such year. For purposes of clause (iii), the amount of State housing credit ceiling returned in the calendar year equals the housing credit dollar amount previously allocated within the State to any project which fails to meet the 10 percent test under paragraph (1)(E)(ii) on a date after the close of the calendar year in which the allocation was made or which does not become a qualified low-income housing project within the period required by this section or the terms of the allocation or to any project with respect to which an allocation is cancelled by mutual consent of the housing credit agency and the allocation recipient. The unused housing credit carryover of a State for any calendar year shall be assigned to the Secretary for allocation among qualified States for the succeeding calendar year. For purposes of this subparagraph, the unused housing credit carryover of a State for any calendar year is the excess (if any) of— the unused State housing credit ceiling for the year preceding such year, over the aggregate housing credit dollar amount allocated for such year. The amount allocated under this subparagraph to a qualified State for any calendar year shall be the amount determined by the Secretary to bear the same ratio to the aggregate unused housing credit carryovers of all States for the preceding calendar year as such State’s population for the calendar year bears to the population of all qualified States for the calendar year. For purposes of the preceding sentence, population shall be determined in accordance with section 146(j). For purposes of this subparagraph, the term “qualified State” means, with respect to a calendar year, any State— which allocated its entire State housing credit ceiling for the preceding calendar year, and for which a request is made (not later than May 1 of the calendar year) to receive an allocation under clause (iii). For purposes of this subsection— The aggregate housing credit dollar amount for any constitutional home rule city for any calendar year shall be an amount which bears the same ratio to the State housing credit ceiling for such calendar year as— the population of such city, bears to the population of the entire State. In the case of any State which contains 1 or more constitutional home rule cities, for purposes of applying this paragraph with respect to housing credit agencies in such State other than constitutional home rule cities, the State housing credit ceiling for any calendar year shall be reduced by the aggregate housing credit dollar amounts determined for such year for all constitutional home rule cities in such State. For purposes of this paragraph, the term “constitutional home rule city” has the meaning given such term by section 146(d)(3)(C). Rules similar to the rules of section 146(e) (other than paragraph (2)(B) thereof) shall apply for purposes of this paragraph. For purposes of this paragraph, population shall be determined in accordance with section 146(j). In the case of a calendar year after 2002, the $2, 000, 000 an d$ 1.75 amounts in subparagraph (C) shall each be increased by an amount equal to— such dollar amount, multiplied by the cost-of-living adjustment determined under section 1(f)(3) for such calendar year by substituting “calendar year 2001” for “calendar year 2016” in subparagraph (A)(ii) thereof. In the case of the $2, 000, 000 am o u n t, an y in cre a se u n d erc l a u se (i) w hi c hi s n o t am u lt i pl eo f$ 5,000 shall be rounded to the next lowest multiple of $5, 000. I n t h ec a seo f t h e$ 1.75 amount, any increase under clause (i) which is not a multiple of 5 cents shall be rounded to the next lowest multiple of 5 cents. In the case of calendar years beginning after December 31, 2025 , each of the dollar amounts in effect under clauses (I) and (II) of subparagraph (C)(ii) for any calendar year (after any increase under subparagraph (H)) shall be increased by multiplying such dollar amount by 1.12. Paragraph (1) shall not apply to the portion of any credit allowable under subsection (a) which is attributable to eligible basis financed by any obligation the interest on which is exempt from tax under section 103 if— such obligation is taken into account under section 146, and principal payments on such financing are applied within a reasonable period to redeem obligations the proceeds of which were used to provide such financing or such financing is refunded as described in section 146(i)(6). For purposes of subparagraph (A), paragraph (1) shall not apply to any portion of the credit allowable under subsection (a) with respect to a building if— 50 percent or more of the aggregate basis of such building and the land on which the building is located is financed by 1 or more obligations described in subparagraph (A), or 25 percent or more of the aggregate basis of such building and the land on which the building is located is financed by 1 or more obligations described in subparagraph (A), and 1 or more of such obligations— are part of an issue the issue date of which is after December 31, 2025 , and provide the financing for not less than 5 percent of the aggregate basis of such building and the land on which the building is located. Not more than 90 percent of the State housing credit ceiling for any State for any calendar year shall be allocated to projects other than qualified low-income housing projects described in subparagraph (B). For purposes of subparagraph (A), a qualified low-income housing project is described in this subparagraph if a qualified nonprofit organization is to own an interest in the project (directly or through a partnership) and materially participate (within the meaning of section 469(h)) in the development and operation of the project throughout the compliance period. For purposes of this paragraph, the term “qualified nonprofit organization” means any organization if— such organization is described in paragraph (3) or (4) of section 501(c) and is exempt from tax under section 501(a), such organization is determined by the State housing credit agency not to be affiliated with or controlled by a for-profit organization, and 1 of the exempt purposes of such organization includes the fostering of low-income housing. For purposes of this paragraph, a qualified nonprofit organization shall be treated as satisfying the ownership and material participation test of subparagraph (B) if any qualified corporation in which such organization holds stock satisfies such test. For purposes of clause (i), the term “qualified corporation” means any corporation if 100 percent of the stock of such corporation is held by 1 or more qualified nonprofit organizations at all times during the period such corporation is in existence. Nothing in subparagraph (F) of paragraph (3) shall be construed to permit a State not to comply with subparagraph (A) of this paragraph. No credit shall be allowed by reason of this section with respect to any building for the taxable year unless an extended low-income housing commitment is in effect as of the end of such taxable year. For purposes of this paragraph, the term “extended low-income housing commitment” means any agreement between the taxpayer and the housing credit agency— which requires that the applicable fraction (as defined in subsection (c)(1)) for the building for each taxable year in the extended use period will not be less than the applicable fraction specified in such agreement and which prohibits the actions described in subclauses (I) and (II) of subparagraph (E)(ii), which allows individuals who meet the income limitation applicable to the building under subsection (g) (whether prospective, present, or former occupants of the building) the right to enforce in any State court the requirement and prohibitions of clause (i), which prohibits the disposition to any person of any portion of the building to which such agreement applies unless all of the building to which such agreement applies is disposed of to such person, which prohibits the refusal to lease to a holder of a voucher or certificate of eligibility under section 8 of the United States Housing Act of 1937 because of the status of the prospective tenant as such a holder, which is binding on all successors of the taxpayer, and which, with respect to the property, is recorded pursuant to State law as a restrictive covenant. The housing credit dollar amount allocated to any building may not exceed the amount necessary to support the applicable fraction specified in the extended low-income housing commitment for such building, including any increase in such fraction pursuant to the application of subsection (f)(3) if such increase is reflected in an amended low-income housing commitment. If paragraph (4) applies to any building the amount of credit allowed in any taxable year may not exceed the amount necessary to support the applicable fraction specified in the extended low-income housing commitment for such building. Such commitment may be amended to increase such fraction. For purposes of this paragraph, the term “extended use period” means the period— beginning on the 1st day in the compliance period on which such building is part of a qualified low-income housing project, and ending on the later of— the date specified by such agency in such agreement, or the date which is 15 years after the close of the compliance period. The extended use period for any building shall terminate— on the date the building is acquired by foreclosure (or instrument in lieu of foreclosure) unless the Secretary determines that such acquisition is part of an arrangement with the taxpayer a purpose of which is to terminate such period, or on the last day of the period specified in subparagraph (I) if the housing credit agency is unable to present during such period a qualified contract for the acquisition of the low-income portion of the building by any person who will continue to operate such portion as a qualified low-income building. Subclause (II) shall not apply to the extent more stringent requirements are provided in the agreement or in State law. The termination of an extended use period under clause (i) shall not be construed to permit before the close of the 3-year period following such termination— the eviction or the termination of tenancy (other than for good cause) of an existing tenant of any low-income unit, or any increase in the gross rent with respect to such unit not otherwise permitted under this section. For purposes of subparagraph (E), the term “qualified contract” means a bona fide contract to acquire (within a reasonable period after the contract is entered into) the nonlow-income portion of the building for fair market value and the low-income portion of the building for an amount not less than the applicable fraction (specified in the extended low-income housing commitment) of— the sum of— the outstanding indebtedness secured by, or with respect to, the building, the adjusted investor equity in the building, plus other capital contributions not reflected in the amounts described in subclause (I) or (II), reduced by cash distributions from (or available for distribution from) the project. The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out this paragraph, including regulations to prevent the manipulation of the amount determined under the preceding sentence. For purposes of subparagraph (E), the term “adjusted investor equity” means, with respect to any calendar year, the aggregate amount of cash taxpayers invested with respect to the project increased by the amount equal to— such amount, multiplied by the cost-of-living adjustment for such calendar year, determined under section 1(f)(3) by substituting the base calendar year for “calendar year 2016” in subparagraph (A)(ii) thereof. An amount shall be taken into account as an investment in the project only to the extent there was an obligation to invest such amount as of the beginning of the credit period and to the extent such amount is reflected in the adjusted basis of the project. Under regulations prescribed by the Secretary, if the C-CPI-U for any calendar year (as defined in section 1(f)(6)) exceeds the C-CPI-U for the preceding calendar year by more than 5 percent, the C-CPI-U for the base calendar year shall be increased such that such excess shall never be taken into account under clause (i). In the case of a base calendar year before 2017, the C-CPI-U for such year shall be determined by multiplying the CPI for such year by the amount determined under section 1(f)(3)(B). For purposes of this subparagraph, the term “base calendar year” means the calendar year with or within which the 1st taxable year of the credit period ends. For purposes of this paragraph, the low-income portion of a building is the portion of such building equal to the applicable fraction specified in the extended low-income housing commitment for the building. The period referred to in this subparagraph is the 1-year period beginning on the date (after the 14th year of the compliance period) the taxpayer submits a written request to the housing credit agency to find a person to acquire the taxpayer’s interest in the low-income portion of the building. If, during a taxable year, there is a determination that an extended low-income housing agreement was not in effect as of the beginning of such year, such determination shall not apply to any period before such year and subparagraph (A) shall be applied without regard to such determination if the failure is corrected within 1 year from the date of the determination. The application of this paragraph to projects which consist of more than 1 building shall be made under regulations prescribed by the Secretary. A housing credit agency may allocate its aggregate housing credit dollar amount only to buildings located in the jurisdiction of the governmental unit of which such agency is a part. If the aggregate housing credit dollar amounts allocated by a housing credit agency for any calendar year exceed the portion of the State housing credit ceiling allocated to such agency for such calendar year, the housing credit dollar amounts so allocated shall be reduced (to the extent of such excess) for buildings in the reverse of the order in which the allocations of such amounts were made. The amount of the credit determined under this section with respect to any building shall not exceed the clause (ii) percentage of the amount of the credit which would (but for this subparagraph) be determined under this section with respect to such building. For purposes of clause (i), the clause (ii) percentage with respect to any building is the percentage which— the housing credit dollar amount allocated to such building bears to the credit amount determined in accordance with clause (iii). The credit amount determined in accordance with this clause is the amount of the credit which would (but for this subparagraph) be determined under this section with respect to the building if— this section were applied without regard to paragraphs (2)(A) and (3)(B) of subsection (f), and subsection (f)(3)(A) were applied without regard to “the percentage equal to ⅔ of”. In allocating a housing credit dollar amount to any building, the housing credit agency shall specify the applicable percentage and the maximum qualified basis which may be taken into account under this section with respect to such building. The applicable percentage and maximum qualified basis so specified shall not exceed the applicable percentage and qualified basis determined under this section without regard to this subsection. For purposes of this subsection— The term “housing credit agency” means any agency authorized to carry out this subsection. The term “State” includes a possession of the United States.

(i) Definitions and special rules For purposes of this section— The term “compliance period” means, with respect to any building, the period of 15 taxable years beginning with the 1st taxable year of the credit period with respect thereto. Except as otherwise provided in this paragraph, for purposes of subsection (b)(1), a new building shall be treated as federally subsidized for any taxable year if, at any time during such taxable year or any prior taxable year, there is or was outstanding any obligation the interest on which is exempt from tax under section 103 the proceeds of which 1 are or were used (directly or indirectly) with respect to such building or the operation thereof. A tax-exempt obligation shall not be taken into account under subparagraph (A) if the taxpayer elects to exclude from the eligible basis of the building for purposes of subsection (d) the proceeds of such obligation. Subparagraph (A) shall not apply to any tax-exempt obligation used to provide construction financing for any building if— such obligation (when issued) identified the building for which the proceeds of such obligation would be used, and such obligation is redeemed before such building is placed in service. The term “low-income unit” means any unit in a building if— such unit is rent-restricted (as defined in subsection (g)(2)), and the individuals occupying such unit meet the income limitation applicable under subsection (g)(1) to the project of which such building is a part. A unit shall not be treated as a low-income unit unless the unit is suitable for occupancy and used other than on a transient basis. For purposes of clause (i), the suitability of a unit for occupancy shall be determined under regulations prescribed by the Secretary taking into account local health, safety, and building codes. For purposes of clause (i), a unit shall be considered to be used other than on a transient basis if the unit contains sleeping accommodations and kitchen and bathroom facilities and is located in a building— which is used exclusively to facilitate the transition of homeless individuals (within the meaning of section 103 of the McKinney-Vento Homeless Assistance Act ( 42 U.S.C. 11302 ), as in effect on the date of the enactment of this clause) to independent living within 24 months, and in which a governmental entity or qualified nonprofit organization (as defined in subsection (h)(5)) provides such individuals with temporary housing and supportive services designed to assist such individuals in locating and retaining permanent housing. For purposes of clause (i), a single-room occupancy unit shall not be treated as used on a transient basis merely because it is rented on a month-by-month basis. In the case of any building which has 4 or fewer residential rental units, no unit in such building shall be treated as a low-income unit if the units in such building are owned by— any individual who occupies a residential unit in such building, or any person who is related (as defined in subsection (d)(2)(D)(iii)) to such individual. A unit shall not fail to be treated as a low-income unit merely because it is occupied— by an individual who is— a student and receiving assistance under title IV of the Social Security Act, a student who was previously under the care and placement responsibility of the State agency responsible for administering a plan under part B or part E of title IV of the Social Security Act, or enrolled in a job training program receiving assistance under the Job Training Partnership Act or under other similar Federal, State, or local laws, or entirely by full-time students if such students are— single parents and their children and such parents are not dependents (as defined in section 152, determined without regard to subsections (b)(1), (b)(2), and (d)(1)(B) thereof) of another individual and such children are not dependents (as so defined) of another individual other than a parent of such children, or married and file a joint return. Subparagraph (C) shall not apply to the acquisition or rehabilitation of a building pursuant to a development plan of action sponsored by a State or local government or a qualified nonprofit organization (as defined in subsection (h)(5)(C)). In the case of a building to which clause (i) applies, the applicable fraction shall not exceed 80 percent of the unit fraction. In the case of a building to which clause (i) applies, any unit which is not rented for 90 days or more shall be treated as occupied by the owner of the building as of the 1st day it is not rented. The term “new building” means a building the original use of which begins with the taxpayer. The term “existing building” means any building which is not a new building. In the case of an estate or trust, the amount of the credit determined under subsection (a) and any increase in tax under subsection (j) shall be apportioned between the estate or trust and the beneficiaries on the basis of the income of the estate or trust allocable to each. No Federal income tax benefit shall fail to be allowable to the taxpayer with respect to any qualified low-income building merely by reason of a right of 1st refusal held by the tenants (in cooperative form or otherwise) or resident management corporation of such building or by a qualified nonprofit organization (as defined in subsection (h)(5)(C)) or government agency to purchase the property after the close of the compliance period for a price which is not less than the minimum purchase price determined under subparagraph (B). For purposes of subparagraph (A), the minimum purchase price under this subparagraph is an amount equal to the sum of— the principal amount of outstanding indebtedness secured by the building (other than indebtedness incurred within the 5-year period ending on the date of the sale to the tenants), and all Federal, State, and local taxes attributable to such sale. Except in the case of Federal income taxes, there shall not be taken into account under clause (ii) any additional tax attributable to the application of clause (ii). For purposes of this section, in the case of any project for residential rental property located in a rural area (as defined in section 520 of the Housing Act of 1949), any income limitation measured by reference to area median gross income shall be measured by reference to the greater of area median gross income or national non-metropolitan median income. The preceding sentence shall not apply with respect to any building if paragraph (1) of section 42(h) does not apply by reason of paragraph (4) thereof to any portion of the credit determined under this section with respect to such building. For purposes of this section, the amounts described in clauses (i) through (iv) of subsection (h)(3)(C) with respect to any State for 2009 shall each be reduced by so much of such amount as is taken into account in determining the amount of any grant to such State under section 1602 of the American Recovery and Reinvestment Tax Act of 2009. Basis of a qualified low-income building shall not be reduced by the amount of any grant described in subparagraph (A).

(j) Recapture of credit If— as of the close of any taxable year in the compliance period, the amount of the qualified basis of any building with respect to the taxpayer is less than the amount of such basis as of the close of the preceding taxable year, then the taxpayer’s tax under this chapter for the taxable year shall be increased by the credit recapture amount. For purposes of paragraph (1), the credit recapture amount is an amount equal to the sum of— the aggregate decrease in the credits allowed to the taxpayer under section 38 for all prior taxable years which would have resulted if the accelerated portion of the credit allowable by reason of this section were not allowed for all prior taxable years with respect to the excess of the amount described in paragraph (1)(B) over the amount described in paragraph (1)(A), plus interest at the overpayment rate established under section 6621 on the amount determined under subparagraph (A) for each prior taxable year for the period beginning on the due date for filing the return for the prior taxable year involved. No deduction shall be allowed under this chapter for interest described in subparagraph (B). For purposes of paragraph (2), the accelerated portion of the credit for the prior taxable years with respect to any amount of basis is the excess of— the aggregate credit allowed by reason of this section (without regard to this subsection) for such years with respect to such basis, over the aggregate credit which would be allowable by reason of this section for such years with respect to such basis if the aggregate credit which would (but for this subsection) have been allowable for the entire compliance period were allowable ratably over 15 years. The tax for the taxable year shall be increased under paragraph (1) only with respect to credits allowed by reason of this section which were used to reduce tax liability. In the case of credits not so used to reduce tax liability, the carryforwards and carrybacks under section 39 shall be appropriately adjusted. Qualified basis shall be taken into account under paragraph (1)(B) only to the extent such basis was taken into account in determining the credit under subsection (a) for the preceding taxable year referred to in such paragraph. Paragraph (1) shall apply to a decrease in qualified basis only to the extent such decrease exceeds the amount of qualified basis with respect to which a credit was allowable for the taxable year referred to in paragraph (1)(B) by reason of subsection (f)(3). Any increase in tax under this subsection shall not be treated as a tax imposed by this chapter for purposes of determining the amount of any credit under this chapter. The increase in tax under this subsection shall not apply to a reduction in qualified basis by reason of a casualty loss to the extent such loss is restored by reconstruction or replacement within a reasonable period established by the Secretary. The Secretary may provide that the increase in tax under this subsection shall not apply with respect to any building if— such increase results from a de minimis change in the floor space fraction under subsection (c)(1), and the building is a qualified low-income building after such change. For purposes of applying this subsection to a partnership to which this paragraph applies— such partnership shall be treated as the taxpayer to which the credit allowable under subsection (a) was allowed, the amount of such credit allowed shall be treated as the amount which would have been allowed to the partnership were such credit allowable to such partnership, paragraph (4)(A) shall not apply, and the amount of the increase in tax under this subsection for any taxable year shall be allocated among the partners of such partnership in the same manner as such partnership’s taxable income for such year is allocated among such partners. This paragraph shall apply to any partnership which has 35 or more partners unless the partnership elects not to have this paragraph apply. For purposes of subparagraph (B)(i), a husband and wife (and their estates) shall be treated as 1 partner. Any election under subparagraph (B), once made, shall be irrevocable. The increase in tax under this subsection shall not apply solely by reason of the disposition of a building (or an interest therein) if it is reasonably expected that such building will continue to be operated as a qualified low-income building for the remaining compliance period with respect to such building. If a building (or an interest therein) is disposed of during any taxable year and there is any reduction in the qualified basis of such building which results in an increase in tax under this subsection for such taxable or any subsequent taxable year, then— the statutory period for the assessment of any deficiency with respect to such increase in tax shall not expire before the expiration of 3 years from the date the Secretary is notified by the taxpayer (in such manner as the Secretary may prescribe) of such reduction in qualified basis, and such deficiency may be assessed before the expiration of such 3-year period notwithstanding the provisions of any other law or rule of law which would otherwise prevent such assessment.

(k) Application of at-risk rules For purposes of this section— Except as otherwise provided in this subsection, rules similar to the rules of section 49(a)(1) (other than subparagraphs (D)(ii)(II) and (D)(iv)(I) thereof), section 49(a)(2), and section 49(b)(1) shall apply in determining the qualified basis of any building in the same manner as such sections apply in determining the credit base of property. For purposes of paragraph (1)— If the requirements of subparagraphs (B), (C), and (D) are met with respect to any financing borrowed from a qualified nonprofit organization (as defined in subsection (h)(5)), the determination of whether such financing is qualified commercial financing with respect to any qualified low-income building shall be made without regard to whether such organization— is actively and regularly engaged in the business of lending money, or is a person described in section 49(a)(1)(D)(iv)(II). The requirements of this subparagraph are met with respect to any financing if such financing is secured by the qualified low-income building, except that this subparagraph shall not apply in the case of a federally assisted building described in subsection (d)(6)(C) if— a security interest in such building is not permitted by a Federal agency holding or insuring the mortgage secured by such building, and the proceeds from the financing (if any) are applied to acquire or improve such building. The requirements of this subparagraph are met with respect to any financing for any taxable year in the compliance period if, as of the close of such taxable year, not more than 60 percent of the eligible basis of the qualified low-income building is attributable to such financing (reduced by the principal and interest of any governmental financing which is part of a wrap-around mortgage involving such financing). The requirements of this subparagraph are met with respect to any financing if such financing is fully repaid on or before the earliest of— the date on which such financing matures, the 90th day after the close of the compliance period with respect to the qualified low-income building, or the date of its refinancing or the sale of the building to which such financing relates. In the case of a qualified nonprofit organization which is not described in section 49(a)(1)(D)(iv)(II) with respect to a building, clause (ii) of this subparagraph shall be applied as if the date described therein were the 90th day after the earlier of the date the building ceases to be a qualified low-income building or the date which is 15 years after the close of a compliance period with respect thereto. If the rate of interest on any financing described in paragraph (2)(A) is less than the rate which is 1 percentage point below the applicable Federal rate as of the time such financing is incurred, then the qualified basis (to which such financing relates) of the qualified low-income building shall be the present value of the amount of such financing, using as the discount rate such applicable Federal rate. For purposes of the preceding sentence, the rate of interest on any financing shall be determined by treating interest to the extent of government subsidies as not payable. To the extent that the requirements of paragraph (2)(D) are not met, then the taxpayer’s tax under this chapter for the taxable year in which such failure occurs shall be increased by an amount equal to the applicable portion of the credit under this section with respect to such building, increased by an amount of interest for the period— beginning with the due date for the filing of the return of tax imposed by chapter 1 for the 1st taxable year for which such credit was allowable, and ending with the due date for the taxable year in which such failure occurs, determined by using the underpayment rate and method under section 6621. For purposes of subparagraph (A), the term “applicable portion” means the aggregate decrease in the credits allowed to a taxpayer under section 38 for all prior taxable years which would have resulted if the eligible basis of the building were reduced by the amount of financing which does not meet requirements of paragraph (2)(D). Rules similar to the rules of subparagraphs (A) and (D) of subsection (j)(4) shall apply for purposes of this subsection.

(l) Certifications and other reports to Secretary Following the close of the 1st taxable year in the credit period with respect to any qualified low-income building, the taxpayer shall certify to the Secretary (at such time and in such form and in such manner as the Secretary prescribes)— the taxable year, and calendar year, in which such building was placed in service, the adjusted basis and eligible basis of such building as of the close of the 1st year of the credit period, the maximum applicable percentage and qualified basis permitted to be taken into account by the appropriate housing credit agency under subsection (h), the election made under subsection (g) with respect to the qualified low-income housing project of which such building is a part, and such other information as the Secretary may require. In the case of a failure to make the certification required by the preceding sentence on the date prescribed therefor, unless it is shown that such failure is due to reasonable cause and not to willful neglect, no credit shall be allowable by reason of subsection (a) with respect to such building for any taxable year ending before such certification is made. The Secretary may require taxpayers to submit an information return (at such time and in such form and manner as the Secretary prescribes) for each taxable year setting forth— the qualified basis for the taxable year of each qualified low-income building of the taxpayer, the information described in paragraph (1)(C) for the taxable year, and such other information as the Secretary may require. The penalty under section 6652(j) shall apply to any failure to submit the return required by the Secretary under the preceding sentence on the date prescribed therefor. Each agency which allocates any housing credit amount to any building for any calendar year shall submit to the Secretary (at such time and in such manner as the Secretary shall prescribe) an annual report specifying— the amount of housing credit amount allocated to each building for such year, sufficient information to identify each such building and the taxpayer with respect thereto, and such other information as the Secretary may require. The penalty under section 6652(j) shall apply to any failure to submit the report required by the preceding sentence on the date prescribed therefor.

(m) Responsibilities of housing credit agencies Notwithstanding any other provision of this section, the housing credit dollar amount with respect to any building shall be zero unless— such amount was allocated pursuant to a qualified allocation plan of the housing credit agency which is approved by the governmental unit (in accordance with rules similar to the rules of section 147(f)(2) (other than subparagraph (B)(ii) thereof)) of which such agency is a part, such agency notifies the chief executive officer (or the equivalent) of the local jurisdiction within which the building is located of such project and provides such individual a reasonable opportunity to comment on the project, a comprehensive market study of the housing needs of low-income individuals in the area to be served by the project is conducted before the credit allocation is made and at the developer’s expense by a disinterested party who is approved by such agency, and a written explanation is available to the general public for any allocation of a housing credit dollar amount which is not made in accordance with established priorities and selection criteria of the housing credit agency. For purposes of this paragraph, the term “qualified allocation plan” means any plan— which sets forth selection criteria to be used to determine housing priorities of the housing credit agency which are appropriate to local conditions, which also gives preference in allocating housing credit dollar amounts among selected projects to— projects serving the lowest income tenants, projects obligated to serve qualified tenants for the longest periods, and projects which are located in qualified census tracts (as defined in subsection (d)(5)(B)(ii)) and the development of which contributes to a concerted community revitalization plan, and which provides a procedure that the agency (or an agent or other private contractor of such agency) will follow in monitoring for noncompliance with the provisions of this section and in notifying the Internal Revenue Service of such noncompliance which such agency becomes aware of and in monitoring for noncompliance with habitability standards through regular site visits. The selection criteria set forth in a qualified allocation plan must include project location, housing needs characteristics, project characteristics, including whether the project includes the use of existing housing as part of a community revitalization plan, sponsor characteristics, tenant populations with special housing needs, public housing waiting lists, tenant populations of individuals with children, projects intended for eventual tenant ownership, the energy efficiency of the project, and the historic nature of the project. Subsection (h)(4) shall not apply to any project unless the project satisfies the requirements for allocation of a housing credit dollar amount under the qualified allocation plan applicable to the area in which the project is located. The housing credit dollar amount allocated to a project shall not exceed the amount the housing credit agency determines is necessary for the financial feasibility of the project and its viability as a qualified low-income housing project throughout the credit period. In making the determination under subparagraph (A), the housing credit agency shall consider— the sources and uses of funds and the total financing planned for the project, any proceeds or receipts expected to be generated by reason of tax benefits, the percentage of the housing credit dollar amount used for project costs other than the cost of intermediaries, and the reasonableness of the developmental and operational costs of the project. Clause (iii) shall not be applied so as to impede the development of projects in hard-to-develop areas. Such a determination shall not be construed to be a representation or warranty as to the feasibility or viability of the project. A determination under subparagraph (A) shall be made as of each of the following times: The application for the housing credit dollar amount. The allocation of the housing credit dollar amount. The date the building is placed in service. Prior to each determination under clause (i), the taxpayer shall certify to the housing credit agency the full extent of all Federal, State, and local subsidies which apply (or which the taxpayer expects to apply) with respect to the building. Subsection (h)(4) shall not apply to any project unless the governmental unit which issued the bonds (or on behalf of which the bonds were issued) makes a determination under rules similar to the rules of subparagraphs (A) and (B).

(n) Regulations The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section, including regulations— dealing with— projects which include more than 1 building or only a portion of a building, buildings which are placed in service in portions, providing for the application of this section to short taxable years, preventing the avoidance of the rules of this section, and providing the opportunity for housing credit agencies to correct administrative errors and omissions with respect to allocations and record keeping within a reasonable period after their discovery, taking into account the availability of regulations and other administrative guidance from the Secretary.

§ 43 Enhanced oil recovery credit

(a) General rule For purposes of section 38, the enhanced oil recovery credit for any taxable year is an amount equal to 15 percent of the taxpayer’s qualified enhanced oil recovery costs for such taxable year.

(b) Phase-out of credit as crude oil prices increase The amount of the credit determined under subsection (a) for any taxable year shall be reduced by an amount which bears the same ratio to the amount of such credit (determined without regard to this paragraph) as— the amount by which the reference price for the calendar year preceding the calendar year in which the taxable year begins exceeds $28, b e a rs t o$ 6. For purposes of this subsection, the term “reference price” means, with respect to any calendar year, the reference price determined for such calendar year under section 45K(d)(2)(C). In the case of any taxable year beginning in a calendar year after 1991, there shall be substituted for the $28 am o u n t u n d er p a r a g r a p h (1) (A) anam o u n t e q u a lt o t h e p ro d u c t o f —$ 28, multiplied by the inflation adjustment factor for such calendar year. The term “inflation adjustment factor” means, with respect to any calendar year, a fraction the numerator of which is the GNP implicit price deflator for the preceding calendar year and the denominator of which is the GNP implicit price deflator for 1990. For purposes of the preceding sentence, the term “GNP implicit price deflator” means the first revision of the implicit price deflator for the gross national product as computed and published by the Secretary of Commerce. Not later than April 1 of any calendar year, the Secretary shall publish the inflation adjustment factor for the preceding calendar year.

(c) Qualified enhanced oil recovery costs For purposes of this section— The term “qualified enhanced oil recovery costs” means any of the following: Any amount paid or incurred during the taxable year for tangible property— which is an integral part of a qualified enhanced oil recovery project, and with respect to which depreciation (or amortization in lieu of depreciation) is allowable under this chapter. Any intangible drilling and development costs— which are paid or incurred in connection with a qualified enhanced oil recovery project, and with respect to which the taxpayer may make an election under section 263(c) for the taxable year. Any qualified tertiary injectant expenses (as defined in section 193(b)) which are paid or incurred in connection with a qualified enhanced oil recovery project and for which a deduction is allowable for the taxable year. Any amount which is paid or incurred during the taxable year to construct a gas treatment plant which— is located in the area of the United States (within the meaning of section 638(1)) lying north of 64 degrees North latitude, prepares Alaska natural gas for transportation through a pipeline with a capacity of at least 2,000,000,000,000 Btu of natural gas per day, and produces carbon dioxide which is injected into hydrocarbon-bearing geological formations. For purposes of this subsection— The term “qualified enhanced oil recovery project” means any project— which involves the application (in accordance with sound engineering principles) of 1 or more tertiary recovery methods (as defined in section 193(b)(3)) which can reasonably be expected to result in more than an insignificant increase in the amount of crude oil which will ultimately be recovered, which is located within the United States (within the meaning of section 638(1)), and with respect to which the first injection of liquids, gases, or other matter commences after December 31, 1990 . A project shall not be treated as a qualified enhanced oil recovery project unless the operator submits to the Secretary (at such times and in such manner as the Secretary provides) a certification from a petroleum engineer that the project meets (and continues to meet) the requirements of subparagraph (A). For purposes of determining qualified enhanced oil recovery costs, rules similar to the rules of section 49(a)(1), section 49(a)(2), and section 49(b) shall apply. For purposes of this section, immiscible non-hydrocarbon gas displacement shall be treated as a tertiary recovery method under section 193(b)(3). For purposes of paragraph (1)(D)— The term “Alaska natural gas” means natural gas entering the Alaska natural gas pipeline (as defined in section 168(i)(16) (determined without regard to subparagraph (B) thereof)) which is produced from a well— located in the area of the State of Alaska lying north of 64 degrees North latitude, determined by excluding the area of the Alaska National Wildlife Refuge (including the continental shelf thereof within the meaning of section 638(1)), and pursuant to the applicable State and Federal pollution prevention, control, and permit requirements from such area (including the continental shelf thereof within the meaning of section 638(1)). The term “natural gas” has the meaning given such term by section 613A(e)(2).

(d) Other rules Any deduction allowable under this chapter for any costs taken into account in computing the amount of the credit determined under subsection (a) shall be reduced by the amount of such credit attributable to such costs. For purposes of this subtitle, if a credit is determined under this section for any expenditure with respect to any property, the increase in the basis of such property which would (but for this subsection) result from such expenditure shall be reduced by the amount of the credit so allowed.

(e) Election to have credit not apply A taxpayer may elect to have this section not apply for any taxable year. An election under paragraph (1) for any taxable year may be made (or revoked) at any time before the expiration of the 3-year period beginning on the last date prescribed by law for filing the return for such taxable year (determined without regard to extensions). An election under paragraph (1) (or revocation thereof) shall be made in such manner as the Secretary may by regulations prescribe.

§ 44 Expenditures to provide access to disabled individuals

(a) General rule For purposes of section 38, in the case of an eligible small business, the amount of the disabled access credit determined under this section for any taxable year shall be an amount equal to 50 percent of so much of the eligible access expenditures for the taxable year as exceed $250 b u t d o n o t e x cee d$ 10,250.

(b) Eligible small business For purposes of this section, the term “eligible small business” means any person if— either— the gross receipts of such person for the preceding taxable year did not exceed $1,000,000, or in the case of a person to which subparagraph (A) does not apply, such person employed not more than 30 full-time employees during the preceding taxable year, and such person elects the application of this section for the taxable year. For purposes of paragraph (1)(B), an employee shall be considered full-time if such employee is employed at least 30 hours per week for 20 or more calendar weeks in the taxable year.

(c) Eligible access expenditures For purposes of this section— The term “eligible access expenditures” means amounts paid or incurred by an eligible small business for the purpose of enabling such eligible small business to comply with applicable requirements under the Americans With Disabilities Act of 1990 (as in effect on the date of the enactment of this section). The term “eligible access expenditures” includes amounts paid or incurred— for the purpose of removing architectural, communication, physical, or transportation barriers which prevent a business from being accessible to, or usable by, individuals with disabilities, to provide qualified interpreters or other effective methods of making aurally delivered materials available to individuals with hearing impairments, to provide qualified readers, taped texts, and other effective methods of making visually delivered materials available to individuals with visual impairments, to acquire or modify equipment or devices for individuals with disabilities, or to provide other similar services, modifications, materials, or equipment. Amounts paid or incurred for the purposes described in paragraph (2) shall include only expenditures which are reasonable and shall not include expenditures which are unnecessary to accomplish such purposes. The term “eligible access expenditures” shall not include amounts described in paragraph (2)(A) which are paid or incurred in connection with any facility first placed in service after the date of the enactment of this section. The term “eligible access expenditures” shall not include any amount unless the taxpayer establishes, to the satisfaction of the Secretary, that the resulting removal of any barrier (or the provision of any services, modifications, materials, or equipment) meets the standards promulgated by the Secretary with the concurrence of the Architectural and Transportation Barriers Compliance Board and set forth in regulations prescribed by the Secretary.

(d) Definition of disability; special rules For purposes of this section— The term “disability” has the same meaning as when used in the Americans With Disabilities Act of 1990 (as in effect on the date of the enactment of this section). All members of the same controlled group of corporations (within the meaning of section 52(a)) and all persons under common control (within the meaning of section 52(b)) shall be treated as 1 person for purposes of this section. The Secretary shall apportion the dollar limitation under subsection (a) among the members of any group described in subparagraph (A) in such manner as the Secretary shall by regulations prescribe. In the case of a partnership, the limitation under subsection (a) shall apply with respect to the partnership and each partner. A similar rule shall apply in the case of an S corporation and its shareholders. The Secretary shall prescribe such adjustments as may be appropriate for purposes of paragraph (1) of subsection (b) if the preceding taxable year is a taxable year of less than 12 months. Gross receipts for any taxable year shall be reduced by returns and allowances made during such year. The reference to any person in paragraph (1) of subsection (b) shall be treated as including a reference to any predecessor. In the case of the amount of the credit determined under this section— no deduction or credit shall be allowed for such amount under any other provision of this chapter, and no increase in the adjusted basis of any property shall result from such amount.

(e) Regulations The Secretary shall prescribe regulations necessary to carry out the purposes of this section.

[§ 44A Renumbered § 21]

[§ 44B Repealed. Pub. L. 98–369, div. A, title IV, § 474(m)(1), July 18, 1984, 98 Stat. 833]

[§ 44C Renumbered § 23]

[§ 44D Renumbered § 29]

[§ 44E Renumbered § 40]

[§ 44F Renumbered § 30]

[§ 44G Renumbered § 41]

[§ 44H Renumbered § 45C]

§ 45 Electricity produced from certain renewable resources, etc.

(a) General rule For purposes of section 38, the renewable electricity production credit for any taxable year is an amount equal to the product of— 0.3 cents, multiplied by the kilowatt hours of electricity— produced by the taxpayer— from qualified energy resources, and at a qualified facility during the 10-year period beginning on the date the facility was originally placed in service, and sold by the taxpayer to an unrelated person during the taxable year.

(b) Limitations and adjustments The amount of the credit determined under subsection (a) shall be reduced by an amount which bears the same ratio to the amount of the credit (determined without regard to this paragraph) as— the amount by which the reference price for the calendar year in which the sale occurs exceeds 8 cents, bears to 3 cents. The 0.3 cent amount in subsection (a), the 8 cent amount in paragraph (1), the $4.375 am o u n t in s u b sec t i o n (e) (8) (A), t h e$ 2 amount in subsection (e)(8)(D)(ii)(I), and in subsection (e)(8)(B)(i) the reference price of fuel used as a feedstock (within the meaning of subsection (c)(7)(A)) in 2002 shall each be adjusted by multiplying such amount by the inflation adjustment factor for the calendar year in which the sale occurs. If the 0.3 cent amount as increased under the preceding sentence is not a multiple of 0.05 cent, such amount shall be rounded to the nearest multiple of 0.05 cent. In any other case, if an amount as increased under this paragraph is not a multiple of 0.1 cent, such amount shall be rounded to the nearest multiple of 0.1 cent. The amount of the credit determined under subsection (a) with respect to any facility for any taxable year (determined after the application of paragraphs (1) and (2)) shall be reduced by the amount which is the product of the amount so determined for such year and the lesser of 15 percent or a fraction— the numerator of which is the sum, for the taxable year and all prior taxable years, of proceeds of an issue of any obligations the interest on which is exempt from tax under section 103 and which is used to provide financing for the qualified facility, and the denominator of which is the aggregate amount of additions to the capital account for the qualified facility for the taxable year and all prior taxable years. The amounts under the preceding sentence for any taxable year shall be determined as of the close of the taxable year. In the case of electricity produced and sold in any calendar year after 2003 at any qualified facility described in paragraph (3), (5), (6), or (7) of subsection (d), the amount in effect under subsection (a)(1) for such calendar year (determined before the application of the last two sentences of paragraph (2) of this subsection) shall be reduced by one-half. Except as provided in clause (ii) or clause (iii), in the case of any facility described in paragraph (3), (4), (5), (6), or (7) of subsection (d), the 5-year period beginning on the date the facility was originally placed in service shall be substituted for the 10-year period in subsection (a)(2)(A)(ii). In the case of any facility described in subsection (d)(3)(A)(ii) placed in service before the date of the enactment of this paragraph, the 5-year period beginning on January 1, 2005 , shall be substituted for the 10-year period in subsection (a)(2)(A)(ii). Clause (i) shall not apply to any facility placed in service after the date of the enactment of this clause. In the case of any facility using wind to produce electricity which is placed in service before January 1, 2022 , the amount of the credit determined under subsection (a) (determined after the application of paragraphs (1), (2), and (3) and without regard to this paragraph) shall be reduced by— in the case of any facility the construction of which begins after December 31, 2016 , and before January 1, 2018 , 20 percent, in the case of any facility the construction of which begins after December 31, 2017 , and before January 1, 2019 , 40 percent, in the case of any facility the construction of which begins after December 31, 2018 , and before January 1, 2020 , 60 percent, and in the case of any facility the construction of which begins after December 31, 2019 , and before January 1, 2022 , 40 percent. In the case of any qualified facility which satisfies the requirements of subparagraph (B), the amount of the credit determined under subsection (a) (determined after the application of paragraphs (1) through (5) and without regard to this paragraph) shall be equal to such amount multiplied by 5. A qualified facility meets the requirements of this subparagraph if it is one of the following: A facility with a maximum net output of less than 1 megawatt (as measured in alternating current). A facility the construction of which begins prior to the date that is 60 days after the Secretary publishes guidance with respect to the requirements of paragraphs (7)(A) and (8). A facility which satisfies the requirements of paragraphs (7)(A) and (8). The requirements described in this subparagraph with respect to any qualified facility are that the taxpayer shall ensure that any laborers and mechanics employed by the taxpayer or any contractor or subcontractor in— the construction of such facility, and with respect to any taxable year, for any portion of such taxable year which is within the period described in subsection (a)(2)(A)(ii), the alteration or repair of such facility, shall be paid wages at rates not less than the prevailing rates for construction, alteration, or repair of a similar character in the locality in which such facility is located as most recently determined by the Secretary of Labor, in accordance with subchapter IV of chapter 31 of title 40, United States Code. For purposes of determining an increased credit amount under paragraph (6)(A) for a taxable year, the requirement under clause (ii) is applied to such taxable year in which the alteration or repair of the qualified facility occurs. In the case of any taxpayer which fails to satisfy the requirement under subparagraph (A) with respect to the construction of any qualified facility or with respect to the alteration or repair of a facility in any year during the period described in subparagraph (A)(ii), such taxpayer shall be deemed to have satisfied such requirement under such subparagraph with respect to such facility for any year if, with respect to any laborer or mechanic who was paid wages at a rate below the rate described in such subparagraph for any period during such year, such taxpayer— makes payment to such laborer or mechanic in an amount equal to the sum of— an amount equal to the difference between— the amount of wages paid to such laborer or mechanic during such period, and the amount of wages required to be paid to such laborer or mechanic pursuant to such subparagraph during such period, plus interest on the amount determined under item (aa) at the underpayment rate established under section 6621 (determined by substituting “6 percentage points” for “3 percentage points” in subsection (a)(2) of such section) for the period described in such item, and makes payment to the Secretary of a penalty in an amount equal to the product of— $5, 000, m u lt i pl i e d b y t h e t o t a l n u mb ero f l ab orers an d m ec hani cs w h o w ere p ai d w a g es a t a r a t e b e l o wt h er a t e d escr ib e d in s u b p a r a g r a p h (A) f or an y p er i o dd u r in g s u c h ye a r . S u b c ha pt er B o f c ha pt er 63 (re l a t in g t o d e f i c i e n cy p roce d u res f or in co m e, es t a t e, g i f t, an d cer t ain e x c i se t a x es) s ha ll n o t a ppl y w i t h res p ec tt o t h e a ssess m e n t orco ll ec t i o n o f an y p e na lt y im p ose d b y t hi s p a r a g r a p h . I f t h e S ecre t a ry d e t er min es t ha t an y f ai l u re d escr ib e d in c l a u se (i) i s d u e t o in t e n t i o na l d i sre g a r d o f t h ere q u i re m e n t s u n d ers u b p a r a g r a p h (A), s u c h c l a u ses ha ll b e a ppl i e d — in s u b c l a u se (I), b ys u b s t i t u t in g “ t h ree t im es t h es u m ” f or “ t h es u m ”, an d in s u b c l a u se (II), b ys u b s t i t u t in g “$ 10,000” for “5,000 1 ” in item (aa) thereof. Pursuant to rules issued by the Secretary, in the case of a final determination by the Secretary with respect to any failure by the taxpayer to satisfy the requirement under subparagraph (A), subparagraph (B)(i) shall not apply unless the payments described in subclauses (I) and (II) of such subparagraph are made by the taxpayer on or before the date which is 180 days after the date of such determination. The requirements described in this paragraph with respect to the construction of any qualified facility are as follows: Taxpayers shall ensure that, with respect to the construction of any qualified facility, not less than the applicable percentage of the total labor hours of the construction, alteration, or repair work (including such work performed by any contractor or subcontractor) with respect to such facility shall, subject to subparagraph (B), be performed by qualified apprentices. For purposes of clause (i), the applicable percentage shall be— in the case of a qualified facility the construction of which begins before January 1, 2023 , 10 percent, in the case of a qualified facility the construction of which begins after December 31, 2022 , and before January 1, 2024 , 12.5 percent, and in the case of a qualified facility the construction of which begins after December 31, 2023 , 15 percent. The requirement under subparagraph (A)(i) shall be subject to any applicable requirements for apprentice-to-journeyworker ratios of the Department of Labor or the applicable State apprenticeship agency. Each taxpayer, contractor, or subcontractor who employs 4 or more individuals to perform construction, alteration, or repair work with respect to the construction of a qualified facility shall employ 1 or more qualified apprentices to perform such work. A taxpayer shall not be treated as failing to satisfy the requirements of this paragraph if such taxpayer— satisfies the requirements described in clause (ii), or subject to clause (iii), in the case of any failure by the taxpayer to satisfy the requirement under subparagraphs (A) and (C) with respect to the construction, alteration, or repair work on any qualified facility to which subclause (I) does not apply, makes payment to the Secretary of a penalty in an amount equal to the product of— $50, m u lt i pl i e d b y t h e t o t a ll ab or h o u rs f or w hi c h t h ere q u i re m e n t d escr ib e d in s u c h s u b p a r a g r a p h w a s n o t s a t i s f i e d w i t h res p ec tt o t h eco n s t r u c t i o n, a lt er a t i o n, orre p ai r w or k o n s u c h q u a l i f i e df a c i l i t y . F or p u r p oseso f c l a u se (i), a t a x p a yers ha ll b e d ee m e d t o ha v es a t i s f i e d t h ere q u i re m e n t s u n d er t hi s p a r a g r a p h w i t h res p ec tt o a q u a l i f i e df a c i l i t y i f s u c h t a x p a yer ha sre q u es t e d q u a l i f i e d a pp re n t i ces f ro ma re g i s t ere d a pp re n t i ces hi pp ro g r am, a s d e f in e d in sec t i o n 3131 (e) (3) (B), an d — s u c h re q u es t ha s b ee n d e ni e d, p ro v i d e d t ha t s u c h d e nia l i s n o tt h eres u lt o f a re f u s a l b y t h e t a x p a yeror an yco n t r a c t orsors u b co n t r a c t orse n g a g e d in t h e p er f or man ceo f co n s t r u c t i o n, a lt er a t i o n, orre p ai r w or k w i t h res p ec tt os u c h q u a l i f i e df a c i l i t y t oco m pl y w i t h t h ees t ab l i s h e d s t an d a r d s an d re q u i re m e n t so f t h ere g i s t ere d a pp re n t i ces hi pp ro g r am, or t h ere g i s t ere d a pp re n t i ces hi pp ro g r am f ai l s t ores p o n d t os u c h re q u es tw i t hin 5 b u s in ess d a ys a f t er t h e d a t eo n w hi c h s u c h re g i s t ere d a pp re n t i ces hi pp ro g r am rece i v e d s u c h re q u es t . I f t h e S ecre t a ry d e t er min es t ha t an y f ai l u re d escr ib e d in s u b c l a u se (i) (II) i s d u e t o in t e n t i o na l d i sre g a r d o f t h ere q u i re m e n t s u n d ers u b p a r a g r a p h s (A) an d (C), s u b c l a u se (i) (II) s ha ll b e a ppl i e d b ys u b s t i t u t in g “$ 500” for “$50” in item (aa) thereof. For purposes of this paragraph— The term “labor hours”— means the total number of hours devoted to the performance of construction, alteration, or repair work by any individual employed by the taxpayer or by any contractor or subcontractor, and excludes any hours worked by— foremen, superintendents, owners, or persons employed in a bona fide executive, administrative, or professional capacity (within the meaning of those terms in part 541 of title 29, Code of Federal Regulations). The term “qualified apprentice” means an individual who is employed by the taxpayer or by any contractor or subcontractor and who is participating in a registered apprenticeship program, as defined in section 3131(e)(3)(B). In the case of any qualified facility which satisfies the requirement under subparagraph (B)(i), the amount of the credit determined under subsection (a) (determined after the application of paragraphs (1) through (8)) shall be increased by an amount equal to 10 percent of the amount so determined. The requirement described in this clause is satisfied with respect to any qualified facility if the taxpayer certifies to the Secretary (at such time, and in such form and manner, as the Secretary may prescribe) that any steel, iron, or manufactured product which is a component of such facility (upon completion of construction) was produced in the United States (as determined under section 2 661 of title 49, Code of Federal Regulations). In the case of steel or iron, clause (i) shall be applied in a manner consistent with section 661.5 of title 49, Code of Federal Regulations. For purposes of clause (i), the manufactured products which are components of a qualified facility upon completion of construction shall be deemed to have been produced in the United States if not less than the adjusted percentage (as determined under subparagraph (C)) of the total costs of all such manufactured products of such facility are attributable to manufactured products (including components) which are mined, produced, or manufactured in the United States. Subject to subclause (ii), for purposes of subparagraph (B)(iii), the adjusted percentage shall be 40 percent. For purposes of subparagraph (B)(iii), in the case of a qualified facility which is an offshore wind facility, the adjusted percentage shall be 20 percent. In the case of a taxpayer making an election under section 6417 with respect to a credit under this section, the amount of such credit shall be replaced with— the value of such credit (determined without regard to this paragraph), multiplied by the applicable percentage. In the case of any qualified facility— which satisfies the requirements under paragraph (9)(B), or with a maximum net output of less than 1 megawatt (as measured in alternating current), the applicable percentage shall be 100 percent. Subject to subparagraph (D), in the case of any qualified facility which is not described in subparagraph (B), the applicable percentage shall be— if construction of such facility began before January 1, 2024 , 100 percent, and if construction of such facility began in calendar year 2024, 90 percent. For purposes of this paragraph, the Secretary shall provide exceptions to the requirements under this paragraph if— the inclusion of steel, iron, or manufactured products which are produced in the United States increases the overall costs of construction of qualified facilities by more than 25 percent, or relevant steel, iron, or manufactured products are not produced in the United States in sufficient and reasonably available quantities or of a satisfactory quality. In any case in which the Secretary provides an exception pursuant to clause (i), the applicable percentage shall be 100 percent. In the case of a qualified facility which is located in an energy community, the credit determined under subsection (a) (determined after the application of paragraphs (1) through (10), without the application of paragraph (9)) shall be increased by an amount equal to 10 percent of the amount so determined. For purposes of this paragraph, the term “energy community” means— a brownfield site (as defined in subparagraphs (A), (B), and (D)(ii)(III) of section 101(39) of the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 ( 42 U.S.C. 9601(39) )), a metropolitan statistical area or non-metropolitan statistical area which— has (or, at any time during the period beginning after December 31, 2009 , had) 0.17 percent or greater direct employment or 25 percent or greater local tax revenues related to the extraction, processing, transport, or storage of coal, oil, or natural gas (as determined by the Secretary), and has an unemployment rate at or above the national average unemployment rate for the previous year (as determined by the Secretary), a census tract— in which— after December 31, 1999 , a coal mine has closed, or after December 31, 2009 , a coal-fired electric generating unit has been retired, or which is directly adjoining to any census tract described in subclause (I), or for purposes of any qualified facility which is an advanced nuclear facility, a metropolitan statistical area which has (or, at any time during the period beginning after December 31, 2009 , had) 0.17 percent or greater direct employment related to the advancement of nuclear power, including employment related to— an advanced nuclear facility, advanced nuclear power research and development, nuclear fuel cycle research, development, or production, including mining, enrichment, manufacture, storage, disposal, or recycling of nuclear fuel, and the manufacturing or assembly of components used in an advanced nuclear facility. Subject to clause (ii), for purposes of subparagraph (B)(iv), the term “advanced nuclear facility” means any nuclear facility the reactor design for which is approved in the manner described in section 45J(d)(2). For purposes of clause (i), a facility shall be deemed to have a reactor design which is approved in the manner described in section 45J(d)(2) if the Nuclear Regulatory Commission has authorized construction and issued a site-specific construction permit or combined license with respect to such facility (without regard to whether the reactor design was approved after December 31, 1993 ). The Secretary shall issue such regulations or other guidance as the Secretary determines necessary to carry out the purposes of this subsection, including regulations or other guidance which provides for requirements for recordkeeping or information reporting for purposes of administering the requirements of this subsection.

(c) Resources For purposes of this section: The term “qualified energy resources” means— wind, closed-loop biomass, open-loop biomass, geothermal energy, solar energy, small irrigation power, municipal solid waste, qualified hydropower production, and marine and hydrokinetic renewable energy. The term “closed-loop biomass” means any organic material from a plant which is planted exclusively for purposes of being used at a qualified facility to produce electricity. The term “open-loop biomass” means— any agricultural livestock waste nutrients, or any solid, nonhazardous, cellulosic waste material or any lignin material which is derived from— any of the following forest-related resources: mill and harvesting residues, precommercial thinnings, slash, and brush, solid wood waste materials, including waste pallets, crates, dunnage, manufacturing and construction wood wastes (other than pressure-treated, chemically-treated, or painted wood wastes), and landscape or right-of-way tree trimmings, but not including municipal solid waste, gas derived from the biodegradation of solid waste, or paper which is commonly recycled, or agriculture sources, including orchard tree crops, vineyard, grain, legumes, sugar, and other crop by-products or residues. Such term shall not include closed-loop biomass or biomass burned in conjunction with fossil fuel (cofiring) beyond such fossil fuel required for startup and flame stabilization. The term “agricultural livestock waste nutrients” means agricultural livestock manure and litter, including wood shavings, straw, rice hulls, and other bedding material for the disposition of manure. The term “agricultural livestock” includes bovine, swine, poultry, and sheep. The term “geothermal energy” means energy derived from a geothermal deposit (within the meaning of section 613(e)(2)). The term “small irrigation power” means power— generated without any dam or impoundment of water through an irrigation system canal or ditch, and the nameplate capacity rating of which is not less than 150 kilowatts but is less than 5 megawatts. The term “municipal solid waste” has the meaning given the term “solid waste” under section 1004(27) of the Solid Waste Disposal Act ( 42 U.S.C. 6903 ), except that such term does not include paper which is commonly recycled and which has been segregated from other solid waste (as so defined). The term “refined coal” means a fuel— which— is a liquid, gaseous, or solid fuel produced from coal (including lignite) or high carbon fly ash, including such fuel used as a feedstock, is sold by the taxpayer with the reasonable expectation that it will be used for the purpose of producing steam, and is certified by the taxpayer as resulting (when used in the production of steam) in a qualified emission reduction, or which is steel industry fuel. The term “qualified emission reduction” means a reduction of at least 20 percent of the emissions of nitrogen oxide and at least 40 percent of the emissions of either sulfur dioxide or mercury released when burning the refined coal (excluding any dilution caused by materials combined or added during the production process), as compared to the emissions released when burning the feedstock coal or comparable coal predominantly available in the marketplace as of January 1, 2003 . The term “steel industry fuel” means a fuel which— is produced through a process of liquifying coal waste sludge and distributing it on coal, and is used as a feedstock for the manufacture of coke. The term “coal waste sludge” means the tar decanter sludge and related byproducts of the coking process, including such materials that have been stored in ground, in tanks and in lagoons, that have been treated as hazardous wastes under applicable Federal environmental rules absent liquefaction and processing with coal into a feedstock for the manufacture of coke. The term “qualified hydropower production” means— in the case of any hydroelectric dam which was placed in service on or before the date of the enactment of this paragraph, the incremental hydropower production for the taxable year, and in the case of any nonhydroelectric dam described in subparagraph (C), the hydropower production from the facility for the taxable year. For purposes of subparagraph (A), incremental hydropower production for any taxable year shall be equal to the percentage of average annual hydropower production at the facility attributable to the efficiency improvements or additions of capacity placed in service after the date of the enactment of this paragraph, determined by using the same water flow information used to determine an historic average annual hydropower production baseline for such facility. Such percentage and baseline shall be certified by the Federal Energy Regulatory Commission. For purposes of clause (i), the determination of incremental hydropower production shall not be based on any operational changes at such facility not directly associated with the efficiency improvements or additions of capacity. For purposes of subparagraph (A), a facility is described in this subparagraph if— the hydroelectric project installed on the nonhydroelectric dam is licensed by the Federal Energy Regulatory Commission and meets all other applicable environmental, licensing, and regulatory requirements, the nonhydroelectric dam was placed in service before the date of the enactment of this paragraph and operated for flood control, navigation, or water supply purposes and did not produce hydroelectric power on the date of the enactment of this paragraph, and the hydroelectric project is operated so that the water surface elevation at any given location and time that would have occurred in the absence of the hydroelectric project is maintained, subject to any license requirements imposed under applicable law that change the water surface elevation for the purpose of improving environmental quality of the affected waterway. The Secretary, in consultation with the Federal Energy Regulatory Commission, shall certify if a hydroelectric project licensed at a nonhydroelectric dam meets the criteria in clause (iii). Nothing in this section shall affect the standards under which the Federal Energy Regulatory Commission issues licenses for and regulates hydropower projects under part I of the Federal Power Act. The term “Indian coal” means coal which is produced from coal reserves which, on June 14, 2005 — were owned by an Indian tribe, or were held in trust by the United States for the benefit of an Indian tribe or its members. For purposes of this paragraph, the term “Indian tribe” has the meaning given such term by section 7871(c)(3)(E)(ii). The term “marine and hydrokinetic renewable energy” means energy derived from— waves, tides, and currents in oceans, estuaries, and tidal areas, free flowing water in rivers, lakes, and streams, free flowing water in an irrigation system, canal, or other man-made channel, including projects that utilize nonmechanical structures to accelerate the flow of water for electric power production purposes, differentials in ocean temperature (ocean thermal energy conversion), or pressurized water used in a pipeline (or similar man-made water conveyance) which is operated— for the distribution of water for agricultural, municipal, or industrial consumption, and not primarily for the generation of electricity. Such term shall not include any energy which is derived from any source which utilizes a dam, diversionary structure (except as provided in subparagraph (A)(iii)), or impoundment for electric power production purposes.

(d) Qualified facilities For purposes of this section: In the case of a facility using wind to produce electricity, the term “qualified facility” means any facility owned by the taxpayer which is originally placed in service after December 31, 1993 , and the construction of which begins before January 1, 2025 . Such term shall not include any facility with respect to which any qualified small wind energy property expenditure (as defined in subsection (d)(4) of section 25D) is taken into account in determining the credit under such section. In the case of a facility using closed-loop biomass to produce electricity, the term “qualified facility” means any facility— owned by the taxpayer which is originally placed in service after December 31, 1992 , and the construction of which begins before January 1, 2025 , or owned by the taxpayer which before January 1, 2025 , is originally placed in service and modified to use closed-loop biomass to co-fire with coal, with other biomass, or with both, but only if the modification is approved under the Biomass Power for Rural Development Programs or is part of a pilot project of the Commodity Credit Corporation as described in 65 Fed. Reg. 63052. For purposes of clause (ii), a facility shall be treated as modified before January 1, 2025 , if the construction of such modification begins before such date. Such term shall include a new unit placed in service after the date of the enactment of this subparagraph in connection with a facility described in subparagraph (A)(i), but only to the extent of the increased amount of electricity produced at the facility by reason of such new unit. In the case of a qualified facility described in subparagraph (A)(ii)— the 10-year period referred to in subsection (a) shall be treated as beginning no earlier than the date of the enactment of this clause, and if the owner of such facility is not the producer of the electricity, the person eligible for the credit allowable under subsection (a) shall be the lessee or the operator of such facility. In the case of a facility using open-loop biomass to produce electricity, the term “qualified facility” means any facility owned by the taxpayer which— in the case of a facility using agricultural livestock waste nutrients— is originally placed in service after the date of the enactment of this subclause and the construction of which begins before January 1, 2025 , and the nameplate capacity rating of which is not less than 150 kilowatts, and in the case of any other facility, the construction of which begins before January 1, 2025 . Such term shall include a new unit placed in service after the date of the enactment of this subparagraph in connection with a facility described in subparagraph (A), but only to the extent of the increased amount of electricity produced at the facility by reason of such new unit. In the case of any facility described in subparagraph (A), if the owner of such facility is not the producer of the electricity, the person eligible for the credit allowable under subsection (a) shall be the lessee or the operator of such facility. In the case of a facility using geothermal or solar energy to produce electricity, the term “qualified facility” means any facility owned by the taxpayer which is originally placed in service after the date of the enactment of this paragraph and the construction of which begins before January 1, 2025 . Such term shall not include any property described in section 48(a)(3) the basis of which is taken into account by the taxpayer for purposes of determining the energy credit under section 48. In the case of a facility using small irrigation power to produce electricity, the term “qualified facility” means any facility owned by the taxpayer which is originally placed in service after the date of the enactment of this paragraph and before October 3, 2008 . In the case of a facility producing electricity from gas derived from the biodegradation of municipal solid waste, the term “qualified facility” means any facility owned by the taxpayer which is originally placed in service after the date of the enactment of this paragraph and the construction of which begins before January 1, 2025 . In the case of a facility (other than a facility described in paragraph (6)) which uses municipal solid waste to produce electricity, the term “qualified facility” means any facility owned by the taxpayer which is originally placed in service after the date of the enactment of this paragraph and the construction of which begins before January 1, 2025 . Such term shall include a new unit placed in service in connection with a facility placed in service on or before the date of the enactment of this paragraph, but only to the extent of the increased amount of electricity produced at the facility by reason of such new unit. In the case of a facility that produces refined coal, the term “refined coal production facility” means— with respect to a facility producing steel industry fuel, any facility (or any modification to a facility) which is placed in service before January 1, 2010 , and with respect to any other facility producing refined coal, any facility placed in service after the date of the enactment of the American Jobs Creation Act of 2004 and before January 1, 2012 . In the case of a facility producing qualified hydroelectric production described in subsection (c)(8), the term “qualified facility” means— in the case of any facility producing incremental hydropower production, such facility but only to the extent of its incremental hydropower production attributable to efficiency improvements or additions to capacity described in subsection (c)(8)(B) placed in service after the date of the enactment of this paragraph and before January 1, 2025 , and any other facility placed in service after the date of the enactment of this paragraph and the construction of which begins before January 1, 2025 . In the case of a qualified facility described in subparagraph (A), the 10-year period referred to in subsection (a) shall be treated as beginning on the date the efficiency improvements or additions to capacity are placed in service. For purposes of subparagraph (A)(i), an efficiency improvement or addition to capacity shall be treated as placed in service before January 1, 2025 , if the construction of such improvement or addition begins before such date. The term “Indian coal production facility” means a facility that produces Indian coal. In the case of a facility producing electricity from marine and hydrokinetic renewable energy, the term “qualified facility” means any facility owned by the taxpayer— which has a nameplate capacity rating of at least 25 kilowatts, and which is originally placed in service on or after the date of the enactment of this paragraph and the construction of which begins before January 1, 2025 .

(e) Definitions and special rules For purposes of this section— Sales shall be taken into account under this section only with respect to electricity the production of which is within— the United States (within the meaning of section 638(1)), or a possession of the United States (within the meaning of section 638(2)). The Secretary shall, not later than April 1 of each calendar year, determine and publish in the Federal Register the inflation adjustment factor and the reference price for such calendar year in accordance with this paragraph. The term “inflation adjustment factor” means, with respect to a calendar year, a fraction the numerator of which is the GDP implicit price deflator for the preceding calendar year and the denominator of which is the GDP implicit price deflator for the calendar year 1992. The term “GDP implicit price deflator” means the most recent revision of the implicit price deflator for the gross domestic product as computed and published by the Department of Commerce before March 15 of the calendar year. The term “reference price” means, with respect to a calendar year, the Secretary’s determination of the annual average contract price per kilowatt hour of electricity generated from the same qualified energy resource and sold in the previous year in the United States. For purposes of the preceding sentence, only contracts entered into after December 31, 1989 , shall be taken into account. In the case of a facility in which more than 1 person has an ownership interest, except to the extent provided in regulations prescribed by the Secretary, production from the facility shall be allocated among such persons in proportion to their respective ownership interests in the gross sales from such facility. Persons shall be treated as related to each other if such persons would be treated as a single employer under the regulations prescribed under section 52(b). In the case of a corporation which is a member of an affiliated group of corporations filing a consolidated return, such corporation shall be treated as selling electricity to an unrelated person if such electricity is sold to such a person by another member of such group. Under regulations prescribed by the Secretary, rules similar to the rules of subsection (d) of section 52 shall apply. The credit determined under subsection (a) shall not apply to electricity— produced at a qualified facility described in subsection (d)(1) which is originally placed in service after June 30, 1999 , and sold to a utility pursuant to a contract originally entered into before January 1, 1987 (whether or not amended or restated after that date). Subparagraph (A) shall not apply if— the prices for energy and capacity from such facility are established pursuant to an amendment to the contract referred to in subparagraph (A)(ii), such amendment provides that the prices set forth in the contract which exceed avoided cost prices determined at the time of delivery shall apply only to annual quantities of electricity (prorated for partial years) which do not exceed the greater of— the average annual quantity of electricity sold to the utility under the contract during calendar years 1994, 1995, 1996, 1997, and 1998, or the estimate of the annual electricity production set forth in the contract, or, if there is no such estimate, the greatest annual quantity of electricity sold to the utility under the contract in any of the calendar years 1996, 1997, or 1998, and such amendment provides that energy and capacity in excess of the limitation in clause (ii) may be— sold to the utility only at prices that do not exceed avoided cost prices determined at the time of delivery, or sold to a third party subject to a mutually agreed upon advance notice to the utility. For purposes of this subparagraph, avoided cost prices shall be determined as provided for in 18 CFR 292.304(d)(1) or any successor regulation. In the case of a producer of refined coal, the credit determined under this section (without regard to this paragraph) for any taxable year shall be increased by an amount equal to $4.375 p er t o n o f q u a l i f i e d re f in e d co a l — p ro d u ce d b y t h e t a x p a yer a t a re f in e d co a lp ro d u c t i o n f a c i l i t y d u r in g t h e 10 - ye a r p er i o d b e g innin g o n t h e d a t e t h e f a c i l i t y w a sor i g ina ll y pl a ce d in ser v i ce, an d so l d b y t h e t a x p a yer — t o an u n re l a t e d p erso n, an dd u r in g s u c h 10 - ye a r p er i o d an d s u c h t a x ab l eye a r . T h e am o u n t o f t h e in cre a se d e t er min e d u n d ers u b p a r a g r a p h (A) s ha ll b ere d u ce d b y anam o u n tw hi c hb e a rs t h es am er a t i o t o t h e am o u n t o f t h e in cre a se (d e t er min e d w i t h o u t re g a r d t o t hi ss u b p a r a g r a p h) a s — t h e am o u n t b y w hi c h t h ere f ere n ce p r i ceo ff u e l u se d a s a f ee d s t oc k (w i t hin t h e m e anin g o f s u b sec t i o n (c) (7) (A)) f or t h ec a l e n d a rye a r in w hi c h t h es a l eocc u rse x cee d s anam o u n t e q u a lt o 1.7 m u lt i pl i e d b y t h ere f ere n ce p r i ce f ors u c h f u e l in 2002, b e a rs t o$ 8.75. Rules similar to the rules of the subsection (b)(3) and paragraphs (1) through (5) of this subsection shall apply for purposes of determining the amount of any increase under this paragraph. In the case of a taxpayer who produces steel industry fuel— this paragraph shall be applied separately with respect to steel industry fuel and other refined coal, and in applying this paragraph to steel industry fuel, the modifications in clause (ii) shall apply. Subparagraph (A) shall be applied by substituting “ $2 p er ba rre l - o f - o i l e q u i v a l e n t ” f or “$ 4.375 per ton”. In lieu of the 10-year period referred to in clauses (i) and (ii)(II) of subparagraph (A), the credit period shall be the period beginning on the later of the date such facility was originally placed in service, the date the modifications described in clause (iii) were placed in service, or October 1, 2008 , and ending on the later of December 31, 2009 , or the date which is 1 year after the date such facility or the modifications described in clause (iii) were placed in service. Subparagraph (B) shall not apply. The modifications described in this clause are modifications to an existing facility which allow such facility to produce steel industry fuel. For purposes of this subparagraph, a barrel-of-oil equivalent is the amount of steel industry fuel that has a Btu content of 5,800,000 Btus. The term “qualified facility” shall not include any facility which produces electricity from gas derived from the biodegradation of municipal solid waste if such biodegradation occurred in a facility (within the meaning of section 45K) the production from which is allowed as a credit under section 45K for the taxable year or any prior taxable year. The term “refined coal production facility” shall not include any facility the production from which is allowed as a credit under section 45K for the taxable year or any prior taxable year (or under section 29, 3 as in effect on the day before the date of enactment of the Energy Tax Incentives Act of 2005, for any prior taxable year). In the case of a facility producing steel industry fuel, clause (i) shall not apply to so much of the refined coal produced at such facility as is steel industry fuel. In the case of a producer of Indian coal, the credit determined under this section (without regard to this paragraph) for any taxable year shall be increased by an amount equal to the applicable dollar amount per ton of Indian coal— produced by the taxpayer at an Indian coal production facility during the 16-year period beginning on January 1, 2006 , and sold by the taxpayer— to an unrelated person (either directly by the taxpayer or after sale or transfer to one or more related persons), and during such 16-year period and such taxable year. The term “applicable dollar amount” for any taxable year beginning in a calendar year means— $1.50 in t h ec a seo f c a l e n d a rye a rs 2006 t h ro ug h 2009, an d$ 2.00 in the case of calendar years beginning after 2009. In the case of any calendar year after 2006, each of the dollar amounts under clause (i) shall be equal to the product of such dollar amount and the inflation adjustment factor determined under paragraph (2)(B) for the calendar year, except that such paragraph shall be applied by substituting “2005” for “1992”. Rules similar to the rules of the subsection (b)(3) and paragraphs (1), (3), (4), and (5) of this subsection shall apply for purposes of determining the amount of any increase under this paragraph. In the case of an eligible cooperative organization, any portion of the credit determined under subsection (a) for the taxable year may, at the election of the organization, be apportioned among patrons of the organization on the basis of the amount of business done by the patrons during the taxable year. An election under clause (i) for any taxable year shall be made on a timely filed return for such year. Such election, once made, shall be irrevocable for such taxable year. Such election shall not take effect unless the organization designates the apportionment as such in a written notice mailed to its patrons during the payment period described in section 1382(d). The amount of the credit apportioned to any patrons under subparagraph (A)— shall not be included in the amount determined under subsection (a) with respect to the organization for the taxable year, and shall be included in the amount determined under subsection (a) for the first taxable year of each patron ending on or after the last day of the payment period (as defined in section 1382(d)) for the taxable year of the organization or, if earlier, for the taxable year of each patron ending on or after the date on which the patron receives notice from the cooperative of the apportionment. If the amount of the credit of a cooperative organization determined under subsection (a) for a taxable year is less than the amount of such credit shown on the return of the cooperative organization for such year, an amount equal to the excess of— such reduction, over the amount not apportioned to such patrons under subparagraph (A) for the taxable year, shall be treated as an increase in tax imposed by this chapter on the organization. Such increase shall not be treated as tax imposed by this chapter for purposes of determining the amount of any credit under this chapter. For purposes of this section the term “eligible cooperative” means a cooperative organization described in section 1381(a) which is owned more than 50 percent by agricultural producers or by entities owned by agricultural producers. For this purpose an entity owned by an agricultural producer is one that is more than 50 percent owned by agricultural producers. The term “qualified facility” shall not include any facility which produces electricity from gas produced by qualified biogas property (as defined in section 48(c)(7)) if a credit is allowed under section 48 with respect to such property for the taxable year or any prior taxable year. Electricity produced by the taxpayer shall be treated as sold by such taxpayer to an unrelated person during the taxable year if— such electricity is used during such taxable year by the taxpayer or a person related to the taxpayer at a qualified clean hydrogen production facility (as defined in section 45V(c)(3)) to produce qualified clean hydrogen (as defined in section 45V(c)(2)), and such use and production is verified (in such form or manner as the Secretary may prescribe) by an unrelated third party.

§ 45A Indian employment credit

(a) Amount of credit For purposes of section 38, the amount of the Indian employment credit determined under this section with respect to any employer for any taxable year is an amount equal to 20 percent of the excess (if any) of— the sum of— the qualified wages paid or incurred during such taxable year, plus qualified employee health insurance costs paid or incurred during such taxable year, over the sum of the qualified wages and qualified employee health insurance costs (determined as if this section were in effect) which were paid or incurred by the employer (or any predecessor) during calendar year 1993.

(b) Qualified wages; qualified employee health insurance costs For purposes of this section— The term “qualified wages” means any wages paid or incurred by an employer for services performed by an employee while such employee is a qualified employee. The term “qualified wages” shall not include wages attributable to service rendered during the 1-year period beginning with the day the individual begins work for the employer if any portion of such wages is taken into account in determining the credit under section 51. If any portion of wages are taken into account under subsection (e)(1)(A) of section 51, the preceding sentence shall be applied by substituting “2-year period” for “1-year period”. The term “qualified employee health insurance costs” means any amount paid or incurred by an employer for health insurance to the extent such amount is attributable to coverage provided to any employee while such employee is a qualified employee. No amount paid or incurred for health insurance pursuant to a salary reduction arrangement shall be taken into account under subparagraph (A). The aggregate amount of qualified wages and qualified employee health insurance costs taken into account with respect to any employee for any taxable year (and for the base period under subsection (a)(2)) shall not exceed $20,000.

(c) Qualified employee For purposes of this section— Except as otherwise provided in this subsection, the term “qualified employee” means, with respect to any period, any employee of an employer if— the employee is an enrolled member of an Indian tribe or the spouse of an enrolled member of an Indian tribe, substantially all of the services performed during such period by such employee for such employer are performed within an Indian reservation, and the principal place of abode of such employee while performing such services is on or near the reservation in which the services are performed. An employee shall not be treated as a qualified employee for any taxable year of the employer if the total amount of the wages paid or incurred by such employer to such employee during such taxable year (whether or not for services within an Indian reservation) exceeds the amount determined at an annual rate of $30, 000. T h e S ecre t a rys ha ll a d j u s tt h e$ 30,000 amount under paragraph (2) for years beginning after 1994 at the same time and in the same manner as under section 415(d), except that the base period taken into account for purposes of such adjustment shall be the calendar quarter beginning October 1, 1993 . An employee shall be treated as a qualified employee for any taxable year of the employer only if more than 50 percent of the wages paid or incurred by the employer to such employee during such taxable year are for services performed in a trade or business of the employer. Any determination as to whether the preceding sentence applies with respect to any employee for any taxable year shall be made without regard to subsection (e)(2). The term “qualified employee” shall not include— any individual described in subparagraph (A), (B), or (C) of section 51(i)(1), any 5-percent owner (as defined in section 416(i)(1)(B)), and any individual if the services performed by such individual for the employer involve the conduct of class I, II, or III gaming as defined in section 4 of the Indian Gaming Regulatory Act ( 25 U.S.C. 2703 ), or are performed in a building housing such gaming activity. The term “Indian tribe” means any Indian tribe, band, nation, pueblo, or other organized group or community, including any Alaska Native village, or regional or village corporation, as defined in, or established pursuant to, the Alaska Native Claims Settlement Act ( 43 U.S.C. 1601 et seq.) which is recognized as eligible for the special programs and services provided by the United States to Indians because of their status as Indians. The term “Indian reservation” has the meaning given such term by section 168(j)(6).

(d) Early termination of employment by employer If the employment of any employee is terminated by the taxpayer before the day 1 year after the day on which such employee began work for the employer— no wages (or qualified employee health insurance costs) with respect to such employee shall be taken into account under subsection (a) for the taxable year in which such employment is terminated, and the tax under this chapter for the taxable year in which such employment is terminated shall be increased by the aggregate credits (if any) allowed under section 38(a) for prior taxable years by reason of wages (or qualified employee health insurance costs) taken into account with respect to such employee. In the case of any termination of employment to which paragraph (1) applies, the carrybacks and carryovers under section 39 shall be properly adjusted. Paragraph (1) shall not apply to— a termination of employment of an employee who voluntarily leaves the employment of the taxpayer, a termination of employment of an individual who before the close of the period referred to in paragraph (1) becomes disabled to perform the services of such employment unless such disability is removed before the close of such period and the taxpayer fails to offer reemployment to such individual, or a termination of employment of an individual if it is determined under the applicable State unemployment compensation law that the termination was due to the misconduct of such individual. For purposes of paragraph (1), the employment relationship between the taxpayer and an employee shall not be treated as terminated— by a transaction to which section 381(a) applies if the employee continues to be employed by the acquiring corporation, or by reason of a mere change in the form of conducting the trade or business of the taxpayer if the employee continues to be employed in such trade or business and the taxpayer retains a substantial interest in such trade or business. Any increase in tax under paragraph (1) shall not be treated as a tax imposed by this chapter for purposes of— determining the amount of any credit allowable under this chapter, and determining the amount of the tax imposed by section 55.

(e) Other definitions and special rules For purposes of this section— The term “wages” has the same meaning given to such term in section 51. All employers treated as a single employer under section (a) or (b) of section 52 shall be treated as a single employer for purposes of this section. The credit (if any) determined under this section with respect to each such employer shall be its proportionate share of the wages and qualified employee health insurance costs giving rise to such credit. Rules similar to the rules of section 51(k) and subsections (c), (d), and (e) of section 52 shall apply. Any reference in this section to a provision not contained in this title shall be treated for purposes of this section as a reference to such provision as in effect on the date of the enactment of this paragraph. For any taxable year having less than 12 months, the amount determined under subsection (a)(2) shall be multiplied by a fraction, the numerator of which is the number of days in the taxable year and the denominator of which is 365.

(f) Termination This section shall not apply to taxable years beginning after December 31, 2021 .

(a) General rule For purposes of section 38, the employer social security credit determined under this section for the taxable year is an amount equal to the excess employer social security tax paid or incurred by the taxpayer during the taxable year.

(b) Excess employer social security tax For purposes of this section— The term “excess employer social security tax” means any tax paid by an employer under section 3111 with respect to tips received by an employee during any month, to the extent such tips— are deemed to have been paid by the employer to the employee pursuant to section 3121(q) (without regard to whether such tips are reported under section 6053), and exceed the amount by which the wages (excluding tips) paid by the employer to the employee during such month are less than the total amount which would be payable (with respect to such employment) at the minimum wage rate applicable to such individual under section 6(a)(1) of the Fair Labor Standards Act of 1938 (determined without regard to section 3(m) of such Act, and in the case of food or beverage establishments, as in effect on January 1, 2007 ). In applying paragraph (1) there shall be taken into account only tips received from customers or clients in connection with the following services: The providing, delivering, or serving of food or beverages for consumption, if the tipping of employees delivering or serving food or beverages by customers is customary. The providing of any of the following services to a customer or client if the tipping of employees providing such services is customary: Barbering and hair care. Nail care. Esthetics. Body and spa treatments.

(c) Denial of double benefit No deduction shall be allowed under this chapter for any amount taken into account in determining the credit under this section.

(d) Election not to claim credit This section shall not apply to a taxpayer for any taxable year if such taxpayer elects to have this section not apply for such taxable year.

§ 45C Clinical testing expenses for certain drugs for rare diseases or conditions

(a) General rule For purposes of section 38, the credit determined under this section for the taxable year is an amount equal to 25 percent of the qualified clinical testing expenses for the taxable year.

(b) Qualified clinical testing expenses For purposes of this section— Except as otherwise provided in this paragraph, the term “qualified clinical testing expenses” means the amounts which are paid or incurred by the taxpayer during the taxable year which would be described in subsection (b) of section 41 if such subsection were applied with the modifications set forth in subparagraph (B). For purposes of subparagraph (A), subsection (b) of section 41 shall be applied— by substituting “clinical testing” for “qualified research” each place it appears in paragraphs (2) and (3) of such subsection, and by substituting “100 percent” for “65 percent” in paragraph (3)(A) of such subsection. The term “qualified clinical testing expenses” shall not include any amount to the extent such amount is funded by any grant, contract, or otherwise by another person (or any governmental entity). The term “clinical testing” means any human clinical testing— which is carried out under an exemption for a drug being tested for a rare disease or condition under section 505(i) of the Federal Food, Drug, and Cosmetic Act (or regulations issued under such section), which occurs— after the date such drug is designated under section 526 of such Act, and before the date on which an application with respect to such drug is approved under section 505(b) of such Act or, if the drug is a biological product, before the date on which a license for such drug is issued under section 351 of the Public Health Service Act, and which is conducted by or on behalf of the taxpayer to whom the designation under such section 526 applies. Human clinical testing shall be taken into account under subparagraph (A) only to the extent such testing is related to the use of a drug for the rare disease or condition for which it was designated under section 526 of the Federal Food, Drug, and Cosmetic Act.

(c) Coordination with credit for increasing research expenditures Except as provided in paragraph (2), any qualified clinical testing expenses for a taxable year to which an election under this section applies shall not be taken into account for purposes of determining the credit allowable under section 41 for such taxable year. Any qualified clinical testing expenses for any taxable year which are qualified research expenses (within the meaning of section 41(b)) shall be taken into account in determining base period research expenses for purposes of applying section 41 to subsequent taxable years.

(d) Definition and special rules For purposes of this section, the term “rare disease or condition” means any disease or condition which— affects less than 200,000 persons in the United States, or affects more than 200,000 persons in the United States but for which there is no reasonable expectation that the cost of developing and making available in the United States a drug for such disease or condition will be recovered from sales in the United States of such drug. Determinations under the preceding sentence with respect to any drug shall be made on the basis of the facts and circumstances as of the date such drug is designated under section 526 of the Federal Food, Drug, and Cosmetic Act. No credit shall be allowed under this section with respect to any clinical testing conducted outside the United States unless— such testing is conducted outside the United States because there is an insufficient testing population in the United States, and such testing is conducted by a United States person or by any other person who is not related to the taxpayer to whom the designation under section 526 of the Federal Food, Drug, and Cosmetic Act applies. Rules similar to the rules of paragraphs (1) and (2) of section 41(f) shall apply for purposes of this section. This section shall apply to any taxpayer for any taxable year only if such taxpayer elects (at such time and in such manner as the Secretary may by regulations prescribe) to have this section apply for such taxable year.

§ 45D New markets tax credit

(a) Allowance of credit For purposes of section 38, in the case of a taxpayer who holds a qualified equity investment on a credit allowance date of such investment which occurs during the taxable year, the new markets tax credit determined under this section for such taxable year is an amount equal to the applicable percentage of the amount paid to the qualified community development entity for such investment at its original issue. For purposes of paragraph (1), the applicable percentage is— 5 percent with respect to the first 3 credit allowance dates, and 6 percent with respect to the remainder of the credit allowance dates. For purposes of paragraph (1), the term “credit allowance date” means, with respect to any qualified equity investment— the date on which such investment is initially made, and each of the 6 anniversary dates of such date thereafter.

(b) Qualified equity investment For purposes of this section— The term “qualified equity investment” means any equity investment in a qualified community development entity if— such investment is acquired by the taxpayer at its original issue (directly or through an underwriter) solely in exchange for cash, substantially all of such cash is used by the qualified community development entity to make qualified low-income community investments, and such investment is designated for purposes of this section by the qualified community development entity. Such term shall not include any equity investment issued by a qualified community development entity more than 5 years after the date that such entity receives an allocation under subsection (f). Any allocation not used within such 5-year period may be reallocated by the Secretary under subsection (f). The maximum amount of equity investments issued by a qualified community development entity which may be designated under paragraph (1)(C) by such entity shall not exceed the portion of the limitation amount allocated under subsection (f) to such entity. The requirement of paragraph (1)(B) shall be treated as met if at least 85 percent of the aggregate gross assets of the qualified community development entity are invested in qualified low-income community investments. The term “qualified equity investment” includes any equity investment which would (but for paragraph (1)(A)) be a qualified equity investment in the hands of the taxpayer if such investment was a qualified equity investment in the hands of a prior holder. A rule similar to the rule of section 1202(c)(3) shall apply for purposes of this subsection. The term “equity investment” means— any stock (other than nonqualified preferred stock as defined in section 351(g)(2)) in an entity which is a corporation, and any capital interest in an entity which is a partnership.

(c) Qualified community development entity For purposes of this section— The term “qualified community development entity” means any domestic corporation or partnership if— the primary mission of the entity is serving, or providing investment capital for, low-income communities or low-income persons, the entity maintains accountability to residents of low-income communities through their representation on any governing board of the entity or on any advisory board to the entity, and the entity is certified by the Secretary for purposes of this section as being a qualified community development entity. The requirements of paragraph (1) shall be treated as met by— any specialized small business investment company (as defined in section 1044(c)(3)), 1 and any community development financial institution (as defined in section 103 of the Community Development Banking and Financial Institutions Act of 1994 ( 12 U.S.C. 4702 )).

(d) Qualified low-income community investments For purposes of this section— The term “qualified low-income community investment” means— any capital or equity investment in, or loan to, any qualified active low-income community business, the purchase from another qualified community development entity of any loan made by such entity which is a qualified low-income community investment, financial counseling and other services specified in regulations prescribed by the Secretary to businesses located in, and residents of, low-income communities, and any equity investment in, or loan to, any qualified community development entity. For purposes of paragraph (1), the term “qualified active low-income community business” means, with respect to any taxable year, any corporation (including a nonprofit corporation) or partnership if for such year— at least 50 percent of the total gross income of such entity is derived from the active conduct of a qualified business within any low-income community, a substantial portion of the use of the tangible property of such entity (whether owned or leased) is within any low-income community, a substantial portion of the services performed for such entity by its employees are performed in any low-income community, less than 5 percent of the average of the aggregate unadjusted bases of the property of such entity is attributable to collectibles (as defined in section 408(m)(2)) other than collectibles that are held primarily for sale to customers in the ordinary course of such business, and less than 5 percent of the average of the aggregate unadjusted bases of the property of such entity is attributable to nonqualified financial property (as defined in section 1397C(e)). Such term shall include any business carried on by an individual as a proprietor if such business would meet the requirements of subparagraph (A) were it incorporated. The term “qualified active low-income community business” includes any trades or businesses which would qualify as a qualified active low-income community business if such trades or businesses were separately incorporated. For purposes of this subsection, the term “qualified business” has the meaning given to such term by section 1397C(d); except that— in lieu of applying paragraph (2)(B) thereof, the rental to others of real property located in any low-income community shall be treated as a qualified business if there are substantial improvements located on such property, and paragraph (3) thereof shall not apply.

(e) Low-income community For purposes of this section— The term “low-income community” means any population census tract if— the poverty rate for such tract is at least 20 percent, or in the case of a tract not located within a metropolitan area, the median family income for such tract does not exceed 80 percent of statewide median family income, or in the case of a tract located within a metropolitan area, the median family income for such tract does not exceed 80 percent of the greater of statewide median family income or the metropolitan area median family income. Subparagraph (B) shall be applied using possessionwide median family income in the case of census tracts located within a possession of the United States. The Secretary shall prescribe regulations under which 1 or more targeted populations (within the meaning of section 103(20) of the Riegle Community Development and Regulatory Improvement Act of 1994 ( 12 U.S.C. 4702(20) )) may be treated as low-income communities. Such regulations shall include procedures for determining which entities are qualified active low-income community businesses with respect to such populations. In the case of an area which is not tracted for population census tracts, the equivalent county divisions (as defined by the Bureau of the Census for purposes of defining poverty areas) shall be used for purposes of determining poverty rates and median family income. A population census tract with a population of less than 2,000 shall be treated as a low-income community for purposes of this section if such tract— is within an empowerment zone the designation of which is in effect under section 1391, and is contiguous to 1 or more low-income communities (determined without regard to this paragraph). In the case of a population census tract located within a high migration rural county, paragraph (1)(B)(i) shall be applied by substituting “85 percent” for “80 percent”. For purposes of this paragraph, the term “high migration rural county” means any county which, during the 20-year period ending with the year in which the most recent census was conducted, has a net out-migration of inhabitants from the county of at least 10 percent of the population of the county at the beginning of such period.

(f) National limitation on amount of investments designated There is a new markets tax credit limitation for each calendar year. Such limitation is— $1, 000, 000, 000 f or 2001,$ 1,500,000,000 for 2002 and 2003, $2, 000, 000, 000 f or 2004 an d 2005,$ 3,500,000,000 for 2006 and 2007, $5, 000, 000, 000 f or 2008,$ 5,000,000,000 for 2009, $3, 500, 000, 000 f ore a c h o f c a l e n d a rye a rs 2010 t h ro ug h 2019, an d$ 5,000,000,000 for each calendar year after 2019. The limitation under paragraph (1) shall be allocated by the Secretary among qualified community development entities selected by the Secretary. In making allocations under the preceding sentence, the Secretary shall give priority to any entity— with a record of having successfully provided capital or technical assistance to disadvantaged businesses or communities, or which intends to satisfy the requirement under subsection (b)(1)(B) by making qualified low-income community investments in 1 or more businesses in which persons unrelated to such entity (within the meaning of section 267(b) or 707(b)(1)) hold the majority equity interest. If the new markets tax credit limitation for any calendar year exceeds the aggregate amount allocated under paragraph (2) for such year, such limitation for the succeeding calendar year shall be increased by the amount of such excess. No amount may be carried under subparagraph (A) to any calendar year afer the fifth calendar year after the calendar year in which the excess described in such subparagraph occurred. For purposes of this subparagraph, any excess described in subparagraph (A) with respect to any calendar year before 2026 shall be treated as occurring in calendar year 2025.

(g) Recapture of credit in certain cases If, at any time during the 7-year period beginning on the date of the original issue of a qualified equity investment in a qualified community development entity, there is a recapture event with respect to such investment, then the tax imposed by this chapter for the taxable year in which such event occurs shall be increased by the credit recapture amount. For purposes of paragraph (1), the credit recapture amount is an amount equal to the sum of— the aggregate decrease in the credits allowed to the taxpayer under section 38 for all prior taxable years which would have resulted if no credit had been determined under this section with respect to such investment, plus interest at the underpayment rate established under section 6621 on the amount determined under subparagraph (A) for each prior taxable year for the period beginning on the due date for filing the return for the prior taxable year involved. No deduction shall be allowed under this chapter for interest described in subparagraph (B). For purposes of paragraph (1), there is a recapture event with respect to an equity investment in a qualified community development entity if— such entity ceases to be a qualified community development entity, the proceeds of the investment cease to be used as required of subsection (b)(1)(B), or such investment is redeemed by such entity. The tax for the taxable year shall be increased under paragraph (1) only with respect to credits allowed by reason of this section which were used to reduce tax liability. In the case of credits not so used to reduce tax liability, the carryforwards and carrybacks under section 39 shall be appropriately adjusted. Any increase in tax under this subsection shall not be treated as a tax imposed by this chapter for purposes of determining the amount of any credit under this chapter or for purposes of section 55.

(h) Basis reduction The basis of any qualified equity investment shall be reduced by the amount of any credit determined under this section with respect to such investment. This subsection shall not apply for purposes of section 1202.

(i) Regulations The Secretary shall prescribe such regulations as may be appropriate to carry out this section, including regulations— which limit the credit for investments which are directly or indirectly subsidized by other Federal tax benefits (including the credit under section 42 and the exclusion from gross income under section 103), which prevent the abuse of the purposes of this section, which provide rules for determining whether the requirement of subsection (b)(1)(B) is treated as met, which impose appropriate reporting requirements, which apply the provisions of this section to newly formed entities, and which ensure that non-metropolitan counties receive a proportional allocation of qualified equity investments.

§ 45E Small employer pension plan startup costs

(a) General rule For purposes of section 38, in the case of an eligible employer, the small employer pension plan startup cost credit determined under this section for any taxable year is an amount equal to 50 percent of the qualified startup costs paid or incurred by the taxpayer during the taxable year.

(b) Dollar limitation The amount of the credit determined under this section for any taxable year shall not exceed— for the first credit year and each of the 2 taxable years immediately following the first credit year, the greater of— $500, or t h e l essero f —$ 250 for each employee of the eligible employer who is not a highly compensated employee (as defined in section 414(q)) and who is eligible to participate in the eligible employer plan maintained by the eligible employer, or $5,000, and zero for any other taxable year.

(c) Eligible employer For purposes of this section— The term “eligible employer” has the meaning given such term by section 408(p)(2)(C)(i). Such term shall not include an employer if, during the 3-taxable year period immediately preceding the 1st taxable year for which the credit under this section is otherwise allowable for a qualified employer plan of the employer, the employer or any member of any controlled group including the employer (or any predecessor of either) established or maintained a qualified employer plan with respect to which contributions were made, or benefits were accrued, for substantially the same employees as are in the qualified employer plan.

(d) Other definitions For purposes of this section— The term “qualified startup costs” means any ordinary and necessary expenses of an eligible employer which are paid or incurred in connection with— the establishment or administration of an eligible employer plan, or the retirement-related education of employees with respect to such plan. Such term shall not include any expense in connection with a plan that does not have at least 1 employee eligible to participate who is not a highly compensated employee. The term “eligible employer plan” means a qualified employer plan within the meaning of section 4972(d). The term “first credit year” means— the taxable year which includes the date that the eligible employer plan to which such costs relate becomes effective with respect to the eligible employer, or at the election of the eligible employer, the taxable year preceding the taxable year referred to in subparagraph (A).

(e) Special rules For purposes of this section— All persons treated as a single employer under subsection (a) or (b) of section 52, or subsection (m) or ( o ) of section 414, shall be treated as one person. All eligible employer plans shall be treated as 1 eligible employer plan. No deduction shall be allowed— for that portion of the qualified startup costs paid or incurred for the taxable year which is equal to so much of the portion of the credit determined under subsection (a) as is properly allocable to such costs, and for that portion of the employer contributions by the employer for the taxable year which is equal to so much of the credit increase determined under subsection (f) as is properly allocable to such contributions. This section shall not apply to a taxpayer for any taxable year if such taxpayer elects to have this section not apply for such taxable year. In the case of an employer which would be an eligible employer under subsection (c) if section 408(p)(2)(C)(i) was applied by substituting “50 employees” for “100 employees”, subsection (a) shall be applied by substituting “100 percent” for “50 percent”.

(f) Additional credit for employer contributions by certain eligible employers In the case of an eligible employer, the credit allowed for the taxable year under subsection (a) (determined without regard to this subsection) shall be increased by an amount equal to the applicable percentage of employer contributions (other than any elective deferrals (as defined in section 402(g)(3)) by the employer to an eligible employer plan (other than a defined benefit plan (as defined in section 414(j))). The amount determined under paragraph (1) (before the application of subparagraph (B)) with respect to any employee of the employer shall not exceed $1, 000. I n t h ec a seo f an ye l i g ib l ee m pl oyer w hi c hha df or t h e p rece d in g t a x ab l eye a r m ore t han 50 e m pl oyees, t h e am o u n t d e t er min e d u n d er p a r a g r a p h (1) (w i t h o u t re g a r d t o t hi ss u b p a r a g r a p h) s ha ll b ere d u ce d b y anam o u n t e q u a lt o t h e p ro d u c t o f — t h e am o u n t o t h er w i seso d e t er min e d u n d er p a r a g r a p h (1), m u lt i pl i e d b y a p erce n t a g ee q u a lt o 2 p erce n t a g e p o in t s f ore a c h e m pl oyeeo f t h ee m pl oyer f or t h e p rece d in g t a x ab l eye a r in e x cesso f 50 e m pl oyees . N oco n t r ib u t i o n s w i t h res p ec tt o an ye m pl oyee w h orece i v es w a g es f ro m t h ee m pl oyer f or t h e t a x ab l eye a r in e x cesso f$ 100,000 may be taken into account for such taxable year under subparagraph (A). For purposes of the preceding sentence, the term “wages” has the meaning given such term by section 3121(a). In the case of any taxable year beginning in a calendar year after 2023, the $100, 000 am o u n t u n d erc l a u se (i) s ha ll b e in cre a se d b y anam o u n t e q u a lt o — s u c h d o ll a r am o u n t, m u lt i pl i e d b y t h ecos t - o f - l i v in g a d j u s t m e n t d e t er min e d u n d ersec t i o n 1 (f) (3) f or t h ec a l e n d a rye a r in w hi c h t h e t a x ab l eye a r b e g in s, d e t er min e d b ys u b s t i t u t in g “ c a l e n d a rye a r 2007” f or “ c a l e n d a rye a r 2016” in s u b p a r a g r a p h (A) (ii) t h ereo f . I f an y am o u n t a s a d j u s t e d u n d er t hi sc l a u se i s n o t am u lt i pl eo f$ 5,000, such amount shall be rounded to the next lowest multiple of $5,000. For purposes of this section, the applicable percentage for the taxable year during which the eligible employer plan is established with respect to the eligible employer shall be 100 percent, and for taxable years thereafter shall be determined under the following table: In the case of the following taxable year beginning after the taxable year during which plan is established with respect to the eligible employer: The applicable percentage shall be: 1st 100% 2nd 75% 3rd 50% 4th 25% Any taxable year thereafter 0% For purposes of this subsection, whether an employer is an eligible employer and the number of employees of an employer shall be determined under the rules of subsection (c), except that paragraph (2) thereof shall only apply to the taxable year during which the eligible employer plan to which this section applies is established with respect to the eligible employer.

§ 45F Employer-provided child care credit

(a) In general For purposes of section 38, the employer-provided child care credit determined under this section for the taxable year is an amount equal to the sum of— 40 percent (50 percent in the case of an eligible small business) of the qualified child care expenditures, and 10 percent of the qualified child care resource and referral expenditures, of the taxpayer for such taxable year.

(b) Dollar limitation The credit allowable under subsection (a) for any taxable year shall not exceed $500, 000 ($ 600,000 in the case of an eligible small business). In the case of any taxable year beginning after 2026, the $500, 000 an d$ 600,000 amounts in paragraph (1) shall each be increased by an amount equal to— such dollar amount, multiplied by the cost-of-living adjustment determined under section 1(f)(3) for the calendar year in which the taxable year begins, determined by substituting “calendar year 2025” for “calendar year 2016” in subparagraph (A)(ii) thereof.

(c) Definitions For purposes of this section— The term “qualified child care expenditure” means any amount paid or incurred— to acquire, construct, rehabilitate, or expand property— which is to be used as part of a qualified child care facility of the taxpayer, with respect to which a deduction for depreciation (or amortization in lieu of depreciation) is allowable, and which does not constitute part of the principal residence (within the meaning of section 121) of the taxpayer or any employee of the taxpayer, for the operating costs of a qualified child care facility of the taxpayer, including costs related to the training of employees, to scholarship programs, and to the providing of increased compensation to employees with higher levels of child care training, or under a contract with a qualified child care facility to provide child care services to employees of the taxpayer, or under a contract with an intermediate entity that contracts with one or more qualified child care facilities to provide such child care services. The term “qualified child care expenditures” shall not include expenses in excess of the fair market value of such care. The term “qualified child care facility” means a facility— the principal use of which is to provide child care assistance, and which meets the requirements of all applicable laws and regulations of the State or local government in which it is located, including the licensing of the facility as a child care facility. Clause (i) shall not apply to a facility which is the principal residence (within the meaning of section 121) of the operator of the facility. A facility shall not be treated as a qualified child care facility with respect to a taxpayer unless— enrollment in the facility is open to employees of the taxpayer during the taxable year, if the facility is the principal trade or business of the taxpayer, at least 30 percent of the enrollees of such facility are dependents of employees of the taxpayer, and the use of such facility (or the eligibility to use such facility) does not discriminate in favor of employees of the taxpayer who are highly compensated employees (within the meaning of section 414(q)). A facility shall not fail to be treated as a qualified child care facility of the taxpayer merely because such facility is jointly owned or operated by the taxpayer and other persons. The term “qualified child care resource and referral expenditure” means any amount paid or incurred under a contract to provide child care resource and referral services to an employee of the taxpayer. The services shall not be treated as qualified unless the provision of such services (or the eligibility to use such services) does not discriminate in favor of employees of the taxpayer who are highly compensated employees (within the meaning of section 414(q)). The term “eligible small business” means a business that meets the gross receipts test of section 448(c), determined— by substituting “5-taxable-year” for “3-taxable-year” in paragraph (1) thereof, and by substituting “5-year” for “3-year” in paragraph (3)(A) thereof.

(d) Recapture of acquisition and construction credit If, as of the close of any taxable year, there is a recapture event with respect to any qualified child care facility of the taxpayer, then the tax of the taxpayer under this chapter for such taxable year shall be increased by an amount equal to the product of— the applicable recapture percentage, and the aggregate decrease in the credits allowed under section 38 for all prior taxable years which would have resulted if the qualified child care expenditures of the taxpayer described in subsection (c)(1)(A) with respect to such facility had been zero. For purposes of this subsection, the applicable recapture percentage shall be determined from the following table: If the recapture event occurs in: The applicable recapture percentage is: Years 1–3 100 Year 4 85 Year 5 70 Year 6 55 Year 7 40 Year 8 25 Years 9 and 10 10 Years 11 and thereafter 0. For purposes of subparagraph (A), year 1 shall begin on the first day of the taxable year in which the qualified child care facility is placed in service by the taxpayer. For purposes of this subsection, the term “recapture event” means— The cessation of the operation of the facility as a qualified child care facility. Except as provided in clause (ii), the disposition of a taxpayer’s interest in a qualified child care facility with respect to which the credit described in subsection (a) was allowable. Clause (i) shall not apply if the person acquiring such interest in the facility agrees in writing to assume the recapture liability of the person disposing of such interest in effect immediately before such disposition. In the event of such an assumption, the person acquiring the interest in the facility shall be treated as the taxpayer for purposes of assessing any recapture liability (computed as if there had been no change in ownership). The tax for the taxable year shall be increased under paragraph (1) only with respect to credits allowed by reason of this section which were used to reduce tax liability. In the case of credits not so used to reduce tax liability, the carryforwards and carrybacks under section 39 shall be appropriately adjusted. Any increase in tax under this subsection shall not be treated as a tax imposed by this chapter for purposes of determining the amount of any credit under this chapter or for purposes of section 55. The increase in tax under this subsection shall not apply to a cessation of operation of the facility as a qualified child care facility by reason of a casualty loss to the extent such loss is restored by reconstruction or replacement within a reasonable period established by the Secretary.

(e) Special rules For purposes of this section— All persons which are treated as a single employer under subsections (a) and (b) of section 52 shall be treated as a single taxpayer. Under regulations prescribed by the Secretary, rules similar to the rules of subsection (d) of section 52 shall apply. In the case of partnerships, the credit shall be allocated among partners under regulations prescribed by the Secretary.

(f) No double benefit For purposes of this subtitle— If a credit is determined under this section with respect to any property by reason of expenditures described in subsection (c)(1)(A), the basis of such property shall be reduced by the amount of the credit so determined. If, during any taxable year, there is a recapture amount determined with respect to any property the basis of which was reduced under subparagraph (A), the basis of such property (immediately before the event resulting in such recapture) shall be increased by an amount equal to such recapture amount. For purposes of the preceding sentence, the term “recapture amount” means any increase in tax (or adjustment in carrybacks or carryovers) determined under subsection (d). No deduction or credit shall be allowed under any other provision of this chapter with respect to the amount of the credit determined under this section.

(g) Regulations and guidance The Secretary shall issue such regulations or other guidance as may be necessary to carry out the purposes of this section, including guidance to carry out the purposes of paragraphs (1)(A)(iii) and (2)(C) of subsection (c).

§ 45G Railroad track maintenance credit

(a) General rule For purposes of section 38, the railroad track maintenance credit determined under this section for the taxable year is an amount equal to 40 percent (50 percent in the case of any taxable year beginning before January 1, 2023 ) of the qualified railroad track maintenance expenditures paid or incurred by an eligible taxpayer during the taxable year.

(b) Limitation The credit allowed under subsection (a) for any taxable year shall not exceed the product of— $3,500, multiplied by the sum of— the number of miles of railroad track owned or leased by the eligible taxpayer as of the close of the taxable year, and the number of miles of railroad track assigned for purposes of this subsection to the eligible taxpayer by a Class II or Class III railroad which owns or leases such railroad track as of the close of the taxable year. With respect to any assignment of a mile of railroad track under paragraph (1)(B)(ii)— such assignment may be made only once per taxable year of the Class II or Class III railroad and shall be treated as made as of the close of such taxable year, such mile may not be taken into account under this section by such railroad for such taxable year, and such assignment shall be taken into account for the taxable year of the assignee which includes the date that such assignment is treated as effective.

(c) Eligible taxpayer For purposes of this section, the term “eligible taxpayer” means— any Class II or Class III railroad, and any person who transports property using the rail facilities of a Class II or Class III railroad or who furnishes railroad-related property or services to a Class II or Class III railroad, but only with respect to miles of railroad track assigned to such person by such Class II or Class III railroad for purposes of subsection (b).

(d) Qualified railroad track maintenance expenditures For purposes of this section, the term “qualified railroad track maintenance expenditures” means gross expenditures (whether or not otherwise chargeable to capital account) for maintaining railroad track (including roadbed, bridges, and related track structures) owned or leased as of January 1, 2015 , by a Class II or Class III railroad (determined without regard to any consideration for such expenditures given by the Class II or Class III railroad which made the assignment of such track).

(e) Other definitions and special rules For purposes of this section, the terms “Class II railroad” and “Class III railroad” have the respective meanings given such terms by the Surface Transportation Board. Rules similar to the rules of paragraph (1) of section 41(f) shall apply for purposes of this section. For purposes of this subtitle, if a credit is allowed under this section with respect to any railroad track, the basis of such track shall be reduced by the amount of the credit so allowed.

§ 45H Credit for production of low sulfur diesel fuel

(a) In general For purposes of section 38, the amount of the low sulfur diesel fuel production credit determined under this section with respect to any facility of a small business refiner is an amount equal to 5 cents for each gallon of low sulfur diesel fuel produced during the taxable year by such small business refiner at such facility.

(b) Maximum credit The aggregate credit determined under subsection (a) for any taxable year with respect to any facility shall not exceed— 25 percent of the qualified costs incurred by the small business refiner with respect to such facility, reduced by the aggregate credits determined under this section for all prior taxable years with respect to such facility. In the case of a small business refiner with average daily domestic refinery runs for the 1-year period ending on December 31, 2002 , in excess of 155,000 barrels, the number of percentage points described in paragraph (1) shall be reduced (not below zero) by the product of such number (before the application of this paragraph) and the ratio of such excess to 50,000 barrels.

(c) Definitions and special rule For purposes of this section— The term “small business refiner” means, with respect to any taxable year, a refiner of crude oil— with respect to which not more than 1,500 individuals are engaged in the refinery operations of the business on any day during such taxable year, and the average daily domestic refinery run or average retained production of which for all facilities of the taxpayer for the 1-year period ending on December 31, 2002 , did not exceed 205,000 barrels. The term “qualified costs” means, with respect to any facility, those costs paid or incurred during the applicable period for compliance with the applicable EPA regulations with respect to such facility, including expenditures for the construction of new process operation units or the dismantling and reconstruction of existing process units to be used in the production of low sulfur diesel fuel, associated adjacent or offsite equipment (including tankage, catalyst, and power supply), engineering, construction period interest, and sitework. The term “applicable EPA regulations” means the Highway Diesel Fuel Sulfur Control Requirements of the Environmental Protection Agency. The term “applicable period” means, with respect to any facility, the period beginning on January 1, 2003 , and ending on the earlier of the date which is 1 year after the date on which the taxpayer must comply with the applicable EPA regulations with respect to such facility or December 31, 2009 . The term “low sulfur diesel fuel” means diesel fuel with a sulfur content of 15 parts per million or less.

(d) Special rule for determination of refinery runs For purposes of this section and section 179B(b), in the calculation of average daily domestic refinery run or retained production, only refineries which on April 1, 2003 , were refineries of the refiner or a related person (within the meaning of section 613A(d)(3)), shall be taken into account.

(e) Certification No credit shall be allowed unless, not later than the date which is 30 months after the first day of the first taxable year in which the low sulfur diesel fuel production credit is determined with respect to a facility, the small business refiner obtains certification from the Secretary, after consultation with the Administrator of the Environmental Protection Agency, that the taxpayer’s qualified costs with respect to such facility will result in compliance with the applicable EPA regulations. An application for certification shall include relevant information regarding unit capacities and operating characteristics sufficient for the Secretary, after consultation with the Administrator of the Environmental Protection Agency, to determine that such qualified costs are necessary for compliance with the applicable EPA regulations. Any application shall be reviewed and notice of certification, if applicable, shall be made within 60 days of receipt of such application. In the event the Secretary does not notify the taxpayer of the results of such certification within such period, the taxpayer may presume the certification to be issued until so notified. With respect to the credit allowed under this section— the statutory period for the assessment of any deficiency attributable to such credit shall not expire before the end of the 3-year period ending on the date that the review period described in paragraph (3) ends with respect to the taxpayer, and such deficiency may be assessed before the expiration of such 3-year period notwithstanding the provisions of any other law or rule of law which would otherwise prevent such assessment.

(f) Cooperative organizations In the case of a cooperative organization described in section 1381(a), any portion of the credit determined under subsection (a) for the taxable year may, at the election of the organization, be apportioned among patrons eligible to share in patronage dividends on the basis of the quantity or value of business done with or for such patrons for the taxable year. An election under subparagraph (A) for any taxable year shall be made on a timely filed return for such year. Such election, once made, shall be irrevocable for such taxable year. The amount of the credit not apportioned to patrons pursuant to paragraph (1) shall be included in the amount determined under subsection (a) for the taxable year of the organization. The amount of the credit apportioned to patrons pursuant to paragraph (1) shall be included in the amount determined under subsection (a) for the first taxable year of each patron ending on or after the last day of the payment period (as defined in section 1382(d)) for the taxable year of the organization or, if earlier, for the taxable year of each patron ending on or after the date on which the patron receives notice from the cooperative of the apportionment. If the amount of a credit which has been apportioned to any patron under this subsection is decreased for any reason— such amount shall not increase the tax imposed on such patron, and the tax imposed by this chapter on such organization shall be increased by such amount. The increase under subparagraph (B) shall not be treated as tax imposed by this chapter for purposes of determining the amount of any credit under this chapter or for purposes of section 55.

(g) Election to not take credit No credit shall be determined under subsection (a) for the taxable year if the taxpayer elects not to have subsection (a) apply to such taxable year.

§ 45I Credit for producing oil and gas from marginal wells

(a) General rule For purposes of section 38, the marginal well production credit for any taxable year is an amount equal to the product of— the credit amount, and the qualified crude oil production and the qualified natural gas production which is attributable to the taxpayer.

(b) Credit amount For purposes of this section— The credit amount is— $3 p er ba rre l o f q u a l i f i e d cr u d eo i lp ro d u c t i o n, an d 50 ce n t s p er 1, 000 c u bi c f ee t o f q u a l i f i e d na t u r a l g a s p ro d u c t i o n . T h e$ 3 and 50 cents amounts under paragraph (1) shall each be reduced (but not below zero) by an amount which bears the same ratio to such amount (determined without regard to this paragraph) as— the excess (if any) of the applicable reference price over $15 ($ 1.67 for qualified natural gas production), bears to $3 ($ 0.33 for qualified natural gas production). The applicable reference price for a taxable year is the reference price of the calendar year preceding the calendar year in which the taxable year begins. In the case of any taxable year beginning in a calendar year after 2005, each of the dollar amounts contained in subparagraph (A) shall be increased to an amount equal to such dollar amount multiplied by the inflation adjustment factor for such calendar year (determined under section 43(b)(3)(B) by substituting “2004” for “1990”). For purposes of this paragraph, the term “reference price” means, with respect to any calendar year— in the case of qualified crude oil production, the reference price determined under section 45K(d)(2)(C), and in the case of qualified natural gas production, the Secretary’s estimate of the annual average wellhead price per 1,000 cubic feet for all domestic natural gas.

(c) Qualified crude oil and natural gas production For purposes of this section— The terms “qualified crude oil production” and “qualified natural gas production” mean domestic crude oil or natural gas which is produced from a qualified marginal well. Crude oil or natural gas produced during any taxable year from any well shall not be treated as qualified crude oil production or qualified natural gas production to the extent production from the well during the taxable year exceeds 1,095 barrels or barrel-of-oil equivalents (as defined in section 45K(d)(5)). In the case of a short taxable year, the limitations under this paragraph shall be proportionately reduced to reflect the ratio which the number of days in such taxable year bears to 365. In the case of a well which is not capable of production during each day of a taxable year, the limitations under this paragraph applicable to the well shall be proportionately reduced to reflect the ratio which the number of days of production bears to the total number of days in the taxable year. The term “qualified marginal well” means a domestic well— the production from which during the taxable year is treated as marginal production under section 613A(c)(6), or which, during the taxable year— has average daily production of not more than 25 barrel-of-oil equivalents (as so defined), and produces water at a rate not less than 95 percent of total well effluent. The terms “crude oil”, “natural gas”, “domestic”, and “barrel” have the meanings given such terms by section 613A(e).

(d) Other rules In the case of a qualified marginal well in which there is more than one owner of operating interests in the well and the crude oil or natural gas production exceeds the limitation under subsection (c)(2), qualifying crude oil production or qualifying natural gas production attributable to the taxpayer shall be determined on the basis of the ratio which taxpayer’s revenue interest in the production bears to the aggregate of the revenue interests of all operating interest owners in the production. Any credit under this section may be claimed only on production which is attributable to the holder of an operating interest. In the case of production from a qualified marginal well which is eligible for the credit allowed under section 45K for the taxable year, no credit shall be allowable under this section unless the taxpayer elects not to claim the credit under section 45K with respect to the well.

§ 45J Credit for production from advanced nuclear power facilities

(a) General rule For purposes of section 38, the advanced nuclear power facility production credit of any taxpayer for any taxable year is equal to the product of— 1.8 cents, multiplied by the kilowatt hours of electricity— produced by the taxpayer at an advanced nuclear power facility during the 8-year period beginning on the date the facility was originally placed in service, and sold by the taxpayer to an unrelated person during the taxable year.

(b) National limitation The amount of credit which would (but for this subsection and subsection (c)) be allowed with respect to any facility for any taxable year shall not exceed the amount which bears the same ratio to such amount of credit as— the national megawatt capacity limitation allocated to the facility, bears to the total megawatt nameplate capacity of such facility. The aggregate amount of national megawatt capacity limitation allocated by the Secretary under paragraph (3) shall not exceed 6,000 megawatts. The Secretary shall allocate the national megawatt capacity limitation in such manner as the Secretary may prescribe. Not later than 6 months after the date of the enactment of or any amendment to this section, the Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this subsection. Such regulations shall provide a certification process under which the Secretary, after consultation with the Secretary of Energy, shall approve and allocate the national megawatt capacity limitation. Any unutilized national megawatt capacity limitation shall be allocated by the Secretary under paragraph (3) as rapidly as is practicable after December 31, 2020 — first to facilities placed in service on or before such date to the extent that such facilities did not receive an allocation equal to their full nameplate capacity, and then to facilities placed in service after such date in the order in which such facilities are placed in service. The term “unutilized national megawatt capacity limitation” means the excess (if any) of— 6,000 megawatts, over the aggregate amount of national megawatt capacity limitation allocated by the Secretary before January 1, 2021 , reduced by any amount of such limitation which was allocated to a facility which was not placed in service before such date. In the case of any unutilized national megawatt capacity limitation allocated by the Secretary pursuant to this paragraph— such allocation shall be treated for purposes of this section in the same manner as an allocation of national megawatt capacity limitation, and subsection (d)(1)(B) shall not apply to any facility which receives such allocation.

(c) Other limitations The amount of the credit allowable under subsection (a) (after the application of subsection (b)) for any taxable year with respect to any facility shall not exceed an amount which bears the same ratio to $125,000,000 as— the national megawatt capacity limitation allocated under subsection (b) to the facility, bears to 1,000. The amount of the credit determined under subsection (a) shall be reduced by an amount which bears the same ratio to the amount of the credit (determined without regard to this paragraph) as— the amount by which the reference price (as defined in section 45(e)(2)(C)) for the calendar year in which the sale occurs exceeds 8 cents, bears to 3 cents. The 8 cent amount in subparagraph (A) shall be adjusted by multiplying such amount by the inflation adjustment factor (as defined in section 45(e)(2)(B)) for the calendar year in which the sale occurs. If any amount as increased under the preceding sentence is not a multiple of 0.1 cent, such amount shall be rounded to the nearest multiple of 0.1 cent.

(d) Advanced nuclear power facility For purposes of this section— The term “advanced nuclear power facility” means any advanced nuclear facility— which is owned by the taxpayer and which uses nuclear energy to produce electricity, and which is placed in service after the date of the enactment of this paragraph and before January 1, 2021 . For purposes of paragraph (1), the term “advanced nuclear facility” means any nuclear facility the reactor design for which is approved after December 31, 1993 , by the Nuclear Regulatory Commission (and such design or a substantially similar design of comparable capacity was not approved on or before such date).

(e) Transfer of credit by certain public entities If, with respect to a credit under subsection (a) for any taxable year— a qualified public entity would be the taxpayer (but for this paragraph), and such entity elects the application of this paragraph for such taxable year with respect to all (or any portion specified in such election) of such credit, the eligible project partner specified in such election, and not the qualified public entity, shall be treated as the taxpayer for purposes of this title with respect to such credit (or such portion thereof). For purposes of this subsection— The term “qualified public entity” means— a Federal, State, or local government entity, or any political subdivision, agency, or instrumentality thereof, a mutual or cooperative electric company described in section 501(c)(12) or 1381(a)(2), or a not-for-profit electric utility which had or has received a loan or loan guarantee under the Rural Electrification Act of 1936. The term “eligible project partner” means any person who— is responsible for, or participates in, the design or construction of the advanced nuclear power facility to which the credit under subsection (a) relates, participates in the provision of the nuclear steam supply system to such facility, participates in the provision of nuclear fuel to such facility, is a financial institution providing financing for the construction or operation of such facility, or has an ownership interest in such facility. In the case of a credit under subsection (a) which is determined at the partnership level— for purposes of paragraph (1)(A), a qualified public entity shall be treated as the taxpayer with respect to such entity’s distributive share of such credit, and the term “eligible project partner” shall include any partner of the partnership. In the case of any credit (or portion thereof) with respect to which an election is made under paragraph (1), such credit shall be taken into account in the first taxable year of the eligible project partner ending with, or after, the qualified public entity’s taxable year with respect to which the credit was determined. For purposes of section 141(b)(1), any benefit derived by an eligible project partner in connection with an election under this subsection shall not be taken into account as a private business use.

(f) Other rules to apply Rules similar to the rules of paragraphs (1), (3), (4), and (5) of section 45(e) shall apply for purposes of this section.

§ 45K Credit for producing fuel from a nonconventional source

(a) Allowance of credit For purposes of section 38, the nonconventional source production credit determined under this section for the taxable year is an amount equal to— $3, multiplied by the barrel-of-oil equivalent of qualified fuels— sold by the taxpayer to an unrelated person during the taxable year, and the production of which is attributable to the taxpayer.

(b) Limitations and adjustments The amount of the credit allowable under subsection (a) shall be reduced by an amount which bears the same ratio to the amount of the credit (determined without regard to this paragraph) as— the amount by which the reference price for the calendar year in which the sale occurs exceeds $23.50, b e a rs t o$ 6. The $3 am o u n t in s u b sec t i o n (a) an d t h e$ 23.50 and $6 am o u n t s in p a r a g r a p h (1) s ha ll e a c hb e a d j u s t e d b y m u lt i pl y in g s u c ham o u n t b y t h e in f l a t i o na d j u s t m e n t f a c t or f or t h ec a l e n d a rye a r in w hi c h t h es a l eocc u rs . I n t h ec a seo f g a s f ro ma t i g h t f or ma t i o n, t h e$ 3 amount in subsection (a) shall not be adjusted. The amount of the credit allowable under subsection (a) with respect to any project for any taxable year (determined after the application of paragraphs (1) and (2)) shall be reduced by the amount which is the product of the amount so determined for such year and a fraction— the numerator of which is the sum, for the taxable year and all prior taxable years, of— grants provided by the United States, a State, or a political subdivision of a State for use in connection with the project, proceeds of any issue of State or local government obligations used to provide financing for the project the interest on which is exempt from tax under section 103, and the aggregate amount of subsidized energy financing (within the meaning of section 48(a)(4)(C)) provided in connection with the project, and the denominator of which is the aggregate amount of additions to the capital account for the project for the taxable year and all prior taxable years. The amounts under subparagraph (A) for any taxable year shall be determined as of the close of the taxable year. The amount allowable as a credit under subsection (a) with respect to any project for any taxable year (determined after the application of paragraphs (1), (2), and (3)) shall be reduced by the excess of— the aggregate amount allowed under section 38 for the taxable year or any prior taxable year by reason of the energy percentage with respect to property used in the project, over the aggregate amount recaptured with respect to the amount described in subparagraph (A)— under section 49(b) or 50(a) for the taxable year or any prior taxable year, or under this paragraph for any prior taxable year. The amount recaptured under section 49(b) or 50(a) with respect to any property shall be appropriately reduced to take into account any reduction in the credit allowed by this section by reason of the preceding sentence. The amount allowable as a credit under subsection (a) with respect to any project for any taxable year (determined after application of paragraphs (1), (2), (3), and (4)) shall be reduced by the excess (if any) of— the aggregate amount allowed under section 38 for the taxable year and any prior taxable year by reason of any enhanced oil recovery credit determined under section 43 with respect to such project, over the aggregate amount recaptured with respect to the amount described in subparagraph (A) under this paragraph for any prior taxable year.

(c) Definition of qualified fuels For purposes of this section— The term “qualified fuels” means— oil produced from shale and tar sands, gas produced from— geopressured brine, Devonian shale, coal seams, or a tight formation, or biomass, and liquid, gaseous, or solid synthetic fuels produced from coal (including lignite), including such fuels when used as feedstocks. Except as provided in subparagraph (B), the determination of whether any gas is produced from geopressured brine, Devonian shale, coal seams, or a tight formation shall be made in accordance with section 503 of the Natural Gas Policy Act of 1978 (as in effect before the repeal of such section). The term “gas produced from a tight formation” shall only include gas from a tight formation— which, as of April 20, 1977 , was committed or dedicated to interstate commerce (as defined in section 2(18) of the Natural Gas Policy Act of 1978, as in effect on the date of the enactment of this clause), or which is produced from a well drilled after such date of enactment. The term “biomass” means any organic material other than— oil and natural gas (or any product thereof), and coal (including lignite) or any product thereof.

(d) Other definitions and special rules For purposes of this section— Sales shall be taken into account under this section only with respect to qualified fuels the production of which is within— the United States (within the meaning of section 638(1)), or a possession of the United States (within the meaning of section 638(2)). The Secretary shall, not later than April 1 of each calendar year, determine and publish in the Federal Register the inflation adjustment factor and the reference price for the preceding calendar year in accordance with this paragraph. The term “inflation adjustment factor” means, with respect to a calendar year, a fraction the numerator of which is the GNP implicit price deflator for the calendar year and the denominator of which is the GNP implicit price deflator for calendar year 1979. The term “GNP implicit price deflator” means the first revision of the implicit price deflator for the gross national product as computed and published by the Department of Commerce. The term “reference price” means with respect to a calendar year the Secretary’s estimate of the annual average wellhead price per barrel for all domestic crude oil the price of which is not subject to regulation by the United States. In the case of a property or facility in which more than 1 person has an interest, except to the extent provided in regulations prescribed by the Secretary, production from the property or facility (as the case may be) shall be allocated among such persons in proportion to their respective interests in the gross sales from such property or facility. The amount of the credit allowable under subsection (a) shall be determined without regard to any production attributable to a property from which gas from Devonian shale, coal seams, geopressured brine, or a tight formation was produced in marketable quantities before January 1, 1980 . The term “barrel-of-oil equivalent” with respect to any fuel means that amount of such fuel which has a Btu content of 5.8 million; except that in the case of qualified fuels described in subparagraph (C) of subsection (c)(1), the Btu content shall be determined without regard to any material from a source not described in such subparagraph. The term “barrel” means 42 United States gallons. Persons shall be treated as related to each other if such persons would be treated as a single employer under the regulations prescribed under section 52(b). In the case of a corporation which is a member of an affiliated group of corporations filing a consolidated return, such corporation shall be treated as selling qualified fuels to an unrelated person if such fuels are sold to such a person by another member of such group. Under regulations prescribed by the Secretary, rules similar to the rules of subsection (d) of section 52 shall apply.

(e) Application of section This section shall apply with respect to qualified fuels— which are— produced from a well drilled after December 31, 1979 , and before January 1, 1993 , or produced in a facility placed in service after December 31, 1979 , and before January 1, 1993 , and which are sold before January 1, 2003 .

(f) Extension for certain facilities In the case of a facility for producing qualified fuels described in subparagraph (B)(ii) or (C) of subsection (c)(1)— for purposes of subsection (e)(1)(B), such facility shall be treated as being placed in service before January 1, 1993 , if such facility is placed in service before July 1, 1998 , pursuant to a binding written contract in effect before January 1, 1997 , and if such facility is originally placed in service after December 31, 1992 , paragraph (2) of subsection (e) shall be applied with respect to such facility by substituting “ January 1, 2008 ” for “ January 1, 2003 ”. Paragraph (1) shall not apply to any facility which produces coke or coke gas unless the original use of the facility commences with the taxpayer.

(g) Extension for facilities producing coke or coke gas Notwithstanding subsection (e)— In the case of a facility for producing coke or coke gas (other than from petroleum based products) which was placed in service before January 1, 1993 , or after June 30, 1998 , and before January 1, 2010 , this section shall apply with respect to coke and coke gas produced in such facility and sold during the period— beginning on the later of January 1, 2006 , or the date that such facility is placed in service, and ending on the date which is 4 years after the date such period began. In determining the amount of credit allowable under this section solely by reason of this subsection— The amount of qualified fuels sold during any taxable year which may be taken into account by reason of this subsection with respect to any facility shall not exceed an average barrel-of-oil equivalent of 4,000 barrels per day. Days before the date the facility is placed in service shall not be taken into account in determining such average. For purposes of applying subsection (b)(2) to the $3 amount in subsection (a), in the case of fuels sold after 2005, subsection (d)(2)(B) shall be applied by substituting “2004” for “1979”. This subsection shall not apply to any facility producing qualified fuels for which a credit was allowed under this section for the taxable year or any preceding taxable year by reason of subsection (f). Subsection (b)(1) shall not apply. No credit shall be allowed with respect to any coke or coke gas which is produced using steel industry fuel (as defined in section 45(c)(7)) as feedstock if a credit is allowed to any taxpayer under section 45 with respect to the production of such steel industry fuel.

“If— any provision amended or repealed by this part [part I (§§ 11801–11821) of subtitle H of title XI of Pub. L. 101–508 , see Tables for classification] applied to— any transaction occurring before the date of the enactment of this Act [ Nov. 5, 1990 ], any property acquired before such date of enactment, or any item of income, loss, deduction, or credit taken into account before such date of enactment, and the treatment of such transaction, property, or item under such provision would (without regard to the amendments made by this part) affect liability for tax for periods ending after such date of enactment, nothing in the amendments made by this part shall be construed to affect the treatment of such transaction, property, or item for purposes of determining liability for tax for periods ending after such date of enactment.”

§ 45L New energy efficient home credit

(a) Allowance of credit For purposes of section 38, in the case of an eligible contractor, the new energy efficient home credit for the taxable year is the applicable amount for each qualified new energy efficient home which is— constructed by the eligible contractor, and acquired by a person from such eligible contractor for use as a residence during the taxable year. For purposes of paragraph (1), the applicable amount is an amount equal to— in the case of a dwelling unit which is eligible to participate in the Energy Star Residential New Construction Program or the Energy Star Manufactured New Homes program— which meets the requirements of subsection (c)(1)(A) (and which does not meet the requirements of subsection (c)(1)(B)), $2, 500, an d w hi c hm ee t s t h ere q u i re m e n t so f s u b sec t i o n (c) (1) (B),$ 5,000, and in the case of a dwelling unit which is part of a building eligible to participate in the Energy Star Multifamily New Construction Program— which meets the requirements of subsection (c)(1)(A) (and which does not meet the requirements of subsection (c)(1)(B)), $500, an d w hi c hm ee t s t h ere q u i re m e n t so f s u b sec t i o n (c) (1) (B),$ 1,000.

(b) Definitions For purposes of this section— The term “eligible contractor” means— the person who constructed the qualified new energy efficient home, or in the case of a qualified new energy efficient home which is a manufactured home, the manufactured home producer of such home. The term “qualified new energy efficient home” means a dwelling unit— located in the United States, the construction of which is substantially completed after the date of the enactment of this section, and which meets the energy saving requirements of subsection (c). The term “construction” includes substantial reconstruction and rehabilitation. The term “acquire” includes purchase.

(c) Energy saving requirements A dwelling unit meets the requirements of this subparagraph if such dwelling unit meets the requirements of paragraph (2) or (3) (whichever is applicable). A dwelling unit meets the requirements of this subparagraph if such dwelling unit is certified as a zero energy ready home under the zero energy ready home program of the Department of Energy as in effect on January 1, 2023 (or any successor program determined by the Secretary). A dwelling unit meets the requirements of this paragraph if— such dwelling unit meets— in the case of a dwelling unit acquired before January 1, 2025 , the Energy Star Single-Family New Homes National Program Requirements 3.1, or in the case of a dwelling unit acquired after December 31, 2024 , the Energy Star Single-Family New Homes National Program Requirements 3.2, and the most recent Energy Star Single-Family New Homes Program Requirements applicable to the location of such dwelling unit (as in effect on the latter of January 1, 2023 , or January 1 of two calendar years prior to the date the dwelling unit was acquired), or such dwelling unit meets the most recent Energy Star Manufactured Home National program requirements as in effect on the latter of January 1, 2023 , or January 1 of two calendar years prior to the date such dwelling unit is acquired. A dwelling unit meets the requirements of this paragraph if— such dwelling unit meets the most recent Energy Star Multifamily New Construction National Program Requirements (as in effect on either January 1, 2023 , or January 1 of three calendar years prior to the date the dwelling was acquired, whichever is later), and such dwelling unit meets the most recent Energy Star Multifamily New Construction Regional Program Requirements applicable to the location of such dwelling unit (as in effect on either January 1, 2023 , or January 1 of three calendar years prior to the date the dwelling was acquired, whichever is later).

(d) Certification A certification described in subsection (c) shall be made in accordance with guidance prescribed by the Secretary, after consultation with the Secretary of Energy. Such guidance shall specify procedures and methods for calculating energy and cost savings. Any certification described in subsection (c) shall be made in writing in a manner which specifies in readily verifiable fashion the energy efficient building envelope components and energy efficient heating or cooling equipment installed and their respective rated energy efficiency performance.

(e) Basis adjustment For purposes of this subtitle, if a credit is allowed under this section in connection with any expenditure for any property, the increase in the basis of such property which would (but for this subsection) result from such expenditure shall be reduced by the amount of the credit so determined. This subsection shall not apply for purposes of determining the adjusted basis of any building under section 42.

(f) Coordination with investment credit For purposes of this section, expenditures taken into account under section 47 or 48(a) shall not be taken into account under this section.

(g) Prevailing wage requirement In the case of a qualifying residence described in subsection (a)(2)(B) meeting the prevailing wage requirements of paragraph (2)(A), the credit amount allowed with respect to such residence shall be— $2, 500 in t h ec a seo f a res i d e n ce w hi c hm ee t s t h ere q u i re m e n t so f s u b p a r a g r a p h (A) o f s u b sec t i o n (c) (1) (an d w hi c h d oes n o t m ee tt h ere q u i re m e n t so f s u b p a r a g r a p h (B) o f s u c h s u b sec t i o n), an d$ 5,000 in the case of a residence which meets the requirements of subsection (c)(1)(B). The requirements described in this subparagraph with respect to any qualified residence are that the taxpayer shall ensure that any laborers and mechanics employed by the taxpayer or any contractor or subcontractor in the construction of such residence shall be paid wages at rates not less than the prevailing rates for construction, alteration, or repair of a similar character in the locality in which such residence is located as most recently determined by the Secretary of Labor, in accordance with subchapter IV of chapter 31 of title 40, United States Code. Rules similar to the rules of section 45(b)(7)(B) shall apply. The Secretary shall issue such regulations or other guidance as the Secretary determines necessary to carry out the purposes of this subsection, including regulations or other guidance which provides for requirements for recordkeeping or information reporting for purposes of administering the requirements of this subsection.

(h) Termination This section shall not apply to any qualified new energy efficient home acquired after June 30, 2026 .

[§ 45M Repealed. Pub. L. 115–141, div. U, title IV, § 401(d)(2)(A), Mar. 23, 2018, 132 Stat. 1208]

§ 45N Mine rescue team training credit

(a) Amount of credit For purposes of section 38, the mine rescue team training credit determined under this section with respect to each qualified mine rescue team employee of an eligible employer for any taxable year is an amount equal to the lesser of— 20 percent of the amount paid or incurred by the taxpayer during the taxable year with respect to the training program costs of such qualified mine rescue team employee (including wages of such employee while attending such program), or $10,000.

(b) Qualified mine rescue team employee For purposes of this section, the term “qualified mine rescue team employee” means with respect to any taxable year any full-time employee of the taxpayer who is— a miner eligible for more than 6 months of such taxable year to serve as a mine rescue team member as a result of completing, at a minimum, an initial 20-hour course of instruction as prescribed by the Mine Safety and Health Administration’s Office of Educational Policy and Development, or a miner eligible for more than 6 months of such taxable year to serve as a mine rescue team member by virtue of receiving at least 40 hours of refresher training in such instruction.

(c) Eligible employer For purposes of this section, the term “eligible employer” means any taxpayer which employs individuals as miners in underground mines in the United States.

(d) Wages For purposes of this section, the term “wages” has the meaning given to such term by subsection (b) of section 3306 (determined without regard to any dollar limitation contained in such section).

(e) Termination This section shall not apply to taxable years beginning after December 31, 2021 .

§ 45O Agricultural chemicals security credit

(a) In general For purposes of section 38, in the case of an eligible agricultural business, the agricultural chemicals security credit determined under this section for the taxable year is 30 percent of the qualified security expenditures for the taxable year.

(b) Facility limitation The amount of the credit determined under subsection (a) with respect to any facility for any taxable year shall not exceed— $100,000, reduced by the aggregate amount of credits determined under subsection (a) with respect to such facility for the 5 prior taxable years.

(c) Annual limitation The amount of the credit determined under subsection (a) with respect to any taxpayer for any taxable year shall not exceed $2,000,000.

(d) Qualified chemical security expenditure For purposes of this section, the term “qualified chemical security expenditure” means, with respect to any eligible agricultural business for any taxable year, any amount paid or incurred by such business during such taxable year for— employee security training and background checks, limitation and prevention of access to controls of specified agricultural chemicals stored at the facility, tagging, locking tank valves, and chemical additives to prevent the theft of specified agricultural chemicals or to render such chemicals unfit for illegal use, protection of the perimeter of specified agricultural chemicals, installation of security lighting, cameras, recording equipment, and intrusion detection sensors, implementation of measures to increase computer or computer network security, conducting a security vulnerability assessment, implementing a site security plan, and such other measures for the protection of specified agricultural chemicals as the Secretary may identify in regulation. Amounts described in the preceding sentence shall be taken into account only to the extent that such amounts are paid or incurred for the purpose of protecting specified agricultural chemicals.

(e) Eligible agricultural business For purposes of this section, the term “eligible agricultural business” means any person in the trade or business of— selling agricultural products, including specified agricultural chemicals, at retail predominantly to farmers and ranchers, or manufacturing, formulating, distributing, or aerially applying specified agricultural chemicals.

(f) Specified agricultural chemical For purposes of this section, the term “specified agricultural chemical” means— any fertilizer commonly used in agricultural operations which is listed under— section 302(a)(2) of the Emergency Planning and Community Right-to-Know Act of 1986, section 101 of part 172 of title 49, Code of Federal Regulations, or part 126, 127, or 154 of title 33, Code of Federal Regulations, and any pesticide (as defined in section 2(u) of the Federal Insecticide, Fungicide, and Rodenticide Act), including all active and inert ingredients thereof, which is customarily used on crops grown for food, feed, or fiber.

(g) Controlled groups Rules similar to the rules of paragraphs (1) and (2) of section 41(f) shall apply for purposes of this section.

(h) Regulations The Secretary may prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section, including regulations which— provide for the proper treatment of amounts which are paid or incurred for purpose of protecting any specified agricultural chemical and for other purposes, and provide for the treatment of related properties as one facility for purposes of subsection (b).

(i) Termination This section shall not apply to any amount paid or incurred after December 31, 2012 .

§ 45P Employer wage credit for employees who are active duty members of the uniformed services

(a) General rule For purposes of section 38, the differential wage payment credit for any taxable year is an amount equal to 20 percent of the sum of the eligible differential wage payments for each of the qualified employees of the taxpayer during such taxable year.

(b) Definitions For purposes of this section— The term “eligible differential wage payments” means, with respect to each qualified employee, so much of the differential wage payments (as defined in section 3401(h)(2)) paid to such employee for the taxable year as does not exceed $20,000. The term “qualified employee” means a person who has been an employee of the taxpayer for the 91-day period immediately preceding the period for which any differential wage payment is made. All persons treated as a single employer under subsection (b), (c), (m), or ( o ) of section 414 shall be treated as a single employer.

(c) Coordination with other credits The amount of credit otherwise allowable under this chapter with respect to compensation paid to any employee shall be reduced by the credit determined under this section with respect to such employee.

(d) Disallowance for failure to comply with employment or reemployment rights of members of the reserve components of the Armed Forces of the United States No credit shall be allowed under subsection (a) to a taxpayer for— any taxable year, beginning after the date of the enactment of this section, in which the taxpayer is under a final order, judgment, or other process issued or required by a district court of the United States under section 4323 of title 38 of the United States Code with respect to a violation of chapter 43 of such title, and the 2 succeeding taxable years.

(e) Certain rules to apply For purposes of this section, rules similar to the rules of subsections (c), (d), and (e) of section 52 shall apply.

§ 45Q Credit for carbon oxide sequestration

(a) General rule For purposes of section 38, the carbon oxide sequestration credit for any taxable year is an amount equal to the sum of— $20 p er m e t r i c t o n o f q u a l i f i e d c a r b o n o x i d e w hi c hi s — c a pt u re d b y t h e t a x p a yer u s in g c a r b o n c a pt u ree q u i p m e n tw hi c hi sor i g ina ll y pl a ce d in ser v i ce a t a q u a l i f i e df a c i l i t y b e f ore t h e d a t eo f t h ee na c t m e n t o f t h e B i p a r t i s an B u d g e t A c t o f 2018, an dd i s p ose d o f b y t h e t a x p a yer in sec u re g eo l o g i c a l s t or a g e an d n o t u se d b y t h e t a x p a yer a s d escr ib e d in p a r a g r a p h (2) (B),$ 10 per metric ton of qualified carbon oxide which is— captured by the taxpayer using carbon capture equipment which is originally placed in service at a qualified facility before the date of the enactment of the Bipartisan Budget Act of 2018, and used by the taxpayer as a tertiary injectant in a qualified enhanced oil or natural gas recovery project and disposed of by the taxpayer in secure geological storage, or utilized by the taxpayer in a manner described in subsection (f)(5), and the applicable dollar amount (as determined under subsection (b)(1)) per metric ton of qualified carbon oxide which is— captured by the taxpayer using carbon capture equipment which is originally placed in service at a qualified facility on or after the date of the enactment of the Bipartisan Budget Act of 2018, during the 12-year period beginning on the date the equipment was originally placed in service, and disposed of by the taxpayer in secure geological storage and not used by the taxpayer as described in clause (ii) or (iii), used by the taxpayer as a tertiary injectant in a qualified enhanced oil or natural gas recovery project and disposed of by the taxpayer in secure geological storage, or utilized by the taxpayer in a manner described in subsection (f)(5).

(b) Applicable dollar amount; additional equipment; election Except as provided in subparagraph (B) or (C), the applicable dollar amount shall be an amount equal to— for any taxable year beginning in a calendar year after 2024 and before 2027, $17, an df or an y t a x ab l eye a r b e g innin g ina c a l e n d a rye a r a f t er 2026, anam o u n t e q u a lt o t h e p ro d u c t o f$ 17 and the inflation adjustment factor for such calendar year determined under section 43(b)(3)(B) for such calendar year, determined by substituting “2025” for “1990”. In the case of any qualified facility described in subsection (d)(2)(A) which is placed in service after December 31, 2022 , the applicable dollar amount shall be an amount equal to the applicable dollar amount otherwise determined with respect to such qualified facility under subparagraph (A), except that such subparagraph shall be applied by substituting “ $36” f or “$ 17” each place it appears. In the case of any qualified facility which is placed in service before January 1, 2023 , if any additional carbon capture equipment is installed at such facility and such equipment is placed in service after December 31, 2022 , the applicable dollar amount shall be an amount equal to the applicable dollar amount otherwise determined under this paragraph, except that subparagraph (B) shall be applied— by substituting “before January 1, 2023 ” for “after December 31, 2022 ”, and by substituting “the additional carbon capture equipment installed at such qualified facility” for “such qualified facility”. The applicable dollar amount determined under subparagraph (A), (B), or (C) shall be rounded to the nearest cent. In the case of a qualified facility placed in service before the date of the enactment of the Bipartisan Budget Act of 2018, for which additional carbon capture equipment is placed in service on or after the date of the enactment of such Act, the amount of qualified carbon oxide which is captured by the taxpayer shall be equal to— for purposes of paragraphs (1)(A) and (2)(A) of subsection (a), the lesser of— the total amount of qualified carbon oxide captured at such facility for the taxable year, or the total amount of the carbon dioxide capture capacity of the carbon capture equipment in service at such facility on the day before the date of the enactment of the Bipartisan Budget Act of 2018, and for purposes of paragraph (3)(A) of such subsection, an amount (not less than zero) equal to the excess of— the amount described in clause (i) of subparagraph (A), over the amount described in clause (ii) of such subparagraph. For purposes of determining the carbon oxide sequestration credit under this section, a taxpayer may elect to have the dollar amounts applicable under paragraph (1) or (2) of subsection (a) apply in lieu of the dollar amount applicable under paragraph (3) of such subsection for each metric ton of qualified carbon oxide which is captured by the taxpayer using carbon capture equipment which is originally placed in service at a qualified facility on or after the date of the enactment of the Bipartisan Budget Act of 2018.

(c) Qualified carbon oxide For purposes of this section— The term “qualified carbon oxide” means— any carbon dioxide which— is captured from an industrial source by carbon capture equipment which is originally placed in service before the date of the enactment of the Bipartisan Budget Act of 2018, would otherwise be released into the atmosphere as industrial emission of greenhouse gas or lead to such release, and is measured at the source of capture and verified at the point of disposal, injection, or utilization, any carbon dioxide or other carbon oxide which— is captured from an industrial source by carbon capture equipment which is originally placed in service on or after the date of the enactment of the Bipartisan Budget Act of 2018, would otherwise be released into the atmosphere as industrial emission of greenhouse gas or lead to such release, and is measured at the source of capture and verified at the point of disposal, injection, or utilization, or in the case of a direct air capture facility, any carbon dioxide which— is captured directly from the ambient air, and is measured at the source of capture and verified at the point of disposal, injection, or utilization. The term “qualified carbon oxide” includes the initial deposit of captured carbon oxide used as a tertiary injectant. Such term does not include carbon oxide that is recaptured, recycled, and re-injected as part of the enhanced oil and natural gas recovery process.

(d) Qualified facility For purposes of this section, the term “qualified facility” means any industrial facility or direct air capture facility— the construction of which begins before January 1, 2033 , and either— construction of carbon capture equipment begins before such date, or the original planning and design for such facility includes installation of carbon capture equipment, and which— in the case of a direct air capture facility, captures not less than 1,000 metric tons of qualified carbon oxide during the taxable year, in the case of an electricity generating facility— captures not less than 18,750 metric tons of qualified carbon oxide during the taxable year, and with respect to any carbon capture equipment for the applicable electric generating unit at such facility, has a capture design capacity of not less than 75 percent of the baseline carbon oxide production of such unit, or in the case of any other facility, captures not less than 12,500 metric tons of qualified carbon oxide during the taxable year.

(e) Definitions For purposes of this section— The term “applicable electric generating unit” means the principal electric generating unit for which the carbon capture equipment is originally planned and designed. The term “baseline carbon oxide production” means either of the following: In the case of an applicable electric generating unit which was originally placed in service more than 1 year prior to the date on which construction of the carbon capture equipment begins, the average annual carbon oxide production, by mass, from such unit during— in the case of an applicable electric generating unit which was originally placed in service more than 1 year prior to the date on which construction of the carbon capture equipment begins and on or after the date which is 3 years prior to the date on which construction of such equipment begins, the period beginning on the date such unit was placed in service and ending on the date on which construction of such equipment began, and in the case of an applicable electric generating unit which was originally placed in service more than 3 years prior to the date on which construction of the carbon capture equipment begins, the 3 years with the highest annual carbon oxide production during the 12-year period preceding the date on which construction of such equipment began. In the case of an applicable electric generating unit which— as of the date on which construction of the carbon capture equipment begins, is not yet placed in service, or was placed in service during the 1-year period prior to the date on which construction of the carbon capture equipment begins, the designed annual carbon oxide production, by mass, as determined based on an assumed capacity factor of 60 percent. The term “capacity factor” means the ratio (expressed as a percentage) of the actual electric output from the applicable electric generating unit to the potential electric output from such unit. Subject to subparagraph (B), the term “direct air capture facility” means any facility which uses carbon capture equipment to capture carbon dioxide directly from the ambient air. The term “direct air capture facility” shall not include any facility which captures carbon dioxide— which is deliberately released from naturally occurring subsurface springs, or using natural photosynthesis. The term “qualified enhanced oil or natural gas recovery project” has the meaning given the term “qualified enhanced oil recovery project” by section 43(c)(2), by substituting “crude oil or natural gas” for “crude oil” in subparagraph (A)(i) thereof. The term “tertiary injectant” has the same meaning as when used within section 193(b)(1).

(f) Special rules The credit under this section shall apply only with respect to qualified carbon oxide the capture and disposal, use, or utilization of which is within— the United States (within the meaning of section 638(1)), or a possession of the United States (within the meaning of section 638(2)). The Secretary, in consultation with the Administrator of the Environmental Protection Agency, the Secretary of Energy, and the Secretary of the Interior, shall establish regulations for determining adequate security measures for the geological storage of qualified carbon oxide under subsection (a) such that the qualified carbon oxide does not escape into the atmosphere. Such term shall include storage at deep saline formations, oil and gas reservoirs, and unminable coal seams under such conditions as the Secretary may determine under such regulations. Except as provided in subparagraph (B) or in any regulations prescribed by the Secretary, any credit under this section shall be attributable to— in the case of qualified carbon oxide captured using carbon capture equipment which is originally placed in service at a qualified facility before the date of the enactment of the Bipartisan Budget Act of 2018, the person that captures and physically or contractually ensures the disposal, utilization, or use as a tertiary injectant of such qualified carbon oxide, and in the case of qualified carbon oxide captured using carbon capture equipment which is originally placed in service at a qualified facility on or after the date of the enactment of the Bipartisan Budget Act of 2018, the person that owns the carbon capture equipment and physically or contractually ensures the capture and disposal, utilization, or use as a tertiary injectant of such qualified carbon oxide. If the person described in subparagraph (A) makes an election under this subparagraph in such time and manner as the Secretary may prescribe by regulations, the credit under this section— shall be allowable to the person that disposes of the qualified carbon oxide, utilizes the qualified carbon oxide, or uses the qualified carbon oxide as a tertiary injectant, and shall not be allowable to the person described in subparagraph (A). The Secretary shall, by regulations, provide for recapturing the benefit of any credit allowable under subsection (a) with respect to any qualified carbon oxide which ceases to be captured, disposed of, or used as a tertiary injectant in a manner consistent with the requirements of this section. For purposes of this section, utilization of qualified carbon oxide means— the fixation of such qualified carbon oxide through photosynthesis or chemosynthesis, such as through the growing of algae or bacteria, the chemical conversion of such qualified carbon oxide to a material or chemical compound in which such qualified carbon oxide is securely stored, or the use of such qualified carbon oxide for any other purpose for which a commercial market exists (with the exception of use as a tertiary injectant in a qualified enhanced oil or natural gas recovery project), as determined by the Secretary. For purposes of determining the amount of qualified carbon oxide utilized by the taxpayer under paragraph (2)(B)(ii) or (3)(B)(iii) of subsection (a), such amount shall be equal to the metric tons of qualified carbon oxide which the taxpayer demonstrates, based upon an analysis of lifecycle greenhouse gas emissions and subject to such requirements as the Secretary, in consultation with the Secretary of Energy and the Administrator of the Environmental Protection Agency, determines appropriate, were— captured and permanently isolated from the atmosphere, or displaced from being emitted into the atmosphere, through use of a process described in subparagraph (A). For purposes of clause (i), the term “lifecycle greenhouse gas emissions” has the same meaning given such term under subparagraph (H) of section 211( o )(1) of the Clean Air Act ( 42 U.S.C. 7545 ( o )(1)), as in effect on the date of the enactment of the Bipartisan Budget Act of 2018, except that “product” shall be substituted for “fuel” each place it appears in such subparagraph. For purposes of this section, in the case of an applicable facility, for any taxable year in which such facility captures not less than 500,000 metric tons of qualified carbon oxide during the taxable year, the person described in paragraph (3)(A)(ii) may elect to have such facility, and any carbon capture equipment placed in service at such facility, deemed as having been placed in service on the date of the enactment of the Bipartisan Budget Act of 2018. For purposes of this paragraph, the term “applicable facility” means a qualified facility— which was placed in service before the date of the enactment of the Bipartisan Budget Act of 2018, and for which no taxpayer claimed a credit under this section in regards to such facility for any taxable year ending before the date of the enactment of such Act. In the case of any taxable year beginning in a calendar year after 2009, there shall be substituted for each dollar amount contained in paragraphs (1) and (2) of subsection (a) an amount equal to the product of— such dollar amount, multiplied by the inflation adjustment factor for such calendar year determined under section 43(b)(3)(B) for such calendar year, determined by substituting “2008” for “1990”. Rules similar to the rule under section 45(b)(3) shall apply for purposes of this section. For purposes of subsection (a)(3), a person described in paragraph (3)(A)(ii) may elect, at such time and in such manner as the Secretary may prescribe, to have the 12–year period begin on the first day of the first taxable year in which a credit under this section is claimed with respect to carbon capture equipment which is originally placed in service at a qualified facility on or after the date of the enactment of the Bipartisan Budget Act of 2018 (after application of paragraph (6), where applicable) if— no taxpayer claimed a credit under this section with respect to such carbon capture equipment for any prior taxable year, the qualified facility at which such carbon capture equipment is placed in service is located in an area affected by a federally-declared disaster (as defined by section 165(i)(5)(A)) after the carbon capture equipment is originally placed in service, and such federally-declared disaster results in a cessation of the operation of the qualified facility or the carbon capture equipment after such equipment is originally placed in service. No credit shall be determined under subsection (a) for any taxable year beginning after the date of enactment of this paragraph if the taxpayer is— a specified foreign entity (as defined in section 7701(a)(51)(B)), or a foreign-influenced entity (as defined in section 7701(a)(51)(D), determined without regard to clause (i)(II) thereof).

(g) Application of section for certain carbon capture equipment In the case of any carbon capture equipment placed in service before the date of the enactment of the Bipartisan Budget Act of 2018, the credit under this section shall apply with respect to qualified carbon oxide captured using such equipment before the earlier of January 1, 2023 , and the end of the calendar year in which the Secretary, in consultation with the Administrator of the Environmental Protection Agency, certifies that, during the period beginning after October 3, 2008 , a total of 75,000,000 metric tons of qualified carbon oxide have been taken into account in accordance with— subsection (a) of this section, as in effect on the day before the date of the enactment of the Bipartisan Budget Act of 2018, and paragraphs (1) and (2) of subsection (a) of this section.

(h) Increased credit amount for qualified facilities and carbon capture equipment In the case of any qualified facility or any carbon capture equipment which satisfy the requirements of paragraph (2), the amount of the credit determined under subsection (a) shall be equal to such amount (determined without regard to this sentence) multiplied by 5. The requirements described in this paragraph are that— with respect to any qualified facility the construction of which begins on or after the date that is 60 days after the Secretary publishes guidance with respect to the requirements of paragraphs (3)(A) and (4), as well as any carbon capture equipment placed in service at such facility— subject to subparagraph (B) of paragraph (3), the taxpayer satisfies the requirements under subparagraph (A) of such paragraph with respect to such facility and equipment, and the taxpayer satisfies the requirements under paragraph (4) with respect to the construction of such facility and equipment, with respect to any carbon capture equipment the construction of which begins on or after the date that is 60 days after the Secretary publishes guidance with respect to the requirements of paragraphs (3)(A) and (4), and which is installed at a qualified facility the construction of which began prior to such date— subject to subparagraph (B) of paragraph (3), the taxpayer satisfies the requirements under subparagraph (A) of such paragraph with respect to such equipment, and the taxpayer satisfies the requirements under paragraph (4) with respect to the construction of such equipment, or the construction of carbon capture equipment begins prior to the date that is 60 days after the Secretary publishes guidance with respect to the requirements of paragraphs (3)(A) and (4), and such equipment is installed at a qualified facility the construction of which begins prior to such date. The requirements described in this subparagraph with respect to any qualified facility and any carbon capture equipment placed in service at such facility are that the taxpayer shall ensure that any laborers and mechanics employed by the taxpayer or any contractor or subcontractor in— the construction of such facility or equipment, and with respect to any taxable year, for any portion of such taxable year which is within the period described in subsection (a)(3)(A), the alteration or repair of such facility or such equipment, shall be paid wages at rates not less than the prevailing rates for construction, alteration, or repair of a similar character in the locality in which such facility and equipment are located as most recently determined by the Secretary of Labor, in accordance with subchapter IV of chapter 31 of title 40, United States Code. For purposes of determining an increased credit amount under paragraph (1) for a taxable year, the requirement under clause (ii) of this subparagraph is applied to such taxable year in which the alteration or repair of qualified facility occurs. Rules similar to the rules of section 45(b)(7)(B) shall apply. Rules similar to the rules of section 45(b)(8) shall apply. The Secretary shall issue such regulations or other guidance as the Secretary determines necessary to carry out the purposes of this subsection, including regulations or other guidance which provides for requirements for recordkeeping or information reporting for purposes of administering the requirements of this subsection.

(i) Regulations The Secretary may prescribe such regulations and other guidance as may be necessary or appropriate to carry out this section, including regulations or other guidance to— ensure proper allocation under subsection (a) for qualified carbon oxide captured by a taxpayer during the taxable year ending after the date of the enactment of the Bipartisan Budget Act of 2018, determine whether a facility satisfies the requirements under subsection (d)(1) during such taxable year, and for purposes of subsection (d)(2)(B)(ii), adjust the baseline carbon oxide production with respect to any applicable electric generating unit at any electricity generating facility if, after the date on which the carbon capture equipment is placed in service, modifications which are chargeable to capital account are made to such unit which result in a significant increase or decrease in carbon oxide production.

§ 45R Employee health insurance expenses of small employers

(a) General rule For purposes of section 38, in the case of an eligible small employer, the small employer health insurance credit determined under this section for any taxable year in the credit period is the amount determined under subsection (b).

(b) Health insurance credit amount Subject to subsection (c), the amount determined under this subsection with respect to any eligible small employer is equal to 50 percent (35 percent in the case of a tax-exempt eligible small employer) of the lesser of— the aggregate amount of nonelective contributions the employer made on behalf of its employees during the taxable year under the arrangement described in subsection (d)(4) for premiums for qualified health plans offered by the employer to its employees through an Exchange, or the aggregate amount of nonelective contributions which the employer would have made during the taxable year under the arrangement if each employee taken into account under paragraph (1) had enrolled in a qualified health plan which had a premium equal to the average premium (as determined by the Secretary of Health and Human Services) for the small group market in the rating area in which the employee enrolls for coverage.

(c) Phaseout of credit amount based on number of employees and average wages The amount of the credit determined under subsection (b) without regard to this subsection shall be reduced (but not below zero) by the sum of the following amounts: Such amount multiplied by a fraction the numerator of which is the total number of full-time equivalent employees of the employer in excess of 10 and the denominator of which is 15. Such amount multiplied by a fraction the numerator of which is the average annual wages of the employer in excess of the dollar amount in effect under subsection (d)(3)(B) and the denominator of which is such dollar amount.

(d) Eligible small employer For purposes of this section— The term “eligible small employer” means, with respect to any taxable year, an employer— which has no more than 25 full-time equivalent employees for the taxable year, the average annual wages of which do not exceed an amount equal to twice the dollar amount in effect under paragraph (3)(B) for the taxable year, and which has in effect an arrangement described in paragraph (4). The term “full-time equivalent employees” means a number of employees equal to the number determined by dividing— the total number of hours of service for which wages were paid by the employer to employees during the taxable year, by 2,080. Such number shall be rounded to the next lowest whole number if not otherwise a whole number. If an employee works in excess of 2,080 hours of service during any taxable year, such excess shall not be taken into account under subparagraph (A). The Secretary, in consultation with the Secretary of Labor, shall prescribe such regulations, rules, and guidance as may be necessary to determine the hours of service of an employee, including rules for the application of this paragraph to employees who are not compensated on an hourly basis. The average annual wages of an eligible small employer for any taxable year is the amount determined by dividing— the aggregate amount of wages which were paid by the employer to employees during the taxable year, by the number of full-time equivalent employees of the employee determined under paragraph (2) for the taxable year. Such amount shall be rounded to the next lowest multiple of $1, 000 i f n o t o t h er w i ses u c ham u lt i pl e . F or p u r p oseso f p a r a g r a p h (1) (B) an d s u b sec t i o n (c) (2) — T h e d o ll a r am o u n t in e ff ec t u n d er t hi s p a r a g r a p h f or t a x ab l eye a rs b e g innin g in 2010, 2011, 2012, or 2013 i s$ 25,000. In the case of a taxable year beginning in a calendar year after 2013, the dollar amount in effect under this paragraph shall be equal to $25,000, multiplied by the cost-of-living adjustment under section 1(f)(3) for the calendar year, determined by substituting “calendar year 2012” for “calendar year 2016” in subparagraph (A)(ii) thereof. An arrangement is described in this paragraph if it requires an eligible small employer to make a nonelective contribution on behalf of each employee who enrolls in a qualified health plan offered to employees by the employer through an exchange in an amount equal to a uniform percentage (not less than 50 percent) of the premium cost of the qualified health plan. For purposes of this subsection— The number of hours of service worked by, and wages paid to, a seasonal worker of an employer shall not be taken into account in determining the full-time equivalent employees and average annual wages of the employer unless the worker works for the employer on more than 120 days during the taxable year. The term “seasonal worker” means a worker who performs labor or services on a seasonal basis as defined by the Secretary of Labor, including workers covered by section 500.20(s)(1) of title 29, Code of Federal Regulations and retail workers employed exclusively during holiday seasons.

(e) Other rules and definitions For purposes of this section— The term “employee” shall not include— an employee within the meaning of section 401(c)(1), any 2-percent shareholder (as defined in section 1372(b)) of an eligible small business which is an S corporation, any 5-percent owner (as defined in section 416(i)(1)(B)(i)) of an eligible small business, or any individual who bears any of the relationships described in subparagraphs (A) through (G) of section 152(d)(2) to, or is a dependent described in section 152(d)(2)(H) of, an individual described in clause (i), (ii), or (iii). The term “employee” shall include a leased employee within the meaning of section 414(n). The term “credit period” means, with respect to any eligible small employer, the 2-consecutive-taxable year period beginning with the 1st taxable year in which the employer (or any predecessor) offers 1 or more qualified health plans to its employees through an Exchange. The term “nonelective contribution” means an employer contribution other than an employer contribution pursuant to a salary reduction arrangement. The term “wages” has the meaning given such term by section 3121(a) (determined without regard to any dollar limitation contained in such section). All employers treated as a single employer under subsection (b), (c), (m), or ( o ) of section 414 shall be treated as a single employer for purposes of this section. Rules similar to the rules of subsections (c), (d), and (e) of section 52 shall apply.

(f) Credit made available to tax-exempt eligible small employers In the case of a tax-exempt eligible small employer, there shall be treated as a credit allowable under subpart C (and not allowable under this subpart) the lesser of— the amount of the credit determined under this section with respect to such employer, or the amount of the payroll taxes of the employer during the calendar year in which the taxable year begins. For purposes of this section, the term “tax-exempt eligible small employer” means an eligible small employer which is any organization described in section 501(c) which is exempt from taxation under section 501(a). For purposes of this subsection— The term “payroll taxes” means— amounts required to be withheld from the employees of the tax-exempt eligible small employer under section 3401(a), amounts required to be withheld from such employees under section 3101(b), and amounts of the taxes imposed on the tax-exempt eligible small employer under section 3111(b). A rule similar to the rule of section 24(d)(2)(C) shall apply for purposes of subparagraph (A).

(g) Application of section for calendar years 2010, 2011, 2012, and 2013 In the case of any taxable year beginning in 2010, 2011, 2012, or 2013, the following modifications to this section shall apply in determining the amount of the credit under subsection (a): The credit shall be determined without regard to whether the taxable year is in a credit period and for purposes of applying this section to taxable years beginning after 2013, no credit period shall be treated as beginning with a taxable year beginning before 2014. The amount of the credit determined under subsection (b) shall be determined— by substituting “35 percent (25 percent in the case of a tax-exempt eligible small employer)” for “50 percent (35 percent in the case of a tax-exempt eligible small employer)”, by reference to an eligible small employer’s nonelective contributions for premiums paid for health insurance coverage (within the meaning of section 9832(b)(1)) of an employee, and by substituting for the average premium determined under subsection (b)(2) the amount the Secretary of Health and Human Services determines is the average premium for the small group market in the State in which the employer is offering health insurance coverage (or for such area within the State as is specified by the Secretary). An arrangement shall not fail to meet the requirements of subsection (d)(4) solely because it provides for the offering of insurance outside of an Exchange.

(h) Insurance definitions Any term used in this section which is also used in the Public Health Service Act or subtitle A of title I of the Patient Protection and Affordable Care Act shall have the meaning given such term by such Act or subtitle.

(i) Regulations The Secretary shall prescribe such regulations as may be necessary to carry out the provisions of this section, including regulations to prevent the avoidance of the 2-year limit on the credit period through the use of successor entities and the avoidance of the limitations under subsection (c) through the use of multiple entities.

§ 45S Employer credit for paid family and medical leave

(a) Establishment of credit For purposes of section 38, in the case of an eligible employer, the paid family and medical leave credit is an amount equal to either of the following (as elected by such employer): The applicable percentage of the amount of wages paid to qualifying employees with respect to any period in which such employees are on family and medical leave. If such employer has an insurance policy with regards to the provision of paid family and medical leave which is in force during the taxable year, the applicable percentage of the total amount of premiums paid or incurred by such employer during such taxable year with respect to such insurance policy. For purposes of paragraph (1), the term “applicable percentage” means 12.5 percent increased (but not above 25 percent) by 0.25 percentage points for each percentage point by which the rate of payment (as described under subsection (c)(1)(B)) exceeds 50 percent. For purposes of determining the applicable percentage with respect to paragraph (1)(B), the rate of payment under the insurance policy shall be determined without regard to whether any qualifying employees were on family and medical leave during the taxable year.

(b) Limitation The wages taken into account under subsection (a) with respect to any employee for any taxable year shall not exceed an amount equal to the product of the normal hourly wage rate of such employee for each hour (or fraction thereof) of actual services performed for the employer and the number of hours (or fraction thereof) for which family and medical leave is taken. For purposes of paragraph (1), in the case of any employee who is not paid on an hourly wage rate, the wages of such employee shall be prorated to an hourly wage rate under regulations established by the Secretary. The amount of family and medical leave that may be taken into account with respect to any employee under subsection (a) for any taxable year shall not exceed 12 weeks.

(c) Eligible employer For purposes of this section— The term “eligible employer” means any employer who has in place a written policy that meets the following requirements: The policy provides— in the case of a qualifying employee who is not a part-time employee (as defined in section 4980E(d)(4)(B)), not less than 2 weeks of annual paid family and medical leave, and in the case of a qualifying employee who is a part-time employee, an amount of annual paid family and medical leave that is not less than an amount which bears the same ratio to the amount of annual paid family and medical leave that is provided to a qualifying employee described in clause (i) as— the number of hours the employee is expected to work during any week, bears to the number of hours an equivalent qualifying employee described in clause (i) is expected to work during the week. The policy requires that the rate of payment under the program is not less than 50 percent of the wages normally paid to such employee for services performed for the employer. An added employer shall not be treated as an eligible employer unless such employer provides paid family and medical leave in compliance with a written policy which ensures that the employer— will not interfere with, restrain, or deny the exercise of or the attempt to exercise, any right provided under the policy, and will not discharge or in any other manner discriminate against any individual for opposing any practice prohibited by the policy. For purposes of this paragraph— The term “added employee” means a qualifying employee who is not covered by title I of the Family and Medical Leave Act of 1993, as amended. The term “added employer” means an eligible employer (determined without regard to this paragraph), whether or not covered by that title I, who offers paid family and medical leave to added employees. Except as provided in subparagraph (B), all persons which are treated as a single employer under subsections (b) and (c) of section 414 shall be treated as a single employer. Subparagraph (A) shall not apply to any person who establishes to the satisfaction of the Secretary that such person has a substantial and legitimate business reason for failing to provide a written policy described in paragraph (1) or (2). For purposes of clause (i), the term “substantial and legitimate business reason” shall not include the operation of a separate line of business, the rate of wages or category of jobs for employees (or any similar basis), or the application of State or local laws relating to family and medical leave, but may include the grouping of employees of a common law employer. For purposes of this section, any leave which is paid by a State or local government or required by State or local law— except as provided in subparagraph (B), shall be taken into account in determining the amount of paid family and medical leave provided by the employer, and shall not be taken into account in determining the amount of the paid family and medical leave credit under subsection (a). Nothing in this subsection shall be construed as subjecting an employer to any penalty, liability, or other consequence (other than ineligibility for the credit allowed by reason of subsection (a) or recapturing the benefit of such credit) for failure to comply with the requirements of this subsection.

(d) Qualifying employees For purposes of this section, the term “qualifying employee” means any employee (as defined in section 3(e) of the Fair Labor Standards Act of 1938, as amended) who— has been employed by the employer for 1 year or more (or, at the election of the employer, for not less than 6 months), and for the preceding year, had compensation, as determined on an annualized basis (pro-rata for part-time employees), not in excess of an amount equal to 60 percent of the amount applicable for such year under clause (i) of section 414(q)(1)(B), and is customarily employed for not less than 20 hours per week.

(e) Family and medical leave Except as provided in paragraph (2), for purposes of this section, the term “family and medical leave” means leave for any 1 or more of the purposes described under subparagraph (A), (B), (C), (D), or (E) of paragraph (1), or paragraph (3), of section 102(a) of the Family and Medical Leave Act of 1993, as amended, whether the leave is provided under that Act or by a policy of the employer. If an employer provides paid leave as vacation leave, personal leave, or medical or sick leave (other than leave specifically for 1 or more of the purposes referred to in paragraph (1)), that paid leave shall not be considered to be family and medical leave under paragraph (1). In this subsection, the terms “vacation leave”, “personal leave”, and “medical or sick leave” mean those 3 types of leave, within the meaning of section 102(d)(2) of that Act.

(f) Determinations made by Secretary of Treasury For purposes of this section, any determination as to whether an employer or an employee satisfies the applicable requirements for an eligible employer (as described in subsection (c)) or qualifying employee (as described in subsection (d)), respectively, shall be made by the Secretary based on such information, to be provided by the employer, as the Secretary determines to be necessary or appropriate.

(g) Wages For purposes of this section, the term “wages” has the meaning given such term by subsection (b) of section 3306 (determined without regard to any dollar limitation contained in such section). Such term shall not include any amount taken into account for purposes of determining any other credit allowed under this subpart.

(h) Election to have credit not apply A taxpayer may elect to have this section not apply for any taxable year. Rules similar to the rules of paragraphs (2) and (3) of section 51(j) shall apply for purposes of this subsection.

§ 45T Auto-enrollment option for retirement savings options provided by small employers

(a) In general For purposes of section 38, in the case of an eligible employer, the retirement auto-enrollment credit determined under this section for any taxable year is an amount equal to— $500 for any taxable year occurring during the credit period, and zero for any other taxable year.

(b) Credit period For purposes of subsection (a)— The credit period with respect to any eligible employer is the 3-taxable-year period beginning with the first taxable year for which the employer includes an eligible automatic contribution arrangement (as defined in section 414(w)(3)) in a qualified employer plan (as defined in section 4972(d)) sponsored by the employer. No taxable year with respect to an employer shall be treated as occurring within the credit period unless the arrangement described in paragraph (1) is included in the plan for such year.

(c) Eligible employer For purposes of this section, the term “eligible employer” has the meaning given such term in section 408(p)(2)(C)(i).

§ 45U Zero-emission nuclear power production credit

(a) Amount of credit For purposes of section 38, the zero-emission nuclear power production credit for any taxable year is an amount equal to the amount by which— the product of— 0.3 cents, multiplied by the kilowatt hours of electricity— produced by the taxpayer at a qualified nuclear power facility, and sold by the taxpayer to an unrelated person during the taxable year, exceeds the reduction amount for such taxable year.

(b) Definitions For purposes of this section, the term “qualified nuclear power facility” means any nuclear facility— which is owned by the taxpayer and which uses nuclear energy to produce electricity, which is not an advanced nuclear power facility as defined in subsection (d)(1) of section 45J, and which is placed in service before the date of the enactment of this section. For purposes of this section, the term “reduction amount” means, with respect to any qualified nuclear power facility for any taxable year, the amount equal to the lesser of— the amount determined under subsection (a)(1), or the amount equal to 16 percent of the excess of— subject to subparagraph (B), the gross receipts from any electricity produced by such facility (including any electricity services or products provided in conjunction with the electricity produced by such facility) and sold to an unrelated person during such taxable year, over the amount equal to the product of— 2.5 cents, multiplied by the amount determined under subsection (a)(1)(B). Subject to clause (iii), the amount determined under subparagraph (A)(ii)(I) shall include any amount received by the taxpayer during the taxable year with respect to the qualified nuclear power facility from a zero-emission credit program. For purposes of determining the amount received during such taxable year, the taxpayer shall take into account any reductions required under such program. For purposes of this subparagraph, the term “zero-emission credit program” means any payments with respect to a qualified nuclear power facility as a result of any Federal, State or local government program for, in whole or in part, the zero-emission, zero-carbon, or air quality attributes of any portion of the electricity produced by such facility. For purposes of clause (i), any amount received by the taxpayer from a zero-emission credit program shall be excluded from the amount determined under subparagraph (A)(ii)(I) if the full amount of the credit calculated pursuant to subsection (a) (determined without regard to this subparagraph) is used to reduce payments from such zero-emission credit program. For purposes of this section, the term “electricity” means the energy produced by a qualified nuclear power facility from the conversion of nuclear fuel into electric power.

(c) Other rules The 0.3 cent amount in subsection (a)(1)(A) and the 2.5 cent amount in subsection (b)(2)(A)(ii)(II)(aa) shall each be adjusted by multiplying such amount by the inflation adjustment factor (as determined under section 45(e)(2), as applied by substituting “calendar year 2023” for “calendar year 1992” in subparagraph (B) thereof) for the calendar year in which the sale occurs. If the 0.3 cent amount as increased under this paragraph is not a multiple of 0.05 cent, such amount shall be rounded to the nearest multiple of 0.05 cent. If the 2.5 cent amount as increased under this paragraph is not a multiple of 0.1 cent, such amount shall be rounded to the nearest multiple of 0.1 cent. Rules similar to the rules of paragraphs (1), (3), (4), (5), and (13) of section 45(e) shall apply for purposes of this section. No credit shall be determined under subsection (a) for any taxable year beginning after the date of enactment of this paragraph if the taxpayer is a specified foreign entity (as defined in section 7701(a)(51)(B)). No credit shall be determined under subsection (a) for any taxable year beginning after the date which is 2 years after the date of enactment of this paragraph if the taxpayer is a foreign-influenced entity (as defined in section 7701(a)(51)(D), without regard to clause (i)(II) thereof).

(d) Wage requirements In the case of any qualified nuclear power facility which satisfies the requirements of paragraph (2)(A), the amount of the credit determined under subsection (a) shall be equal to such amount (as determined without regard to this sentence) multiplied by 5. The requirements described in this subparagraph with respect to any qualified nuclear power facility are that the taxpayer shall ensure that any laborers and mechanics employed by the taxpayer or any contractor or subcontractor in the alteration or repair of such facility shall be paid wages at rates not less than the prevailing rates for alteration or repair of a similar character in the locality in which such facility is located as most recently determined by the Secretary of Labor, in accordance with subchapter IV of chapter 31 of title 40, United States Code. Rules similar to the rules of section 45(b)(7)(B) shall apply. The Secretary shall issue such regulations or other guidance as the Secretary determines necessary to carry out the purposes of this subsection, including regulations or other guidance which provides for requirements for recordkeeping or information reporting for purposes of administering the requirements of this subsection.

(e) Termination This section shall not apply to taxable years beginning after December 31, 2032 .

§ 45V Credit for production of clean hydrogen

(a) Amount of credit For purposes of section 38, the clean hydrogen production credit for any taxable year is an amount equal to the product of— the kilograms of qualified clean hydrogen produced by the taxpayer during such taxable year at a qualified clean hydrogen production facility during the 10-year period beginning on the date such facility was originally placed in service, multiplied by the applicable amount (as determined under subsection (b)) with respect to such hydrogen.

(b) Applicable amount For purposes of subsection (a)(2), the applicable amount shall be an amount equal to the applicable percentage of 0.60 amount in paragraph (1) shall be adjusted by multiplying such amount by the inflation adjustment factor (as determined under section 45(e)(2), determined by substituting “2022” for “1992” in subparagraph (B) thereof) for the calendar year in which the qualified clean hydrogen is produced. If any amount as increased under the preceding sentence is not a multiple of 0.1 cent, such amount shall be rounded to the nearest multiple of 0.1 cent.

(c) Definitions For purposes of this section— Subject to subparagraph (B), the term “lifecycle greenhouse gas emissions” has the same meaning given such term under subparagraph (H) of section 211( o )(1) of the Clean Air Act ( 42 U.S.C. 7545 ( o )(1)), as in effect on the date of enactment of this section. The term “lifecycle greenhouse gas emissions” shall only include emissions through the point of production (well-to-gate), as determined under the most recent Greenhouse gases, Regulated Emissions, and Energy use in Transportation model (commonly referred to as the “GREET model”) developed by Argonne National Laboratory, or a successor model (as determined by the Secretary). The term “qualified clean hydrogen” means hydrogen which is produced through a process that results in a lifecycle greenhouse gas emissions rate of not greater than 4 kilograms of CO2e per kilogram of hydrogen. Such term shall not include any hydrogen unless— such hydrogen is produced— in the United States (as defined in section 638(1)) or a possession of the United States (as defined in section 638(2)), in the ordinary course of a trade or business of the taxpayer, and for sale or use, and the production and sale or use of such hydrogen is verified by an unrelated party. In the case of any hydrogen for which a lifecycle greenhouse gas emissions rate has not been determined for purposes of this section, a taxpayer producing such hydrogen may file a petition with the Secretary for determination of the lifecycle greenhouse gas emissions rate with respect to such hydrogen. The term “qualified clean hydrogen production facility” means a facility— owned by the taxpayer, which produces qualified clean hydrogen, and the construction of which begins before January 1, 2028 .

(d) Special rules Rules similar to the rules section 45(e)(3) shall apply for purposes of this section. No credit shall be allowed under this section with respect to any qualified clean hydrogen produced at a facility which includes carbon capture equipment for which a credit is allowed to any taxpayer under section 45Q for the taxable year or any prior taxable year. Rules similar to the rule under section 45(b)(3) shall apply for purposes of this section. For purposes of subsection (a)(1), in the case of any facility which— was originally placed in service before January 1, 2023 , and, prior to the modification described in subparagraph (B), did not produce qualified clean hydrogen, and after the date such facility was originally placed in service— is modified to produce qualified clean hydrogen, and amounts paid or incurred with respect to such modification are properly chargeable to capital account of the taxpayer, such facility shall be deemed to have been originally placed in service as of the date that the property required to complete the modification described in subparagraph (B) is placed in service.

(e) Increased credit amount for qualified clean hydrogen production facilities In the case of any qualified clean hydrogen production facility which satisfies the requirements of paragraph (2), the amount of the credit determined under subsection (a) with respect to qualified clean hydrogen described in subsection (b)(2) shall be equal to such amount (determined without regard to this sentence) multiplied by 5. A facility meets the requirements of this paragraph if it is one of the following: A facility— the construction of which begins prior to the date that is 60 days after the Secretary publishes guidance with respect to the requirements of paragraphs (3)(A) and (4), and which meets the requirements of paragraph (3)(A) with respect to alteration or repair of such facility which occurs after such date. A facility which satisfies the requirements of paragraphs (3)(A) and (4). The requirements described in this subparagraph with respect to any qualified clean hydrogen production facility are that the taxpayer shall ensure that any laborers and mechanics employed by the taxpayer or any contractor or subcontractor in— the construction of such facility, and with respect to any taxable year, for any portion of such taxable year which is within the period described in subsection (a)(2), the alteration or repair of such facility, shall be paid wages at rates not less than the prevailing rates for construction, alteration, or repair of a similar character in the locality in which such facility is located as most recently determined by the Secretary of Labor, in accordance with subchapter IV of chapter 31 of title 40, United States Code. For purposes of determining an increased credit amount under paragraph (1) for a taxable year, the requirement under clause (ii) of this subparagraph is applied to such taxable year in which the alteration or repair of qualified facility occurs. Rules similar to the rules of section 45(b)(7)(B) shall apply. Rules similar to the rules of section 45(b)(8) shall apply. The Secretary shall issue such regulations or other guidance as the Secretary determines necessary to carry out the purposes of this subsection, including regulations or other guidance which provides for requirements for recordkeeping or information reporting for purposes of administering the requirements of this subsection.

(f) Regulations Not later than 1 year after the date of enactment of this section, the Secretary shall issue regulations or other guidance to carry out the purposes of this section, including regulations or other guidance for determining lifecycle greenhouse gas emissions.

§ 45W Credit for qualified commercial clean vehicles

(a) In general For purposes of section 38, the qualified commercial clean vehicle credit for any taxable year is an amount equal to the sum of the credit amounts determined under subsection (b) with respect to each qualified commercial clean vehicle placed in service by the taxpayer during the taxable year.

(b) Per vehicle amount Subject to paragraph (4), the amount determined under this subsection with respect to any qualified commercial clean vehicle shall be equal to the lesser of— 15 percent of the basis of such vehicle (30 percent in the case of a vehicle not powered by a gasoline or diesel internal combustion engine), or the incremental cost of such vehicle. For purposes of paragraph (1)(B), the incremental cost of any qualified commercial clean vehicle is an amount equal to the excess of the purchase price for such vehicle over such price of a comparable vehicle. For purposes of this subsection, the term “comparable vehicle” means, with respect to any qualified commercial clean vehicle, any vehicle which is powered solely by a gasoline or diesel internal combustion engine and which is comparable in size and use to such vehicle. The amount determined under this subsection with respect to any qualified commercial clean vehicle shall not exceed— in the case of a vehicle which has a gross vehicle weight rating of less than 14,000 pounds, $7, 500, an d in t h ec a seo f a v e hi c l e n o t d escr ib e d in s u b p a r a g r a p h (A),$ 40,000.

(c) Qualified commercial clean vehicle For purposes of this section, the term “qualified commercial clean vehicle” means any vehicle which— meets the requirements of section 30D(d)(1)(C) and is acquired for use or lease by the taxpayer and not for resale, either— meets the requirements of subparagraph (D) of section 30D(d)(1) and is manufactured primarily for use on public streets, roads, and highways (not including a vehicle operated exclusively on a rail or rails), or is mobile machinery, as defined in section 4053(8) (including vehicles that are not designed to perform a function of transporting a load over the public highways), either— is propelled to a significant extent by an electric motor which draws electricity from a battery which has a capacity of not less than 15 kilowatt hours (or, in the case of a vehicle which has a gross vehicle weight rating of less than 14,000 pounds, 7 kilowatt hours) and is capable of being recharged from an external source of electricity, or is a motor vehicle which satisfies the requirements under subparagraphs (A) and (B) of section 30B(b)(3), and is of a character subject to the allowance for depreciation.

(d) Special rules Rules similar to the rules under subsection (f) of section 30D (without regard to paragraph (10) or (11) thereof) shall apply for purposes of this section. Subsection (c)(4) shall not apply to any vehicle which is not subject to a lease and which is placed in service by a tax-exempt entity described in clause (i), (ii), or (iv) of section 168(h)(2)(A). No credit shall be allowed under this section with respect to any vehicle for which a credit was allowed under section 30D.

(e) VIN number requirement No credit shall be determined under subsection (a) with respect to any vehicle unless the taxpayer includes the vehicle identification number of such vehicle on the return of tax for the taxable year.

(f) Regulations and guidance The Secretary shall issue such regulations or other guidance as the Secretary determines necessary to carry out the purposes of this section, including regulations or other guidance relating to determination of the incremental cost of any qualified commercial clean vehicle.

(g) Termination No credit shall be determined under this section with respect to any vehicle acquired after September 30, 2025 .

§ 45X Advanced manufacturing production credit

(a) In general For purposes of section 38, the advanced manufacturing production credit for any taxable year is an amount equal to the sum of the credit amounts determined under subsection (b) with respect to each eligible component which is— produced by the taxpayer, and during the taxable year, sold by such taxpayer to an unrelated person. Any eligible component produced and sold by the taxpayer shall be taken into account only if the production and sale described in paragraph (1) is in a trade or business of the taxpayer. For purposes of this subsection, a taxpayer shall be treated as selling components to an unrelated person if such component is sold to such person by a person related to the taxpayer. At the election of the taxpayer (in such form and manner as the Secretary may prescribe), a sale of components by such taxpayer to a related person shall be deemed to have been made to an unrelated person. As a condition of, and prior to, any election described in clause (i), the Secretary may require such information or registration as the Secretary deems necessary for purposes of preventing duplication, fraud, or any improper or excessive amount determined under paragraph (1).

(b) Credit amount Subject to paragraph (3), the amount determined under this subsection with respect to any eligible component, including any eligible component it incorporates, shall be equal to— in the case of a thin film photovoltaic cell or a crystalline photovoltaic cell, an amount equal to the product of— 4 cents, multiplied by the capacity of such cell (expressed on a per direct current watt basis), in the case of a photovoltaic wafer, $12 p ers q u a re m e t er, in t h ec a seo f so l a r g r a d e p o l ys i l i co n,$ 3 per kilogram, in the case of a polymeric backsheet, 40 cents per square meter, in the case of a solar module, an amount equal to the product of— 7 cents, multiplied by the capacity of such module (expressed on a per direct current watt basis), in the case of a wind energy component— if such component is a related offshore wind vessel, an amount equal to 10 percent of the sales price of such vessel, and if such component is not described in clause (i), an amount equal to the product of— the applicable amount with respect to such component (as determined under paragraph (2)(A)), multiplied by the total rated capacity (expressed on a per watt basis) of the completed wind turbine for which such component is designed, in the case of a torque tube, 87 cents per kilogram, in the case of a structural fastener, $2.28 p er ki l o g r am, in t h ec a seo f anin v er t er, anam o u n t e q u a lt o t h e p ro d u c t o f — t h e a ppl i c ab l e am o u n tw i t h res p ec tt os u c hin v er t er (a s d e t er min e d u n d er p a r a g r a p h (2) (B)), m u lt i pl i e d b y t h ec a p a c i t yo f s u c hin v er t er (e x p resse d o na p er a lt er na t in g c u rre n tw a tt ba s i s), in t h ec a seo f e l ec t ro d e a c t i v e ma t er ia l s, anam o u n t e q u a lt o 10 p erce n t o f t h ecos t s in c u rre d b y t h e t a x p a yer w i t h res p ec tt o p ro d u c t i o n o f s u c hma t er ia l s, in t h ec a seo f aba tt eryce ll, anam o u n t e q u a lt o t h e p ro d u c t o f —$ 35, multiplied by subject to paragraph (4), the capacity of such battery cell (expressed on a kilowatt-hour basis), in the case of a battery module, an amount equal to the product of— $10 (or, in t h ec a seo f aba tt ery m o d u l e w hi c h d oes n o t u se ba tt eryce ll s,$ 45), multiplied by subject to paragraph (4), the capacity of such battery module (expressed on a kilowatt-hour basis), and in the case of any applicable critical mineral, an amount equal to 10 percent (2.5 percent in the case of metallurgical coal) of the costs incurred by the taxpayer with respect to production of such mineral. For purposes of paragraph (1)(F)(ii), the applicable amount with respect to any wind energy component shall be— in the case of a blade, 2 cents, in the case of a nacelle, 5 cents, in the case of a tower, 3 cents, and in the case of an offshore wind foundation— which uses a fixed platform, 2 cents, or which uses a floating platform, 4 cents. For purposes of paragraph (1)(I), the applicable amount with respect to any inverter shall be— in the case of a central inverter, 0.25 cents, in the case of a utility inverter, 1.5 cents, in the case of a commercial inverter, 2 cents, in the case of a residential inverter, 6.5 cents, and in the case of a microinverter or a distributed wind inverter, 11 cents. Subject to subparagraphs (C) and (D), in the case of any eligible component sold after December 31, 2029 , the amount determined under this subsection with respect to such component shall be equal to the product of— the amount determined under paragraph (1) with respect to such component, as determined without regard to this paragraph, multiplied by the phase out percentage under subparagraph (B). The phase out percentage under this subparagraph is equal to— in the case of an eligible component sold during calendar year 2030, 75 percent, in the case of an eligible component sold during calendar year 2031, 50 percent, in the case of an eligible component sold during calendar year 2032, 25 percent, in the case of an eligible component sold after December 31, 2032 , 0 percent. In the case of any applicable critical mineral (other than metallurgical coal) produced after December 31, 2030 , the amount determined under this subsection with respect to such mineral shall be equal to the product of— the amount determined under paragraph (1) with respect to such mineral, as determined without regard to this subparagraph, multiplied by the phase out percentage under clause (ii). The phase out percentage under this clause is equal to— in the case of any applicable critical mineral produced during calendar year 2031, 75 percent, in the case of any applicable critical mineral produced during calendar year 2032, 50 percent, in the case of any applicable critical mineral produced during calendar year 2033, 25 percent, and in the case of any applicable critical mineral produced after December 31, 2033 , 0 percent. This section shall not apply to any wind energy component produced and sold after December 31, 2027 . This section shall not apply to any metallurgical coal produced after December 31, 2029 . For purposes of subparagraph (K)(ii) or (L)(ii) of paragraph (1), the capacity determined under either subparagraph with respect to a battery cell or battery module shall not exceed a capacity-to-power ratio of 100:1. For purposes of this paragraph, the term “capacity-to-power ratio” means, with respect to a battery cell or battery module, the ratio of the capacity of such cell or module to the maximum discharge amount of such cell or module.

(c) Definitions For purposes of this section— The term “eligible component” means— any solar energy component, any wind energy component, any inverter described in subparagraphs (B) through (G) of paragraph (2), any qualifying battery component, and any applicable critical mineral. The term “eligible component” shall not include any property which is produced at a facility if the basis of any property which is part of such facility is taken into account for purposes of the credit allowed under section 48C after the date of the enactment of this section. In the case of taxable years beginning after the date of enactment of this subparagraph, the term “eligible component” shall not include any property which includes any material assistance from a prohibited foreign entity (as defined in section 7701(a)(52), as applied by substituting “used in a product sold before January 1, 2027 ” for “used in a product sold before January 1, 2030 ” in subparagraph (D)(iv)(II)(bb) thereof). The term “inverter” means an end product which is suitable to convert direct current electricity from 1 or more solar modules or certified distributed wind energy systems into alternating current electricity. The term “central inverter” means an inverter which is suitable for large utility-scale systems and has a capacity which is greater than 1,000 kilowatts (expressed on a per alternating current watt basis). The term “commercial inverter” means an inverter which— is suitable for commercial or utility-scale applications, has a rated output of 208, 480, 600, or 800 volt three-phase power, and has a capacity which is not less than 20 kilowatts and not greater than 125 kilowatts (expressed on a per alternating current watt basis). The term “distributed wind inverter” means an inverter which— is used in a residential or non-residential system which utilizes 1 or more certified distributed wind energy systems, and has a rated output of not greater than 150 kilowatts. The term “certified distributed wind energy system” means a wind energy system which is certified by an accredited certification agency to meet Standard 9.1-2009 of the American Wind Energy Association (including any subsequent revisions to or modifications of such Standard which have been approved by the American National Standards Institute). The term “microinverter” means an inverter which— is suitable to connect with one solar module, has a rated output of— 120 or 240 volt single-phase power, or 208 or 480 volt three-phase power, and has a capacity which is not greater than 650 watts (expressed on a per alternating current watt basis). The term “residential inverter” means an inverter which— is suitable for a residence, has a rated output of 120 or 240 volt single-phase power, and has a capacity which is not greater than 20 kilowatts (expressed on a per alternating current watt basis). The term “utility inverter” means an inverter which— is suitable for commercial or utility-scale systems, has a rated output of not less than 600 volt three-phase power, and has a capacity which is greater than 125 kilowatts and not greater than 1000 kilowatts (expressed on a per alternating current watt basis) 1 The term “solar energy component” means any of the following: Solar modules. Photovoltaic cells. Photovoltaic wafers. Solar grade polysilicon. Torque tubes or structural fasteners. Polymeric backsheets. The term “photovoltaic cell” means the smallest semiconductor element of a solar module which performs the immediate conversion of light into electricity. The term “photovoltaic wafer” means a thin slice, sheet, or layer of semiconductor material of at least 240 square centimeters— produced by a single manufacturer either— directly from molten or evaporated solar grade polysilicon or deposition of solar grade thin film semiconductor photon absorber layer, or through formation of an ingot from molten polysilicon and subsequent slicing, and which comprises the substrate or absorber layer of one or more photovoltaic cells. The term “polymeric backsheet” means a sheet on the back of a solar module which acts as an electric insulator and protects the inner components of such module from the surrounding environment. The term “solar grade polysilicon” means silicon which is— suitable for use in photovoltaic manufacturing, and purified to a minimum purity of 99.999999 percent silicon by mass. The term “solar module” means the connection and lamination of photovoltaic cells into an environmentally protected final assembly which is— suitable to generate electricity when exposed to sunlight, and ready for installation without an additional manufacturing process. The term “solar tracker” means a mechanical system that moves solar modules according to the position of the sun and to increase energy output. The term “torque tube” means a structural steel support element (including longitudinal purlins) which— is part of a solar tracker, is of any cross-sectional shape, may be assembled from individually manufactured segments, spans longitudinally between foundation posts, supports solar panels and is connected to a mounting attachment for solar panels (with or without separate module interface rails), and is rotated by means of a drive system. The term “structural fastener” means a component which is used— to connect the mechanical and drive system components of a solar tracker to the foundation of such solar tracker, to connect torque tubes to drive assemblies, or to connect segments of torque tubes to one another. The term “wind energy component” means any of the following: Blades. Nacelles. Towers. Offshore wind foundations. Related offshore wind vessels. The term “blade” means an airfoil-shaped blade which is responsible for converting wind energy to low-speed rotational energy. The term “offshore wind foundation” means the component (including transition piece) which secures an offshore wind tower and any above-water turbine components to the seafloor using— fixed platforms, such as offshore wind monopiles, jackets, or gravity-based foundations, or floating platforms and associated mooring systems. The term “nacelle” means the assembly of the drivetrain and other tower-top components of a wind turbine (with the exception of the blades and the hub) within their cover housing. The term “related offshore wind vessel” means any vessel which is purpose-built or retrofitted for purposes of the development, transport, installation, operation, or maintenance of offshore wind energy components. The term “tower” means a tubular or lattice structure which supports the nacelle and rotor of a wind turbine. The term “qualifying battery component” means any of the following: Electrode active materials. Battery cells. Battery modules. The term “electrode active material” means cathode materials, anode materials, anode foils, and electrochemically active materials, including solvents, additives, and electrolyte salts that contribute to the electrochemical processes necessary for energy storage. The term “battery cell” means an electrochemical cell— comprised of 1 or more positive electrodes and 1 or more negative electrodes, with an energy density of not less than 100 watt-hours per liter, and capable of storing at least 12 watt-hours of energy. The term “battery module” means a module— in the case of a module using battery cells, with 2 or more battery cells which are configured electrically, in series or parallel, to create voltage or current, as appropriate, to a specified end use, or with no battery cells, with an aggregate capacity of not less than 7 kilowatt-hours (or, in the case of a module for a hydrogen fuel cell vehicle, not less than 1 kilowatt-hour), and which is comprised of all other essential equipment needed for battery functionality, such as current collector assemblies and voltage sense harnesses, or any other essential energy collection equipment. The term “applicable critical mineral” means any of the following: Aluminum which is— converted from bauxite to a minimum purity of 99 percent alumina by mass, or purified to a minimum purity of 99.9 percent aluminum by mass. Antimony which is— converted to antimony trisulfide concentrate with a minimum purity of 90 percent antimony trisulfide by mass, or purified to a minimum purity of 99.65 percent antimony by mass. Barite which is barium sulfate purified to a minimum purity of 80 percent barite by mass. Beryllium which is— converted to copper-beryllium master alloy, or purified to a minimum purity of 99 percent beryllium by mass. Cerium which is— converted to cerium oxide which is purified to a minimum purity of 99.9 percent cerium oxide by mass, or purified to a minimum purity of 99 percent cerium by mass. Cesium which is— converted to cesium formate or cesium carbonate, or purified to a minimum purity of 99 percent cesium by mass. Chromium which is— converted to ferrochromium consisting of not less than 60 percent chromium by mass, or purified to a minimum purity of 99 percent chromium by mass. Cobalt which is— converted to cobalt sulfate, or purified to a minimum purity of 99.6 percent cobalt by mass. Dysprosium which is— converted to not less than 99 percent pure dysprosium iron alloy by mass, or purified to a minimum purity of 99 percent dysprosium by mass. Europium which is— converted to europium oxide which is purified to a minimum purity of 99.9 percent europium oxide by mass, or purified to a minimum purity of 99 percent by mass. Fluorspar which is— converted to fluorspar which is purified to a minimum purity of 97 percent calcium fluoride by mass, or purified to a minimum purity of 99 percent fluorspar by mass. Gadolinium which is— converted to gadolinium oxide which is purified to a minimum purity of 99.9 percent gadolinium oxide by mass, or purified to a minimum purity of 99 percent gadolinium by mass. Germanium which is— converted to germanium tetrachloride, or purified to a minimum purity of 99.99 percent germanium by mass. Graphite which is purified to a minimum purity of 99.9 percent graphitic carbon by mass. Indium which is— converted to— indium tin oxide, or indium oxide which is purified to a minimum purity of 99.9 percent indium oxide by mass, or purified to a minimum purity of 99 percent indium by mass. Lithium which is— converted to lithium carbonate or lithium hydroxide, or purified to a minimum purity of 99.9 percent lithium by mass. Manganese which is— converted to manganese sulphate, or purified to a minimum purity of 99.7 percent manganese by mass. Metallurgical coal which is suitable for use in the production of steel (within the meaning of the notice published by the Department of Energy entitled “Critical Material List; Addition of Metallurgical Coal Used for Steelmaking” (90 Fed. Reg. 22711 ( May 29, 2025 ))), regardless of whether such production occurs inside or outside of the United States. Neodymium which is— converted to neodymium-praseodymium oxide which is purified to a minimum purity of 99 percent neodymium-praseodymium oxide by mass, converted to neodymium oxide which is purified to a minimum purity of 99.5 percent neodymium oxide by mass 2 purified to a minimum purity of 99.9 percent neodymium by mass. Nickel which is— converted to nickel sulphate, or purified to a minimum purity of 99 percent nickel by mass. Niobium which is— converted to ferronibium, or purified to a minimum purity of 99 percent niobium by mass. Tellurium which is— converted to cadmium telluride, or purified to a minimum purity of 99 percent tellurium by mass. Tin which is purified to low alpha emitting tin which— has a purity of greater than 99.99 percent by mass, and possesses an alpha emission rate of not greater than 0.01 counts per hour per centimeter square. Tungsten which is converted to ammonium paratungstate or ferrotungsten. Vanadium which is converted to ferrovanadium or vanadium pentoxide. Yttrium which is— converted to yttrium oxide which is purified to a minimum purity of 99.999 percent yttrium oxide by mass, or purified to a minimum purity of 99.9 percent yttrium by mass. Any of the following minerals, provided that such mineral is purified to a minimum purity of 99 percent by mass: Arsenic. Bismuth. Erbium. Gallium. Hafnium. Holmium. Iridium. Lanthanum. Lutetium. Magnesium. Palladium. Platinum. Praseodymium. Rhodium. Rubidium. Ruthenium. Samarium. Scandium. Tantalum. Terbium. Thulium. Titanium. Ytterbium. Zinc. Zirconium.

(d) Special rules In this section— Persons shall be treated as related to each other if such persons would be treated as a single employer under the regulations prescribed under section 52(b). Sales shall be taken into account under this section only with respect to eligible components the production of which is within— the United States (within the meaning of section 638(1)), or a possession of the United States (within the meaning of section 638(2)). Under regulations prescribed by the Secretary, rules similar to the rules of subsection (d) of section 52 shall apply. For purposes of this section, a person shall be treated as having sold an eligible component to an unrelated person if such component is integrated, incorporated, or assembled into another eligible component which is sold to an unrelated person. No credit shall be determined under subsection (a) for any taxable year if the taxpayer is— a specified foreign entity (as defined in section 7701(a)(51)(B)), or a foreign-influenced entity (as defined in section 7701(a)(51)(D), without regard to clause (i)(II) thereof). In the case of a taxpayer for which section 7701(a)(51)(D)(i)(II) is determined to apply for any taxable year, no credit shall be determined under subsection (a) for such taxable year if such determination relates to an eligible component described in subsection (c)(1).

§ 45Y Clean electricity production credit

(a) Amount of credit For purposes of section 38, the clean electricity production credit for any taxable year is an amount equal to the product of— the kilowatt hours of electricity— produced by the taxpayer at a qualified facility, and sold by the taxpayer to an unrelated person during the taxable year, or in the case of a qualified facility which is equipped with a metering device which is owned and operated by an unrelated person, sold, consumed, or stored by the taxpayer during the taxable year, multiplied by the applicable amount with respect to such qualified facility. Subject to subsection (g)(7), in the case of any qualified facility which is not described in clause (i) or (ii) of subparagraph (B) and does not satisfy the requirements described in clause (iii) of such subparagraph, the applicable amount shall be 0.3 cents. Subject to subsection (g)(7), in the case of any qualified facility— with a maximum net output of less than 1 megawatt (as measured in alternating current), the construction of which begins prior to the date that is 60 days after the Secretary publishes guidance with respect to the requirements of paragraphs (9) and (10) of subsection (g), or which— satisfies the requirements under paragraph (9) of subsection (g), and with respect to the construction of such facility, satisfies the requirements under paragraph (10) of subsection (g), the applicable amount shall be 1.5 cents.

(b) Qualified facility Subject to subparagraphs (B), (C), and (D), the term “qualified facility” means a facility owned by the taxpayer— which is used for the generation of electricity, which is placed in service after December 31, 2024 , and for which the greenhouse gas emissions rate (as determined under paragraph (2)) is not greater than zero. For purposes of this section, a facility shall only be treated as a qualified facility during the 10-year period beginning on the date the facility was originally placed in service. The term “qualified facility” shall include either of the following in connection with a facility described in subparagraph (A) (without regard to clause (ii) of such subparagraph) which was placed in service before January 1, 2025 , but only to the extent of the increased amount of electricity produced at the facility by reason of the following: A new unit which is placed in service after December 31, 2024 . Any additions of capacity which are placed in service after December 31, 2024 . For purposes of subparagraph (C), additions of capacity of a facility shall be determined in any reasonable manner, including based on— determinations by, or reports to, the Federal Energy Regulatory Commission (including interconnection agreements), the Nuclear Regulatory Commission, or any similar entity, reflecting additions of capacity, determinations or reports reflecting additions of capacity made by an independent professional engineer, reports to, or issued by, regional transmission organizations or independent system operators reflecting additions of capacity, or any other method or manner provided by the Secretary. The term “qualified facility” shall not include any facility for which a credit determined under section 45, 45J, 45Q, 45U, 48, 48A, or 48E is allowed under section 38 for the taxable year or any prior taxable year. The term “qualified facility” shall not include any facility for which construction begins after December 31, 2025 , if the construction of such facility includes any material assistance from a prohibited foreign entity (as defined in section 7701(a)(52)). For purposes of this section, the term “greenhouse gas emissions rate” means the amount of greenhouse gases emitted into the atmosphere by a facility in the production of electricity, expressed as grams of CO 2 e per KWh. In the case of a facility which produces electricity through combustion or gasification, the greenhouse gas emissions rate for such facility shall be equal to the net rate of greenhouse gases emitted into the atmosphere by such facility (taking into account lifecycle greenhouse gas emissions, as described in section 211( o )(1)(H) of the Clean Air Act ( 42 U.S.C. 7545 ( o )(1)(H))) in the production of electricity, expressed as grams of CO 2 e per KWh. The Secretary shall annually publish a table that sets forth the greenhouse gas emissions rates for types or categories of facilities, which a taxpayer shall use for purposes of this section. In the case of any facility for which an emissions rate has not been established by the Secretary, a taxpayer which owns such facility may file a petition with the Secretary for determination of the emissions rate with respect to such facility. For purposes of clause (i), in determining greenhouse gas emissions rates for types or categories of facilities for the purpose of determining whether a facility satisfies the requirements under paragraph (1), the Secretary shall consider studies published on or before the date of enactment of this clause which demonstrate a net lifecycle greenhouse gas emissions rate which is not greater than zero using widely accepted lifecycle assessment concepts, such as concepts described in standards developed by the International Organization for Standardization. For purposes of this subsection, the amount of greenhouse gases emitted into the atmosphere by a facility in the production of electricity shall not include any qualified carbon dioxide that is captured by the taxpayer and— pursuant to any regulations established under paragraph (2) of section 45Q(f), disposed of by the taxpayer in secure geological storage, or utilized by the taxpayer in a manner described in paragraph (5) of such section.

(c) Inflation adjustment In the case of a calendar year beginning after 2024, the 0.3 cent amount in paragraph (2)(A) of subsection (a) and the 1.5 cent amount in paragraph (2)(B) of such subsection shall each be adjusted by multiplying such amount by the inflation adjustment factor for the calendar year in which the sale, consumption, or storage of the electricity occurs. If the 0.3 cent amount as increased under this paragraph is not a multiple of 0.05 cent, such amount shall be rounded to the nearest multiple of 0.05 cent. If the 1.5 cent amount as increased under this paragraph is not a multiple of 0.1 cent, such amount shall be rounded to the nearest multiple of 0.1 cent. The Secretary shall, not later than April 1 of each calendar year, determine and publish in the Federal Register the inflation adjustment factor for such calendar year in accordance with this subsection. The term “inflation adjustment factor” means, with respect to a calendar year, a fraction the numerator of which is the GDP implicit price deflator for the preceding calendar year and the denominator of which is the GDP implicit price deflator for the calendar year 1992. The term “GDP implicit price deflator” means the most recent revision of the implicit price deflator for the gross domestic product as computed and published by the Department of Commerce before March 15 of the calendar year.

(d) Credit phase-out Subject to paragraph (4), the amount of the clean electricity production credit under subsection (a) for any qualified facility the construction of which begins during a calendar year described in paragraph (2) shall be equal to the product of— the amount of the credit determined under subsection (a) without regard to this subsection, multiplied by the phase-out percentage under paragraph (2). The phase-out percentage under this paragraph is equal to— for a facility the construction of which begins during the first calendar year following the applicable year, 100 percent, for a facility the construction of which begins during the second calendar year following the applicable year, 75 percent, for a facility the construction of which begins during the third calendar year following the applicable year, 50 percent, and for a facility the construction of which begins during any calendar year subsequent to the calendar year described in subparagraph (C), 0 percent. For purposes of this subsection, the term “applicable year” means calendar year 2032. This section shall not apply with respect to any applicable facility placed in service after December 31, 2027 . For purposes of this paragraph, the term “applicable facility” means a qualified facility which— uses wind to produce electricity (within the meaning of such term as used in section 45(d)(1), as determined without regard to any requirement under such section with respect to the date on which construction of property begins), or uses solar energy to produce electricity (within the meaning of such term as used in section 45(d)(4), as determined without regard to any requirement under such section with respect to the date on which construction of property begins).

(e) Definitions For purposes of this section: The term “CO 2 e per KWh” means, with respect to any greenhouse gas, the equivalent carbon dioxide (as determined based on global warming potential) per kilowatt hour of electricity produced. The term “greenhouse gas” has the same meaning given such term under section 211( o )(1)(G) of the Clean Air Act ( 42 U.S.C. 7545 ( o )(1)(G)), as in effect on the date of the enactment of this section. The term “qualified carbon dioxide” means carbon dioxide captured from an industrial source which— would otherwise be released into the atmosphere as industrial emission of greenhouse gas, is measured at the source of capture and verified at the point of disposal or utilization, and is captured and disposed or utilized within the United States (within the meaning of section 638(1)) or a possession of the United States (within the meaning of section 638(2)).

(f) Guidance Not later than January 1, 2025 , the Secretary shall issue guidance regarding implementation of this section, including calculation of greenhouse gas emission rates for qualified facilities and determination of clean electricity production credits under this section.

(g) Special rules Consumption, sales, or storage shall be taken into account under this section only with respect to electricity the production of which is within— the United States (within the meaning of section 638(1)), or a possession of the United States (within the meaning of section 638(2)). For purposes of subsection (a)— the kilowatt hours of electricity produced by a taxpayer at a qualified facility shall include any production in the form of useful thermal energy by any combined heat and power system property within such facility, and the amount of greenhouse gases emitted into the atmosphere by such facility in the production of such useful thermal energy shall be included for purposes of determining the greenhouse gas emissions rate for such facility. For purposes of this paragraph, the term “combined heat and power system property” has the same meaning given such term by section 48(c)(3) (without regard to subparagraphs (A)(iv), (B), and (D) thereof). For purposes of subparagraph (A)(i), the amount of kilowatt hours of electricity produced in the form of useful thermal energy shall be equal to the quotient of— the total useful thermal energy produced by the combined heat and power system property within the qualified facility, divided by the heat rate for such facility. For purposes of this subparagraph, the term “heat rate” means the amount of energy used by the qualified facility to generate 1 kilowatt hour of electricity, expressed as British thermal units per net kilowatt hour generated. In the case of a qualified facility in which more than 1 person has an ownership interest, except to the extent provided in regulations prescribed by the Secretary, production from the facility shall be allocated among such persons in proportion to their respective ownership interests in the gross sales from such facility. Persons shall be treated as related to each other if such persons would be treated as a single employer under the regulations prescribed under section 52(b). In the case of a corporation which is a member of an affiliated group of corporations filing a consolidated return, such corporation shall be treated as selling electricity to an unrelated person if such electricity is sold to such a person by another member of such group. Under regulations prescribed by the Secretary, rules similar to the rules of subsection (d) of section 52 shall apply. In the case of an eligible cooperative organization, any portion of the credit determined under subsection (a) for the taxable year may, at the election of the organization, be apportioned among patrons of the organization on the basis of the amount of business done by the patrons during the taxable year. An election under clause (i) for any taxable year shall be made on a timely filed return for such year. Such election, once made, shall be irrevocable for such taxable year. Such election shall not take effect unless the organization designates the apportionment as such in a written notice mailed to its patrons during the payment period described in section 1382(d). The amount of the credit apportioned to any patrons under subparagraph (A)— shall not be included in the amount determined under subsection (a) with respect to the organization for the taxable year, and shall be included in the amount determined under subsection (a) for the first taxable year of each patron ending on or after the last day of the payment period (as defined in section 1382(d)) for the taxable year of the organization or, if earlier, for the taxable year of each patron ending on or after the date on which the patron receives notice from the cooperative of the apportionment. If the amount of the credit of a cooperative organization determined under subsection (a) for a taxable year is less than the amount of such credit shown on the return of the cooperative organization for such year, an amount equal to the excess of— such reduction, over the amount not apportioned to such patrons under subparagraph (A) for the taxable year, shall be treated as an increase in tax imposed by this chapter on the organization. Such increase shall not be treated as tax imposed by this chapter for purposes of determining the amount of any credit under this chapter. For purposes of this section, the term “eligible cooperative” means a cooperative organization described in section 1381(a) which is owned more than 50 percent by agricultural producers or by entities owned by agricultural producers. For this purpose an entity owned by an agricultural producer is one that is more than 50 percent owned by agricultural producers. In the case of any qualified facility which is located in an energy community (as defined in section 45(b)(11)(B)), for purposes of determining the amount of the credit under subsection (a) with respect to any electricity produced by the taxpayer at such facility during the taxable year, the applicable amount under paragraph (2) of such subsection shall be increased by an amount equal to 10 percent of the amount otherwise in effect under such paragraph. Rules similar to the rules of section 45(b)(3) shall apply. Rules similar to the rules of section 45(b)(7) shall apply. Rules similar to the rules of section 45(b)(8) shall apply. In the case of any qualified facility which satisfies the requirement under subparagraph (B)(i), the amount of the credit determined under subsection (a) shall be increased by an amount equal to 10 percent of the amount so determined (as determined without application of paragraph (7)). The requirement described in this subclause is satisfied with respect to any qualified facility if the taxpayer certifies to the Secretary (at such time, and in such form and manner, as the Secretary may prescribe) that any steel, iron, or manufactured product which is a component of such facility (upon completion of construction) was produced in the United States (as determined under section 661 of title 49 , Code of Federal Regulations). In the case of steel or iron, clause (i) shall be applied in a manner consistent with section 661.5 of title 49, Code of Federal Regulations. For purposes of clause (i), the manufactured products which are components of a qualified facility upon completion of construction shall be deemed to have been produced in the United States if not less than the adjusted percentage (as determined under subparagraph (C)) of the total costs of all such manufactured products of such facility are attributable to manufactured products (including components) which are mined, produced, or manufactured in the United States. Subject to subclause (ii), for purposes of subparagraph (B)(iii), the adjusted percentage shall be— in the case of a facility the construction of which begins before January 1, 2025 , 40 percent, in the case of a facility the construction of which begins after December 31, 2024 , and before January 1, 2026 , 45 percent, in the case of a facility the construction of which begins after December 31, 2025 , and before January 1, 2027 , 50 percent, and in the case of a facility the construction of which begins after December 31, 2026 , 55 percent. For purposes of subparagraph (B)(iii), in the case of a qualified facility which is an offshore wind facility, the adjusted percentage shall be— in the case of a facility the construction of which begins before January 1, 2025 , 20 percent, in the case of a facility the construction of which begins after December 31, 2024 , and before January 1, 2026 , 27.5 percent, in the case of a facility the construction of which begins after December 31, 2025 , and before January 1, 2027 , 35 percent, in the case of a facility the construction of which begins after December 31, 2026 , and before January 1, 2028 , 45 percent, and in the case of a facility the construction of which begins after December 31, 2027 , 55 percent. In the case of a taxpayer making an election under section 6417 with respect to a credit under this section, the amount of such credit shall be replaced with— the value of such credit (determined without regard to this paragraph), multiplied by the applicable percentage. In the case of any qualified facility— which satisfies the requirements under paragraph (11)(B), or with a maximum net output of less than 1 megawatt (as measured in alternating current), the applicable percentage shall be 100 percent. Subject to subparagraph (D), in the case of any qualified facility which is not described in subparagraph (B), the applicable percentage shall be— if construction of such facility began before January 1, 2024 , 100 percent, if construction of such facility began in calendar year 2024, 90 percent, if construction of such facility began in calendar year 2025, 85 percent, and if construction of such facility began after December 31, 2025 , 0 percent. For purposes of this paragraph, the Secretary shall provide exceptions to the requirements under this paragraph if— the inclusion of steel, iron, or manufactured products which are produced in the United States increases the overall costs of construction of qualified facilities by more than 25 percent, or relevant steel, iron, or manufactured products are not produced in the United States in sufficient and reasonably available quantities or of a satisfactory quality. In any case in which the Secretary provides an exception pursuant to clause (i), the applicable percentage shall be 100 percent. No credit shall be determined under subsection (a) for any taxable year if the taxpayer is— a specified foreign entity (as defined in section 7701(a)(51)(B)), or a foreign-influenced entity (as defined in section 7701(a)(51)(D), without regard to clause (i)(II) thereof). In the case of a taxpayer for which section 7701(a)(51)(D)(i)(II) is determined to apply for any taxable year, no credit shall be determined under subsection (a) for such taxable year if such determination relates to a qualified facility described in subsection (b)(1).

(h) Denial of credit for wind and solar leasing arrangements No credit shall be determined under this section with respect to any production of electricity during the taxable year with respect to property described in paragraph (1) or (4) of section 25D(d) (as applied by substituting “lessee” for “taxpayer”) if the taxpayer rents or leases such property to a third party during such taxable year.

§ 45Z Clean fuel production credit

(a) Amount of credit For purposes of section 38, the clean fuel production credit for any taxable year is an amount equal to the product of— the applicable amount per gallon (or gallon equivalent) with respect to any transportation fuel which is— produced by the taxpayer at a qualified facility, and sold by the taxpayer in a manner described in paragraph (4) during the taxable year, and the emissions factor for such fuel (as determined under subsection (b)). In the case of any transportation fuel produced at a qualified facility which does not satisfy the requirements described in subparagraph (B), the applicable amount shall be 20 cents. In the case of any transportation fuel produced at a qualified facility which satisfies the requirements under paragraphs (6) and (7) of subsection (f), the applicable amount shall be $1.00. For purposes of this section, the term “sustainable aviation fuel” means liquid fuel, the portion of which is not kerosene, which is sold for use in an aircraft and which— meets the requirements of— ASTM International Standard D7566, or the Fischer Tropsch provisions of ASTM International Standard D1655, Annex A1, and is not derived from palm fatty acid distillates or petroleum. For purposes of paragraph (1), the transportation fuel is sold in a manner described in this paragraph if such fuel is sold by the taxpayer to an unrelated person— for use by such person in the production of a fuel mixture, for use by such person in a trade or business, or who sells such fuel at retail to another person and places such fuel in the fuel tank of such other person. If any amount determined under paragraph (1) is not a multiple of 1 cent, such amount shall be rounded to the nearest cent.

(b) Emissions factors The emissions factor of a transportation fuel shall be an amount equal to the quotient of— an amount equal to— 50 kilograms of CO 2 e per mmBTU, minus the emissions rate for such fuel, divided by 50 kilograms of CO 2 e per mmBTU. Subject to clauses (ii), (iii), (iv), and (v), the Secretary shall annually publish a table which sets forth the emissions rate for similar types and categories of transportation fuels based on the amount of lifecycle greenhouse gas emissions (as described in section 211( o )(1)(H) of the Clean Air Act ( 42 U.S.C. 7545 ( o )(1)(H)), as in effect on the date of the enactment of this section) for such fuels, expressed as kilograms of CO 2 e per mmBTU, which a taxpayer shall use for purposes of this section. In the case of any transportation fuel which is not a sustainable aviation fuel, the lifecycle greenhouse gas emissions of such fuel shall be based on the most recent determinations under the Greenhouse gases, Regulated Emissions, and Energy use in Transportation model developed by Argonne National Laboratory, or a successor model (as determined by the Secretary). In the case of any transportation fuel which is a sustainable aviation fuel, the lifecycle greenhouse gas emissions of such fuel shall be determined in accordance with— the most recent Carbon Offsetting and Reduction Scheme for International Aviation which has been adopted by the International Civil Aviation Organization with the agreement of the United States, or any similar methodology which satisfies the criteria under section 211( o )(1)(H) of the Clean Air Act ( 42 U.S.C. 7545 ( o )(1)(H)), as in effect on the date of enactment of this section. Notwithstanding clauses (i), (ii), and (iii), the emissions rate shall be adjusted as necessary to exclude any emissions attributed to indirect land use change. Any such adjustment shall be based on regulations or methodologies determined by the Secretary. With respect to any transportation fuel which is derived from animal manure, the Secretary— shall provide a distinct emissions rate with respect to such fuel based on the specific animal manure feedstock, which may include dairy manure, swine manure, poultry manure, or any other sources as are determined appropriate by the Secretary, and notwithstanding subparagraph (E), may provide an emissions rate that is less than zero. The Secretary may round the emissions rates under subparagraph (B) to the nearest multiple of 5 kilograms of CO2e 1 per mmBTU. In the case of any transportation fuel for which an emissions rate has not been established under subparagraph (B), a taxpayer producing such fuel may file a petition with the Secretary for determination of the emissions rate with respect to such fuel. For purposes of this section, the emissions rate for a transportation fuel may not be less than zero. If any amount determined under paragraph (1)(A) is not a multiple of 0.1, such amount shall be rounded to the nearest multiple of 0.1.

(c) Inflation adjustment In the case of calendar years beginning after 2024, the 20 cent amount in subsection (a)(2)(A) and the $1.00 amount in subsection (a)(2)(B) shall each be adjusted by multiplying such amount by the inflation adjustment factor for the calendar year in which the sale of the transportation fuel occurs. If any amount as increased under the preceding sentence is not a multiple of 1 cent, such amount shall be rounded to the nearest multiple of 1 cent. For purposes of paragraph (1), the inflation adjustment factor shall be the inflation adjustment factor determined and published by the Secretary pursuant to section 45Y(c), determined by substituting “calendar year 2022” for “calendar year 1992” in paragraph (3) thereof.

(d) Definitions In this section: The term “mmBTU” means 1,000,000 British thermal units. The term “CO 2 e” means, with respect to any greenhouse gas, the equivalent carbon dioxide (as determined based on relative global warming potential). The term “greenhouse gas” has the same meaning given that term under section 211( o )(1)(G) of the Clean Air Act ( 42 U.S.C. 7545 ( o )(1)(G)), as in effect on the date of the enactment of this section. The term “qualified facility”— means a facility used for the production of transportation fuels, and does not include any facility for which one of the following credits is allowed under section 38 for the taxable year: The credit for production of clean hydrogen under section 45V. The credit determined under section 46 to the extent that such credit is attributable to the energy credit determined under section 48 with respect to any specified clean hydrogen production facility for which an election is made under subsection (a)(15) of such section. The credit for carbon oxide sequestration under section 45Q. The term “transportation fuel” means a fuel which— is suitable for use as a fuel in a highway vehicle or aircraft, has an emissions rate which is not greater than 50 kilograms of CO 2 e per mmBTU, is not derived from coprocessing an applicable material (or materials derived from an applicable material) with a feedstock which is not biomass, and is not produced from a fuel for which a credit under this section is allowable. In this paragraph— The term “applicable material” means— monoglycerides, diglycerides, and triglycerides, free fatty acids, and fatty acid esters. The term “biomass” has the same meaning given such term in section 45K(c)(3). The Secretary shall issue such regulations or other guidance as the Secretary determines necessary to carry out the purposes of subparagraph (A)(iv).

(e) Guidance Not later than January 1, 2025 , the Secretary shall issue guidance regarding implementation of this section, including calculation of emissions factors for transportation fuel, the table described in subsection (b)(1)(B)(i), and the determination of clean fuel production credits under this section.

(f) Special rules No clean fuel production credit shall be determined under subsection (a) with respect to any transportation fuel unless— the taxpayer— is registered as a producer of clean fuel under section 4101 at the time of production, and in the case of any transportation fuel which is a sustainable aviation fuel, provides— certification (in such form and manner as the Secretary shall prescribe) from an unrelated party demonstrating compliance with— any general requirements, supply chain traceability requirements, and information transmission requirements established under the Carbon Offsetting and Reduction Scheme for International Aviation described in subclause (I) of subsection (b)(1)(B)(iii), or in the case of any methodology described in subclause (II) of such subsection, requirements similar to the requirements described in subitem (AA), and such other information with respect to such fuel as the Secretary may require for purposes of carrying out this section, such fuel is produced in the United States, and such fuel is exclusively derived from a feedstock which was produced or grown in the United States, Mexico, or Canada. For purposes of this paragraph, the term “United States” includes any possession of the United States. In the case of a facility in which more than 1 person has an ownership interest, except to the extent provided in regulations prescribed by the Secretary, production from the facility shall be allocated among such persons in proportion to their respective ownership interests in the gross sales from such facility. Persons shall be treated as related to each other if such persons would be treated as a single employer under the regulations prescribed under section 52(b). In the case of a corporation which is a member of an affiliated group of corporations filing a consolidated return, such corporation shall be treated as selling fuel to an unrelated person if such fuel is sold to such a person by another member of such group. The Secretary may prescribe additional related person rules similar to the rule described in the preceding sentence for entities which are not described in such sentence, including rules for related persons with respect to which the taxpayer has reason to believe will sell fuel to an unrelated person in a manner described in subsection (a)(4). Under regulations prescribed by the Secretary, rules similar to the rules of subsection (d) of section 52 shall apply. Rules similar to the rules of section 45Y(g)(6) shall apply. Subject to subparagraph (B), rules similar to the rules of section 45(b)(7) shall apply. For purposes of subparagraph (A), in the case of any qualified facility placed in service before January 1, 2025 — clause (i) of section 45(b)(7)(A) shall not apply, and clause (ii) of such section shall be applied by substituting “with respect to any taxable year beginning after December 31, 2024 , for which the credit is allowed under this section” for “with respect to any taxable year, for any portion of such taxable year which is within the period described in subsection (a)(2)(A)(ii)”. Rules similar to the rules of section 45(b)(8) shall apply. No credit shall be determined under subsection (a) for any taxable year beginning after the date of enactment of this paragraph if the taxpayer is a specified foreign entity (as defined in section 7701(a)(51)(B)). No credit shall be determined under subsection (a) for any taxable year beginning after the date which is 2 years after the date of enactment of this paragraph if the taxpayer is a foreign-influenced entity (as defined in section 7701(a)(51)(D), without regard to clause (i)(II) thereof).

(g) Termination This section shall not apply to transportation fuel sold after December 31, 2029 .

§ 45AA Military spouse retirement plan eligibility credit for small employers

(a) In general For purposes of section 38, in the case of any eligible small employer, the military spouse retirement plan eligibility credit determined under this section for any taxable year is an amount equal to the sum of— $200 w i t h res p ec tt oe a c hmi l i t a rys p o u se w h o i s an e m pl oyeeo f s u c h e m pl oyer an d w h o p a r t i c i p a t es inan e l i g ib l e d e f in e d co n t r ib u t i o n pl an o f s u c h e m pl oyer a t an y t im e d u r in g s u c h t a x ab l eye a r, pl u sso m u c h o f t h eco n t r ib u t i o n s ma d e b ys u c h e m pl oyer (o t h er t hanan e l ec t i v e d e f err a l (a s d e f in e d in sec t i o n 402 (g) (3)) 1 t o a ll s u c h pl an s w i t h res p ec tt os u c h e m pl oyee d u r in g s u c h t a x ab l eye a r a s d o n o t e x cee d$ 300.

(b) Limitation An individual shall only be taken into account as a military spouse under subsection (a) for the taxable year which includes the date on which such individual began participating in the eligible defined contribution plan of the employer and the 2 succeeding taxable years.

(c) Eligible small employer For purposes of this section, the term “eligible small employer” means an eligible employer (as defined in section 408(p)(2)(C)(i)(I). 2

(d) Military spouse For purposes of this section— The term “military spouse” means, with respect to any employer, any individual who is married (within the meaning of section 7703 as of the first date that the employee is employed by the employer) to an individual who is a member of the uniformed services (as defined section 101(a)(5) of title 10 , United States Code) serving on active duty. For purposes of this section, an employer may rely on an employee’s certification that such employee’s spouse is a member of the uniformed services if such certification provides the name, rank, and service branch of such spouse. With respect to any employer, the term “military spouse” shall not include any individual if such individual is a highly compensated employee of such employer (within the meaning of section 414(q)).

(e) Eligible defined contribution plan For purposes of this section, the term “eligible defined contribution plan” means, with respect to any eligible small employer, any defined contribution plan (as defined in section 414(i)) of such employer if, under the terms of such plan— military spouses employed by such employer are eligible to participate in such plan not later than the date which is 2 months after the date on which such individual begins employment with such employer, and military spouses who are eligible to participate in such plan— are immediately eligible to receive an amount of employer contributions under such plan which is not less the amount of such contributions that a similarly situated participant who is not a military spouse would be eligible to receive under such plan after 2 years of service, and immediately have a nonforfeitable right to the employee’s accrued benefit derived from employer contributions under such plan.

(f) Aggregation rule All persons treated as a single employer under subsection (b), (c), (m), or ( o ) of section 414 shall be treated as one employer for purposes of this section.

§ 46 Amount of credit

For purposes of section 38, the amount of the investment credit determined under this section for any taxable year shall be the sum of— the rehabilitation credit, the energy credit, the qualifying advanced coal project credit, the qualifying gasification project credit, the qualifying advanced energy project credit, the advanced manufacturing investment credit, and the clean electricity investment credit. (Added Pub. L. 87–834, § 2(b) , Oct. 16, 1962 , 76 Stat. 963 ; amended Pub. L. 88–272, title II, § 201(d)(4) , Feb. 26, 1964 , 78 Stat. 32 ; Pub. L. 89–384, § 1(c)(1) , Apr. 8, 1966 , 80 Stat. 102 ; Pub. L. 89–389, § 2(b)(5) , Apr. 14, 1966 , 80 Stat. 114 ; Pub. L. 89–800, § 3 , Nov. 8, 1966 , 80 Stat. 1514 ; Pub. L. 90–225, § 2(a) , Dec. 27, 1967 , 81 Stat. 731 ; Pub. L. 91–172, title III, § 301(b)(4) , title IV, § 401(e)(1), title VII, § 703(b), Dec. 30, 1969 , 83 Stat. 585 , 603, 666; Pub. L. 92–178, title I , §§ 102(a)(1), (b), 105(a)–(c), 106(a)–(c), 107(a)(1), 108(a), Dec. 10, 1971 , 85 Stat. 499 , 503, 506, 507; Pub. L. 93–406, title II , §§ 2001(g)(2)(B), 2002(g)(2), 2005(c)(4), Sept. 2, 1974 , 88 Stat. 957 , 968, 991; Pub. L. 94–12, title III, § 301(a) , (b)(1)–(3), 302(a), (b)(1), Mar. 29, 1975 , 89 Stat. 36 , 37, 40, 43; Pub. L. 94–455, title V, § 503(b)(4) , title VIII, §§ 802(a), (b)(1)–(5), 803(a), (b)(1), 805(a), title XVI, § 1607(b)(1)(B), title XVII, §§ 1701(b), 1703, title XIX, §§ 1901(a)(4), (b)(1)(C), 1906(b)(13)(A), title XXI, § 2112(a)(2), Oct. 4, 1976 , 90 Stat. 1562 , 1580–1583, 1596, 1756, 1759, 1761, 1764, 1790, 1834, 1905; Pub. L. 95–600, title I, § 141(e) , (f)(2), title III, §§ 311(a), (c), 312(a), (b), (c)(2), 313(a), 316(a), (b)(1), (2), title VII, § 703(a)(1), (2), (j)(9), Nov. 6, 1978 , 92 Stat. 2794 , 2795, 2824–2826, 2829, 2939, 2941; Pub. L. 95–618, title II, § 241(a) , title III, § 301(a), (c)(1), Nov. 9, 1978 , 92 Stat. 3192 , 3194, 3199; Pub. L. 96–222, title I , §§ 101(a)(7)(A), (L)(iii)(I), (v)(I), (M)(i), 103(a)(2)(A), (B)(i)–(iii), (3), (4)(A), 107(a)(3)(A), Apr. 1, 1980 , 94 Stat. 197 , 200, 201, 208, 209, 223; Pub. L. 96–223, title II , §§ 221(a), 222(e)(2), 223(b)(1), Apr. 2, 1980 , 94 Stat. 260 , 263, 266; Pub. L. 97–34, title II , §§ 207(c)(1), 211(a)(1), (b), (d), (e)(1), (2), (f)(1), 212(a)(1), (2), title III, §§ 302(c)(3), (d)(1), 332(a), Aug. 13, 1981 , 95 Stat. 225 , 227–229, 235, 236, 272, 274, 296; Pub. L. 97–248, title II, § 201(d)(8)(A) , formerly § 201(c)(8)(A), §§ 205(b), 265(b)(2)(A)(i), Sept. 3, 1982 , 96 Stat. 420 , 430, 547, renumbered § 201(d)(8)(A), Pub. L. 97–448, title III, § 306(a)(1)(A)(i) , Jan. 12, 1983 , 96 Stat. 2400 ; Pub. L. 97–354, § 5(a)(4) –(6), Oct. 19, 1982 , 96 Stat. 1692 ; Pub. L. 97–424, title V , §§ 541(b), 546(b), Jan. 6, 1983 , 96 Stat. 2192 , 2199; Pub. L. 97–448, title I, § 102(e)(1) , (f)(5), title II, § 202(f), Jan. 12, 1983 , 96 Stat. 2370 , 2372, 2396; Pub. L. 98–21, title I, § 122(c)(1) , Apr. 20, 1983 , 97 Stat. 87 ; Pub. L. 98–369, div. A, title I , §§ 16(a), 31(f), 113(b)(2)(B), title IV, §§ 431(a), (b)(1), (d)(1)–(3), 474( o )(1)–(7), title VII, § 713(c)(1)(C), July 18, 1984 , 98 Stat. 505 , 521, 637, 805, 807, 810, 834–836, 957; Pub. L. 99–514, title II , §§ 201(d)(7)(B), 251(a), title IV, § 421(a), (b), title XVIII, §§ 1802(a)(6), (8), 1844(a), (b)(3), (5), 1847(b)(11), 1848(a), Oct. 22, 1986 , 100 Stat. 2141 , 2183, 2229, 2789, 2855, 2857; Pub. L. 100–647, title I , §§ 1002(a)(4), (15), (17), (25), 1009(a)(1), 1013(a)(44), title IV, § 4006, Nov. 10, 1988 , 102 Stat. 3353 , 3355, 3356, 3445, 3545, 3652; Pub. L. 101–239, title VII , §§ 7106, 7814(d), Dec. 19, 1989 , 103 Stat. 2306 , 2413; Pub. L. 101–508, title XI , §§ 11406, 11813(a), Nov. 5, 1990 , 104 Stat. 1388–474 , 1388–536; Pub. L. 108–357, title III, § 322(d)(1) , Oct. 22, 2004 , 118 Stat. 1475 ; Pub. L. 109–58, title XIII, § 1307(a) , Aug. 8, 2005 , 119 Stat. 999 ; Pub. L. 111–5, div. B, title I, § 1302(a) , Feb. 17, 2009 , 123 Stat. 345 ; Pub. L. 111–148, title IX, § 9023(b) , Mar. 23, 2010 , 124 Stat. 880 ; Pub. L. 113–295, div. A, title II, § 220(c) , Dec. 19, 2014 , 128 Stat. 4035 ; Pub. L. 117–167, div. A, § 107(d)(1) , Aug. 9, 2022 , 136 Stat. 1398 ; Pub. L. 117–169, title I, § 13702(b)(1) , Aug. 16, 2022 , 136 Stat. 1996 .)

§ 47 Rehabilitation credit

(a) General rule For purposes of section 46, for any taxable year during the 5-year period beginning in the taxable year in which a qualified rehabilitated building is placed in service, the rehabilitation credit for such year is an amount equal to the ratable share for such year. For purposes of paragraph (1), the ratable share for any taxable year during the period described in such paragraph is the amount equal to 20 percent of the qualified rehabilitation expenditures with respect to the qualified rehabilitated building, as allocated ratably to each year during such period.

(b) When expenditures taken into account Qualified rehabilitation expenditures with respect to any qualified rehabilitated building shall be taken into account for the taxable year in which such qualified rehabilitated building is placed in service. The amount which would (but for this paragraph) be taken into account under paragraph (1) with respect to any qualified rehabilitated building shall be reduced (but not below zero) by any amount of qualified rehabilitation expenditures taken into account under subsection (d) by the taxpayer or a predecessor of the taxpayer (or, in the case of a sale and leaseback described in section 50(a)(2)(C), by the lessee), to the extent any amount so taken into account has not been required to be recaptured under section 50(a).

(c) Definitions For purposes of this section— The term “qualified rehabilitated building” means any building (and its structural components) if— such building has been substantially rehabilitated, such building was placed in service before the beginning of the rehabilitation, such building is a certified historic structure, and depreciation (or amortization in lieu of depreciation) is allowable with respect to such building. For purposes of subparagraph (A)(i), a building shall be treated as having been substantially rehabilitated only if the qualified rehabilitation expenditures during the 24-month period selected by the taxpayer (at the time and in the manner prescribed by regulation) and ending with or within the taxable year exceed the greater of— the adjusted basis of such building (and its structural components), or $5,000. The adjusted basis of the building (and its structural components) shall be determined as of the beginning of the 1st day of such 24-month period, or of the holding period of the building, whichever is later. For purposes of the preceding sentence, the determination of the beginning of the holding period shall be made without regard to any reconstruction by the taxpayer in connection with the rehabilitation. In the case of any rehabilitation which may reasonably be expected to be completed in phases set forth in architectural plans and specifications completed before the rehabilitation begins, clause (i) shall be applied by substituting “60-month period” for “24-month period”. The Secretary shall prescribe by regulation rules for applying this subparagraph to lessees. Rehabilitation includes reconstruction. The term “qualified rehabilitation expenditure” means any amount properly chargeable to capital account— for property for which depreciation is allowable under section 168 and which is— nonresidential real property, residential rental property, real property which has a class life of more than 12.5 years, or an addition or improvement to property described in subclause (I), (II), or (III), and in connection with the rehabilitation of a qualified rehabilitated building. The term “qualified rehabilitation expenditure” does not include— Any expenditure with respect to which the taxpayer does not use the straight line method over a recovery period determined under subsection (c) or (g) of section 168. The preceding sentence shall not apply to any expenditure to the extent the alternative depreciation system of section 168(g) applies to such expenditure by reason of subparagraph (B) or (C) of section 168(g)(1). The cost of acquiring any building or interest therein. Any expenditure attributable to the enlargement of an existing building. Any expenditure attributable to the rehabilitation of a qualified rehabilitated building unless the rehabilitation is a certified rehabilitation (within the meaning of subparagraph (C)). Any expenditure in connection with the rehabilitation of a building which is allocable to the portion of such property which is (or may reasonably be expected to be) tax-exempt use property (within the meaning of section 168(h), except that “50 percent” shall be substituted for “35 percent” in paragraph (1)(B)(iii) thereof). This clause shall not apply for purposes of determining under paragraph (1)(C) whether a building has been substantially rehabilitated. Any expenditure of a lessee of a building if, on the date the rehabilitation is completed, the remaining term of the lease (determined without regard to any renewal periods) is less than the recovery period determined under section 168(c). For purposes of subparagraph (B), the term “certified rehabilitation” means any rehabilitation of a certified historic structure which the Secretary of the Interior has certified to the Secretary as being consistent with the historic character of such property or the district in which such property is located. For purposes of subparagraph (A), the terms “nonresidential real property,” “residential rental property,” and “class life” have the respective meanings given such terms by section 168. The term “certified historic structure” means any building (and its structural components) which— is listed in the National Register, or is located in a registered historic district and is certified by the Secretary of the Interior to the Secretary as being of historic significance to the district. The term “registered historic district” means— any district listed in the National Register, and any district— which is designated under a statute of the appropriate State or local government, if such statute is certified by the Secretary of the Interior to the Secretary as containing criteria which will substantially achieve the purpose of preserving and rehabilitating buildings of historic significance to the district, and which is certified by the Secretary of the Interior to the Secretary as meeting substantially all of the requirements for the listing of districts in the National Register.

(d) Progress expenditures In the case of any building to which this subsection applies, except as provided in paragraph (3)— if such building is self-rehabilitated property, any qualified rehabilitation expenditure with respect to such building shall be taken into account for the taxable year for which such expenditure is properly chargeable to capital account with respect to such building, and if such building is not self-rehabilitated property, any qualified rehabilitation expenditure with respect to such building shall be taken into account for the taxable year in which paid. This subsection shall apply to any building which is being rehabilitated by or for the taxpayer if— the normal rehabilitation period for such building is 2 years or more, and it is reasonable to expect that such building will be a qualified rehabilitated building in the hands of the taxpayer when it is placed in service. Clauses (i) and (ii) shall be applied on the basis of facts known as of the close of the taxable year of the taxpayer in which the rehabilitation begins (or, if later, at the close of the first taxable year to which an election under this subsection applies). For purposes of subparagraph (A), the term “normal rehabilitation period” means the period reasonably expected to be required for the rehabilitation of the building— beginning with the date on which physical work on the rehabilitation begins (or, if later, the first day of the first taxable year to which an election under this subsection applies), and ending on the date on which it is expected that the property will be available for placing in service. For purposes of paragraph (1)— Property which is to be a component part of, or is otherwise to be included in, any building to which this subsection applies shall be taken into account— at a time not earlier than the time at which it becomes irrevocably devoted to use in the building, and as if (at the time referred to in clause (i)) the taxpayer had expended an amount equal to that portion of the cost to the taxpayer of such component or other property which, for purposes of this subpart, is properly chargeable (during such taxable year) to capital account with respect to such building. Any amount borrowed directly or indirectly by the taxpayer from the person rehabilitating the property for him shall not be treated as an amount expended for such rehabilitation. In the case of a building which is not self-rehabilitated, the amount taken into account under paragraph (1)(B) for any taxable year shall not exceed the amount which represents the portion of the overall cost to the taxpayer of the rehabilitation which is properly attributable to the portion of the rehabilitation which is completed during such taxable year. In the case of a building which is not a self-rehabilitated building, if for the taxable year— the amount which (but for clause (i)) would have been taken into account under paragraph (1)(B) exceeds the limitation of clause (i), then the amount of such excess shall be taken into account under paragraph (1)(B) for the succeeding taxable year, or the limitation of clause (i) exceeds the amount taken into account under paragraph (1)(B), then the amount of such excess shall increase the limitation of clause (i) for the succeeding taxable year. The determination under subparagraph (C)(i) of the portion of the overall cost to the taxpayer of the rehabilitation which is properly attributable to rehabilitation completed during any taxable year shall be made, under regulations prescribed by the Secretary, on the basis of engineering or architectural estimates or on the basis of cost accounting records. Unless the taxpayer establishes otherwise by clear and convincing evidence, the rehabilitation shall be deemed to be completed not more rapidly than ratably over the normal rehabilitation period. No qualified rehabilitation expenditures shall be taken into account under this subsection for any period before the first day of the first taxable year to which an election under this subsection applies. In the case of any building, no qualified rehabilitation expenditures shall be taken into account under this subsection for the earlier of— the taxable year in which the building is placed in service, or the first taxable year for which recapture is required under section 50(a)(2) with respect to such property, or for any taxable year thereafter. For purposes of this subsection, the term “self-rehabilitated building” means any building if it is reasonable to believe that more than half of the qualified rehabilitation expenditures for such building will be made directly by the taxpayer. This subsection shall apply to any taxpayer only if such taxpayer has made an election under this paragraph. Such an election shall apply to the taxable year for which made and all subsequent taxable years. Such an election, once made, may be revoked only with the consent of the Secretary.

§ 48 Energy credit

(a) Energy credit For purposes of section 46, except as provided in paragraphs (1)(B), (2)(B), and (3)(B) of subsection (c), the energy credit for any taxable year is the energy percentage of the basis of each energy property placed in service during such taxable year. Except as provided in paragraphs (6) and (7), the energy percentage is— 6 percent in the case of— qualified fuel cell property, energy property described in clause (i) or (iii) of paragraph (3)(A) but only with respect to property the construction of which begins before January 1, 2025 , energy property described in paragraph (3)(A)(ii), qualified small wind energy property, waste energy recovery property, energy storage technology, qualified biogas property, microgrid controllers, and energy property described in clauses (v) and (vii) of paragraph (3)(A), and in the case of any energy property to which clause (i) does not apply, 0 percent. The energy percentage shall not apply to that portion of the basis of any property which is attributable to qualified rehabilitation expenditures. For purposes of energy property described in subparagraph (A)(ii), the energy percentage applicable to such property pursuant to such subparagraph shall not be increased or otherwise adjusted by any provision of this section. For purposes of this subpart, the term “energy property” means any property— which is— equipment which uses solar energy to generate electricity, to heat or cool (or provide hot water for use in) a structure, or to provide solar process heat, excepting property used to generate energy for the purposes of heating a swimming pool, equipment which uses solar energy to illuminate the inside of a structure using fiber-optic distributed sunlight, or electrochromic glass which uses electricity to change its light transmittance properties in order to heat or cool a structure, but only with respect to property the construction of which begins before January 1, 2025 , equipment used to produce, distribute, or use energy derived from a geothermal deposit (within the meaning of section 613(e)(2)), but only, in the case of electricity generated by geothermal power, up to (but not including) the electrical transmission stage, qualified fuel cell property or qualified microturbine property, combined heat and power system property, qualified small wind energy property, equipment which uses the ground or ground water as a thermal energy source to heat a structure or as a thermal energy sink to cool a structure, but only with respect to property the construction of which begins before January 1, 2035 , waste energy recovery property, energy storage technology, qualified biogas property, or microgrid controllers, the construction, reconstruction, or erection of which is completed by the taxpayer, or which is acquired by the taxpayer if the original use of such property commences with the taxpayer, with respect to which depreciation (or amortization in lieu of depreciation) is allowable, and which meets the performance and quality standards (if any) which— have been prescribed by the Secretary by regulations (after consultation with the Secretary of Energy), and are in effect at the time of the acquisition of the property. Such term shall not include any property which is part of a facility the production from which is allowed as a credit under section 45 for the taxable year or any prior taxable year. Rules similar to the rule under section 45(b)(3) shall apply for purposes of this section. In the case of any qualified property which is part of a qualified investment credit facility— such property shall be treated as energy property for purposes of this section, and the energy percentage with respect to such property shall be 6 percent. No credit shall be allowed under section 45 for any taxable year with respect to any qualified investment credit facility. For purposes of this paragraph, the term “qualified investment credit facility” means any facility— which is a qualified facility (within the meaning of section 45) described in paragraph (1), (2), (3), (4), (6), (7), (9), or (11) of section 45(d), which is placed in service after 2008 and the construction of which begins before January 1, 2025 , and with respect to which— no credit has been allowed under section 45, and the taxpayer makes an irrevocable election to have this paragraph apply. For purposes of this paragraph, the term “qualified property” means property— which is— tangible personal property, or other tangible property (not including a building or its structural components), but only if such property is used as an integral part of the qualified investment credit facility, with respect to which depreciation (or amortization in lieu of depreciation) is allowable, which is constructed, reconstructed, erected, or acquired by the taxpayer, and the original use of which commences with the taxpayer. In the case of any facility using wind to produce electricity which is placed in service before January 1, 2022 , and treated as energy property by reason of this paragraph, the amount of the credit determined under this section (determined after the application of paragraphs (1) and (2) and without regard to this subparagraph) shall be reduced by— in the case of any facility the construction of which begins after December 31, 2016 , and before January 1, 2018 , 20 percent, in the case of any facility the construction of which begins after December 31, 2017 , and before January 1, 2019 , 40 percent, in the case of any facility the construction of which begins after December 31, 2018 , and before January 1, 2020 , 60 percent, and in the case of any facility the construction of which begins after December 31, 2019 , and before January 1, 2022 , 40 percent. In the case of any qualified offshore wind facility, subparagraph (E) shall not apply. For purposes of this subparagraph, the term “qualified offshore wind facility” means a qualified facility (within the meaning of section 45) described in paragraph (1) of section 45(d) (determined without regard to any date by which the construction of the facility is required to begin) which is located in the inland navigable waters of the United States or in the coastal waters of the United States. In the case of any qualified fuel cell property, qualified small wind property, or energy property described in clause (i) or clause (ii) of paragraph (3)(A) the construction of which begins after December 31, 2019 , and which is placed in service before January 1, 2022 , the energy percentage determined under paragraph (2) shall be equal to 26 percent. In the case of any energy property described in clause (vii) of paragraph (3)(A), the energy percentage determined under paragraph (2) shall be equal to— in the case of any property the construction of which begins before January 1, 2033 , and which is placed in service after December 31, 2021 , 6 percent, in the case of any property the construction of which begins after December 31, 2032 , and before January 1, 2034 , 5.2 percent, and in the case of any property the construction of which begins after December 31, 2033 , and before January 1, 2035 , 4.4 percent. For purposes of determining the credit under subsection (a), energy property shall include amounts paid or incurred by the taxpayer for qualified interconnection property in connection with the installation of energy property (as defined in paragraph (3)) which has a maximum net output of not greater than 5 megawatts (as measured in alternating current), to provide for the transmission or distribution of the electricity produced or stored by such property, and which are properly chargeable to the capital account of the taxpayer. The term “qualified interconnection property” means, with respect to an energy project which is not a microgrid controller, any tangible property— which is part of an addition, modification, or upgrade to a transmission or distribution system which is required at or beyond the point at which the energy project interconnects to such transmission or distribution system in order to accommodate such interconnection, either— which is constructed, reconstructed, or erected by the taxpayer, or for which the cost with respect to the construction, reconstruction, or erection of such property is paid or incurred by such taxpayer, and the original use of which, pursuant to an interconnection agreement, commences with a utility. The term “interconnection agreement” means an agreement with a utility for the purposes of interconnecting the energy property owned by such taxpayer to the transmission or distribution system of such utility. For purposes of this paragraph, the term “utility” means the owner or operator of an electrical transmission or distribution system which is subject to the regulatory authority of a State or political subdivision thereof, any agency or instrumentality of the United States, a public service or public utility commission or other similar body of any State or political subdivision thereof, or the governing or ratemaking body of an electric cooperative. In the case of expenses paid or incurred for interconnection property, amounts otherwise chargeable to capital account with respect to such expenses shall be reduced under rules similar to the rules of section 50(c). In the case of any energy project which satisfies the requirements of subparagraph (B), the amount of the credit determined under this subsection (determined after the application of paragraphs (1) through (8) and paragraph (15) and without regard to this clause) shall be equal to such amount multiplied by 5. For purposes of this subsection, the term “energy project” means a project consisting of one or more energy properties that are part of a single project. A project meets the requirements of this subparagraph if it is one of the following: A project with a maximum net output of less than 1 megawatt of electrical (as measured in alternating current) or thermal energy. A project the construction of which begins before the date that is 60 days after the Secretary publishes guidance with respect to the requirements of paragraphs (10)(A) and (11). A project which satisfies the requirements of paragraphs (10)(A) and (11). The requirements described in this subparagraph with respect to any energy project are that the taxpayer shall ensure that any laborers and mechanics employed by the taxpayer or any contractor or subcontractor in— the construction of such energy project, and for the 5-year period beginning on the date such project is originally placed in service, the alteration or repair of such project, shall be paid wages at rates not less than the prevailing rates for construction, alteration, or repair of a similar character in the locality in which such project is located as most recently determined by the Secretary of Labor, in accordance with subchapter IV of chapter 31 of title 40, United States Code. Subject to subparagraph (C), for purposes of any determination under paragraph (9)(A)(i) for the taxable year in which the energy project is placed in service, the taxpayer shall be deemed to satisfy the requirement under clause (ii) at the time such project is placed in service. Rules similar to the rules of section 45(b)(7)(B) shall apply. The Secretary shall, by regulations or other guidance, provide for recapturing the benefit of any increase in the credit allowed under this subsection by reason of this paragraph with respect to any project which does not satisfy the requirements under subparagraph (A) (after application of subparagraph (B)) for the period described in clause (ii) of subparagraph (A) (but which does not cease to be investment credit property within the meaning of section 50(a)). The period and percentage of such recapture shall be determined under rules similar to the rules of section 50(a). Rules similar to the rules of section 45(b)(8) shall apply. In the case of any energy project which satisfies the requirement under subparagraph (B), for purposes of applying paragraph (2) with respect to such property, the energy percentage shall be increased by the applicable credit rate increase. Rules similar to the rules of section 45(b)(9)(B) shall apply. For purposes of subparagraph (A), the applicable credit rate increase shall be— in the case of an energy project which does not satisfy the requirements of paragraph (9)(B), 2 percentage points, and in the case of an energy project which satisfies the requirements of paragraph (9)(B), 10 percentage points. In the case of a taxpayer making an election under section 6417 with respect to a credit under this section, rules similar to the rules of section 45(b)(10) shall apply. In the case of any energy project that is placed in service within an energy community (as defined in section 45(b)(11)(B), as applied by substituting “energy project” for “qualified facility” each place it appears), for purposes of applying paragraph (2) with respect to energy property which is part of such project, the energy percentage shall be increased by the applicable credit rate increase. For purposes of subparagraph (A), the applicable credit rate increase shall be equal to— in the case of any energy project which does not satisfy the requirements of paragraph (9)(B), 2 percentage points, and in the case of any energy project which satisfies the requirements of paragraph (9)(B), 10 percentage points. In the case of any qualified property (as defined in paragraph (5)(D)) which is part of a specified clean hydrogen production facility— such property shall be treated as energy property for purposes of this section, and the energy percentage with respect to such property is— in the case of a facility which is designed and reasonably expected to produce qualified clean hydrogen which is described in a subparagraph (A) of section 45V(b)(2), 1.2 percent, in the case of a facility which is designed and reasonably expected to produce qualified clean hydrogen which is described in a subparagraph (B) of such section, 1.5 percent, in the case of a facility which is designed and reasonably expected to produce qualified clean hydrogen which is described in a subparagraph (C) of such section, 2 percent, and in the case of a facility which is designed and reasonably expected to produce qualified clean hydrogen which is described in subparagraph (D) of such section, 6 percent. No credit shall be allowed under section 45V or section 45Q for any taxable year with respect to any specified clean hydrogen production facility or any carbon capture equipment included at such facility. For purposes of this paragraph, the term “specified clean hydrogen production facility” means any qualified clean hydrogen production facility (as defined in section 45V(c)(3))— which is placed in service after December 31, 2022 , with respect to which— no credit has been allowed under section 45V or 45Q, and the taxpayer makes an irrevocable election to have this paragraph apply, and for which an unrelated third party has verified (in such form or manner as the Secretary may prescribe) that such facility produces hydrogen through a process which results in lifecycle greenhouse gas emissions which are consistent with the hydrogen that such facility was designed and expected to produce under subparagraph (A)(ii). For purposes of this paragraph, the term “qualified clean hydrogen” has the meaning given such term by section 45V(c)(2). The Secretary shall issue such regulations or other guidance as the Secretary determines necessary to carry out the purposes of this section, including regulations or other guidance which recaptures so much of any credit allowed under this section as exceeds the amount of the credit which would have been allowed if the expected production were consistent with the actual verified production (or all of the credit so allowed in the absence of such verification). The Secretary shall issue such regulations or other guidance as the Secretary determines necessary to carry out the purposes of this subsection, including regulations or other guidance which provides for requirements for recordkeeping or information reporting for purposes of administering the requirements of this subsection.

(b) Certain progress expenditure rules made applicable Rules similar to the rules of subsections (c)(4) and (d) of section 46 (as in effect on the day before the date of the enactment of the Revenue Reconciliation Act of 1990) shall apply for purposes of subsection (a).

(c) Definitions For purposes of this section— The term “qualified fuel cell property” means a fuel cell power plant which— has a nameplate capacity of at least 0.5 kilowatt (1 kilowatt in the case of a fuel cell power plant with a linear generator assembly) of electricity using an electrochemical or electromechanical process, and has an electricity-only generation efficiency greater than 30 percent. In the case of qualified fuel cell property placed in service during the taxable year, the credit otherwise determined under subsection (a) for such year with respect to such property shall not exceed an amount equal to $1, 500 f ore a c h 0.5 ki l o w a tt o f c a p a c i t yo f s u c h p ro p er t y . T h e t er m “ f u e l ce llp o w er pl an t ” m e an s anin t e g r a t e d sys t e m co m p r i se d o f a f u e l ce ll s t a c ka sse mb l y, or l in e a r g e n er a t or a sse mb l y, an d a ssoc ia t e d ba l an ceo f pl an t co m p o n e n t s w hi c h co n v er t s a f u e l in t oe l ec t r i c i t y u s in g e l ec t roc h e mi c a l ore l ec t ro m ec hani c a l m e an s . T h e t er m “ l in e a r g e n er a t or a sse mb l y ” d oes n o t in c l u d e an y a sse mb l y w hi c h co n t ain sro t a t in g p a r t s . T h e t er m “ q u a l i f i e df u e l ce llp ro p er t y ” s ha ll n o t in c l u d e an y p ro p er t y t h eco n s t r u c t i o n o f w hi c h d oes n o t b e g inb e f ore J an u a ry 1, 2025. T h e t er m “ q u a l i f i e d mi cro t u r bin e p ro p er t y ” m e an s a s t a t i o na ry mi cro t u r bin e p o w er pl an tw hi c h — ha s anam e pl a t ec a p a c i t yo f l ess t han 2, 000 ki l o w a tt s, an d ha s an e l ec t r i c i t y - o n l y g e n er a t i o n e ff i c i e n cyo f n o tl ess t han 26 p erce n t a t I n t er na t i o na lSt an d a r d O r g ani z a t i o n co n d i t i o n s . I n t h ec a seo f q u a l i f i e d mi cro t u r bin e p ro p er t y pl a ce d in ser v i ce d u r in g t h e t a x ab l eye a r, t h ecre d i t o t h er w i se d e t er min e d u n d ers u b sec t i o n (a) f ors u c h ye a r w i t h res p ec tt os u c h p ro p er t ys ha ll n o t e x cee d anam o u n t e q u a lt o$ 200 for each kilowatt of capacity of such property. The term “stationary microturbine power plant” means an integrated system comprised of a gas turbine engine, a combustor, a recuperator or regenerator, a generator or alternator, and associated balance of plant components which converts a fuel into electricity and thermal energy. Such term also includes all secondary components located between the existing infrastructure for fuel delivery and the existing infrastructure for power distribution, including equipment and controls for meeting relevant power standards, such as voltage, frequency, and power factors. The term “qualified microturbine property” shall not include any property the construction of which does not begin before January 1, 2025 . The term “combined heat and power system property” means property comprising a system— which uses the same energy source for the simultaneous or sequential generation of electrical power, mechanical shaft power, or both, in combination with the generation of steam or other forms of useful thermal energy (including heating and cooling applications), which produces— at least 20 percent of its total useful energy in the form of thermal energy which is not used to produce electrical or mechanical power (or combination thereof), and at least 20 percent of its total useful energy in the form of electrical or mechanical power (or combination thereof), the energy efficiency percentage of which exceeds 60 percent, and the construction of which begins before January 1, 2025 . In the case of combined heat and power system property with an electrical capacity in excess of the applicable capacity placed in service during the taxable year, the credit under subsection (a)(1) (determined without regard to this paragraph) for such year shall be equal to the amount which bears the same ratio to such credit as the applicable capacity bears to the capacity of such property. For purposes of clause (i), the term “applicable capacity” means 15 megawatts or a mechanical energy capacity of more than 20,000 horsepower or an equivalent combination of electrical and mechanical energy capacities. The term “combined heat and power system property” shall not include any property comprising a system if such system has a capacity in excess of 50 megawatts or a mechanical energy capacity in excess of 67,000 horsepower or an equivalent combination of electrical and mechanical energy capacities. For purposes of this paragraph, the energy efficiency percentage of a system is the fraction— the numerator of which is the total useful electrical, thermal, and mechanical power produced by the system at normal operating rates, and expected to be consumed in its normal application, and the denominator of which is the lower heating value of the fuel sources for the system. The energy efficiency percentage and the percentages under subparagraph (A)(ii) shall be determined on a Btu basis. The term “combined heat and power system property” does not include property used to transport the energy source to the facility or to distribute energy produced by the facility. If a system is designed to use biomass (within the meaning of paragraphs (2) and (3) of section 45(c) without regard to the last sentence of paragraph (3)(A)) for at least 90 percent of the energy source— subparagraph (A)(iii) shall not apply, but the amount of credit determined under subsection (a) with respect to such system shall not exceed the amount which bears the same ratio to such amount of credit (determined without regard to this subparagraph) as the energy efficiency percentage of such system bears to 60 percent. The term “qualified small wind energy property” means property which uses a qualifying small wind turbine to generate electricity. The term “qualifying small wind turbine” means a wind turbine which has a nameplate capacity of not more than 100 kilowatts. The term “qualified small wind energy property” shall not include any property the construction of which does not begin before January 1, 2025 . The term “waste energy recovery property” means property that generates electricity solely from heat from buildings or equipment if the primary purpose of such building or equipment is not the generation of electricity. The term “waste energy recovery property” shall not include any property which has a capacity in excess of 50 megawatts. Any waste energy recovery property (determined without regard to this subparagraph) which is part of a system which is a combined heat and power system property shall not be treated as waste energy recovery property for purposes of this section unless the taxpayer elects to not treat such system as a combined heat and power system property for purposes of this section. The term “waste energy recovery property” shall not include any property the construction of which does not begin before January 1, 2025 . The term “energy storage technology” means— property (other than property primarily used in the transportation of goods or individuals and not for the production of electricity) which receives, stores, and delivers energy for conversion to electricity (or, in the case of hydrogen, which stores energy), and has a nameplate capacity of not less than 5 kilowatt hours, and thermal energy storage property. In the case of any property which either— was placed in service before the date of enactment of this section 1 and would be described in subparagraph (A)(i), except that such property has a capacity of less than 5 kilowatt hours and is modified in a manner that such property (after such modification) has a nameplate capacity of not less than 5 kilowatt hours, or is described in subparagraph (A)(i) and is modified in a manner that such property (after such modification) has an increase in nameplate capacity of not less than 5 kilowatt hours, such property shall be treated as described in subparagraph (A)(i) except that the basis of any existing property prior to such modification shall not be taken into account for purposes of this section. In the case of any property to which this subparagraph applies, subparagraph (D) shall be applied by substituting “modification” for “construction”. Subject to clause (ii), for purposes of this paragraph, the term “thermal energy storage property” means property comprising a system which— is directly connected to a heating, ventilation, or air conditioning system, removes heat from, or adds heat to, a storage medium for subsequent use, and provides energy for the heating or cooling of the interior of a residential or commercial building. The term “thermal energy storage property” shall not include— a swimming pool, combined heat and power system property, or a building or its structural components. The term “energy storage technology” shall not include any property the construction of which begins after December 31, 2024 . The term “qualified biogas property” means property comprising a system which— converts biomass (as defined in section 45K(c)(3), as in effect on the date of enactment of this paragraph) into a gas which— consists of not less than 52 percent methane by volume, or is concentrated by such system into a gas which consists of not less than 52 percent methane, and captures such gas for sale or productive use, and not for disposal via combustion. The term “qualified biogas property” includes any property which is part of such system which cleans or conditions such gas. The term “qualified biogas property” shall not include any property the construction of which begins after December 31, 2024 . The term “microgrid controller” means equipment which is— part of a qualified microgrid, and designed and used to monitor and control the energy resources and loads on such microgrid. The term “qualified microgrid” means an electrical system which— includes equipment which is capable of generating not less than 4 kilowatts and not greater than 20 megawatts of electricity, is capable of operating— in connection with the electrical grid and as a single controllable entity with respect to such grid, and independently (and disconnected) from such grid, and is not part of a bulk-power system (as defined in section 215 of the Federal Power Act ( 16 U.S.C. 824 o )). The term “microgrid controller” shall not include any property the construction of which begins after December 31, 2024 .

(d) Coordination with Department of Treasury grants In the case of any property with respect to which the Secretary makes a grant under section 1603 of the American Recovery and Reinvestment Tax Act of 2009— No credit shall be determined under this section or section 45 with respect to such property for the taxable year in which such grant is made or any subsequent taxable year. If a credit was determined under this section with respect to such property for any taxable year ending before such grant is made— the tax imposed under subtitle A on the taxpayer for the taxable year in which such grant is made shall be increased by so much of such credit as was allowed under section 38, the general business carryforwards under section 39 shall be adjusted so as to recapture the portion of such credit which was not so allowed, and the amount of such grant shall be determined without regard to any reduction in the basis of such property by reason of such credit. Any such grant— shall not be includible in the gross income or alternative minimum taxable income of the taxpayer, but shall be taken into account in determining the basis of the property to which such grant relates, except that the basis of such property shall be reduced under section 50(c) in the same manner as a credit allowed under subsection (a).

(e) Special rules for certain solar and wind facilities placed in service in connection with low-income communities In the case of any qualified solar and wind facility with respect to which the Secretary makes an allocation of environmental justice solar and wind capacity limitation under paragraph (4)— the energy percentage otherwise determined under paragraph (2) or (5) of subsection (a) with respect to any eligible property which is part of such facility shall be increased by— in the case of a facility described in subclause (I) of paragraph (2)(A)(iii) and not described in subclause (II) of such paragraph, 10 percentage points, and in the case of a facility described in subclause (II) of paragraph (2)(A)(iii), 20 percentage points, and the increase in the credit determined under subsection (a) by reason of this subsection for any taxable year with respect to all property which is part of such facility shall not exceed the amount which bears the same ratio to the amount of such increase (determined without regard to this subparagraph) as— the environmental justice solar and wind capacity limitation allocated to such facility, bears to the total megawatt nameplate capacity of such facility, as measured in direct current. For purposes of this subsection— The term “qualified solar and wind facility” means any facility— which generates electricity solely from property described in section 45(d)(1) or in clause (i) or (vi) of subsection (a)(3)(A), which has a maximum net output of less than 5 megawatts (as measured in alternating current), and which— is located in a low-income community (as defined in section 45D(e)) or on Indian land (as defined in section 2601(2) of the Energy Policy Act of 1992 ( 25 U.S.C. 3501(2) )), or is part of a qualified low-income residential building project or a qualified low-income economic benefit project. A facility shall be treated as part of a qualified low-income residential building project if— such facility is installed on a residential rental building which participates in a covered housing program (as defined in section 41411(a) of the Violence Against Women Act of 1994 ( 34 U.S.C. 12491(a)(3) ), 2 a housing assistance program administered by the Department of Agriculture under title V of the Housing Act of 1949, a housing program administered by a tribally designated housing entity (as defined in section 4(22) of the Native American Housing Assistance and Self-Determination Act of 1996 ( 25 U.S.C. 4103(22) )) or such other affordable housing programs as the Secretary may provide, and the financial benefits of the electricity produced by such facility are allocated equitably among the occupants of the dwelling units of such building. A facility shall be treated as part of a qualified low-income economic benefit project if at least 50 percent of the financial benefits of the electricity produced by such facility are provided to households with income of— less than 200 percent of the poverty line (as defined in section 36B(d)(3)(A)) applicable to a family of the size involved, or less than 80 percent of area median gross income (as determined under section 142(d)(2)(B)). For purposes of subparagraphs (B) and (C), electricity acquired at a below-market rate shall not fail to be taken into account as a financial benefit. For purposes of this section, the term “eligible property” means energy property which— is part of a facility described in section 45(d)(1) for which an election was made under subsection (a)(5), or is described in clause (i) or (vi) of subsection (a)(3)(A), including energy storage technology (as described in subsection (a)(3)(A)(ix)) installed in connection with such energy property. Not later than 180 days after the date of enactment of this subsection, the Secretary shall establish a program to allocate amounts of environmental justice solar and wind capacity limitation to qualified solar and wind facilities. In establishing such program and to carry out the purposes of this subsection, the Secretary shall provide procedures to allow for an efficient allocation process, including, when determined appropriate, consideration of multiple projects in a single application if such projects will be placed in service by a single taxpayer. The amount of environmental justice solar and wind capacity limitation allocated by the Secretary under subparagraph (A) during any calendar year shall not exceed the annual capacity limitation with respect to such year. For purposes of this paragraph, the term “annual capacity limitation” means 1.8 gigawatts of direct current capacity for each of calendar years 2023 and 2024, and zero thereafter. If the annual capacity limitation for any calendar year exceeds the aggregate amount allocated for such year under this paragraph, such limitation for the succeeding calendar year shall be increased by the amount of such excess. No amount may be carried under the preceding sentence to any calendar year after 2024 except as provided in section 48E(h)(4)(D)(ii). Paragraph (1) shall not apply with respect to any property which is placed in service after the date that is 4 years after the date of the allocation with respect to the facility of which such property is a part. Any amount of environmental justice solar and wind capacity limitation which expires under clause (i) during any calendar year shall be taken into account as an excess described in subparagraph (D) (or as an increase in such excess) for such calendar year, subject to the limitation imposed by the last sentence of such subparagraph. The Secretary shall, by regulations or other guidance, provide for recapturing the benefit of any increase in the credit allowed under subsection (a) by reason of this subsection with respect to any property which ceases to be property eligible for such increase (but which does not cease to be investment credit property within the meaning of section 50(a)). The period and percentage of such recapture shall be determined under rules similar to the rules of section 50(a). To the extent provided by the Secretary, such recapture may not apply with respect to any property if, within 12 months after the date the taxpayer becomes aware (or reasonably should have become aware) of such property ceasing to be property eligible for such increase, the eligibility of such property for such increase is restored. The preceding sentence shall not apply more than once with respect to any facility.

§ 48A Qualifying advanced coal project credit

(a) In general For purposes of section 46, the qualifying advanced coal project credit for any taxable year is an amount equal to— 20 percent of the qualified investment for such taxable year in the case of projects described in subsection (d)(3)(B)(i), 15 percent of the qualified investment for such taxable year in the case of projects described in subsection (d)(3)(B)(ii), and 30 percent of the qualified investment for such taxable year in the case of projects described in clause (iii) of subsection (d)(3)(B).

(b) Qualified investment For purposes of subsection (a), the qualified investment for any taxable year is the basis of eligible property placed in service by the taxpayer during such taxable year which is part of a qualifying advanced coal project— the construction, reconstruction, or erection of which is completed by the taxpayer, or which is acquired by the taxpayer if the original use of such property commences with the taxpayer, and with respect to which depreciation (or amortization in lieu of depreciation) is allowable. Rules similar to section 48(a)(4) (without regard to subparagraph (D) thereof) shall apply for purposes of this section. Rules similar to the rules of subsections (c)(4) and (d) of section 46 (as in effect on the day before the enactment of the Revenue Reconciliation Act of 1990) shall apply for purposes of this section.

(c) Definitions For purposes of this section— The term “qualifying advanced coal project” means a project which meets the requirements of subsection (e). The term “advanced coal-based generation technology” means a technology which meets the requirements of subsection (f). The term “eligible property” means— in the case of any qualifying advanced coal project using an integrated gasification combined cycle, any property which is a part of such project and is necessary for the gasification of coal, including any coal handling and gas separation equipment, and in the case of any other qualifying advanced coal project, any property which is a part of such project. The term “coal” means anthracite, bituminous coal, subbituminous coal, lignite, and peat. The term “greenhouse gas capture capability” means an integrated gasification combined cycle technology facility capable of adding components which can capture, separate on a long-term basis, isolate, remove, and sequester greenhouse gases which result from the generation of electricity. The term “electric generation unit” means any facility at least 50 percent of the total annual net output of which is electrical power, including an otherwise eligible facility which is used in an industrial application. The term “integrated gasification combined cycle” means an electric generation unit which produces electricity by converting coal to synthesis gas which is used to fuel a combined-cycle plant which produces electricity from both a combustion turbine (including a combustion turbine/fuel cell hybrid) and a steam turbine.

(d) Qualifying advanced coal project program Not later than 180 days after the date of enactment of this section, the Secretary, in consultation with the Secretary of Energy, shall establish a qualifying advanced coal project program for the deployment of advanced coal-based generation technologies. Each applicant for certification under this paragraph shall submit an application meeting the requirements of subparagraph (B). An applicant may only submit an application— for an allocation from the dollar amount specified in clause (i) or (ii) of paragraph (3)(B) during the 3-year period beginning on the date the Secretary establishes the program under paragraph (1), and for an allocation from the dollar amount specified in paragraph (3)(B)(iii) during the 3-year period beginning at the earlier of the termination of the period described in clause (i) or the date prescribed by the Secretary. An application under subparagraph (A) shall contain such information as the Secretary may require in order to make a determination to accept or reject an application for certification as meeting the requirements under subsection (e)(1). Any information contained in the application shall be protected as provided in section 552(b)(4) of title 5 , United States Code. The Secretary shall issue a determination as to whether an applicant has met the requirements under subsection (e)(1) within 60 days following the date of submittal of the application for certification. Each applicant for certification shall have 2 years from the date of acceptance by the Secretary of the application during which to provide to the Secretary evidence that the criteria set forth in subsection (e)(2) have been met. An applicant which receives a certification shall have 5 years from the date of issuance of the certification in order to place the project in service and if such project is not placed in service by that time period then the certification shall no longer be valid. The aggregate credits allowed under subsection (a) for projects certified by the Secretary under paragraph (2) may not exceed $2, 550, 000, 000. O f t h e d o ll a r am o u n t in s u b p a r a g r a p h (A), t h e S ecre t a ry i s a u t h or i ze d t ocer t i f y —$ 800,000,000 for integrated gasification combined cycle projects the application for which is submitted during the period described in paragraph (2)(A)(i), $500, 000, 000 f or p ro j ec t s w hi c h u seo t h er a d v an ce d co a l - ba se d g e n er a t i o n t ec hn o l o g i es t h e a ppl i c a t i o n f or w hi c hi ss u bmi tt e dd u r in g t h e p er i o dd escr ib e d in p a r a g r a p h (2) (A) (i), an d$ 1,250,000,000 for advanced coal-based generation technology projects the application for which is submitted during the period described in paragraph (2)(A)(ii). Not later than 6 years after the date of enactment of this section, the Secretary shall review the credits allocated under this section as of the date which is 6 years after the date of enactment of this section. The Secretary may reallocate credits available under clauses (i) and (ii) of paragraph (3)(B) if the Secretary determines that— there is an insufficient quantity of qualifying applications for certification pending at the time of the review, or any certification made pursuant to paragraph (2) has been revoked pursuant to paragraph (2)(D) because the project subject to the certification has been delayed as a result of third party opposition or litigation to the proposed project. If the Secretary determines that credits under clause (i) or (ii) of paragraph (3)(B) are available for reallocation pursuant to the requirements set forth in paragraph (2), the Secretary is authorized to conduct an additional program for applications for certification. The Secretary shall, upon making a certification under this subsection or section 48B(d), publicly disclose the identity of the applicant and the amount of the credit certified with respect to such applicant.

(e) Qualifying advanced coal projects For purposes of subsection (c)(1), a project shall be considered a qualifying advanced coal project that the Secretary may certify under subsection (d)(2) if the Secretary determines that, at a minimum— the project uses an advanced coal-based generation technology— to power a new electric generation unit; or to retrofit or repower an existing electric generation unit (including an existing natural gas-fired combined cycle unit); the fuel input for the project, when completed, is at least 75 percent coal; the project, consisting of one or more electric generation units at one site, will have a total nameplate generating capacity of at least 400 megawatts; the applicant provides evidence that a majority of the output of the project is reasonably expected to be acquired or utilized; the applicant provides evidence of ownership or control of a site of sufficient size to allow the proposed project to be constructed and to operate on a long-term basis; the project will be located in the United States; and in the case of any project the application for which is submitted during the period described in subsection (d)(2)(A)(ii), the project includes equipment which separates and sequesters at least 65 percent (70 percent in the case of an application for reallocated credits under subsection (d)(4)) of such project’s total carbon dioxide emissions. For the purpose of subsection (d)(2)(D), a project shall be eligible for certification only if the Secretary determines that— the applicant for certification has received all Federal and State environmental authorizations or reviews necessary to commence construction of the project; and the applicant for certification, except in the case of a retrofit or repower of an existing electric generation unit, has purchased or entered into a binding contract for the purchase of the main steam turbine or turbines for the project, except that such contract may be contingent upon receipt of a certification under subsection (d)(2). In determining which qualifying advanced coal projects to certify under subsection (d)(2), the Secretary shall— certify capacity, in accordance with the procedures set forth in subsection (d), in relatively equal amounts to— projects using bituminous coal as a primary feedstock, projects using subbituminous coal as a primary feedstock, and projects using lignite as a primary feedstock, give high priority to projects which include, as determined by the Secretary— greenhouse gas capture capability, increased by-product utilization, applicant participants who have a research partnership with an eligible educational institution (as defined in section 529(e)(5)), and other benefits, and give highest priority to projects with the greatest separation and sequestration percentage of total carbon dioxide emissions.

(f) Advanced coal-based generation technology For the purpose of this section, an electric generation unit uses advanced coal-based generation technology if— the unit— uses integrated gasification combined cycle technology, or except as provided in paragraph (3), has a design net heat rate of 8530 Btu/kWh (40 percent efficiency), and the unit is designed to meet the performance requirements in the following table: Performance characteristic: Design level for project: SO 2 (percent removal) 99 percent NO x (emissions) 0.07 lbs/MMBTU PM* (emissions) 0.015 lbs/MMBTU Hg (percent removal) 90 percent For purposes of the performance requirement specified for the removal of SO 2 in the table contained in subparagraph (B), the SO 2 removal design level in the case of a unit designed for the use of feedstock substantially all of which is subbituminous coal shall be 99 percent SO 2 removal or the achievement of an emission level of 0.04 pounds or less of SO 2 per million Btu, determined on a 30-day average. For purposes of this subsection, design net heat rate with respect to an electric generation unit shall— be measured in Btu per kilowatt hour (higher heating value), be based on the design annual heat input to the unit and the rated net electrical power, fuels, and chemicals output of the unit (determined without regard to the cogeneration of steam by the unit), be adjusted for the heat content of the design coal to be used by the unit— if the heat content is less than 13,500 Btu per pound, but greater than 7,000 Btu per pound, according to the following formula: design net heat rate = unit net heat rate x [1–[((13,500-design coal heat content, Btu per pound)/1,000)* 0.013]], and if the heat content is less than or equal to 7,000 Btu per pound, according to the following formula: design net heat rate = unit net heat rate x [1–[((13,500-design coal heat content, Btu per pound)/1,000)* 0.018]], and be corrected for the site reference conditions of— elevation above sea level of 500 feet, air pressure of 14.4 pounds per square inch absolute, temperature, dry bulb of 63°F, temperature, wet bulb of 54°F, and relative humidity of 55 percent. In the case of any electric generation unit in existence on the date of the enactment of this section, such unit uses advanced coal-based generation technology if, in lieu of the requirements under paragraph (1)(A)(ii), such unit achieves a minimum efficiency of 35 percent and an overall thermal design efficiency improvement, compared to the efficiency of the unit as operated, of not less than— 7 percentage points for coal of more than 9,000 Btu, 6 percentage points for coal of 7,000 to 9,000 Btu, or 4 percentage points for coal of less than 7,000 Btu.

(g) Applicability No use of technology (or level of emission reduction solely by reason of the use of the technology), and no achievement of any emission reduction by the demonstration of any technology or performance level, by or at one or more facilities with respect to which a credit is allowed under this section, shall be considered to indicate that the technology or performance level is— adequately demonstrated for purposes of section 111 of the Clean Air Act ( 42 U.S.C. 7411 ); achievable for purposes of section 169 of that Act ( 42 U.S.C. 7479 ); or achievable in practice for purposes of section 171 of such Act ( 42 U.S.C. 7501 ).

(h) Competitive certification awards modification authority In implementing this section or section 48B, the Secretary is directed to modify the terms of any competitive certification award and any associated closing agreement where such modification— is consistent with the objectives of such section, is requested by the recipient of the competitive certification award, and involves moving the project site to improve the potential to capture and sequester carbon dioxide emissions, reduce costs of transporting feedstock, and serve a broader customer base, unless the Secretary determines that the dollar amount of tax credits available to the taxpayer under such section would increase as a result of the modification or such modification would result in such project not being originally certified. In considering any such modification, the Secretary shall consult with other relevant Federal agencies, including the Department of Energy.

(i) Recapture of credit for failure to sequester The Secretary shall provide for recapturing the benefit of any credit allowable under subsection (a) with respect to any project which fails to attain or maintain the separation and sequestration requirements of subsection (e)(1)(G).

§ 48B Qualifying gasification project credit

(a) In general For purposes of section 46, the qualifying gasification project credit for any taxable year is an amount equal to 20 percent (30 percent in the case of credits allocated under subsection (d)(1)(B)) of the qualified investment for such taxable year.

(b) Qualified investment For purposes of subsection (a), the qualified investment for any taxable year is the basis of eligible property placed in service by the taxpayer during such taxable year which is part of a qualifying gasification project— the construction, reconstruction, or erection of which is completed by the taxpayer, or which is acquired by the taxpayer if the original use of such property commences with the taxpayer, and with respect to which depreciation (or amortization in lieu of depreciation) is allowable. Rules similar to section 48(a)(4) (without regard to subparagraph (D) thereof) shall apply for purposes of this section. Rules similar to the rules of subsections (c)(4) and (d) of section 46 (as in effect on the day before the enactment of the Revenue Reconciliation Act of 1990) shall apply for purposes of this section.

(c) Definitions For purposes of this section— The term “qualifying gasification project” means any project which— employs gasification technology, will be carried out by an eligible entity, and any portion of the qualified investment of which is certified under the qualifying gasification program as eligible for credit under this section in an amount (not to exceed $650,000,000) determined by the Secretary. The term “gasification technology” means any process which converts a solid or liquid product from coal, petroleum residue, biomass, or other materials which are recovered for their energy or feedstock value into a synthesis gas composed primarily of carbon monoxide and hydrogen for direct use or subsequent chemical or physical conversion. The term “eligible property” means any property which is a part of a qualifying gasification project and is necessary for the gasification technology of such project. The term “biomass” means any— agricultural or plant waste, byproduct of wood or paper mill operations, including lignin in spent pulping liquors, and other products of forestry maintenance. The term “biomass” does not include paper which is commonly recycled. The term “carbon capture capability” means a gasification plant design which is determined by the Secretary to reflect reasonable consideration for, and be capable of, accommodating the equipment likely to be necessary to capture carbon dioxide from the gaseous stream, for later use or sequestration, which would otherwise be emitted in the flue gas from a project which uses a nonrenewable fuel. The term “coal” means anthracite, bituminous coal, subbituminous coal, lignite, and peat. The term “eligible entity” means any person whose application for certification is principally intended for use in a domestic project which employs domestic gasification applications related to— chemicals, fertilizers, glass, steel, petroleum residues, forest products, agriculture, including feedlots and dairy operations, and transportation grade liquid fuels. The term “petroleum residue” means the carbonized product of high-boiling hydrocarbon fractions obtained in petroleum processing.

(d) Qualifying gasification project program Not later than 180 days after the date of the enactment of this section, the Secretary, in consultation with the Secretary of Energy, shall establish a qualifying gasification project program to consider and award certifications for qualified investment eligible for credits under this section to qualifying gasification project sponsors under this section. The total amounts of credit that may be allocated under the program shall not exceed— $350, 000, 000, pl u s$ 250,000,000 for qualifying gasification projects that include equipment which separates and sequesters at least 75 percent of such project’s total carbon dioxide emissions. A certificate of eligibility under paragraph (1) may be issued only during the 10-fiscal year period beginning on October 1, 2005 . The Secretary shall not make a competitive certification award for qualified investment for credit eligibility under this section unless the recipient has documented to the satisfaction of the Secretary that— the award recipient is financially viable without the receipt of additional Federal funding associated with the proposed project, the recipient will provide sufficient information to the Secretary for the Secretary to ensure that the qualified investment is spent efficiently and effectively, a market exists for the products of the proposed project as evidenced by contracts or written statements of intent from potential customers, the fuels identified with respect to the gasification technology for such project will comprise at least 90 percent of the fuels required by the project for the production of chemical feedstocks, liquid transportation fuels, or coproduction of electricity, the award recipient’s project team is competent in the construction and operation of the gasification technology proposed, with preference given to those recipients with experience which demonstrates successful and reliable operations of the technology on domestic fuels so identified, and the award recipient has met other criteria established and published by the Secretary. In determining which qualifying gasification projects to certify under this section, the Secretary shall— give highest priority to projects with the greatest separation and sequestration percentage of total carbon dioxide emissions, and give high priority to applicant participants who have a research partnership with an eligible educational institution (as defined in section 529(e)(5)).

(e) Denial of double benefit A credit shall not be allowed under this section for any qualified investment for which a credit is allowed under section 48A.

(f) Recapture of credit for failure to sequester The Secretary shall provide for recapturing the benefit of any credit allowable under subsection (a) with respect to any project which fails to attain or maintain the separation and sequestration requirements for such project under subsection (d)(1).

§ 48C Qualifying advanced energy project credit

(a) In general For purposes of section 46, the qualifying advanced energy project credit for any taxable year is an amount equal to 30 percent of the qualified investment for such taxable year with respect to any qualifying advanced energy project of the taxpayer.

(b) Qualified investment For purposes of subsection (a), the qualified investment for any taxable year is the basis of eligible property placed in service by the taxpayer during such taxable year which is part of a qualifying advanced energy project. Rules similar to the rules of subsections (c)(4) and (d) of section 46 (as in effect on the day before the enactment of the Revenue Reconciliation Act of 1990) shall apply for purposes of this section. The amount which is treated as the qualified investment for all taxable years with respect to any qualifying advanced energy project shall not exceed the amount designated by the Secretary as eligible for the credit under this section.

(c) Definitions The term “qualifying advanced energy project” means a project, any portion of the qualified investment of which is certified by the Secretary under subsection (e) as eligible for a credit under this section— which re-equips, expands, or establishes an industrial or manufacturing facility for the production or recycling of— property designed to be used to produce energy from the sun, water, wind, geothermal deposits (within the meaning of section 613(e)(2)), or other renewable resources, fuel cells, microturbines, or energy storage systems and components, electric grid modernization equipment or components, property designed to capture, remove, use, or sequester carbon oxide emissions, equipment designed to refine, electrolyze, or blend any fuel, chemical, or product which is— renewable, or low-carbon and low-emission, property designed to produce energy conservation technologies (including residential, commercial, and industrial applications), light-, medium-, or heavy-duty electric or fuel cell vehicles, as well as— technologies, components, or materials for such vehicles, and associated charging or refueling infrastructure, hybrid vehicles with a gross vehicle weight rating of not less than 14,000 pounds, as well as technologies, components, or materials for such vehicles, or other advanced energy property designed to reduce greenhouse gas emissions as may be determined by the Secretary, which re-equips an industrial or manufacturing facility with equipment designed to reduce greenhouse gas emissions by at least 20 percent through the installation of— low- or zero-carbon process heat systems, carbon capture, transport, utilization and storage systems, energy efficiency and reduction in waste from industrial processes, or any other industrial technology designed to reduce greenhouse gas emissions, as determined by the Secretary, or which re-equips, expands, or establishes an industrial facility for the processing, refining, or recycling of critical materials (as defined in section 7002(a) of the Energy Act of 2020 ( 30 U.S.C. 1606(a) ) 1 . Such term shall not include any portion of a project for the production of any property which is used in the refining or blending of any transportation fuel (other than renewable fuels). The term “eligible property” means any property— which is necessary for— the production or recycling of property described in clause (i) of paragraph (1)(A), re-equipping an industrial or manufacturing facility described in clause (ii) of such paragraph, or re-equipping, expanding, or establishing an industrial facility described in clause (iii) of such paragraph, which is— tangible personal property, or other tangible property (not including a building or its structural components), but only if such property is used as an integral part of the qualified investment credit facility, and with respect to which depreciation (or amortization in lieu of depreciation) is allowable.

(d) Qualifying advanced energy project program Not later than 180 days after the date of enactment of this section, the Secretary, in consultation with the Secretary of Energy, shall establish a qualifying advanced energy project program to consider and award certifications for qualified investments eligible for credits under this section to qualifying advanced energy project sponsors. The total amount of credits that may be allocated under the program shall not exceed $2,300,000,000. Each applicant for certification under this paragraph shall submit an application containing such information as the Secretary may require during the 2-year period beginning on the date the Secretary establishes the program under paragraph (1). Each applicant for certification shall have 1 year from the date of acceptance by the Secretary of the application during which to provide to the Secretary evidence that the requirements of the certification have been met. An applicant which receives a certification shall have 3 years from the date of issuance of the certification in order to place the project in service and if such project is not placed in service by that time period, then the certification shall no longer be valid. In determining which qualifying advanced energy projects to certify under this section, the Secretary— shall take into consideration only those projects where there is a reasonable expectation of commercial viability, and shall take into consideration which projects— will provide the greatest domestic job creation (both direct and indirect) during the credit period, will provide the greatest net impact in avoiding or reducing air pollutants or anthropogenic emissions of greenhouse gases, have the greatest potential for technological innovation and commercial deployment, have the lowest levelized cost of generated or stored energy, or of measured reduction in energy consumption or greenhouse gas emission (based on costs of the full supply chain), and have the shortest project time from certification to completion. Not later than 4 years after the date of enactment of this section, the Secretary shall review the credits allocated under this section as of such date. The Secretary may reallocate credits awarded under this section if the Secretary determines that— there is an insufficient quantity of qualifying applications for certification pending at the time of the review, or any certification made pursuant to paragraph (2) has been revoked pursuant to paragraph (2)(B) because the project subject to the certification has been delayed as a result of third party opposition or litigation to the proposed project. If the Secretary determines that credits under this section are available for reallocation pursuant to the requirements set forth in paragraph (2), the Secretary is authorized to conduct an additional program for applications for certification. The Secretary shall, upon making a certification under this subsection, publicly disclose the identity of the applicant and the amount of the credit with respect to such applicant.

(e) Additional allocations Not later than 180 days after the date of enactment of this subsection, the Secretary shall establish a program to consider and award certifications for qualified investments eligible for credits under this section to qualifying advanced energy project sponsors. The total amount of credits which may be allocated under the program established under paragraph (1) shall not exceed $10, 000, 000, 000, o f w hi c hn o t g re a t er t han$ 6,000,000,000 may be allocated to qualified investments which are not located within a census tract which— is described in clause (iii) of section 45(b)(11)(B), and prior to the date of enactment of this subsection, had no project which received a certification and allocation of credits under subsection (d). Each applicant for certification under this subsection shall submit an application at such time and containing such information as the Secretary may require. Each applicant for certification shall have 2 years from the date of acceptance by the Secretary of the application during which to provide to the Secretary evidence that the requirements of the certification have been met. An applicant which receives a certification shall have 2 years from the date of issuance of the certification in order to place the project in service and to notify the Secretary that such project has been so placed in service, and if such project is not placed in service by that time period, then the certification shall no longer be valid. If any certification is revoked under this subparagraph, the amount of the limitation under paragraph (2) shall not be increased by the amount of the credit with respect to such revoked certification. In the case of an applicant which receives a certification, if the Secretary determines that the project has been placed in service at a location which is materially different than the location specified in the application for such project, the certification shall no longer be valid. For purposes of allocations under this subsection, the amount of the credit determined under subsection (a) shall be determined by substituting “6 percent” for “30 percent”. In the case of any project which satisfies the requirements of paragraphs (5)(A) and (6), subparagraph (A) shall not apply. The requirements described in this subparagraph with respect to a project are that the taxpayer shall ensure that any laborers and mechanics employed by the taxpayer or any contractor or subcontractor in the re-equipping, expansion, or establishment of a manufacturing facility shall be paid wages at rates not less than the prevailing rates for construction, alteration, or repair of a similar character in the locality in which such project is located as most recently determined by the Secretary of Labor, in accordance with subchapter IV of chapter 31 of title 40, United States Code. Rules similar to the rules of section 45(b)(7)(B) shall apply. Rules similar to the rules of section 45(b)(8) shall apply. The Secretary shall, upon making a certification under this subsection, publicly disclose the identity of the applicant and the amount of the credit with respect to such applicant.

(f) Denial of double benefit A credit shall not be allowed under this section for any qualified investment for which a credit is allowed under section 48, 48A, 48B, 48E, 45Q, or 45V.

§ 48D Advanced manufacturing investment credit

(a) Establishment of credit For purposes of section 46, the advanced manufacturing investment credit for any taxable year is an amount equal to 35 percent of the qualified investment for such taxable year with respect to any advanced manufacturing facility of an eligible taxpayer.

(b) Qualified investment For purposes of subsection (a), the qualified investment with respect to any advanced manufacturing facility for any taxable year is the basis of any qualified property placed in service by the taxpayer during such taxable year which is part of an advanced manufacturing facility. For purposes of this subsection, the term “qualified property” means property— which is tangible property, with respect to which depreciation (or amortization in lieu of depreciation) is allowable, which is— constructed, reconstructed, or erected by the taxpayer, or acquired by the taxpayer if the original use of such property commences with the taxpayer, and which is integral to the operation of the advanced manufacturing facility. The term “qualified property” includes any building or its structural components which otherwise satisfy the requirements under subparagraph (A). Clause (i) shall not apply with respect to a building or portion of a building used for offices, administrative services, or other functions unrelated to manufacturing. For purposes of this section, the term “advanced manufacturing facility” means a facility for which the primary purpose is the manufacturing of semiconductors or semiconductor manufacturing equipment. The qualified investment with respect to any advanced manufacturing facility for any taxable year shall not include that portion of the basis of any property which is attributable to qualified rehabilitation expenditures (as defined in section 47(c)(2)). Rules similar to the rules of subsections (c)(4) and (d) of section 46 (as in effect on the day before the date of the enactment of the Revenue Reconciliation Act of 1990) shall apply for purposes of subsection (a).

(c) Eligible taxpayer For purposes of this section, the term “eligible taxpayer” means any taxpayer which— is not a foreign entity of concern (as defined in section 9901(6) 1 of the William M. (Mac) Thornberry National Defense Authorization Act for Fiscal Year 2021), and has not made an applicable transaction (as defined in section 50(a)) during the taxable year.

(d) Elective payment Except as otherwise provided in paragraph (2)(A), in the case of a taxpayer making an election (at such time and in such manner as the Secretary may provide) under this subsection with respect to the credit determined under subsection (a) with respect to such taxpayer, such taxpayer shall be treated as making a payment against the tax imposed by subtitle A (for the taxable year with respect to which such credit was determined) equal to the amount of such credit. For purposes of this subsection— In the case of the credit determined under subsection (a) with respect to any property held directly by a partnership or S corporation, any election under paragraph (1) shall be made by such partnership or S corporation. If such partnership or S corporation makes an election under such paragraph (in such manner as the Secretary may provide) with respect to such credit— the Secretary shall make a payment to such partnership or S corporation equal to the amount of such credit, paragraph (3) shall be applied with respect to such credit before determining any partner’s distributive share, or shareholder’s pro rata share, of such credit, any amount with respect to which the election in paragraph (1) is made shall be treated as tax exempt income for purposes of sections 705 and 1366, and a partner’s distributive share of such tax exempt income shall be based on such partner’s distributive share of the otherwise applicable credit for each taxable year. In the case of any property held directly by a partnership or S corporation, no election by any partner or shareholder shall be allowed under paragraph (1) with respect to any credit determined under subsection (a) with respect to such property. Any election under paragraph (1) shall be made not later than the due date (including extensions of time) for the return of tax for the taxable year for which the election is made, but in no event earlier than 270 days after the date of the enactment of this section. Any such election, once made, shall be irrevocable. Except as otherwise provided in this subparagraph, any election under paragraph (1) shall apply with respect to any credit for the taxable year for which the election is made. The payment described in paragraph (1) shall be treated as made on the later of the due date (determined without regard to extensions) of the return of tax for the taxable year or the date on which such return is filed. For purposes of section 1324 of title 31 , United States Code, the payments under subparagraph (A)(i)(I) shall be treated in the same manner as a refund due from a credit provision referred to in subsection (b)(2) of such section. As a condition of, and prior to, any amount being treated as a payment which is made by the taxpayer under paragraph (1) or any payment being made pursuant to subparagraph (A), the Secretary may require such information or registration as the Secretary deems necessary or appropriate for purposes of preventing duplication, fraud, improper payments, or excessive payments under this section. In the case of any amount treated as a payment which is made by the taxpayer under paragraph (1), or any payment made pursuant to subparagraph (A), which the Secretary determines constitutes an excessive payment, the tax imposed on such taxpayer by chapter 1 for the taxable year in which such determination is made shall be increased by an amount equal to the sum of— the amount of such excessive payment, plus an amount equal to 20 percent of such excessive payment. Clause (i)(II) shall not apply if the taxpayer demonstrates to the satisfaction of the Secretary that the excessive payment resulted from reasonable cause. For purposes of this subparagraph, the term “excessive payment” means, with respect to property for which an election is made under this subsection for any taxable year, an amount equal to the excess of— the amount treated as a payment which is made by the taxpayer under paragraph (1), or the amount of the payment made pursuant to subparagraph (A), with respect to such property for such taxable year, over the amount of the credit which, without application of this subsection, would be otherwise allowable (determined without regard to section 38(c)) under subsection (a) with respect to such property for such taxable year. In the case of a taxpayer making an election under this subsection with respect to the credit determined under subsection (a), such credit shall be reduced to zero and shall, for any other purposes under this title, be deemed to have been allowed to the taxpayer for such taxable year. In the case of any possession of the United States with a mirror code tax system (as defined in section 24(k)), this subsection shall not be treated as part of the income tax laws of the United States for purposes of determining the income tax law of such possession unless such possession elects to have this subsection be so treated. Rules similar to the rules of subsections (a) and (c) of section 50 shall apply with respect to— any amount treated as a payment which is made by the taxpayer under paragraph (1), and any payment made pursuant to paragraph (2)(A). The Secretary shall issue such regulations or other guidance as may be necessary or appropriate to carry out the purposes of this subsection, including— regulations or other guidance providing rules for determining a partner’s distributive share of the tax exempt income described in paragraph (2)(A)(i)(III), and guidance to ensure that the amount of the payment or deemed payment made under this subsection is commensurate with the amount of the credit that would be otherwise allowable (determined without regard to section 38(c)).

(e) Termination of credit The credit allowed under this section shall not apply to property the construction of which begins after December 31, 2026 .

§ 48E Clean electricity investment credit

(a) Investment credit for qualified property For purposes of section 46, the clean electricity investment credit for any taxable year is an amount equal to the applicable percentage of the qualified investment for such taxable year with respect to— any qualified facility, and any energy storage technology. Subject to paragraph (3)— In the case of any qualified facility which is not described in subclause (I) or (II) of clause (ii) and does not satisfy the requirements described in subclause (III) of such clause, the applicable percentage shall be 6 percent. In the case of any qualified facility— with a maximum net output of less than 1 megawatt (as measured in alternating current), the construction of which begins prior to the date that is 60 days after the Secretary publishes guidance with respect to the requirements of paragraphs (3) and (4) of subsection (d), or which— satisfies the requirements of subsection (d)(3), and with respect to the construction of such facility, satisfies the requirements of subsection (d)(4), the applicable percentage shall be 30 percent. Subject to paragraph (3)— In the case of any energy storage technology which is not described in subclause (I) or (II) of clause (ii) and does not satisfy the requirements described in subclause (III) of such clause, the applicable percentage shall be 6 percent. In the case of any energy storage technology— with a capacity of less than 1 megawatt, the construction of which begins prior to the date that is 60 days after the Secretary publishes guidance with respect to the requirements of paragraphs (3) and (4) of subsection (d), or which— satisfies the requirements of subsection (d)(3), and with respect to the construction of such property, satisfies the requirements of subsection (d)(4), the applicable percentage shall be 30 percent. In the case of any qualified investment with respect to a qualified facility or with respect to energy storage technology which is placed in service within an energy community (as defined in section 45(b)(11)(B), as applied without regard to clause (iv) thereof), for purposes of applying paragraph (2) with respect to such property or investment, the applicable percentage shall be increased by the applicable credit rate increase. For purposes of clause (i), the applicable credit rate increase shall be an amount equal to— in the case of any qualified investment with respect to a qualified facility described in paragraph (2)(A)(i) or with respect to energy storage technology described in paragraph (2)(B)(i), 2 percentage points, and in the case of any qualified investment with respect to a qualified facility described in paragraph (2)(A)(ii) or with respect to energy storage technology described in paragraph (2)(B)(ii), 10 percentage points. Rules similar to the rules of section 48(a)(12) shall apply, except that, for purposes of subparagraph (B) of such section and the application of rules similar to the rules of section 45(b)(9)(B), the adjusted percentage (as determined under section 45(b)(9)(C)) shall be determined as follows: In the case of any qualified investment with respect to any qualified facility or energy storage technology the construction of which begins before June 16, 2025 , 40 percent (or, in the case of a qualified facility which is an offshore wind facility, 20 percent). In the case of any qualified investment with respect to any qualified facility or energy storage technology the construction of which begins on or after June 16, 2025 , and before January 1, 2026 , 45 percent (or, in the case of a qualified facility which is an offshore wind facility, 27.5 percent). In the case of any qualified investment with respect to any qualified facility or energy storage technology the construction of which begins during calendar year 2026, 50 percent (or, in the case of a qualified facility which is an offshore wind facility, 35 percent). In the case of any qualified investment with respect to any qualified facility or energy storage technology the construction of which begins after December 31, 2026 , 55 percent.

(b) Qualified investment with respect to a qualified facility For purposes of subsection (a), the qualified investment with respect to any qualified facility for any taxable year is the sum of— the basis of any qualified property placed in service by the taxpayer during such taxable year which is part of a qualified facility, plus the amount of any expenditures which are— paid or incurred by the taxpayer for qualified interconnection property— in connection with a qualified facility which has a maximum net output of not greater than 5 megawatts (as measured in alternating current), and placed in service during the taxable year of the taxpayer, and properly chargeable to capital account of the taxpayer. For purposes of this section, the term “qualified property” means property— which is— tangible personal property, or other tangible property (not including a building or its structural components), but only if such property is used as an integral part of the qualified facility, with respect to which depreciation (or amortization in lieu of depreciation) is allowable, and the construction, reconstruction, or erection of which is completed by the taxpayer, or which is acquired by the taxpayer if the original use of such property commences with the taxpayer. For purposes of this section, the term “qualified facility” means a facility— which is used for the generation of electricity, which is placed in service after December 31, 2024 , and for which the anticipated greenhouse gas emissions rate (as determined under subparagraph (B)(ii)) is not greater than zero. Rules similar to the rules of section 45Y(b)(1)(C) shall apply for purposes of this paragraph. Rules similar to the rules of section 45Y(b)(2) shall apply for purposes of this paragraph. The term “qualified facility” shall not include any facility for which— a renewable electricity production credit determined under section 45, an advanced nuclear power facility production credit determined under section 45J, a carbon oxide sequestration credit determined under section 45Q, a zero-emission nuclear power production credit determined under section 45U, a clean electricity production credit determined under section 45Y, an energy credit determined under section 48, or a qualifying advanced coal project credit under section 48A, is allowed under section 38 for the taxable year or any prior taxable year. For purposes of this paragraph, the term “qualified interconnection property” has the meaning given such term in section 48(a)(8)(B). The qualified investment with respect to any qualified facility for any taxable year shall not include that portion of the basis of any property which is attributable to qualified rehabilitation expenditures (as defined in section 47(c)(2)). The terms “qualified facility” and “qualified interconnection property” shall not include any facility or property the construction, reconstruction, or erection of which begins after December 31, 2025 , if the construction, reconstruction, or erection of such facility or property includes any material assistance from a prohibited foreign entity (as defined in section 7701(a)(52)). For purposes of this subsection, the terms “CO2e per KWh” and “greenhouse gas emissions rate” have the same meaning given such terms under section 45Y.

(c) Qualified investment with respect to energy storage technology For purposes of subsection (a), the qualified investment with respect to energy storage technology for any taxable year is the basis of any energy storage technology placed in service by the taxpayer during such taxable year. For purposes of this section, the term “energy storage technology” has the meaning given such term in section 48(c)(6) (except that subparagraph (D) of such section shall not apply). The term “energy storage technology” shall not include any property the construction of which begins after December 31, 2025 , if the construction of such property includes any material assistance from a prohibited foreign entity (as defined in section 7701(a)(52)).

(d) Special rules Rules similar to the rules of subsections (c)(4) and (d) of section 46 (as in effect on the day before the date of the enactment of the Revenue Reconciliation Act of 1990) shall apply for purposes of subsection (a). Rules similar to the rules of section 45(b)(3) shall apply. Rules similar to the rules of section 48(a)(10) shall apply. Rules similar to the rules of section 45(b)(8) shall apply. In the case of a taxpayer making an election under section 6417 with respect to a credit under this section, rules similar to the rules of section 45Y(g)(12) shall apply. No credit shall be determined under subsection (a) for any taxable year if the taxpayer is— a specified foreign entity (as defined in section 7701(a)(51)(B)), or a foreign-influenced entity (as defined in section 7701(a)(51)(D), without regard to clause (i)(II) thereof). In the case of a taxpayer for which section 7701(a)(51)(D)(i)(II) is determined to apply for any taxable year, no credit shall be determined under subsection (a) for such taxable year if such determination relates to a qualified facility described in subsection (b)(3) or energy storage technology described in subsection (c)(2).

(e) Credit phase-out Subject to paragraph (4), the amount of the clean electricity investment credit under subsection (a) for any qualified investment with respect to any qualified facility or energy storage technology the construction of which begins during a calendar year described in paragraph (2) shall be equal to the product of— the amount of the credit determined under subsection (a) without regard to this subsection, multiplied by the phase-out percentage under paragraph (2). The phase-out percentage under this paragraph is equal to— for any qualified investment with respect to any qualified facility or energy storage technology the construction of which begins during the first calendar year following the applicable year, 100 percent, for any qualified investment with respect to any qualified facility or energy storage technology the construction of which begins during the second calendar year following the applicable year, 75 percent, for any qualified investment with respect to any qualified facility or energy storage technology the construction of which begins during the third calendar year following the applicable year, 50 percent, and for any qualified investment with respect to any qualified facility or energy storage technology the construction of which begins during any calendar year subsequent to the calendar year described in subparagraph (C), 0 percent. For purposes of this subsection, the term “applicable year” has the same meaning given such term in section 45Y(d)(3). This section shall not apply to any qualified property placed in service by the taxpayer after December 31, 2027 , which is part of an applicable facility. For purposes of this paragraph, the term “applicable facility” means a qualified facility which— uses wind to produce electricity (within the meaning of such term as used in section 45(d)(1), as determined without regard to any requirement under such section with respect to the date on which construction of property begins), or uses solar energy to produce electricity (within the meaning of such term as used in section 45(d)(4), as determined without regard to any requirement under such section with respect to the date on which construction of property begins). This paragraph shall not apply with respect to any energy storage technology which is placed in service at any applicable facility.

(f) Greenhouse gas In this section, the term “greenhouse gas” has the same meaning given such term under section 45Y(e)(2).

(g) Recapture of credit For purposes of section 50, if the Secretary determines that the greenhouse gas emissions rate for a qualified facility is greater than 10 grams of CO 2 e per KWh, any property for which a credit was allowed under this section with respect to such facility shall cease to be investment credit property in the taxable year in which the determination is made.

(h) Special rules for certain facilities placed in service in connection with low-income communities In the case of any applicable facility with respect to which the Secretary makes an allocation of environmental justice capacity limitation under paragraph (4)— the applicable percentage otherwise determined under subsection (a)(2) with respect to any eligible property which is part of such facility shall be increased by— in the case of a facility described in subclause (I) of paragraph (2)(A)(iii) and not described in subclause (II) of such paragraph, 10 percentage points, and in the case of a facility described in subclause (II) of paragraph (2)(A)(iii), 20 percentage points, and the increase in the credit determined under subsection (a) by reason of this subsection for any taxable year with respect to all property which is part of such facility shall not exceed the amount which bears the same ratio to the amount of such increase (determined without regard to this subparagraph) as— the environmental justice capacity limitation allocated to such facility, bears to the total megawatt nameplate capacity of such facility, as measured in direct current. For purposes of this subsection— The term “applicable facility” means any qualified facility— which is not described in section 45Y(b)(2)(B), which has a maximum net output of less than 5 megawatts (as measured in alternating current), and which— is located in a low-income community (as defined in section 45D(e)) or on Indian land (as defined in section 2601(2) of the Energy Policy Act of 1992 ( 25 U.S.C. 3501(2) )), or is part of a qualified low-income residential building project or a qualified low-income economic benefit project. A facility shall be treated as part of a qualified low-income residential building project if— such facility is installed on a residential rental building which participates in a covered housing program (as defined in section 41411(a) of the Violence Against Women Act of 1994 ( 34 U.S.C. 12491(a)(3) ), 1 a housing assistance program administered by the Department of Agriculture under title V of the Housing Act of 1949, a housing program administered by a tribally designated housing entity (as defined in section 4(22) of the Native American Housing Assistance and Self-Determination Act of 1996 ( 25 U.S.C. 4103(22) )) or such other affordable housing programs as the Secretary may provide, and the financial benefits of the electricity produced by such facility are allocated equitably among the occupants of the dwelling units of such building. A facility shall be treated as part of a qualified low-income economic benefit project if at least 50 percent of the financial benefits of the electricity produced by such facility are provided to households with income of— less than 200 percent of the poverty line (as defined in section 36B(d)(3)(A)) applicable to a family of the size involved, or less than 80 percent of area median gross income (as determined under section 142(d)(2)(B)). For purposes of subparagraphs (B) and (C), electricity acquired at a below-market rate shall not fail to be taken into account as a financial benefit. For purposes of this subsection, the term “eligible property” means a qualified investment with respect to any applicable facility. Not later than January 1, 2025 , the Secretary shall establish a program to allocate amounts of environmental justice capacity limitation to applicable facilities. In establishing such program and to carry out the purposes of this subsection, the Secretary shall provide procedures to allow for an efficient allocation process, including, when determined appropriate, consideration of multiple projects in a single application if such projects will be placed in service by a single taxpayer. The amount of environmental justice capacity limitation allocated by the Secretary under subparagraph (A) during any calendar year shall not exceed the annual capacity limitation with respect to such year. For purposes of this paragraph, the term “annual capacity limitation” means 1.8 gigawatts of direct current capacity for each calendar year during the period beginning on January 1, 2025 , and ending on December 31 of the applicable year (as defined in section 45Y(d)(3)), and zero thereafter. If the annual capacity limitation for any calendar year exceeds the aggregate amount allocated for such year under this paragraph, such limitation for the succeeding calendar year shall be increased by the amount of such excess. No amount may be carried under the preceding sentence to any calendar year after the third calendar year following the applicable year (as defined in section 45Y(d)(3)). If the annual capacity limitation for calendar year 2024 under section 48(e)(4)(D) exceeds the aggregate amount allocated for such year under such section, such excess amount may be carried over and applied to the annual capacity limitation under this subsection for calendar year 2025. The annual capacity limitation for calendar year 2025 shall be increased by the amount of such excess. Paragraph (1) shall not apply with respect to any property which is placed in service after the date that is 4 years after the date of the allocation with respect to the facility of which such property is a part. Any amount of environmental justice capacity limitation which expires under clause (i) during any calendar year shall be taken into account as an excess described in subparagraph (D)(i) (or as an increase in such excess) for such calendar year, subject to the limitation imposed by the last sentence of such subparagraph. The Secretary shall, by regulations or other guidance, provide for recapturing the benefit of any increase in the credit allowed under subsection (a) by reason of this subsection with respect to any property which ceases to be property eligible for such increase (but which does not cease to be investment credit property within the meaning of section 50(a)). The period and percentage of such recapture shall be determined under rules similar to the rules of section 50(a). To the extent provided by the Secretary, such recapture may not apply with respect to any property if, within 12 months after the date the taxpayer becomes aware (or reasonably should have become aware) of such property ceasing to be property eligible for such increase, the eligibility of such property for such increase is restored. The preceding sentence shall not apply more than once with respect to any facility.

(i) Denial of credit for expenditures for wind and solar leasing arrangements No credit shall be determined under this section for any qualified investment during the taxable year with respect to property described in paragraph (1) or (4) of section 25D(d) (as applied by substituting “lessee” for “taxpayer”) if the taxpayer rents or leases such property to a third party during such taxable year.

(j) Application to qualified fuel cell property For purposes of this section, in the case of any qualified fuel cell property (as defined in section 48(c)(1), as applied without regard to subparagraph (E) thereof)— subsection (b)(3)(A) shall be applied without regard to clause (iii) thereof, for purposes of subsection (a)(1), the applicable percentage shall be 30 percent and such percentage shall not be increased or otherwise adjusted by any other provision of this section, and subsection (g) shall not apply.

(k) Guidance Not later than January 1, 2025 , the Secretary shall issue guidance regarding implementation of this section.

§ 49 At-risk rules

(a) General rule The credit base of any property to which this paragraph applies shall be reduced by the nonqualified nonrecourse financing with respect to such credit base (as of the close of the taxable year in which placed in service). This paragraph applies to any property which— is placed in service during the taxable year by a taxpayer described in section 465(a)(1), and is used in connection with an activity with respect to which any loss is subject to limitation under section 465. For purposes of this paragraph, the term “credit base” means— the portion of the basis of any qualified rehabilitated building attributable to qualified rehabilitation expenditures, the basis of any energy property, the basis of any property which is part of a qualifying advanced coal project under section 48A, the basis of any property which is part of a qualifying gasification project under section 48B, the basis of any property which is part of a qualifying advanced energy project under section 48C, the basis of any qualified property (as defined in subsection (b)(2) of section 48D) which is part of an advanced manufacturing facility (as defined in subsection (b)(3) of such section), the basis of any qualified property which is part of a qualified facility under section 48E, and the basis of any energy storage technology under section 48E. For purposes of this paragraph and paragraph (2), the term “nonqualified nonrecourse financing” means any nonrecourse financing which is not qualified commercial financing. For purposes of this paragraph, the term “qualified commercial financing” means any financing with respect to any property if— such property is acquired by the taxpayer from a person who is not a related person, the amount of the nonrecourse financing with respect to such property does not exceed 80 percent of the credit base of such property, and such financing is borrowed from a qualified person or represents a loan from any Federal, State, or local government or instrumentality thereof, or is guaranteed by any Federal, State, or local government. Such term shall not include any convertible debt. For purposes of this subparagraph, the term “nonrecourse financing” includes— any amount with respect to which the taxpayer is protected against loss through guarantees, stop-loss agreements, or other similar arrangements, and except to the extent provided in regulations, any amount borrowed from a person who has an interest (other than as a creditor) in the activity in which the property is used or from a related person to a person (other than the taxpayer) having such an interest. In the case of amounts borrowed by a corporation from a shareholder, subclause (II) shall not apply to an interest as a shareholder. For purposes of this paragraph, the term “qualified person” means any person which is actively and regularly engaged in the business of lending money and which is not— a related person with respect to the taxpayer, a person from which the taxpayer acquired the property (or a related person to such person), or a person who receives a fee with respect to the taxpayer’s investment in the property (or a related person to such person). For purposes of this subparagraph, the term “related person” has the meaning given such term by section 465(b)(3)(C). Except as otherwise provided in regulations prescribed by the Secretary, the determination of whether a person is a related person shall be made as of the close of the taxable year in which the property is placed in service. For purposes of this paragraph and paragraph (2)— Except as otherwise provided in this subparagraph, in the case of any partnership or S corporation, the determination of whether a partner’s or shareholder’s allocable share of any financing is nonqualified nonrecourse financing shall be made at the partner or shareholder level. A shareholder of an S corporation shall be treated as liable for his allocable share of any financing provided by a qualified person to such corporation if— such financing is recourse financing (determined at the corporate level), and such financing is provided with respect to qualified business property of such corporation. For purposes of clause (ii), the term “qualified business property” means any property if— such property is used by the corporation in the active conduct of a trade or business, during the entire 12-month period ending on the last day of the taxable year, such corporation had at least 3 full-time employees who were not owner-employees (as defined in section 465(c)(7)(E)(i)) and substantially all the services of whom were services directly related to such trade or business, and during the entire 12-month period ending on the last day of such taxable year, such corporation had at least 1 full-time employee substantially all of the services of whom were in the active management of the trade or business. The determination of any partner’s or shareholder’s allocable share of any financing shall be made in the same manner as the credit allowable by section 38 with respect to such property. Rules similar to the rules of subparagraph (F) of section 46(c)(8) (as in effect on the day before the date of the enactment of the Revenue Reconciliation Act of 1990) shall apply for purposes of this paragraph. If, at the close of a taxable year following the taxable year in which the property was placed in service, there is a net decrease in the amount of nonqualified nonrecourse financing with respect to such property, such net decrease shall be taken into account as an increase in the credit base for such property in accordance with subparagraph (C). For purposes of this paragraph, nonqualified nonrecourse financing shall not be treated as decreased through the surrender or other use of property financed by nonqualified nonrecourse financing. For purposes of determining the amount of credit allowable under section 38 and the amount of credit subject to the early disposition or cessation rules under section 50(a), any increase in a taxpayer’s credit base for any property by reason of this paragraph shall be taken into account as if it were property placed in service by the taxpayer in the taxable year in which the property referred to in subparagraph (A) was first placed in service. Any credit allowable under this subpart for any increase in qualified investment by reason of this paragraph shall be treated as earned during the taxable year of the decrease in the amount of nonqualified nonrecourse financing.

(b) Increases in nonqualified nonrecourse financing If, as of the close of the taxable year, there is a net increase with respect to the taxpayer in the amount of nonqualified nonrecourse financing (within the meaning of subsection (a)(1)) with respect to any property to which subsection (a)(1) applied, then the tax under this chapter for such taxable year shall be increased by an amount equal to the aggregate decrease in credits allowed under section 38 for all prior taxable years which would have resulted from reducing the credit base (as defined in subsection (a)(1)(C)) taken into account with respect to such property by the amount of such net increase. For purposes of determining the amount of credit subject to the early disposition or cessation rules of section 50(a), the net increase in the amount of the nonqualified nonrecourse financing with respect to the property shall be treated as reducing the property’s credit base in the year in which the property was first placed in service. For purposes of paragraph (1), the amount of nonqualified nonrecourse financing (within the meaning of subsection (a)(1)(D)) with respect to the taxpayer shall not be treated as increased by reason of a transfer of (or agreement to transfer) any evidence of any indebtedness if such transfer occurs (or such agreement is entered into) more than 1 year after the date such indebtedness was incurred. Rules similar to the rules of section 47(d)(3) (as in effect on the day before the date of the enactment of the Revenue Reconciliation Act of 1990) shall apply for purposes of this subsection. Any increase in tax under paragraph (1) shall not be treated as tax imposed by this chapter for purposes of determining the amount of any credit allowable under this chapter.

“If, for any taxable year beginning after December 31, 1985 , the requirements of paragraph (1) or (2) of section 46(f) of the Internal Revenue Code of 1986 are not met with respect to public utility property to which the regular percentage applied for purposes of determining the amount of the investment tax credit— all credits for open taxable years as of the time of the final determination referred to in section 46(f)(4)(A) of such Code shall be recaptured, and if the amount of the taxpayer’s unamortized credits (or the credits not previously restored to rate base) with respect to such property (whether or not for open years) exceeds the amount referred to in paragraph (1), the taxpayer’s tax for the taxable year shall be increased by the amount of such excess. If any portion of the excess described in paragraph (2) is attributable to a credit which is allowable as a carryover to a taxable year beginning after December 31, 1985 , in lieu of applying paragraph (2) with respect to such portion, the amount of such carryover shall be reduced by the amount of such portion. Rules similar to the rules of this subsection shall apply in the case of any property with respect to which the requirements of section 46(f)(9) of such Code are met.”

§ 50 Other special rules

(a) Recapture in case of dispositions, etc. Under regulations prescribed by the Secretary— If, during any taxable year, investment credit property is disposed of, or otherwise ceases to be investment credit property with respect to the taxpayer, before the close of the recapture period, then the tax under this chapter for such taxable year shall be increased by the recapture percentage of the aggregate decrease in the credits allowed under section 38 for all prior taxable years which would have resulted solely from reducing to zero any credit determined under this subpart with respect to such property. For purposes of subparagraph (A), the recapture percentage shall be determined in accordance with the following table: If the property ceases to be investment credit property within— The recapture percentage is: (i) One full year after placed in service 100 (ii) One full year after the close of the period described in clause (i) 80 (iii) One full year after the close of the period described in clause (ii) 60 (iv) One full year after the close of the period described in clause (iii) 40 (v) One full year after the close of the period described in clause (iv) 20 If during any taxable year any building to which section 47(d) applied ceases (by reason of sale or other disposition, cancellation or abandonment of contract, or otherwise) to be, with respect to the taxpayer, property which, when placed in service, will be a qualified rehabilitated building, then the tax under this chapter for such taxable year shall be increased by an amount equal to the aggregate decrease in the credits allowed under section 38 for all prior taxable years which would have resulted solely from reducing to zero the credit determined under this subpart with respect to such building. Any amount which would have been applied as a reduction under paragraph (2) of section 47(b) but for the fact that a reduction under such paragraph cannot reduce the amount taken into account under section 47(b)(1) below zero shall be treated as an amount required to be recaptured under subparagraph (A) for the taxable year during which the building is placed in service. Under regulations prescribed by the Secretary, a sale by, and leaseback to, a taxpayer who, when the property is placed in service, will be a lessee to whom the rules referred to in subsection (d)(5) apply shall not be treated as a cessation described in subparagraph (A) to the extent that the amount which will be passed through to the lessee under such rules with respect to such property is not less than the qualified rehabilitation expenditures properly taken into account by the lessee under section 47(d) with respect to such property. If, after property is placed in service, there is a disposition or other cessation described in paragraph (1), then paragraph (1) shall be applied as if any credit which was allowable by reason of section 47(d) and which has not been required to be recaptured before such disposition, cessation, or change in use were allowable for the taxable year the property was placed in service. Rules similar to the rules of this paragraph shall apply in cases where qualified progress expenditures were taken into account under the rules referred to in section 48(b), 48A(b)(3), 48B(b)(3), 48C(b)(2), 48D(b)(5), or 48E(e). If there is a an applicable transaction by an applicable taxpayer before the close of the 10-year period beginning on the date such taxpayer placed in service investment credit property which is eligible for the advanced manufacturing investment credit under section 48D(a), then the tax under this chapter for the taxable year in which such transaction occurs shall be increased by 100 percent of the aggregate decrease in the credits allowed under section 38 for all prior taxable years which would have resulted solely from reducing to zero any credit determined under section 46 which is attributable to the advanced manufacturing investment credit under section 48D(a) with respect to such property. Subparagraph (A) shall not apply if the applicable taxpayer demonstrates to the satisfaction of the Secretary that the applicable transaction has been ceased or abandoned within 45 days of a determination and notice by the Secretary. The Secretary shall issue such regulations or other guidance as the Secretary determines necessary or appropriate to carry out the purposes of this paragraph, including regulations or other guidance which provide for requirements for recordkeeping or information reporting for purposes of administering the requirements of this paragraph. If there is an applicable payment made by a specified taxpayer before the close of the 10-year period beginning on the date such taxpayer placed in service investment credit property which is eligible for the clean electricity investment credit under section 48E(a), then the tax under this chapter for the taxable year in which such applicable payment occurs shall be increased by 100 percent of the aggregate decrease in the credits allowed under section 38 for all prior taxable years which would have resulted solely from reducing to zero any credit determined under section 46 which is attributable to the clean electricity investment credit under section 48E(a) with respect to such property. For purposes of this paragraph, the term “applicable payment” means, with respect to any taxable year, a payment or payments described in section 7701(a)(51)(D)(i)(II). For purposes of this paragraph, the term “specified taxpayer” means any taxpayer who has been allowed a credit under section 48E(a) for any taxable year beginning after the date which is 2 years after the date of enactment of this paragraph. In the case of any cessation described in paragraph (1) or (2), any applicable transaction to which paragraph (3)(A) applies, or any applicable payment to which paragraph (4)(A) applies, the carrybacks and carryovers under section 39 shall be adjusted by reason of such cessation or applicable transaction. Paragraphs (1) and (2) shall not apply to— a transfer by reason of death, or a transaction to which section 381(a) applies. For purposes of this subsection, property shall not be treated as ceasing to be investment credit property with respect to the taxpayer by reason of a mere change in the form of conducting the trade or business so long as the property is retained in such trade or business as investment credit property and the taxpayer retains a substantial interest in such trade or business. For purposes of this subsection, the term “investment credit property” means any property eligible for a credit determined under this subpart. In the case of any transfer described in subsection (a) of section 1041— the foregoing provisions of this subsection shall not apply, and the same tax treatment under this subsection with respect to the transferred property shall apply to the transferee as would have applied to the transferor. Any increase in tax under paragraph (1), (2), (3), or (4) shall not be treated as tax imposed by this chapter for purposes of determining the amount of any credit allowable under this chapter. For purposes of this subsection— The term “applicable transaction” means, with respect to any applicable taxpayer, any significant transaction (as determined by the Secretary, in coordination with the Secretary of Commerce and the Secretary of Defense) involving the material expansion of semiconductor manufacturing capacity of such applicable taxpayer in the People’s Republic of China or a foreign country of concern (as defined in section 9901(7) of the William M. (Mac) Thornberry National Defense Authorization Act for Fiscal Year 2021). Such term shall not include a transaction which primarily involves the expansion of manufacturing capacity for legacy semiconductors (as defined in section 9902(a)(6) of the William M. (Mac) Thornberry National Defense Authorization Act for Fiscal Year 2021). For purposes of this subsection, the term “applicable taxpayer” means any taxpayer who has been allowed a credit under section 48D(a) for any prior taxable year.

(b) Certain property not eligible No credit shall be determined under this subpart with respect to— Except as provided in subparagraph (B), no credit shall be determined under this subpart with respect to any property which is used predominantly outside the United States. Subparagraph (A) shall not apply to any property described in section 168(g)(4). No credit shall be determined under this subpart with respect to any property which is used predominantly to furnish lodging or in connection with the furnishing of lodging. The preceding sentence shall not apply to— nonlodging commercial facilities which are available to persons not using the lodging facilities on the same basis as they are available to persons using the lodging facilities; property used by a hotel or motel in connection with the trade or business of furnishing lodging where the predominant portion of the accommodations is used by transients; a certified historic structure to the extent of that portion of the basis which is attributable to qualified rehabilitation expenditures; and any energy property. No credit shall be determined under this subpart with respect to any property used by an organization (other than a cooperative described in section 521) which is exempt from the tax imposed by this chapter unless such property is used predominantly in an unrelated trade or business the income of which is subject to tax under section 511. If the property is debt-financed property (as defined in section 514(b)), the amount taken into account for purposes of determining the amount of the credit under this subpart with respect to such property shall be that percentage of the amount (which but for this paragraph would be so taken into account) which is the same percentage as is used under section 514(a), for the year the property is placed in service, in computing the amount of gross income to be taken into account during such taxable year with respect to such property. If any qualified rehabilitated building is used by the tax-exempt organization pursuant to a lease, this paragraph shall not apply for purposes of determining the amount of the rehabilitation credit. No credit shall be determined under this subpart with respect to any property used— by the United States, any State or political subdivision thereof, any possession of the United States, or any agency or instrumentality of any of the foregoing, or by any foreign person or entity (as defined in section 168(h)(2)(C)), but only with respect to property to which section 168(h)(2)(A)(iii) applies (determined after the application of section 168(h)(2)(B)). This paragraph and paragraph (3) shall not apply to any property by reason of use under a lease with a term of less than 6 months (determined under section 168(i)(3)). If any qualified rehabilitated building is leased to a governmental unit (or a foreign person or entity) this paragraph shall not apply for purposes of determining the rehabilitation credit with respect to such building. For purposes of this paragraph and paragraph (3), rules similar to the rules of paragraphs (5) and (6) of section 168(h) shall apply. For special rules for the application of this paragraph and paragraph (3), see section 168(h).

(c) Basis adjustment to investment credit property For purposes of this subtitle, if a credit is determined under this subpart with respect to any property, the basis of such property shall be reduced by the amount of the credit so determined. If during any taxable year there is a recapture amount determined with respect to any property the basis of which was reduced under paragraph (1), the basis of such property (immediately before the event resulting in such recapture) shall be increased by an amount equal to such recapture amount. For purposes of the preceding sentence, the term “recapture amount” means any increase in tax (or adjustment in carrybacks or carryovers) determined under subsection (a). In the case of any energy credit or clean electricity investment credit— only 50 percent of such credit shall be taken into account under paragraph (1), only 50 percent of any recapture amount attributable to such credit shall be taken into account under paragraph (2), and paragraph (1) shall not apply for purposes of determining eligible basis under section 42. For purposes of sections 1245 and 1250, any reduction under this subsection shall be treated as a deduction allowed for depreciation. For purposes of section 1250(b), the determination of what would have been the depreciation adjustments under the straight line method shall be made as if there had been no reduction under this section. The adjusted basis of— a partner’s interest in a partnership, and stock in an S corporation, shall be appropriately adjusted to take into account adjustments made under this subsection in the basis of property held by the partnership or S corporation (as the case may be).

(d) Certain rules made applicable For purposes of this subpart, rules similar to the rules of the following provisions (as in effect on the day before the date of the enactment of the Revenue Reconciliation Act of 1990) shall apply: Section 46(e) (relating to limitations with respect to certain persons). Section 46(f) (relating to limitation in case of certain regulated companies). At the election of a taxpayer, this paragraph shall not apply to any energy storage technology (as defined in section 48(c)(6)), provided— no election under this paragraph shall be permitted if the making of such election is prohibited by a State or political subdivision thereof, by any agency or instrumentality of the United States, or by a public service or public utility commission or other similar body of any State or political subdivision that regulates public utilities as described in section 7701(a)(33)(A), an election under this paragraph shall be made separately with respect to each energy storage technology by the due date (including extensions) of the Federal tax return for the taxable year in which the energy storage technology is placed in service by the taxpayer, and once made, may be revoked only with the consent of the Secretary, and an election shall not apply with respect to any energy storage technology if such energy storage technology has a maximum capacity equal to or less than 500 kilowatt hours. Section 46(h) (relating to special rules for cooperatives). Paragraphs (2) and (3) of section 48(b) (relating to special rule for sale-leasebacks). Section 48(d) (relating to certain leased property). Section 48(f) (relating to estates and trusts). Section 48(r) (relating to certain 501(d) organizations). Paragraphs (1)(A), (2)(A), and (4) of the section 46(e) referred to in paragraph (1) of this subsection shall not apply to any taxable year beginning after December 31, 1995 . In the case of a real estate investment trust making an election under section 6418, paragraphs (1)(B) and (2)(B) of the section 46(e) referred to in paragraph (1) of this subsection shall not apply to any investment credit property of such real estate investment trust to which such election applies.

(e) Rules for geothermal heat pumps For purposes of this section and section 168, the ownership of energy property described in section 48(a)(3)(A)(vii) shall be determined without regard to whether such property is readily usable by a person other than the lessee or service recipient.

[§§ 50A, 50B Repealed. Pub. L. 98–369, div. A, title IV, § 474(m)(2), July 18, 1984, 98 Stat. 833]

§ 51 Amount of credit

(a) Determination of amount For purposes of section 38, the amount of the work opportunity credit determined under this section for the taxable year shall be equal to 40 percent of the qualified first-year wages for such year.

(b) Qualified wages defined For purposes of this subpart— The term “qualified wages” means the wages paid or incurred by the employer during the taxable year to individuals who are members of a targeted group. The term “qualified first-year wages” means, with respect to any individual, qualified wages attributable to service rendered during the 1-year period beginning with the day the individual begins work for the employer. The amount of the qualified first-year wages which may be taken into account with respect to any individual shall not exceed $6, 000 p erye a r ($ 12,000 per year in the case of any individual who is a qualified veteran by reason of subsection (d)(3)(A)(ii)(I), $14, 000 p erye a r in t h ec a seo f an y in d i v i d u a lw h o i s a q u a l i f i e d v e t er anb yre a so n o f s u b sec t i o n (d) (3) (A) (i v), an d$ 24,000 per year in the case of any individual who is a qualified veteran by reason of subsection (d)(3)(A)(ii)(II)).

(c) Wages defined For purposes of this subpart— Except as otherwise provided in this subsection and subsection (h)(2), the term “wages” has the meaning given to such term by subsection (b) of section 3306 (determined without regard to any dollar limitation contained in such section). The term “wages” shall not include any amounts paid or incurred by an employer for any period to any individual for whom the employer receives federally funded payments for on-the-job training of such individual for such period. The amount of wages which would (but for this subparagraph) be qualified wages under this section for an employer with respect to an individual for a taxable year shall be reduced by an amount equal to the amount of the payments made to such employer (however utilized by such employer) with respect to such individual for such taxable year under a program established under section 482(e) 1 of the Social Security Act. If— the principal place of employment of an individual with the employer is at a plant or facility, and there is a strike or lockout involving employees at such plant or facility, the term “wages” shall not include any amount paid or incurred by the employer to such individual for services which are the same as, or substantially similar to, those services performed by employees participating in, or affected by, the strike or lockout during the period of such strike or lockout. The term “wages” shall not include any amount paid or incurred to an individual who begins work for the employer after December 31, 2025 . The term “wages” shall not include any amount paid or incurred to a qualified individual (as defined in section 3111(d)(3)) 1 during the 1-year period beginning on the hiring date of such individual by a qualified employer (as defined in section 3111(d)) 1 unless such qualified employer makes an election not to have section 3111(d) 1 apply.

(d) Members of targeted groups For purposes of this subpart— An individual is a member of a targeted group if such individual is— a qualified IV–A recipient, a qualified veteran, a qualified ex-felon, a designated community resident, a vocational rehabilitation referral, a qualified summer youth employee, a qualified supplemental nutrition assistance program benefits recipient, a qualified SSI recipient, a long-term family assistance recipient, or a qualified long-term unemployment recipient. The term “qualified IV–A recipient” means any individual who is certified by the designated local agency as being a member of a family receiving assistance under a IV–A program for any 9 months during the 18-month period ending on the hiring date. For purposes of this paragraph, the term “IV–A program” means any program providing assistance under a State program funded under part A of title IV of the Social Security Act and any successor of such program. The term “qualified veteran” means any veteran who is certified by the designated local agency as— being a member of a family receiving assistance under a supplemental nutrition assistance program under the Food and Nutrition Act of 2008 for at least a 3-month period ending during the 12-month period ending on the hiring date, entitled to compensation for a service-connected disability, and— having a hiring date which is not more that 1 year after having been discharged or released from active duty in the Armed Forces of the United States, or having aggregate periods of unemployment during the 1-year period ending on the hiring date which equal or exceed 6 months, having aggregate periods of unemployment during the 1-year period ending on the hiring date which equal or exceed 4 weeks (but less than 6 months), or having aggregate periods of unemployment during the 1-year period ending on the hiring date which equal or exceed 6 months. For purposes of subparagraph (A), the term “veteran” means any individual who is certified by the designated local agency as— having served on active duty (other than active duty for training) in the Armed Forces of the United States for a period of more than 180 days, or having been discharged or released from active duty in the Armed Forces of the United States for a service-connected disability, and not having any day during the 60-day period ending on the hiring date which was a day of extended active duty in the Armed Forces of the United States. For purposes of clause (ii), the term “extended active duty” means a period of more than 90 days during which the individual was on active duty (other than active duty for training). For purposes of subparagraph (A), the terms “compensation” and “service-connected” have the meanings given such terms under section 101 of title 38 , United States Code. The term “qualified ex-felon” means any individual who is certified by the designated local agency— as having been convicted of a felony under any statute of the United States or any State, and as having a hiring date which is not more than 1 year after the last date on which such individual was so convicted or was released from prison. The term “designated community resident” means any individual who is certified by the designated local agency— as having attained age 18 but not age 40 on the hiring date, and as having his principal place of abode within an empowerment zone, enterprise community, renewal community, or rural renewal county. In the case of a designated community resident, the term “qualified wages” shall not include wages paid or incurred for services performed while the individual’s principal place of abode is outside an empowerment zone, enterprise community, renewal community, or rural renewal county. For purposes of this paragraph, the term “rural renewal county” means any county which— is outside a metropolitan statistical area (defined as such by the Office of Management and Budget), and during the 5-year periods 1990 through 1994 and 1995 through 1999 had a net population loss. The term “vocational rehabilitation referral” means any individual who is certified by the designated local agency as— having a physical or mental disability which, for such individual, constitutes or results in a substantial handicap to employment, and having been referred to the employer upon completion of (or while receiving) rehabilitative services pursuant to— an individualized written plan for employment under a State plan for vocational rehabilitation services approved under the Rehabilitation Act of 1973, a program of vocational rehabilitation carried out under chapter 31 of title 38, United States Code, or an individual work plan developed and implemented by an employment network pursuant to subsection (g) of section 1148 of the Social Security Act with respect to which the requirements of such subsection are met. The term “qualified summer youth employee” means any individual— who performs services for the employer between May 1 and September 15, who is certified by the designated local agency as having attained age 16 but not 18 on the hiring date (or if later, on May 1 of the calendar year involved), who has not been an employee of the employer during any period prior to the 90-day period described in subparagraph (B)(i), and who is certified by the designated local agency as having his principal place of abode within an empowerment zone, enterprise community, or renewal community. For purposes of applying this subpart to wages paid or incurred to any qualified summer youth employee— subsection (b)(2) shall be applied by substituting “any 90-day period between May 1 and September 15” for “the 1-year period beginning with the day the individual begins work for the employer”, and subsection (b)(3) shall be applied by substituting “ $3, 000” f or “$ 6,000”. The preceding sentence shall not apply to an individual who, with respect to the same employer, is certified as a member of another targeted group after such individual has been a qualified summer youth employee. Paragraph (5)(B) shall apply for purposes of subparagraph (A)(iv). The term “qualified supplemental nutrition assistance program benefits recipient” means any individual who is certified by the designated local agency— as having attained age 18 but not age 40 on the hiring date, and as being a member of a family— receiving assistance under a supplemental nutrition assistance program under the Food and Nutrition Act of 2008 for the 6-month period ending on the hiring date, or receiving such assistance for at least 3 months of the 5-month period ending on the hiring date, in the case of a member of a family who ceases to be eligible for such assistance under section 6( o ) of the Food and Nutrition Act of 2008. Notwithstanding any other provision of law, the Secretary of the Treasury and the Secretary of Agriculture shall enter into an agreement to provide information to designated local agencies with respect to participation in the supplemental nutrition assistance program. The term “qualified SSI recipient” means any individual who is certified by the designated local agency as receiving supplemental security income benefits under title XVI of the Social Security Act (including supplemental security income benefits of the type described in section 1616 of such Act or section 212 of Public Law 93–66 ) for any month ending within the 60-day period ending on the hiring date. The term “long-term family assistance recipient” means any individual who is certified by the designated local agency— as being a member of a family receiving assistance under a IV–A program (as defined in paragraph (2)(B)) for at least the 18-month period ending on the hiring date, as being a member of a family receiving such assistance for 18 months beginning after August 5, 1997 , and as having a hiring date which is not more than 2 years after the end of the earliest such 18-month period, or as being a member of a family which ceased to be eligible for such assistance by reason of any limitation imposed by Federal or State law on the maximum period such assistance is payable to a family, and as having a hiring date which is not more than 2 years after the date of such cessation. The term “hiring date” means the day the individual is hired by the employer. The term “designated local agency” means a State employment security agency established in accordance with the Act of June 6, 1933 , as amended ( 29 U.S.C. 49–49n ). An individual shall not be treated as a member of a targeted group unless— on or before the day on which such individual begins work for the employer, the employer has received a certification from a designated local agency that such individual is a member of a targeted group, or on or before the day the individual is offered employment with the employer, a pre-screening notice is completed by the employer with respect to such individual, and not later than the 28th day after the individual begins work for the employer, the employer submits such notice, signed by the employer and the individual under penalties of perjury, to the designated local agency as part of a written request for such a certification from such agency. For purposes of this paragraph, the term “pre-screening notice” means a document (in such form as the Secretary shall prescribe) which contains information provided by the individual on the basis of which the employer believes that the individual is a member of a targeted group. If— an individual has been certified by a designated local agency as a member of a targeted group, and such certification is incorrect because it was based on false information provided by such individual, the certification shall be revoked and wages paid by the employer after the date on which notice of revocation is received by the employer shall not be treated as qualified wages. If a designated local agency denies a request for certification of membership in a targeted group, such agency shall provide to the person making such request a written explanation of the reasons for such denial. Notwithstanding subparagraph (A), for purposes of paragraph (3)(A)— a veteran will be treated as certified by the designated local agency as having aggregate periods of unemployment meeting the requirements of clause (ii)(II) or (iv) of such paragraph (whichever is applicable) if such veteran is certified by such agency as being in receipt of unemployment compensation under State or Federal law for not less than 6 months during the 1-year period ending on the hiring date, and a veteran will be treated as certified by the designated local agency as having aggregate periods of unemployment meeting the requirements of clause (iii) of such paragraph if such veteran is certified by such agency as being in receipt of unemployment compensation under State or Federal law for not less than 4 weeks (but less than 6 months) during the 1-year period ending on the hiring date. The Secretary may provide alternative methods for certification of a veteran as a qualified veteran described in clause (ii)(II), (iii), or (iv) of paragraph (3)(A), at the Secretary’s discretion. Any unemployed veteran or disconnected youth who begins work for the employer during 2009 or 2010 shall be treated as a member of a targeted group for purposes of this subpart. For purposes of this paragraph— The term “unemployed veteran” means any veteran (as defined in paragraph (3)(B), determined without regard to clause (ii) thereof) who is certified by the designated local agency as— having been discharged or released from active duty in the Armed Forces at any time during the 5-year period ending on the hiring date, and being in receipt of unemployment compensation under State or Federal law for not less than 4 weeks during the 1-year period ending on the hiring date. The term “disconnected youth” means any individual who is certified by the designated local agency— as having attained age 16 but not age 25 on the hiring date, as not regularly attending any secondary, technical, or post-secondary school during the 6-month period preceding the hiring date, as not regularly employed during such 6-month period, and as not readily employable by reason of lacking a sufficient number of basic skills. The term “qualified long-term unemployment recipient” means any individual who is certified by the designated local agency as being in a period of unemployment which— is not less than 27 consecutive weeks, and includes a period in which the individual was receiving unemployment compensation under State or Federal law.

(e) Credit for second-year wages for employment of long-term family assistance recipients With respect to the employment of a long-term family assistance recipient— the amount of the work opportunity credit determined under this section for the taxable year shall include 50 percent of the qualified second-year wages for such year, and in lieu of applying subsection (b)(3), the amount of the qualified first-year wages, and the amount of qualified second-year wages, which may be taken into account with respect to such a recipient shall not exceed $10, 000 p erye a r . F or p u r p oseso f t hi ss u b sec t i o n, t h e t er m “ q u a l i f i e d seco n d - ye a r w a g es ” m e an s q u a l i f i e d w a g es — w hi c ha re p ai d t o a l o n g - t er m f ami l y a ss i s t an cerec i p i e n t, an d w hi c ha re a tt r ib u t ab l e t oser v i cere n d ere dd u r in g t h e 1 - ye a r p er i o d b e g innin g o n t h e d a y a f t er t h e l a s t d a yo f t h e 1 - ye a r p er i o d w i t h res p ec tt os u c h rec i p i e n t d e t er min e d u n d ers u b sec t i o n (b) (2) . I f s u c h rec i p i e n t i s an e m pl oyee t o w h o m s u b p a r a g r a p h (A) or (B) o f s u b sec t i o n (h) (1) a ppl i es, r u l ess imi l a r t o t h er u l eso f s u c h s u b p a r a g r a p h ss ha ll a ppl ye x ce ptt ha t — s u c h s u b p a r a g r a p h (A) s ha ll b e a ppl i e d b ys u b s t i t u t in g “$ 10,000” for “ $6, 000”, an d s u c h s u b p a r a g r a p h (B) s ha ll b e a ppl i e d b ys u b s t i t u t in g “$ 833.33” for “$500”.

(f) Remuneration must be for trade or business employment For purposes of this subpart, remuneration paid by an employer to an employee during any taxable year shall be taken into account only if more than one-half of the remuneration so paid is for services performed in a trade or business of the employer. Any determination as to whether paragraph (1), or subparagraph (A) or (B) of subsection (h)(1), applies with respect to any employee for any taxable year shall be made without regard to subsections (a) and (b) of section 52.

(g) United States Employment Service to notify employers of availability of credit The United States Employment Service, in consultation with the Internal Revenue Service, shall take such steps as may be necessary or appropriate to keep employers apprised of the availability of the work opportunity credit determined under this subpart.

(h) Special rules for agricultural labor and railway labor For purposes of this subpart— If the services performed by any employee for an employer during more than one-half of any pay period (within the meaning of section 3306(d)) taken into account with respect to any year constitute agricultural labor (within the meaning of section 3306(k)), the term “unemployment insurance wages” means, with respect to the remuneration paid by the employer to such employee for such year, an amount equal to so much of such remuneration as constitutes “wages” within the meaning of section 3121(a), except that the contribution and benefit base for each calendar year shall be deemed to be $6, 000. I f m ore t han o n e - ha l f o f re m u n er a t i o n p ai d b y an e m pl oyer t o an e m pl oyee d u r in g an yye a r i sre m u n er a t i o n f orser v i ce d escr ib e d in sec t i o n 3306 (c) (9), t h e t er m “ u n e m pl oy m e n t in s u r an ce w a g es ” m e an s, w i t h res p ec tt os u c h e m pl oyee f ors u c h ye a r, anam o u n t e q u a lt oso m u c h o f t h ere m u n er a t i o n p ai d t os u c h e m pl oyee d u r in g s u c h ye a r w hi c h w o u l d b es u bj ec tt oco n t r ib u t i o n s u n d ersec t i o n 8 (a) o f t h e R ai l ro a d U n e m pl oy m e n t I n s u r an ce A c t (45 U . S . C .358 (a)) i f t h e ma x im u mam o u n t s u bj ec tt os u c h co n t r ib u t i o n s w ere$ 500 per month. In any case to which subparagraph (A) or (B) of paragraph (1) applies, the term “wages” means unemployment insurance wages (determined without regard to any dollar limitation).

(i) Certain individuals ineligible No wages shall be taken into account under subsection (a) with respect to an individual who— bears any of the relationships described in subparagraphs (A) through (G) of section 152(d)(2) to the taxpayer, or, if the taxpayer is a corporation, to an individual who owns, directly or indirectly, more than 50 percent in value of the outstanding stock of the corporation, or, if the taxpayer is an entity other than a corporation, to any individual who owns, directly or indirectly, more than 50 percent of the capital and profits interests in the entity (determined with the application of section 267(c)), if the taxpayer is an estate or trust, is a grantor, beneficiary, or fiduciary of the estate or trust, or is an individual who bears any of the relationships described in subparagraphs (A) through (G) of section 152(d)(2) to a grantor, beneficiary, or fiduciary of the estate or trust, or is a dependent (described in section 152(d)(2)(H)) of the taxpayer, or, if the taxpayer is a corporation, of an individual described in subparagraph (A), or, if the taxpayer is an estate or trust, of a grantor, beneficiary, or fiduciary of the estate or trust. No wages shall be taken into account under subsection (a) with respect to any individual if, prior to the hiring date of such individual, such individual had been employed by the employer at any time. In the case of an individual who has performed at least 120 hours, but less than 400 hours, of service for the employer, subsection (a) shall be applied by substituting “25 percent” for “40 percent”. No wages shall be taken into account under subsection (a) with respect to any individual unless such individual has performed at least 120 hours of service for the employer.

(j) Election to have work opportunity credit not apply A taxpayer may elect to have this section not apply for any taxable year. An election under paragraph (1) for any taxable year may be made (or revoked) at any time before the expiration of the 3-year period beginning on the last date prescribed by law for filing the return for such taxable year (determined without regard to extensions). An election under paragraph (1) (or revocation thereof) shall be made in such manner as the Secretary may by regulations prescribe.

(k) Treatment of successor employers; treatment of employees performing services for other persons Under regulations prescribed by the Secretary, in the case of a successor employer referred to in section 3306(b)(1), the determination of the amount of the credit under this section with respect to wages paid by such successor employer shall be made in the same manner as if such wages were paid by the predecessor employer referred to in such section. No credit shall be determined under this section with respect to remuneration paid by an employer to an employee for services performed by such employee for another person unless the amount reasonably expected to be received by the employer for such services from such other person exceeds the remuneration paid by the employer to such employee for such services.

“There is authorized to be appropriated for each fiscal year such sums as may be necessary, to carry out the functions described by the amendments made by paragraph (1) [amending this section], except that, of the amounts appropriated pursuant to this paragraph— $5,000,000 shall be used to test whether individuals certified as members of targeted groups under section 51 of such Code are eligible for such certification (including the use of statistical sampling techniques), and the remainder shall be distributed under performance standards prescribed by the Secretary of Labor. The Secretary of Labor shall each calendar year beginning with calendar year 1983 report to the Committee on Ways and Means of the House of Representatives and to the Committee on Finance of the Senate with respect to the results of the testing conducted under subparagraph (A) during the preceding calendar year.”

[§ 51A Repealed. Pub. L. 109–432, div. A, title I, § 105(e)(4)(A), Dec. 20, 2006, 120 Stat. 2937]

§ 52 Special rules

(a) Controlled group of corporations For purposes of this subpart, all employees of all corporations which are members of the same controlled group of corporations shall be treated as employed by a single employer. In any such case, the credit (if any) determined under section 51(a) with respect to each such member shall be its proportionate share of the wages giving rise to such credit. For purposes of this subsection, the term “controlled group of corporations” has the meaning given to such term by section 1563(a), except that— “more than 50 percent” shall be substituted for “at least 80 percent” each place it appears in section 1563(a)(1), and the determination shall be made without regard to subsections (a)(4) and (e)(3)(C) of section 1563.

(b) Employees of partnerships, proprietorships, etc., which are under common control For purposes of this subpart, under regulations prescribed by the Secretary— all employees of trades or business (whether or not incorporated) which are under common control shall be treated as employed by a single employer, and the credit (if any) determined under section 51(a) with respect to each trade or business shall be its proportionate share of the wages giving rise to such credit. The regulations prescribed under this subsection shall be based on principles similar to the principles which apply in the case of subsection (a).

(c) Tax-exempt organizations No credit shall be allowed under section 38 for any work opportunity credit determined under this subpart to any organization (other than a cooperative described in section 521) which is exempt from income tax under this chapter. For credit against payroll taxes for employment of qualified veterans by qualified tax-exempt organizations, see section 3111(e).

(d) Estates and trusts In the case of an estate or trust— the amount of the credit determined under this subpart for any taxable year shall be apportioned between the estate or trust and the beneficiaries on the basis of the income of the estate or trust allocable to each, and any beneficiary to whom any amount has been apportioned under paragraph (1) shall be allowed, subject to section 38(c), a credit under section 38(a) for such amount.

(e) Limitations with respect to certain persons Under regulations prescribed by the Secretary, in the case of— a regulated investment company or a real estate investment trust subject to taxation under subchapter M (section 851 and following), and a cooperative organization described in section 1381(a), rules similar to the rules provided in subsections (e) and (h) of section 46 (as in effect on the day before the date of the enactment of the Revenue Reconciliation Act of 1990) shall apply in determining the amount of the credit under this subpart.

§ 53 Credit for prior year minimum tax liability

(a) Allowance of credit There shall be allowed as a credit against the tax imposed by this chapter for any taxable year an amount equal to the minimum tax credit for such taxable year.

(b) Minimum tax credit For purposes of subsection (a), the minimum tax credit for any taxable year is the excess (if any) of— the adjusted net minimum tax imposed for all prior taxable years beginning after 1986, over the amount allowable as a credit under subsection (a) for such prior taxable years.

(c) Limitation The credit allowable under subsection (a) for any taxable year shall not exceed the excess (if any) of— the regular tax liability of the taxpayer for such taxable year reduced by the sum of the credits allowable under subparts A, B, D, E, and F of this part, over the tentative minimum tax for the taxable year.

(d) Definitions For purposes of this section— The term “net minimum tax” means the tax imposed by section 55. The adjusted net minimum tax for any taxable year is— the amount of the net minimum tax for such taxable year, reduced by the amount which would be the net minimum tax for such taxable year if the only adjustments and items of tax preference taken into account were those specified in clause (ii). The following are specified in this clause— the adjustments provided for in subsection (b)(1) of section 56, and the items of tax preference described in paragraphs (1), (5), and (7) of section 57(a). In the case of a corporation— the preceding provisions of this subparagraph shall not apply, and the adjusted net minimum tax for any taxable year is the amount of the net minimum tax for such year. The term “tentative minimum tax” has the meaning given to such term by section 55(b).

(e) Application to applicable corporations In the case of a corporation— subsection (b)(1) shall be applied by substituting “the net minimum tax for all prior taxable years beginning after 2022” for “the adjusted net minimum tax imposed for all prior taxable years beginning after 1986”, and the amount determined under subsection (c)(1) shall be increased by the amount of tax imposed under section 59A for the taxable year.

[§ 54 Repealed. Pub. L. 115–97, title I, § 13404(a), Dec. 22, 2017, 131 Stat. 2138]

[§§ 54A to 54F Repealed. Pub. L. 115–97, title I, § 13404(a), Dec. 22, 2017, 131 Stat. 2138]

[§ 54AA Repealed. Pub. L. 115–97, title I, § 13404(a), Dec. 22, 2017, 131 Stat. 2138]

§ 55 Alternative minimum tax imposed

(a) General rule There is hereby imposed (in addition to any other tax imposed by this subtitle) a tax equal to the excess (if any) of— the tentative minimum tax for the taxable year, over the regular tax for the taxable year plus, in the case of an applicable corporation, the tax imposed by section 59A.

(b) Tentative minimum tax For purposes of this part— In the case of a taxpayer other than a corporation— The tentative minimum tax for the taxable year is the sum of— 26 percent of so much of the taxable excess as does not exceed $175, 000, pl u s 28 p erce n t o f so m u c h o f t h e t a x ab l ee x cess a se x cee d s$ 175,000. The amount determined under the preceding sentence shall be reduced by the alternative minimum tax foreign tax credit for the taxable year. For purposes of this subsection, the term “taxable excess” means so much of the alternative minimum taxable income for the taxable year as exceeds the exemption amount. In the case of a married individual filing a separate return, subparagraph (A) shall be applied by substituting 50 percent of the dollar amount otherwise applicable under clause (i) and clause (ii) thereof. For purposes of the preceding sentence, marital status shall be determined under section 7703. The term “alternative minimum taxable income” means the taxable income of the taxpayer for the taxable year— determined with the adjustments provided in section 56 and section 58, and increased by the amount of the items of tax preference described in section 57. If a taxpayer is subject to the regular tax, such taxpayer shall be subject to the tax imposed by this section (and, if the regular tax is determined by reference to an amount other than taxable income, such amount shall be treated as the taxable income of such taxpayer for purposes of the preceding sentence). In the case of an applicable corporation, the tentative minimum tax for the taxable year shall be the excess of— 15 percent of the adjusted financial statement income for the taxable year (as determined under section 56A), over the corporate AMT foreign tax credit for the taxable year. In the case of any corporation which is not an applicable corporation, the tentative minimum tax for the taxable year shall be zero. The amount determined under the first sentence of paragraph (1)(A) shall not exceed the sum of— the amount determined under such first sentence computed at the rates and in the same manner as if this paragraph had not been enacted on the taxable excess reduced by the lesser of— the net capital gain; or the sum of— the adjusted net capital gain, plus the unrecaptured section 1250 gain, plus 0 percent of so much of the adjusted net capital gain (or, if less, taxable excess) as does not exceed an amount equal to the excess described in section 1(h)(1)(B), plus 15 percent of the lesser of— so much of the adjusted net capital gain (or, if less, taxable excess) as exceeds the amount on which tax is determined under subparagraph (B), or the excess described in section 1(h)(1)(C)(ii), plus 20 percent of the adjusted net capital gain (or, if less, taxable excess) in excess of the sum of the amounts on which tax is determined under subparagraphs (B) and (C), plus 25 percent of the amount of taxable excess in excess of the sum of the amounts on which tax is determined under the preceding subparagraphs of this paragraph. Terms used in this paragraph which are also used in section 1(h) shall have the respective meanings given such terms by section 1(h) but computed with the adjustments under this part.

(c) Regular tax For purposes of this section, the term “regular tax” means the regular tax liability for the taxable year (as defined in section 26(b)) reduced by the foreign tax credit allowable under section 27(a). 1 Such term shall not include any increase in tax under section 45(e)(11)(C), 49(b) or 50(a) or subsection (j) or (k) of section 42. Solely for purposes of this section, section 1301 (relating to averaging of farm and fishing income) shall not apply in computing the regular tax liability. For provisions providing that certain credits are not allowable against the tax imposed by this section, see sections 30C(d)(2) and 38(c).

(d) Exemption amount For purposes of this section— In the case of a taxpayer other than a corporation, the term “exemption amount” means— $78, 750 in t h ec a seo f — aj o in t re t u r n, or a s u r v i v in g s p o u se,$ 50,600 in the case of an individual who— is not a married individual, and is not a surviving spouse, 50 percent of the dollar amount applicable under subparagraph (A) in the case of a married individual who files a separate return, and $22, 500 in t h ec a seo f an es t a t eor t r u s t . F or p u r p oseso f t hi s p a r a g r a p h, t h e t er m “ s u r v i v in g s p o u se ” ha s t h e m e anin gg i v e n t os u c h t er mb ysec t i o n 2 (a), an d ma r i t a l s t a t u ss ha ll b e d e t er min e d u n d ersec t i o n 7703. T h ee x e m pt i o nam o u n t o f an y t a x p a yers ha ll b ere d u ce d (b u t n o t b e l o w zero) b y anam o u n t e q u a lt o 25 p erce n t o f t h e am o u n t b y w hi c h t h e a lt er na t i v e minim u m t a x ab l e in co m eo f t h e t a x p a yere x cee d s —$ 150,000 in the case of a taxpayer described in paragraph (1)(A), 100. In the case of any taxable year beginning after December 31, 2017 — paragraph (1) shall be applied— by substituting “ $109, 400” f or “$ 78,750” in subparagraph (A), and by substituting “ $70, 300” f or “$ 50,600” in subparagraph (B), paragraph (2) shall be applied— by substituting “ $1, 000, 000” f or “$ 150,000” in subparagraph (A), by substituting “50 percent of the dollar amount applicable under subparagraph (A)” for “ $112, 500” in s u b p a r a g r a p h (B), in t h ec a seo f a t a x p a yer d escr ib e d in p a r a g r a p h (1) (D), w i t h o u t re g a r d t o t h es u b s t i t u t i o n u n d ers u b c l a u se (I), an d b ys u b s t i t u t in g “50 p erce n t ” f or “25 p erce n t ”, an d s u b sec t i o n (j) o f sec t i o n 59 s ha ll n o t a ppl y . I n t h ec a seo f an y t a x ab l eye a r b e g innin g ina c a l e n d a rye a r a f t er 2018 (2026, in t h ec a seo f t h e$ 1,000,000 amount in subparagraph (A)(ii)(I)), the amounts described in clause (ii) shall each be increased by an amount equal to— such dollar amount, multiplied by the cost-of-living adjustment determined under section 1(f)(3) for the calendar year in which the taxable year begins, determined by substituting for “calendar year 2016” in subparagraph (A)(ii) thereof— “calendar year 2017”, in the case of the $109, 400 am o u n t in s u b p a r a g r a p h (A) (i) (I) an d t h e$ 70,300 amount in subparagraph (A)(i)(II), and “calendar year 2025”, in the case of the $1, 000, 000 am o u n t in s u b p a r a g r a p h (A) (ii) (I) . T h e am o u n t s d escr ib e d in t hi sc l a u se a re t h e$ 109,400 amount in subparagraph (A)(i)(I), the $70, 300 am o u n t in s u b p a r a g r a p h (A) (i) (II), an d t h e$ 1,000,000 amount in subparagraph (A)(ii)(I). Any increased amount determined under clause (i) shall be rounded to the nearest multiple of $100. In the case of any taxable year to which subparagraph (A) applies, no adjustment shall be made under paragraph (3) to any of the numbers which are substituted under subparagraph (A) and adjusted under this subparagraph.

§ 56 Adjustments in computing alternative minimum taxable income

(a) Adjustments applicable to all taxpayers In determining the amount of the alternative minimum taxable income for any taxable year the following treatment shall apply (in lieu of the treatment applicable for purposes of computing the regular tax): Except as provided in clause (ii), the depreciation deduction allowable under section 167 with respect to any tangible property placed in service after December 31, 1986 , shall be determined under the alternative system of section 168(g). In the case of property placed in service after December 31, 1998 , the preceding sentence shall not apply but clause (ii) shall continue to apply. The method of depreciation used shall be— the 150 percent declining balance method, switching to the straight line method for the 1st taxable year for which using the straight line method with respect to the adjusted basis as of the beginning of the year will yield a higher allowance. The preceding sentence shall not apply to any section 1250 property (as defined in section 1250(c)) (and the straight line method shall be used for such section 1250 property) or to any other property if the depreciation deduction determined under section 168 with respect to such other property for purposes of the regular tax is determined by using the straight line method. This paragraph shall not apply to property described in paragraph (1), (2), (3), or (4) of section 168(f), or in section 168(e)(3)(C)(iv). This paragraph shall not apply to property placed in service after December 31, 1986 , to which the amendments made by section 201 of the Tax Reform Act of 1986 do not apply by reason of section 203, 204, or 251(d) of such Act. This paragraph shall apply to any property to which the amendments made by section 201 of the Tax Reform Act of 1986 apply by reason of an election under section 203(a)(1)(B) of such Act without regard to the requirement of subparagraph (A) that the property be placed in service after December 31, 1986 . With respect to public utility property described in section 168(i)(10), the Secretary shall prescribe the requirements of a normalization method of accounting for this section. With respect to each mine or other natural deposit (other than an oil, gas, or geothermal well) of the taxpayer, the amount allowable as a deduction under section 616(a) or 617(a) (determined without regard to section 291(b)) in computing the regular tax for costs paid or incurred after December 31, 1986 , shall be capitalized and amortized ratably over the 10-year period beginning with the taxable year in which the expenditures were made. If a loss is sustained with respect to any property described in subparagraph (A), a deduction shall be allowed for the expenditures described in subparagraph (A) for the taxable year in which such loss is sustained in an amount equal to the lesser of— the amount allowable under section 165(a) for the expenditures if they had remained capitalized, or the amount of such expenditures which have not previously been amortized under subparagraph (A). In the case of any long-term contract entered into by the taxpayer on or after March 1, 1986 , the taxable income from such contract shall be determined under the percentage of completion method of accounting (as modified by section 460(b)). For purposes of the preceding sentence, in the case of a contract described in section 460(e)(1), the percentage of the contract completed shall be determined under section 460(b)(1) by using the simplified procedures for allocation of costs prescribed under section 460(b)(3). The first sentence of this paragraph shall not apply to any residential construction contract (as defined in section 460(e)(4)). The alternative tax net operating loss deduction shall be allowed in lieu of the net operating loss deduction allowed under section 172. In the case of any certified pollution control facility placed in service after December 31, 1986 , the deduction allowable under section 169 (without regard to section 291) shall be determined under the alternative system of section 168(g). In the case of such a facility placed in service after December 31, 1998 , such deduction shall be determined under section 168 using the straight line method. The adjusted basis of any property to which paragraph (1) or (5) applies (or with respect to which there are any expenditures to which paragraph (2) or subsection (b)(2) applies) shall be determined on the basis of the treatment prescribed in paragraph (1), (2), or (5), or subsection (b)(2), whichever applies. Section 87 (relating to alcohol fuel credit) shall not apply.

(b) Adjustments applicable to individuals In determining the amount of the alternative minimum taxable income of any taxpayer (other than a corporation), the following treatment shall apply (in lieu of the treatment applicable for purposes of computing the regular tax): No deduction shall be allowed— for any miscellaneous itemized deduction (as defined in section 67(b)), or for any taxes described in paragraph (1), (2), or (3) of section 164(a) or clause (ii) of section 164(b)(5)(A). Clause (ii) shall not apply to any amount allowable in computing adjusted gross income. In determining the amount allowable as a deduction for interest, subsections (d) and (h) of section 163 shall apply, except that— in lieu of the exception under section 163(h)(2)(D), the term “personal interest” shall not include any qualified housing interest (as defined in subsection (e)), interest on any specified private activity bond (and any amount treated as interest on a specified private activity bond under section 57(a)(5)(B)), and any deduction referred to in section 57(a)(5)(A), shall be treated as includible in gross income (or as deductible) for purposes of applying section 163(d), in lieu of the exception under section 163(d)(3)(B)(i), the term “investment interest” shall not include any qualified housing interest (as defined in subsection (e)), and the adjustments of this section and sections 57 and 58 shall apply in determining net investment income under section 163(d). No recovery of any tax to which subparagraph (A)(ii) applied shall be included in gross income for purposes of determining alternative minimum taxable income. The standard deduction under section 63(c), the deduction for personal exemptions under section 151, and the deduction under section 642(b) shall not be allowed. Section 68 shall not apply. The amount allowable as a deduction under section 173, 174(a), or 174A(a) in computing the regular tax for amounts paid or incurred after December 31, 1986 , shall be capitalized and— in the case of circulation expenditures described in section 173, shall be amortized ratably over the 3-year period beginning with the taxable year in which the expenditures were made, or in the case of foreign research or experimental expenditures described in section 174(a) and domestic research or experimental expenditures in section 174A(a), shall be amortized ratably over the 10-year period beginning with the taxable year in which the expenditures were made. If a loss is sustained with respect to any property described in subparagraph (A), a deduction shall be allowed for the expenditures described in subparagraph (A) for the taxable year in which such loss is sustained in an amount equal to the lesser of— the amount allowable under section 165(a) for the expenditures if they had remained capitalized, or the amount of such expenditures which have not previously been amortized under subparagraph (A). If the taxpayer materially participates (within the meaning of section 469(h)) in an activity, this paragraph shall not apply to any amount allowable as a deduction under section 174(a) or 174A(a) for expenditures paid or incurred in connection with such activity. Section 421 shall not apply to the transfer of stock acquired pursuant to the exercise of an incentive stock option (as defined in section 422). Section 422(c)(2) shall apply in any case where the disposition and the inclusion for purposes of this part are within the same taxable year and such section shall not apply in any other case. The adjusted basis of any stock so acquired shall be determined on the basis of the treatment prescribed by this paragraph.

([(c) Repealed. Pub. L. 115–97, title I, § 12001(b)(8)(A), Dec. 22, 2017, 131 Stat. 2093]

(d) Alternative tax net operating loss deduction defined For purposes of subsection (a)(4), the term “alternative tax net operating loss deduction” means the net operating loss deduction allowable for the taxable year under section 172, except that— the amount of such deduction shall not exceed the sum of— the lesser of— the amount of such deduction attributable to net operating losses (other than the deduction described in clause (ii)(I)), or 90 percent of alternative minimum taxable income determined without regard to such deduction and the deduction under section 199, 1 plus the lesser of— the amount of such deduction attributable to an applicable net operating loss with respect to which an election is made under section 172(b)(1)(H) (as in effect before its repeal by the Tax Increase Prevention Act of 2014), or alternative minimum taxable income determined without regard to such deduction and the deduction under section 199 1 reduced by the amount determined under clause (i), and in determining the amount of such deduction— the net operating loss (within the meaning of section 172(c)) for any loss year shall be adjusted as provided in paragraph (2), and appropriate adjustments in the application of section 172(b)(2) shall be made to take into account the limitation of subparagraph (A). In the case of a loss year beginning after December 31, 1986 , the net operating loss for such year under section 172(c) shall— be determined with the adjustments provided in this section and section 58, and be reduced by the items of tax preference determined under section 57 for such year. An item of tax preference shall be taken into account under clause (ii) only to the extent such item increased the amount of the net operating loss for the taxable year under section 172(c). In the case of loss years beginning before January 1, 1987 , the amount of the net operating loss which may be carried over to taxable years beginning after December 31, 1986 , for purposes of paragraph (2), shall be equal to the amount which may be carried from the loss year to the first taxable year of the taxpayer beginning after December 31, 1986 .

(e) Qualified housing interest For purposes of this part— The term “qualified housing interest” means interest which is qualified residence interest (as defined in section 163(h)(3)) and is paid or accrued during the taxable year on indebtedness which is incurred in acquiring, constructing, or substantially improving any property which— is the principal residence (within the meaning of section 121) of the taxpayer at the time such interest accrues, or is a qualified dwelling which is a qualified residence (within the meaning of section 163(h)(5)). Such term also includes interest on any indebtedness resulting from the refinancing of indebtedness meeting the requirements of the preceding sentence; but only to the extent that the amount of the indebtedness resulting from such refinancing does not exceed the amount of the refinanced indebtedness immediately before the refinancing. The term “qualified dwelling” means any— house, apartment, condominium, or mobile home not used on a transient basis (within the meaning of section 7701(a)(19)(C)(v)), including all structures or other property appurtenant thereto. The term “qualified housing interest” includes interest which is qualified residence interest (as defined in section 163(h)(3)) and is paid or accrued on indebtedness which— was incurred by the taxpayer before July 1, 1982 , and is secured by property which, at the time such indebtedness was incurred, was— the principal residence (within the meaning of section 121) of the taxpayer, or a qualified dwelling used by the taxpayer (or any member of his family (within the meaning of section 267(c)(4))).

§ 56A Adjusted financial statement income

(a) In general For purposes of this part, the term “adjusted financial statement income” means, with respect to any corporation for any taxable year, the net income or loss of the taxpayer set forth on the taxpayer’s applicable financial statement for such taxable year, adjusted as provided in this section.

(b) Applicable financial statement For purposes of this section, the term “applicable financial statement” means, with respect to any taxable year, an applicable financial statement (as defined in section 451(b)(3) or as specified by the Secretary in regulations or other guidance) which covers such taxable year.

(c) General adjustments Appropriate adjustments shall be made in adjusted financial statement income in any case in which an applicable financial statement covers a period other than the taxable year. If the financial results of a taxpayer are reported on the applicable financial statement for a group of entities, rules similar to the rules of section 451(b)(5) shall apply. Except as provided in regulations prescribed by the Secretary, if the taxpayer is part of an affiliated group of corporations filing a consolidated return for any taxable year, adjusted financial statement income for such group for such taxable year shall take into account items on the group’s applicable financial statement which are properly allocable to members of such group. In the case of any corporation which is not included on a consolidated return with the taxpayer, adjusted financial statement income of the taxpayer with respect to such other corporation shall be determined by only taking into account the dividends received from such other corporation (reduced to the extent provided by the Secretary in regulations or other guidance) and other amounts which are includible in gross income or deductible as a loss under this chapter (other than amounts required to be included under sections 951 and 951A or such other amounts as provided by the Secretary) with respect to such other corporation. Except as provided by the Secretary, if the taxpayer is a partner in a partnership, adjusted financial statement income of the taxpayer with respect to such partnership shall be adjusted to only take into account the taxpayer’s distributive share of adjusted financial statement income of such partnership. For the purposes of this part, the adjusted financial statement income of a partnership shall be the partnership’s net income or loss set forth on such partnership’s applicable financial statement (adjusted under rules similar to the rules of this section). If, for any taxable year, a taxpayer is a United States shareholder of one or more controlled foreign corporations, the adjusted financial statement income of such taxpayer with respect to such controlled foreign corporation (as determined under paragraph (2)(C)) shall be adjusted to also take into account such taxpayer’s pro rata share (determined under rules similar to the rules under section 951(a)(2)) of items taken into account in computing the net income or loss set forth on the applicable financial statement (as adjusted under rules similar to those that apply in determining adjusted financial statement income) of each such controlled foreign corporation with respect to which such taxpayer is a United States shareholder. In any case in which the adjustment determined under subparagraph (A) would result in a negative adjustment for such taxable year— no adjustment shall be made under this paragraph for such taxable year, and the amount of the adjustment determined under this paragraph for the succeeding taxable year (determined without regard to this paragraph) shall be reduced by an amount equal to the negative adjustment for such taxable year. In the case of a foreign corporation, to determine adjusted financial statement income, the principles of section 882 shall apply. Adjusted financial statement income shall be appropriately adjusted to disregard any Federal income taxes, or income, war profits, or excess profits taxes (within the meaning of section 901) with respect to a foreign country or possession of the United States, which are taken into account on the taxpayer’s applicable financial statement. To the extent provided by the Secretary, the preceding sentence shall not apply to income, war profits, or excess profits taxes (within the meaning of section 901) that are imposed by a foreign country or possession of the United States and taken into account on the taxpayer’s applicable financial statement if the taxpayer does not choose to have the benefits of subpart A of part III of subchapter N for the taxable year. The Secretary shall prescribe such regulations or other guidance as may be necessary and appropriate to provide for the proper treatment of current and deferred taxes for purposes of this paragraph, including the time at which such taxes are properly taken into account. Adjusted financial statement income shall be adjusted to take into account any adjusted financial statement income of a disregarded entity owned by the taxpayer. In the case of a cooperative to which section 1381 applies, the adjusted financial statement income (determined without regard to this paragraph) shall be reduced by the amounts referred to in section 1382(b) (relating to patronage dividends and per-unit retain allocations) to the extent such amounts were not otherwise taken into account in determining adjusted financial statement income. Adjusted financial statement income shall be appropriately adjusted to allow— cost recovery and depletion attributable to property the basis of which is determined under section 21(c) of the Alaska Native Claims Settlement Act ( 43 U.S.C. 1620(c) ), and deductions for amounts payable made pursuant to section 7(i) or section 7(j) of such Act ( 43 U.S.C. 1606(i) and 1606(j)) only at such time as the deductions are allowed for tax purposes. Adjusted financial statement income shall be appropriately adjusted to disregard any amount treated as a payment against the tax imposed by subtitle A pursuant to an election under section 48D(d) or 6417, to the extent such amount was not otherwise taken into account under paragraph (5). Adjusted financial statement income shall be adjusted so as not to include any item of income in connection with a mortgage servicing contract any earlier than when such income is included in gross income under any other provision of this chapter. The Secretary shall provide regulations to prevent the avoidance of taxes imposed by this chapter with respect to amounts not representing reasonable compensation (as determined by the Secretary) with respect to a mortgage servicing contract. Except as otherwise provided in rules prescribed by the Secretary in regulations or other guidance, adjusted financial statement income shall be— adjusted to disregard any amount of income, cost, or expense that would otherwise be included on the applicable financial statement in connection with any covered benefit plan, increased by any amount of income in connection with any such covered benefit plan that is included in the gross income of the corporation under any other provision of this chapter, and reduced by deductions allowed under any other provision of this chapter with respect to any such covered benefit plan. For purposes of this paragraph, the term “covered benefit plan” means— a defined benefit plan (other than a multiemployer plan described in section 414(f)) if the trust which is part of such plan is an employees’ trust described in section 401(a) which is exempt from tax under section 501(a), any qualified foreign plan (as defined in section 404A(e)), or any other defined benefit plan which provides post-employment benefits other than pension benefits. In the case of an organization subject to tax under section 511, adjusted financial statement income shall be appropriately adjusted to only take into account any adjusted financial statement income— of an unrelated trade or business (as defined in section 513) of such organization, or derived from debt-financed property (as defined in section 514) to the extent that income from such property is treated as unrelated business taxable income. Adjusted financial statement income shall be— reduced by— depreciation deductions allowed under section 167 with respect to property to which section 168 applies to the extent of the amount allowed as deductions in computing taxable income for the year, and any deduction allowed for expenses under section 263(c) (including any deduction for such expenses under section 59(e) or 291(b)(2)) with respect to property described therein to the extent of the amount allowed as deductions in computing taxable income for the year, and appropriately adjusted— to disregard any amount of— depreciation expense that is taken into account on the taxpayer’s applicable financial statement with respect to such property, and depletion expense that is taken into account on the taxpayer’s applicable financial statement with respect to the intangible drilling and development costs of such property, and to take into account any other item specified by the Secretary in order to provide that such property is accounted for in the same manner as it is accounted for under this chapter. Adjusted financial statement income shall be— reduced by amortization deductions allowed under section 197 with respect to qualified wireless spectrum to the extent of the amount allowed as deductions in computing taxable income for the taxable year, and appropriately adjusted— to disregard any amount of amortization expense that is taken into account on the taxpayer’s applicable financial statement with respect to such qualified wireless spectrum, and to take into account any other item specified by the Secretary in order to provide that such qualified wireless spectrum is accounted for in the same manner as it is accounted for under this chapter. For purposes of this paragraph, the term “qualified wireless spectrum” means wireless spectrum which— is used in the trade or business of a wireless telecommunications carrier, and was acquired after December 31, 2007 , and before the date of enactment of this section. The Secretary shall issue regulations or other guidance to provide for such adjustments to adjusted financial statement income as the Secretary determines necessary to carry out the purposes of this section, including adjustments— to prevent the omission or duplication of any item, and to carry out the principles of part II of subchapter C of this chapter (relating to corporate liquidations), part III of subchapter C of this chapter (relating to corporate organizations and reorganizations), and part II of subchapter K of this chapter (relating to partnership contributions and distributions).

(d) Deduction for financial statement net operating loss Adjusted financial statement income (determined after application of subsection (c) and without regard to this subsection) shall be reduced by an amount equal to the lesser of— the aggregate amount of financial statement net operating loss carryovers to the taxable year, or 80 percent of adjusted financial statement income computed without regard to the deduction allowable under this subsection. A financial statement net operating loss for any taxable year shall be a financial statement net operating loss carryover to each taxable year following the taxable year of the loss. The portion of such loss which shall be carried to subsequent taxable years shall be the amount of such loss remaining (if any) after the application of paragraph (1). For purposes of this subsection, the term “financial statement net operating loss” means the amount of the net loss (if any) set forth on the corporation’s applicable financial statement (determined after application of subsection (c) and without regard to this subsection) for taxable years ending after December 31, 2019 .

(e) Regulations and other guidance The Secretary shall provide for such regulations and other guidance as necessary to carry out the purposes of this section, including regulations and other guidance relating to the effect of the rules of this section on partnerships with income taken into account by an applicable corporation.

§ 57 Items of tax preference

(a) General rule For purposes of this part, the items of tax preference determined under this section are— With respect to each property (as defined in section 614), the excess of the deduction for depletion allowable under section 611 for the taxable year over the adjusted basis of the property at the end of the taxable year (determined without regard to the depletion deduction for the taxable year). This paragraph shall not apply to any deduction for depletion computed in accordance with section 613A(c). With respect to all oil, gas, and geothermal properties of the taxpayer, the amount (if any) by which the amount of the excess intangible drilling costs arising in the taxable year is greater than 65 percent of the net income of the taxpayer from oil, gas, and geothermal properties for the taxable year. For purposes of subparagraph (A), the amount of the excess intangible drilling costs arising in the taxable year is the excess of— the intangible drilling and development costs paid or incurred in connection with oil, gas, and geothermal wells (other than costs incurred in drilling a nonproductive well) allowable under section 263(c) or 291(b) for the taxable year, over the amount which would have been allowable for the taxable year if such costs had been capitalized and straight line recovery of intangibles (as defined in subsection (b)) had been used with respect to such costs. For purposes of subparagraph (A), the amount of the net income of the taxpayer from oil, gas, and geothermal properties for the taxable year is the excess of— the aggregate amount of gross income (within the meaning of section 613(a)) from all oil, gas, and geothermal properties of the taxpayer received or accrued by the taxpayer during the taxable year, over the amount of any deductions allocable to such properties reduced by the excess described in subparagraph (B) for such taxable year. This paragraph shall be applied separately with respect to— all oil and gas properties which are not described in clause (ii), and all properties which are geothermal deposits (as defined in section 613(e)(2)). In the case of any oil or gas well— This paragraph shall not apply to any taxpayer which is not an integrated oil company (as defined in section 291(b)(4)). The reduction in alternative minimum taxable income by reason of clause (i) for any taxable year shall not exceed 40 percent of the alternative minimum taxable income for such year determined without regard to clause (i) and the alternative tax net operating loss deduction under section 56(a)(4). Interest on specified private activity bonds reduced by any deduction (not allowable in computing the regular tax) which would have been allowable if such interest were includible in gross income. Under regulations prescribed by the Secretary, any exempt-interest dividend (as defined in section 852(b)(5)(A)) shall be treated as interest on a specified private activity bond to the extent of its proportionate share of the interest on such bonds received by the company paying such dividend. For purposes of this part, the term “specified private activity bond” means any private activity bond (as defined in section 141) which is issued after August 7, 1986 , and the interest on which is not includible in gross income under section 103. For purposes of clause (i), the term “private activity bond” shall not include any qualified 501(c)(3) bond (as defined in section 145). For purposes of clause (i), the term “private activity bond” shall not include any bond issued after the date of the enactment of this clause if such bond is— an exempt facility bond issued as part of an issue 95 percent or more of the net proceeds of which are to be used to provide qualified residential rental projects (as defined in section 142(d)), a qualified mortgage bond (as defined in section 143(a)), or a qualified veterans’ mortgage bond (as defined in section 143(b)). The preceding sentence shall not apply to any refunding bond unless such preceding sentence applied to the refunded bond (or in the case of a series of refundings, the original bond). For purposes of clause (i), the term “private activity bond” shall not include any refunding bond (whether a current or advance refunding) if the refunded bond (or in the case of a series of refundings, the original bond) was issued before August 8, 1986 . For purposes of this subparagraph, a bond issued before September 1, 1986 , shall be treated as issued before August 8, 1986 , unless such bond would be a private activity bond if— paragraphs (1) and (2) of section 141(b) were applied by substituting “25 percent” for “10 percent” each place it appears, paragraphs (3), (4), and (5) of section 141(b) did not apply, and subparagraph (B) of section 141(c)(1) did not apply. For purposes of clause (i), the term “private activity bond” shall not include any bond issued after December 31, 2008 , and before January 1, 2011 . For purposes of subclause (I), a refunding bond (whether a current or advance refunding) shall be treated as issued on the date of the issuance of the refunded bond (or in the case of a series of refundings, the original bond). Subclause (II) shall not apply to any refunding bond which is issued to refund any bond which was issued after December 31, 2003 , and before January 1, 2009 . The amounts which would be treated as items of tax preference with respect to the taxpayer under paragraphs (2), (3), (4), and (12) of this subsection (as in effect on the day before the date of the enactment of the Tax Reform Act of 1986). The preceding sentence shall not apply to any property to which section 56(a)(1) or (5) applies. In the case of stock acquired on or before the date of the enactment of the Creating Small Business Jobs Act of 2010, an amount equal to 7 percent of the amount excluded from gross income for the taxable year under section 1202.

(b) Straight line recovery of intangibles defined For purposes of paragraph (2) of subsection (a)— The term “straight line recovery of intangibles”, when used with respect to intangible drilling and development costs for any well, means (except in the case of an election under paragraph (2)) ratable amortization of such costs over the 120-month period beginning with the month in which production from such well begins. If the taxpayer elects with respect to the intangible drilling and development costs for any well, the term “straight line recovery of intangibles” means any method which would be permitted for purposes of determining cost depletion with respect to such well and which is selected by the taxpayer for purposes of subsection (a)(2).

§ 58 Denial of certain losses

(a) Denial of farm loss For purposes of computing the amount of the alternative minimum taxable income for any taxable year of a taxpayer other than a corporation— No loss of the taxpayer for such taxable year from any tax shelter farm activity shall be allowed. Any loss from a tax shelter farm activity disallowed under subparagraph (A) shall be treated as a deduction allocable to such activity in the 1st succeeding taxable year. For purposes of this subsection, the term “tax shelter farm activity” means— any farming syndicate as defined in section 461(k), and any other activity consisting of farming which is a passive activity (within the meaning of section 469(c)). In determining the amount of the loss from any tax shelter farm activity, the adjustments of sections 56 and 57 shall apply.

(b) Disallowance of passive activity loss In computing the alternative minimum taxable income of the taxpayer for any taxable year, section 469 shall apply, except that in applying section 469— the adjustments of sections 56 and 57 shall apply, and in lieu of applying section 469(j)(7), the passive activity loss of a taxpayer shall be computed without regard to qualified housing interest (as defined in section 56(e)).

(c) Special rules For purposes of this section— The amount of losses to which subsection (a) or (b) applies shall be reduced by the amount (if any) by which the taxpayer is insolvent as of the close of the taxable year. For purposes of this paragraph, the term “insolvent” means the excess of liabilities over the fair market value of assets. If the taxpayer disposes of his entire interest in any tax shelter farm activity during any taxable year, the amount of the loss attributable to such activity (determined after carryovers under subsection (a)(1)(B)) shall (to the extent otherwise allowable) be allowed for such taxable year in computing alternative minimum taxable income and not treated as a loss from a tax shelter farm activity.

§ 59 Other definitions and special rules

(a) Alternative minimum tax foreign tax credit For purposes of this part— The alternative minimum tax foreign tax credit for any taxable year shall be the credit which would be determined under section 27 for such taxable year if— the pre-credit tentative minimum tax were the tax against which such credit was taken for purposes of section 904 for the taxable year and all prior taxable years beginning after December 31, 1986 , section 904 were applied on the basis of alternative minimum taxable income instead of taxable income, and the determination of whether any income is high-taxed income for purposes of section 904(d)(2) were made on the basis of the applicable rate specified in section 55(b)(1) in lieu of the highest rate of tax specified in section 1. For purposes of this subsection, the term “pre-credit tentative minimum tax” means the amount determined under the first sentence of section 55(b)(1)(A). In determining the alternative minimum tax foreign tax credit for any taxable year to which an election under this paragraph applies— subparagraph (B) of paragraph (1) shall not apply, and the limitation of section 904 shall be based on the proportion which— the taxpayer’s taxable income (as determined for purposes of the regular tax) from sources without the United States (but not in excess of the taxpayer’s entire alternative minimum taxable income), bears to the taxpayer’s entire alternative minimum taxable income for the taxable year. An election under this paragraph may be made only for the taxpayer’s first taxable year which begins after December 31, 1997 , and for which the taxpayer claims an alternative minimum tax foreign tax credit. An election under this paragraph, once made, shall apply to the taxable year for which made and all subsequent taxable years unless revoked with the consent of the Secretary.

([(b) Repealed. Pub. L. 115–97, title I, § 12001(b)(10), Dec. 22, 2017, 131 Stat. 2093]

(c) Treatment of estates and trusts In the case of any estate or trust, the alternative minimum taxable income of such estate or trust and any beneficiary thereof shall be determined by applying part I of subchapter J with the adjustments provided in this part.

(d) Apportionment of differently treated items in case of certain entities The differently treated items for the taxable year shall be apportioned (in accordance with regulations prescribed by the Secretary)— In the case of a regulated investment company to which part I of subchapter M applies or a real estate investment company to which part II of subchapter M applies, between such company or trust and shareholders and holders of beneficial interest in such company or trust. In the case of a common trust fund (as defined in section 584(a)), pro rata among the participants of such fund. For purposes of this section, the term “differently treated item” means any item of tax preference or any other item which is treated differently for purposes of this part than for purposes of computing the regular tax.

(e) Optional 10-year writeoff of certain tax preferences For purposes of this title, any qualified expenditure to which an election under this paragraph applies shall be allowed as a deduction ratably over the 10-year period (3-year period in the case of circulation expenditures described in section 173) beginning with the taxable year in which such expenditure was made (or, in the case of a qualified expenditure described in paragraph (2)(C), over the 60-month period beginning with the month in which such expenditure was paid or incurred). For purposes of this subsection, the term “qualified expenditure” means any amount which, but for an election under this subsection, would have been allowable as a deduction (determined without regard to section 291) for the taxable year in which paid or incurred under— section 173 (relating to circulation expenditures), section 174A(a) (relating to domestic research or experimental expenditures), section 263(c) (relating to intangible drilling and development expenditures), section 616(a) (relating to development expenditures), or section 617(a) (relating to mining exploration expenditures). Except as provided in this subsection, no deduction shall be allowed under any other section for any qualified expenditure to which an election under this subsection applies. An election may be made under paragraph (1) with respect to any portion of any qualified expenditure. Any election under this subsection may be revoked only with the consent of the Secretary. In the case of a partnership, any election under paragraph (1) shall be made separately by each partner with respect to the partner’s allocable share of any qualified expenditure. A similar rule shall apply in the case of an S corporation and its shareholders. In the case of any disposition of property to which section 1254 applies (determined without regard to this section), any deduction under paragraph (1) with respect to amounts which are allocable to such property shall, for purposes of section 1254, be treated as a deduction allowable under section 263(c), 616(a), or 617(a), whichever is appropriate. In the case of any disposition of mining property to which section 617(d) applies (determined without regard to this subsection), any deduction under paragraph (1) with respect to amounts which are allocable to such property shall, for purposes of section 617(d), be treated as a deduction allowable under section 617(a). Any portion of any qualified expenditure to which an election under paragraph (1) applies shall not be treated as an item of tax preference under section 57(a) and section 56 shall not apply to such expenditure.

([(f) Repealed. Pub. L. 115–97, title I, § 12001(b)(10), Dec. 22, 2017, 131 Stat. 2093]

(g) Tax benefit rule The Secretary may prescribe regulations under which differently treated items shall be properly adjusted where the tax treatment giving rise to such items will not result in the reduction of the taxpayer’s regular tax for the taxable year for which the item is taken into account or for any other taxable year.

(h) Coordination with certain limitations The limitations of sections 704(d), 465, and 1366(d) (and such other provisions as may be specified in regulations) shall be applied for purposes of computing the alternative minimum taxable income of the taxpayer for the taxable year with the adjustments of sections 56, 57, and 58.

(i) Special rule for amounts treated as tax preference For purposes of this subtitle (other than this part), any amount shall not fail to be treated as wholly exempt from tax imposed by this subtitle solely by reason of being included in alternative minimum taxable income.

(j) Treatment of unearned income of minor children In the case of a child to whom section 1(g) applies, the exemption amount for purposes of section 55 shall not exceed the sum of— such child’s earned income (as defined in section 911(d)(2)) for the taxable year, plus $5, 000. I n t h ec a seo f an y t a x ab l eye a r b e g innin g ina c a l e n d a rye a r a f t er 1998, t h e d o ll a r am o u n t in p a r a g r a p h (1) (B) s ha ll b e in cre a se d b y anam o u n t e q u a lt o t h e p ro d u c t o f — s u c h d o ll a r am o u n t, an d t h ecos t - o f - l i v in g a d j u s t m e n t d e t er min e d u n d ersec t i o n 1 (f) (3) f or t h ec a l e n d a rye a r in w hi c h t h e t a x ab l eye a r b e g in s, d e t er min e d b ys u b s t i t u t in g “1997” f or “2016” in s u b p a r a g r a p h (A) (ii) t h ereo f . I f an y in cre a se d e t er min e d u n d er t h e p rece d in g se n t e n ce i s n o t am u lt i pl eo f$ 50, such increase shall be rounded to the nearest multiple of $50.

(k) Applicable corporation For purposes of this part— The term “applicable corporation” means, with respect to any taxable year, any corporation (other than an S corporation, a regulated investment company, or a real estate investment trust) which meets the average annual adjusted financial statement income test of subparagraph (B) for one or more taxable years which— are prior to such taxable year, and end after December 31, 2021 . For purposes of this subsection— a corporation meets the average annual adjusted financial statement income test for a taxable year if the average annual adjusted financial statement income of such corporation (determined without regard to section 56A(d)) for the 3-taxable-year period ending with such taxable year exceeds $1, 000, 000, 000, an d in t h ec a seo f a cor p or a t i o n d escr ib e d in p a r a g r a p h (2), s u c h cor p or a t i o nm ee t s t h e a v er a g e ann u a l a d j u s t e df inan c ia l s t a t e m e n t in co m e t es t f or a t a x ab l eye a r i f — t h ecor p or a t i o nm ee t s t h ere q u i re m e n t so f c l a u se (i) f ors u c h t a x ab l eye a r (d e t er min e d a f t er t h e a ppl i c a t i o n o f p a r a g r a p h (2)), an d t h e a v er a g e ann u a l a d j u s t e df inan c ia l s t a t e m e n t in co m eo f s u c h cor p or a t i o n (d e t er min e d w i t h o u t re g a r d t o t h e a ppl i c a t i o n o f p a r a g r a p h (2) an d w i t h o u t re g a r d t osec t i o n 56 A (d)) f or t h e 3 - t a x ab l e - ye a r - p er i o d e n d in g w i t h s u c h t a x ab l eye a r i s$ 100,000,000 or more. Notwithstanding subparagraph (A), the term “applicable corporation” shall not include any corporation which otherwise meets the requirements of subparagraph (A) if— such corporation— has a change in ownership, or has a specified number (to be determined by the Secretary and which shall, as appropriate, take into account the facts and circumstances of the taxpayer) of consecutive taxable years, including the most recent taxable year, in which the corporation does not meet the average annual adjusted financial statement income test of subparagraph (B), and the Secretary determines that it would not be appropriate to continue to treat such corporation as an applicable corporation. The preceding sentence shall not apply to any corporation if, after the Secretary makes the determination described in clause (ii), such corporation meets the average annual adjusted financial statement income test of subparagraph (B) for any taxable year beginning after the first taxable year for which such determination applies. Solely for purposes of determining whether a corporation is an applicable corporation under this paragraph, all adjusted financial statement income of persons treated as a single employer with such corporation under subsection (a) or (b) of section 52 shall be treated as adjusted financial statement income of such corporation, and adjusted financial statement income of such corporation shall be determined without regard to paragraphs (2)(D)(i) and (11) of section 56A(c). If the corporation was in existence for less than 3-taxable years, subparagraph (B) shall be applied on the basis of the period during which such corporation was in existence. Adjusted financial statement income for any taxable year of less than 12 months shall be annualized by multiplying the adjusted financial statement income for the short period by 12 and dividing the result by the number of months in the short period. Any reference in this subparagraph to a corporation shall include a reference to any predecessor of such corporation. If a corporation is a member of a foreign-parented multinational group for any taxable year, then, solely for purposes of determining whether such corporation meets the average annual adjusted financial statement income test under paragraph (1)(B)(ii)(I) for such taxable year, the adjusted financial statement income of such corporation for such taxable year shall include the adjusted financial statement income of all members of such group. Solely for purposes of this subparagraph, adjusted financial statement income shall be determined without regard to paragraphs (2)(D)(i), (3), (4), and (11) of section 56A(c). For purposes of subparagraph (A), the term “foreign-parented multinational group” means, with respect to any taxable year, two or more entities if— at least one entity is a domestic corporation and another entity is a foreign corporation, such entities are included in the same applicable financial statement with respect to such year, and either— the common parent of such entities is a foreign corporation, or if there is no common parent, the entities are treated as having a common parent which is a foreign corporation under subparagraph (D). For purposes of this paragraph, if a foreign corporation is engaged in a trade or business within the United States, such trade or business shall be treated as a separate domestic corporation that is wholly owned by the foreign corporation. The Secretary shall, applying the principles of this section, prescribe rules for the application of this paragraph, including rules for the determination of— the entities (if any) which are to be to be treated under subparagraph (B)(iii)(II) as having a common parent which is a foreign corporation, the entities to be included in a foreign-parented multinational group, and the common parent of a foreign-parented multinational group. The Secretary shall provide regulations or other guidance for the purposes of carrying out this subsection, including regulations or other guidance— providing a simplified method for determining whether a corporation meets the requirements of paragraph (1), and ’(B) 1 addressing the application of this subsection to a corporation that experiences a change in ownership.

(l) Corporate AMT foreign tax credit For purposes of this part, if an applicable corporation chooses to have the benefits of subpart A of part III of subchapter N for any taxable year, the corporate AMT foreign tax credit for the taxable year of the applicable corporation is an amount equal to sum of— the lesser of— the aggregate of the applicable corporation’s pro rata share (as determined under section 56A(c)(3)) of the amount of income, war profits, and excess profits taxes (within the meaning of section 901) imposed by any foreign country or possession of the United States which are— taken into account on the applicable financial statement of each controlled foreign corporation with respect to which the applicable corporation is a United States shareholder, and paid or accrued (for Federal income tax purposes) by each such controlled foreign corporation, or the product of the amount of the adjustment under section 56A(c)(3) and the percentage specified in section 55(b)(2)(A)(i), and in the case of an applicable corporation that is a domestic corporation, the amount of income, war profits, and excess profits taxes (within the meaning of section 901) imposed by any foreign country or possession of the United States to the extent such taxes are— taken into account on the applicable corporation’s applicable financial statement, and paid or accrued (for Federal income tax purposes) by the applicable corporation. For any taxable year for which an applicable corporation chooses to have the benefits of subpart A of part III of subchapter N, the excess of the amount described in paragraph (1)(A)(i) over the amount described in paragraph (1)(A)(ii) shall increase the amount described in paragraph (1)(A)(i) in any of the first 5 succeeding taxable years to the extent not taken into account in a prior taxable year. The Secretary shall provide for such regulations or other guidance as is necessary to carry out the purposes of this subsection.

§ 59A Tax on base erosion payments of taxpayers with substantial gross receipts

(a) Imposition of tax There is hereby imposed on each applicable taxpayer for any taxable year a tax equal to the base erosion minimum tax amount for the taxable year. Such tax shall be in addition to any other tax imposed by this subtitle.

(b) Base erosion minimum tax amount For purposes of this section— Except as provided in paragraph (2), the term “base erosion minimum tax amount” means, with respect to any applicable taxpayer for any taxable year, the excess (if any) of— an amount equal to 10.5 percent (5 percent in the case of taxable years beginning in calendar year 2018) of the modified taxable income of such taxpayer for the taxable year, over an amount equal to the regular tax liability (as defined in section 26(b)) of the taxpayer for the taxable year, reduced (but not below zero) by the excess (if any) of— the credits allowed under this chapter against such regular tax liability, over the sum of— the credit allowed under section 38 for the taxable year which is properly allocable to the research credit determined under section 41(a), plus the portion of the applicable section 38 credits not in excess of 80 percent of the lesser of the amount of such credits or the base erosion minimum tax amount (determined without regard to this subclause). In the case of a taxpayer described in subparagraph (B) who is an applicable taxpayer for any taxable year, the percentages otherwise in effect under paragraph (1)(A) shall be increased by one percentage point. A taxpayer is described in this subparagraph if such taxpayer is a member of an affiliated group (as defined in section 1504(a)(1)) which includes— a bank (as defined in section 581), or a securities dealer registered under section 15(a) of the Securities Exchange Act of 1934. For purposes of paragraph (1)(B)(ii)(II), the term “applicable section 38 credits” means the credit allowed under section 38 for the taxable year which is properly allocable to— the low-income housing credit determined under section 42(a), the renewable electricity production credit determined under section 45(a), and the investment credit determined under section 46, but only to the extent properly allocable to the energy credit determined under section 48.

(c) Modified taxable income For purposes of this section— The term “modified taxable income” means the taxable income of the taxpayer computed under this chapter for the taxable year, determined without regard to— any base erosion tax benefit with respect to any base erosion payment, or the base erosion percentage of any net operating loss deduction allowed under section 172 for the taxable year. The term “base erosion tax benefit” means— any deduction described in subsection (d)(1) which is allowed under this chapter for the taxable year with respect to any base erosion payment, in the case of a base erosion payment described in subsection (d)(2), any deduction allowed under this chapter for the taxable year for depreciation (or amortization in lieu of depreciation) with respect to the property acquired with such payment, in the case of a base erosion payment described in subsection (d)(3)— any reduction under section 803(a)(1)(B) in the gross amount of premiums and other consideration on insurance and annuity contracts for premiums and other consideration arising out of indemnity insurance, and any deduction under section 832(b)(4)(A) from the amount of gross premiums written on insurance contracts during the taxable year for premiums paid for reinsurance, and in the case of a base erosion payment described in subsection (d)(4), any reduction in gross receipts with respect to such payment in computing gross income of the taxpayer for the taxable year for purposes of this chapter. Except as provided in clause (ii), any base erosion tax benefit attributable to any base erosion payment— on which tax is imposed by section 871 or 881, and with respect to which tax has been deducted and withheld under section 1441 or 1442, shall not be taken into account in computing modified taxable income under paragraph (1)(A) or the base erosion percentage under paragraph (4). The amount not taken into account in computing modified taxable income by reason of clause (i) shall be reduced under rules similar to the rules under section 163(j)(5)(B) (as in effect before the date of the enactment of the Tax Cuts and Jobs Act). For purposes of applying paragraph (1), in the case of a taxpayer to which section 163(j) applies for the taxable year, the reduction in the amount of interest for which a deduction is allowed by reason of such subsection shall be treated as allocable first to interest paid or accrued to persons who are not related parties with respect to the taxpayer and then to such related parties. For purposes of paragraph (1)(B)— The term “base erosion percentage” means, for any taxable year, the percentage determined by dividing— the aggregate amount of base erosion tax benefits of the taxpayer for the taxable year, by the sum of— the aggregate amount of the deductions (including deductions described in clauses (i) and (ii) of paragraph (2)(A)) allowable to the taxpayer under this chapter for the taxable year, plus the base erosion tax benefits described in clauses (iii) and (iv) of paragraph (2)(A) allowable to the taxpayer for the taxable year. The amount under subparagraph (A)(ii) shall be determined by not taking into account— any deduction allowed under section 172, 245A, or 250 for the taxable year, any deduction for amounts paid or accrued for services to which the exception under subsection (d)(5) applies, and any deduction for qualified derivative payments which are not treated as a base erosion payment by reason of subsection (h).

(d) Base erosion payment For purposes of this section— The term “base erosion payment” means any amount paid or accrued by the taxpayer to a foreign person which is a related party of the taxpayer and with respect to which a deduction is allowable under this chapter. Such term shall also include any amount paid or accrued by the taxpayer to a foreign person which is a related party of the taxpayer in connection with the acquisition by the taxpayer from such person of property of a character subject to the allowance for depreciation (or amortization in lieu of depreciation). Such term shall also include any premium or other consideration paid or accrued by the taxpayer to a foreign person which is a related party of the taxpayer for any reinsurance payments which are taken into account under sections 803(a)(1)(B) or 832(b)(4)(A). Such term shall also include any amount paid or accrued by the taxpayer with respect to a person described in subparagraph (B) which results in a reduction of the gross receipts of the taxpayer. A person is described in this subparagraph if such person is a— surrogate foreign corporation which is a related party of the taxpayer, but only if such person first became a surrogate foreign corporation after November 9, 2017 , or foreign person which is a member of the same expanded affiliated group as the surrogate foreign corporation. For purposes of this paragraph— The term “surrogate foreign corporation” has the meaning given such term by section 7874(a)(2)(B) but does not include a foreign corporation treated as a domestic corporation under section 7874(b). The term “expanded affiliated group” has the meaning given such term by section 7874(c)(1). Paragraph (1) shall not apply to any amount paid or accrued by a taxpayer for services if— such services are services which meet the requirements for eligibility for use of the services cost method under section 482 (determined without regard to the requirement that the services not contribute significantly to fundamental risks of business success or failure), and such amount constitutes the total services cost with no markup component.

(e) Applicable taxpayer For purposes of this section— The term “applicable taxpayer” means, with respect to any taxable year, a taxpayer— which is a corporation other than a regulated investment company, a real estate investment trust, or an S corporation, the average annual gross receipts of which for the 3-taxable-year period ending with the preceding taxable year are at least $500,000,000, and the base erosion percentage (as determined under subsection (c)(4)) of which for the taxable year is 3 percent (2 percent in the case of a taxpayer described in subsection (b)(2)(B)) or higher. In the case of a foreign person the gross receipts of which are taken into account for purposes of paragraph (1)(B), only gross receipts which are taken into account in determining income which is effectively connected with the conduct of a trade or business within the United States shall be taken into account. In the case of a taxpayer which is a foreign person, the preceding sentence shall not apply to the gross receipts of any United States person which are aggregated with the taxpayer’s gross receipts by reason of paragraph (3). Rules similar to the rules of subparagraphs (B), (C), and (D) of section 448(c)(3) shall apply in determining gross receipts for purposes of this section. All persons treated as a single employer under subsection (a) of section 52 shall be treated as 1 person for purposes of this subsection and subsection (c)(4), except that in applying section 1563 for purposes of section 52, the exception for foreign corporations under section 1563(b)(2)(C) shall be disregarded.

(f) Foreign person For purposes of this section, the term “foreign person” has the meaning given such term by section 6038A(c)(3).

(g) Related party For purposes of this section— The term “related party” means, with respect to any applicable taxpayer— any 25-percent owner of the taxpayer, any person who is related (within the meaning of section 267(b) or 707(b)(1)) to the taxpayer or any 25-percent owner of the taxpayer, and any other person who is related (within the meaning of section 482) to the taxpayer. The term “25-percent owner” means, with respect to any corporation, any person who owns at least 25 percent of— the total voting power of all classes of stock of a corporation entitled to vote, or the total value of all classes of stock of such corporation. Section 318 shall apply for purposes of paragraphs (1) and (2), except that— “10 percent” shall be substituted for “50 percent” in section 318(a)(2)(C), and subparagraphs (A), (B), and (C) of section 318(a)(3) shall not be applied so as to consider a United States person as owning stock which is owned by a person who is not a United States person.

(h) Exception for certain payments made in the ordinary course of trade or business For purposes of this section— Except as provided in paragraph (3), any qualified derivative payment shall not be treated as a base erosion payment. The term “qualified derivative payment” means any payment made by a taxpayer pursuant to a derivative with respect to which the taxpayer— recognizes gain or loss as if such derivative were sold for its fair market value on the last business day of the taxable year (and such additional times as required by this title or the taxpayer’s method of accounting), treats any gain or loss so recognized as ordinary, and treats the character of all items of income, deduction, gain, or loss with respect to a payment pursuant to the derivative as ordinary. No payments shall be treated as qualified derivative payments under subparagraph (A) for any taxable year unless the taxpayer includes in the information required to be reported under section 6038A(b)(2) with respect to such taxable year such information as is necessary to identify the payments to be so treated and such other information as the Secretary determines necessary to carry out the provisions of this subsection. This subsection shall not apply to any qualified derivative payment if— the payment would be treated as a base erosion payment if it were not made pursuant to a derivative, including any interest, royalty, or service payment, or in the case of a contract which has derivative and nonderivative components, the payment is properly allocable to the nonderivative component. For purposes of this subsection— The term “derivative” means any contract (including any option, forward contract, futures contract, short position, swap, or similar contract) the value of which, or any payment or other transfer with respect to which, is (directly or indirectly) determined by reference to one or more of the following: Any share of stock in a corporation. Any evidence of indebtedness. Any commodity which is actively traded. Any currency. Any rate, price, amount, index, formula, or algorithm. Such term shall not include any item described in clauses (i) through (v). Except as otherwise provided by the Secretary, for purposes of this part, American depository receipts (and similar instruments) with respect to shares of stock in foreign corporations shall be treated as shares of stock in such foreign corporations. Such term shall not include any insurance, annuity, or endowment contract issued by an insurance company to which subchapter L applies (or issued by any foreign corporation to which such subchapter would apply if such foreign corporation were a domestic corporation).

(i) Regulations The Secretary shall prescribe such regulations or other guidance as may be necessary or appropriate to carry out the provisions of this section, including regulations— providing for such adjustments to the application of this section as are necessary to prevent the avoidance of the purposes of this section, including through— the use of unrelated persons, conduit transactions, or other intermediaries, or transactions or arrangements designed, in whole or in part— to characterize payments otherwise subject to this section as payments not subject to this section, or to substitute payments not subject to this section for payments otherwise subject to this section and for the application of subsection (h), including rules to prevent the avoidance of the exceptions under subsection (h)(3).

[§ 59B Repealed. Pub. L. 101–234, title I, § 102(a), Dec. 13, 1989, 103 Stat. 1980]

§ 61 Gross income defined

(a) General definition Except as otherwise provided in this subtitle, gross income means all income from whatever source derived, including (but not limited to) the following items: Compensation for services, including fees, commissions, fringe benefits, and similar items; Gross income derived from business; Gains derived from dealings in property; Interest; Rents; Royalties; Dividends; Annuities; Income from life insurance and endowment contracts; Pensions; Income from discharge of indebtedness; Distributive share of partnership gross income; Income in respect of a decedent; and Income from an interest in an estate or trust.

(b) Cross references For items specifically included in gross income, see part II (sec. 71 and following). For items specifically excluded from gross income, see part III (sec. 101 and following).

“SECTION 1 SHORT TITLE.

“This Act may be cited as the ‘Payment-in-Kind Tax Treatment Act of 1983’.

“SEC. 2 INCOME TAX TREATMENT OF AGRICULTURAL COMMODITIES RECEIVED UNDER A 1983 PAYMENT-IN-KIND PROGRAM.

(“(a) Income Tax Deferral, Etc.— Except as otherwise provided in this Act, for purposes of the Internal Revenue Code of 1986 [formerly I.R.C. 1954]— a qualified taxpayer shall not be treated as having realized income when he receives a commodity under a 1983 payment-in-kind program, such commodity shall be treated as if it were produced by such taxpayer, and the unadjusted basis of such commodity in the hands of such taxpayer shall be zero.

(“(b) Effective Date.— This section shall apply to taxable years ending after December 31, 1982 , but only with respect to commodities received for the 1983 crop year.

“SEC. 3 LAND DIVERTED UNDER 1983 PAYMENT-IN-KIND PROGRAM TREATED AS USED IN FARMING BUSINESS, ETC.

(“(a) General Rule.— For purposes of the provisions specified in subsection (b), in the case of any land diverted from the production of an agricultural commodity under a 1983 payment-in-kind program— such land shall be treated as used during the 1983 crop year by the qualified taxpayer in the active conduct of the trade or business of farming, and any qualified taxpayer who materially participates in the diversion and devotion to conservation uses required under a 1983 payment-in-kind program shall be treated as materially participating in the operation of such land during such crop year.

(“(b) Provisions to Which Subsection (a) Applies.— The provisions specified in this subsection are— section 2032A of the Internal Revenue Code of 1986 (relating to valuation of certain farm, etc., real property), section 6166 of such Code (relating to extension of time for payment of estate tax where estate consists largely of interest in closely held business), chapter 2 of such Code (relating to tax on self-employment income), and title II of the Social Security Act [ 42 U.S.C. 401 et seq.] (relating to Federal old-age, survivors, and disability insurance benefits).

“SEC. 4 ANTIABUSE RULES.

(“(a) General Rule.— In the case of any person, sections 2 and 3 of this Act shall not apply with respect to any land acquired by such person after February 23, 1983 , unless such land was acquired in a qualified acquisition.

(“(b) Qualified Acquisition.— For purposes of this section, the term ‘qualified acquisition’ means any acquisition— by reason of the death of a qualified transferor, by reason of a gift from a qualified transferor, or from a qualified transferor who is a member of the family of the person acquiring the land.

(“(c) Definitions and Special Rules.— For purposes of this section— The term ‘qualified transferor’ means any person— who held the land on February 23, 1983 , or who acquired the land after February 23, 1983 , in a qualified acquisition. The term ‘member of the family’ has the meaning given such term by section 2032A(e)(2) of the Internal Revenue Code of 1986. Subsection (a) shall not apply to any change in ownership by reason of a mere change in the form of conducting the trade or business so long as the land is retained in such trade or business and the person holding the land before such change retains a direct or indirect 80-percent interest in such land. The acquisition of a direct or indirect interest in 80 percent or more of the crop from any land shall be treated as an acquisition of such land.

“SEC. 5 DEFINITIONS AND SPECIAL RULES.

(“(a) General Rule.— For purposes of this Act— The term ‘1983 payment-in-kind program’ means any program for the 1983 crop year— under which the Secretary of Agriculture (or his delegate) makes payments in kind of any agricultural commodity to any person in return for— the diversion of farm acreage from the production of an agricultural commodity, and the devotion of such acreage to conservation uses, and which the Secretary of Agriculture certifies to the Secretary of the Treasury as being described in subparagraph (A). The term ‘1983 crop year’ means the crop year for any crop the planting or harvesting period for which occurs during 1983. The term ‘1984 crop year’ means the crop year for wheat the planting and harvesting period for which occurs during 1984. The term ‘qualified taxpayer’ means any producer of agricultural commodities (within the meaning of the 1983 payment-in-kind programs) who receives any agricultural commodity in return for meeting the requirements of clauses (i) and (ii) of paragraph (1)(A). A right to receive (or other constructive receipt of) a commodity shall be treated the same as actual receipt of such commodity. A qualified taxpayer reporting on the cash receipts and disbursements method of accounting shall not be treated as being entitled to receive any amount as reimbursement for storage of commodities received under a 1983 payment-in-kind program until such amount is actually received by the taxpayer. Subsection (a) of section 2 shall apply to the receipt of any commodity under a 1983 payment-in-kind program separately from, and without taking into account, any related transaction or series of transactions involving the satisfaction of loans from the Commodity Credit Corporation.

(“(b) Extension to Wheat Planted and Harvested in 1984.— In the case of wheat— any reference in this Act to the 1983 crop year shall include a reference to the 1984 crop year, and any reference to the 1983 payment-in-kind program shall include a reference to any program for the 1984 year for wheat which meets the requirements of subparagraphs (A) and (B) of subsection (a)(1).

(“(c) Regulations.— The Secretary of the Treasury or his delegate (after consultation with the Secretary of Agriculture) shall prescribe such regulations as may be necessary to carry out the purposes of this Act, including (but not limited to) such regulations as may be necessary to carry out the purposes of this Act where the commodity is received by a cooperative on behalf of the qualified taxpayer.”

§ 62 Adjusted gross income defined

(a) General rule For purposes of this subtitle, the term “adjusted gross income” means, in the case of an individual, gross income minus the following deductions: The deductions allowed by this chapter (other than by part VII of this subchapter) which are attributable to a trade or business carried on by the taxpayer, if such trade or business does not consist of the performance of services by the taxpayer as an employee. The deductions allowed by part VI (section 161 and following) which consist of expenses paid or incurred by the taxpayer, in connection with the performance by him of services as an employee, under a reimbursement or other expense allowance arrangement with his employer. The fact that the reimbursement may be provided by a third party shall not be determinative of whether or not the preceding sentence applies. The deductions allowed by section 162 which consist of expenses paid or incurred by a qualified performing artist in connection with the performances by him of services in the performing arts as an employee. The deductions allowed by section 162 which consist of expenses paid or incurred with respect to services performed by an official as an employee of a State or a political subdivision thereof in a position compensated in whole or in part on a fee basis. The deductions allowed by section 162 which consist of expenses, not in excess of $250, paid or incurred by an eligible educator— by reason of the participation of the educator in professional development courses related to the curriculum in which the educator provides instruction or to the students for which the educator provides instruction, and in connection with books, supplies (other than nonathletic supplies for courses of instruction in health or physical education), computer equipment (including related software and services) and other equipment, and supplementary materials used by the eligible educator in the classroom. The deductions allowed by section 162 which consist of expenses, determined at a rate not in excess of the rates for travel expenses (including per diem in lieu of subsistence) authorized for employees of agencies under subchapter I of chapter 57 of title 5, United States Code, paid or incurred by the taxpayer in connection with the performance of services by such taxpayer as a member of a reserve component of the Armed Forces of the United States for any period during which such individual is more than 100 miles away from home in connection with such services. The deductions allowed by part VI (sec. 161 and following) as losses from the sale or exchange of property. The deductions allowed by part VI (sec. 161 and following), by section 212 (relating to expenses for production of income), and by section 611 (relating to depletion) which are attributable to property held for the production of rents or royalties. In the case of a life tenant of property, or an income beneficiary of property held in trust, or an heir, legatee, or devisee of an estate, the deduction for depreciation allowed by section 167 and the deduction allowed by section 611. In the case of an individual who is an employee within the meaning of section 401(c)(1), the deduction allowed by section 404. The deduction allowed by section 219 (relating to deduction of certain retirement savings). The deductions allowed by section 165 for losses incurred in any transaction entered into for profit, though not connected with a trade or business, to the extent that such losses include amounts forfeited to a bank, mutual savings bank, savings and loan association, building and loan association, cooperative bank or homestead association as a penalty for premature withdrawal of funds from a time savings account, certificate of deposit, or similar class of deposit. The deduction allowed by section 194. The deduction allowed by section 165 for the repayment to a trust described in paragraph (9) or (17) of section 501(c) of supplemental unemployment compensation benefits received from such trust if such repayment is required because of the receipt of trade readjustment allowances under section 231 or 232 of the Trade Act of 1974 ( 19 U.S.C. 2291 and 2292). Any deduction allowable under this chapter by reason of an individual remitting any portion of any jury pay to such individual’s employer in exchange for payment by the employer of compensation for the period such individual was performing jury duty. For purposes of the preceding sentence, the term “jury pay” means any payment received by the individual for the discharge of jury duty. The deduction allowed by section 217. The deduction allowed by section 220. The deduction allowed by section 221. The deduction allowed by section 223. Any deduction allowable under this chapter for attorney fees and court costs paid by, or on behalf of, the taxpayer in connection with any action involving a claim of unlawful discrimination (as defined in subsection (e)) or a claim of a violation of subchapter III of chapter 37 of title 31, United States Code, or a claim made under section 1862(b)(3)(A) of the Social Security Act ( 42 U.S.C. 1395y(b)(3)(A) ). The preceding sentence shall not apply to any deduction in excess of the amount includible in the taxpayer’s gross income for the taxable year on account of a judgment or settlement (whether by suit or agreement and whether as lump sum or periodic payments) resulting from such claim. Any deduction allowable under this chapter for attorney fees and court costs paid by, or on behalf of, the taxpayer in connection with any award under— section 7623(b), or in the case of taxable years beginning after December 31, 2017 , any action brought under— section 21F of the Securities Exchange Act of 1934 ( 15 U.S.C. 78u–6 ), a State false claims act, including a State false claims act with qui tam provisions, or section 23 of the Commodity Exchange Act ( 7 U.S.C. 26 ). Subparagraph (A) shall not apply to any deduction in excess of the amount includible in the taxpayer’s gross income for the taxable year on account of such award. Nothing in this section shall permit the same item to be deducted more than once. Any deduction allowed by section 199A shall not be treated as a deduction described in any of the preceding paragraphs of this subsection.

(b) Qualified performing artist For purposes of subsection (a)(2)(B), the term “qualified performing artist” means, with respect to any taxable year, any individual if— such individual performed services in the performing arts as an employee during the taxable year for at least 2 employers, the aggregate amount allowable as a deduction under section 162 in connection with the performance of such services exceeds 10 percent of such individual’s gross income attributable to the performance of such services, and the adjusted gross income of such individual for the taxable year (determined without regard to subsection (a)(2)(B)) does not exceed $16, 000. A nin d i v i d u a l s ha ll n o t b e t re a t e d a s p er f or min g ser v i ces in t h e p er f or min g a r t s a s an e m pl oyee f or an ye m pl oyer d u r in g an y t a x ab l eye a r u n l ess t h e am o u n t rece i v e d b ys u c hin d i v i d u a l f ro m s u c h e m pl oyer f or t h e p er f or man ceo f s u c h ser v i ces d u r in g t h e t a x ab l eye a re q u a l sore x cee d s$ 200. Except in the case of a husband and wife who lived apart at all times during the taxable year, if the taxpayer is married at the close of the taxable year, subsection (a)(2)(B) shall apply only if the taxpayer and his spouse file a joint return for the taxable year. In the case of a joint return— paragraph (1) (other than subparagraph (C) thereof) shall be applied separately with respect to each spouse, but paragraph (1)(C) shall be applied with respect to their combined adjusted gross income. For purposes of this subsection, marital status shall be determined under section 7703(a). For purposes of this subsection, the term “joint return” means the joint return of a husband and wife made under section 6013.

(c) Certain arrangements not treated as reimbursement arrangements For purposes of subsection (a)(2)(A), an arrangement shall in no event be treated as a reimbursement or other expense allowance arrangement if— such arrangement does not require the employee to substantiate the expenses covered by the arrangement to the person providing the reimbursement, or such arrangement provides the employee the right to retain any amount in excess of the substantiated expenses covered under the arrangement. The substantiation requirements of the preceding sentence shall not apply to any expense to the extent that substantiation is not required under section 274(d) for such expense by reason of the regulations prescribed under the 2nd sentence thereof.

(d) Definition; special rules For purposes of subsection (a)(2)(D), the term “eligible educator” means, with respect to any taxable year, an individual who is a kindergarten through grade 12 teacher, instructor, counselor, principal, or aide in a school for at least 900 hours during a school year. The term “school” means any school which provides elementary education or secondary education (kindergarten through grade 12), as determined under State law. A deduction shall be allowed under subsection (a)(2)(D) for expenses only to the extent the amount of such expenses exceeds the amount excludable under section 135, 529(c)(1), or 530(d)(2) for the taxable year. In the case of any taxable year beginning after 2015, the $250 am o u n t in s u b sec t i o n (a) (2) (D) s ha ll b e in cre a se d b y anam o u n t e q u a lt o — s u c h d o ll a r am o u n t, m u lt i pl i e d b y t h ecos t - o f - l i v in g a d j u s t m e n t d e t er min e d u n d ersec t i o n 1 (f) (3) f or t h ec a l e n d a rye a r in w hi c h t h e t a x ab l eye a r b e g in s, d e t er min e d b ys u b s t i t u t in g “ c a l e n d a rye a r 2014” f or “ c a l e n d a rye a r 2016” in s u b p a r a g r a p h (A) (ii) t h ereo f . A n y in cre a se d e t er min e d u n d er t h e p rece d in g se n t e n ces ha ll b ero u n d e d t o t h e n e a res t m u lt i pl eo f$ 50.

(e) Unlawful discrimination defined For purposes of subsection (a)(20), the term “unlawful discrimination” means an act that is unlawful under any of the following: Section 302 of the Civil Rights Act of 1991 ( 42 U.S.C. 2000e–16b ). Section 201, 202, 203, 204, 205, 206, 207, or 208 of the Congressional Accountability Act of 1995 ( 2 U.S.C. 1311 , 1312, 1313, 1314, 1315, 1316, or 1317). 1 The National Labor Relations Act ( 29 U.S.C. 151 et seq.). The Fair Labor Standards Act of 1938 ( 29 U.S.C. 201 et seq.). Section 4 or 15 of the Age Discrimination in Employment Act of 1967 ( 29 U.S.C. 623 or 633a). Section 501 or 504 of the Rehabilitation Act of 1973 ( 29 U.S.C. 791 or 794). Section 510 of the Employee Retirement Income Security Act of 1974 ( 29 U.S.C. 1140 ). Title IX of the Education Amendments of 1972 ( 20 U.S.C. 1681 et seq.). The Employee Polygraph Protection Act of 1988 ( 29 U.S.C. 2001 et seq.). The Worker Adjustment and Retraining Notification Act ( 29 U.S.C. 2102 et seq.). Section 105 of the Family and Medical Leave Act of 1993 ( 29 U.S.C. 2615 ). Chapter 43 of title 38, United States Code (relating to employment and reemployment rights of members of the uniformed services). Section 1977, 1979, or 1980 of the Revised Statutes ( 42 U.S.C. 1981 , 1983, or 1985). Section 703, 704, or 717 of the Civil Rights Act of 1964 ( 42 U.S.C. 2000e–2 , 2000e–3, or 2000e–16). Section 804, 805, 806, 808, or 818 of the Fair Housing Act ( 42 U.S.C. 3604 , 3605, 3606, 3608, or 3617). Section 102, 202, 302, or 503 of the Americans with Disabilities Act of 1990 ( 42 U.S.C. 12112 , 12132, 12182, or 12203). Any provision of Federal law (popularly known as whistleblower protection provisions) prohibiting the discharge of an employee, the discrimination against an employee, or any other form of retaliation or reprisal against an employee for asserting rights or taking other actions permitted under Federal law. Any provision of Federal, State, or local law, or common law claims permitted under Federal, State, or local law— providing for the enforcement of civil rights, or regulating any aspect of the employment relationship, including claims for wages, compensation, or benefits, or prohibiting the discharge of an employee, the discrimination against an employee, or any other form of retaliation or reprisal against an employee for asserting rights or taking other actions permitted by law.

§ 63 Taxable income defined

(a) In general Except as provided in subsection (b), for purposes of this subtitle, the term “taxable income” means gross income minus the deductions allowed by this chapter (other than the standard deduction).

(b) Individuals who do not itemize their deductions In the case of an individual who does not elect to itemize his deductions for the taxable year, for purposes of this subtitle, the term “taxable income” means adjusted gross income, minus— the standard deduction, the deduction for personal exemptions provided in section 151, any deduction provided in section 199A, the deduction provided in section 170(p), the deduction provided in section 224, the deduction provided in section 225 and 1 so much of the deduction allowed by section 163(a) as is attributable to the exception under section 163(h)(4)(A).

(c) Standard deduction For purposes of this subtitle— Except as otherwise provided in this subsection, the term “standard deduction” means the sum of— the basic standard deduction, and the additional standard deduction. For purposes of paragraph (1), the basic standard deduction is— 200 percent of the dollar amount in effect under subparagraph (C) for the taxable year in the case of— a joint return, or a surviving spouse (as defined in section 2(a)), $4, 400 in t h ec a seo f ah e a d o f h o u se h o l d (a s d e f in e d in sec t i o n 2 (b)), or$ 3,000 in any other case. For purposes of paragraph (1), the additional standard deduction is the sum of each additional amount to which the taxpayer is entitled under subsection (f). In the case of any taxable year beginning in a calendar year after 1988, each dollar amount contained in paragraph (2)(B), (2)(C), or (5) or subsection (f) shall be increased by an amount equal to— such dollar amount, multiplied by the cost-of-living adjustment determined under section 1(f)(3) for the calendar year in which the taxable year begins, by substituting for “calendar year 2016” in subparagraph (A)(ii) thereof— “calendar year 1987” in the case of the dollar amounts contained in paragraph (2)(B), (2)(C), or (5)(A) or subsection (f), and “calendar year 1997” in the case of the dollar amount contained in paragraph (5)(B). In the case of an individual with respect to whom a deduction under section 151 is allowable to another taxpayer for a taxable year beginning in the calendar year in which the individual’s taxable year begins, the basic standard deduction applicable to such individual for such individual’s taxable year shall not exceed the greater of— $500, or t h es u m o f$ 250 and such individual’s earned income. In the case of— a married individual filing a separate return where either spouse itemizes deductions, a nonresident alien individual, an individual making a return under section 443(a)(1) for a period of less than 12 months on account of a change in his annual accounting period, or an estate or trust, common trust fund, or partnership, the standard deduction shall be zero. In the case of a taxable year beginning after December 31, 2017 — Paragraph (2) shall be applied— by substituting “ $23, 625” f or “$ 4,400” in subparagraph (B), and by substituting “ $15, 750” f or “$ 3,000” in subparagraph (C). Paragraph (4) shall not apply to the dollar amounts contained in paragraphs (2)(B) and (2)(C). In the case of a taxable year beginning after 2025, the $23, 625 an d$ 15,750 amounts in subparagraph (A) shall each be increased by an amount equal to— such dollar amount, multiplied by the cost-of-living adjustment determined under section 1(f)(3) for the calendar year in which the taxable year begins, determined by substituting “2024” for “2016” in subparagraph (A)(ii) thereof. If any increase under this clause is not a multiple of $50, s u c hin cre a ses ha ll b ero u n d e d t o t h e n e x tl o w es t m u lt i pl eo f$ 50.

(d) Itemized deductions For purposes of this subtitle, the term “itemized deductions” means the deductions allowable under this chapter other than— the deductions allowable in arriving at adjusted gross income, and any deduction referred to in any paragraph of subsection (b).

(e) Election to itemize Unless an individual makes an election under this subsection for the taxable year, no itemized deduction shall be allowed for the taxable year. For purposes of this subtitle, the determination of whether a deduction is allowable under this chapter shall be made without regard to the preceding sentence. Any election under this subsection shall be made on the taxpayer’s return, and the Secretary shall prescribe the manner of signifying such election on the return. Under regulations prescribed by the Secretary, a change of election with respect to itemized deductions for any taxable year may be made after the filing of the return for such year. If the spouse of the taxpayer filed a separate return for any taxable year corresponding to the taxable year of the taxpayer, the change shall not be allowed unless, in accordance with such regulations— the spouse makes a change of election with respect to itemized deductions, for the taxable year covered in such separate return, consistent with the change of treatment sought by the taxpayer, and the taxpayer and his spouse consent in writing to the assessment (within such period as may be agreed on with the Secretary) of any deficiency, to the extent attributable to such change of election, even though at the time of the filing of such consent the assessment of such deficiency would otherwise be prevented by the operation of any law or rule of law. This paragraph shall not apply if the tax liability of the taxpayer’s spouse for the taxable year corresponding to the taxable year of the taxpayer has been compromised under section 7122.

(f) Aged or blind additional amounts The taxpayer shall be entitled to an additional amount of $600— f or him se l f i f h e ha s a tt ain e d a g e 65 b e f ore t h ec l oseo f hi s t a x ab l eye a r, an df or t h es p o u seo f t h e t a x p a yer i f t h es p o u se ha s a tt ain e d a g e 65 b e f ore t h ec l oseo f t h e t a x ab l eye a r an d ana dd i t i o na l e x e m pt i o ni s a ll o w ab l e t o t h e t a x p a yer f ors u c h s p o u se u n d ersec t i o n 151 (b) . T h e t a x p a yers ha ll b ee n t i tl e d t o ana dd i t i o na l am o u n t o f$ 600— for himself if he is blind at the close of the taxable year, and for the spouse of the taxpayer if the spouse is blind as of the close of the taxable year and an additional exemption is allowable to the taxpayer for such spouse under section 151(b). For purposes of subparagraph (B), if the spouse dies during the taxable year the determination of whether such spouse is blind shall be made as of the time of such death. In the case of an individual who is not married and is not a surviving spouse, paragraphs (1) and (2) shall be applied by substituting “ $750” f or “$ 600”. For purposes of this subsection, an individual is blind only if his central visual acuity does not exceed 20/200 in the better eye with correcting lenses, or if his visual acuity is greater than 20/200 but is accompanied by a limitation in the fields of vision such that the widest diameter of the visual field subtends an angle no greater than 20 degrees.

(g) Marital status For purposes of this section, marital status shall be determined under section 7703.

§ 64 Ordinary income defined

For purposes of this subtitle, the term “ordinary income” includes any gain from the sale or exchange of property which is neither a capital asset nor property described in section 1231(b). Any gain from the sale or exchange of property which is treated or considered, under other provisions of this subtitle, as “ordinary income” shall be treated as gain from the sale or exchange of property which is neither a capital asset nor property described in section 1231(b). (Added Pub. L. 94–455, title XIX, § 1901(a)(10) , Oct. 4, 1976 , 90 Stat. 1765 .)

§ 65 Ordinary loss defined

For purposes of this subtitle, the term “ordinary loss” includes any loss from the sale or exchange of property which is not a capital asset. Any loss from the sale or exchange of property which is treated or considered, under other provisions of this subtitle, as “ordinary loss” shall be treated as loss from the sale or exchange of property which is not a capital asset. (Added Pub. L. 94–455, title XIX, § 1901(a)(11) , Oct. 4, 1976 , 90 Stat. 1765 .)

§ 66 Treatment of community income

(a) Treatment of community income where spouses live apart If— 2 individuals are married to each other at any time during a calendar year; such individuals— live apart at all times during the calendar year, and do not file a joint return under section 6013 with each other for a taxable year beginning or ending in the calendar year; one or both of such individuals have earned income for the calendar year which is community income; and no portion of such earned income is transferred (directly or indirectly) between such individuals before the close of the calendar year, then, for purposes of this title, any community income of such individuals for the calendar year shall be treated in accordance with the rules provided by section 879(a).

(b) Secretary may disregard community property laws where spouse not notified of community income The Secretary may disallow the benefits of any community property law to any taxpayer with respect to any income if such taxpayer acted as if solely entitled to such income and failed to notify the taxpayer’s spouse before the due date (including extensions) for filing the return for the taxable year in which the income was derived of the nature and amount of such income.

(c) Spouse relieved of liability in certain other cases Under regulations prescribed by the Secretary, if— an individual does not file a joint return for any taxable year, such individual does not include in gross income for such taxable year an item of community income properly includible therein which, in accordance with the rules contained in section 879(a), would be treated as the income of the other spouse, the individual establishes that he or she did not know of, and had no reason to know of, such item of community income, and taking into account all facts and circumstances, it is inequitable to include such item of community income in such individual’s gross income, then, for purposes of this title, such item of community income shall be included in the gross income of the other spouse (and not in the gross income of the individual). Under procedures prescribed by the Secretary, if, taking into account all the facts and circumstances, it is inequitable to hold the individual liable for any unpaid tax or any deficiency (or any portion of either) attributable to any item for which relief is not available under the preceding sentence, the Secretary may relieve such individual of such liability.

(d) Definitions For purposes of this section— The term “earned income” has the meaning given to such term by section 911(d)(2). The term “community income” means income which, under applicable community property laws, is treated as community income. The term “community property laws” means the community property laws of a State, a foreign country, or a possession of the United States.

§ 67 2-percent floor on miscellaneous itemized deductions

(a) General rule In the case of an individual, the miscellaneous itemized deductions for any taxable year shall be allowed only to the extent that the aggregate of such deductions exceeds 2 percent of adjusted gross income.

(b) Miscellaneous itemized deductions For purposes of this section, the term “miscellaneous itemized deductions” means the itemized deductions other than— the deduction under section 163 (relating to interest), the deduction under section 164 (relating to taxes), the deduction under section 165(a) for casualty or theft losses described in paragraph (2) or (3) of section 165(c) or for losses described in section 165(d), the deductions under section 170 (relating to charitable, etc., contributions and gifts) and section 642(c) (relating to deduction for amounts paid or permanently set aside for a charitable purpose), the deduction under section 213 (relating to medical, dental, etc., expenses), any deduction allowable for impairment-related work expenses, the deduction under section 691(c) (relating to deduction for estate tax in case of income in respect of the decedent), any deduction allowable in connection with personal property used in a short sale, the deduction under section 1341 (relating to computation of tax where taxpayer restores substantial amount held under claim of right), the deduction under section 72(b)(3) (relating to deduction where annuity payments cease before investment recovered), the deduction under section 171 (relating to deduction for amortizable bond premium), the deduction under section 216 (relating to deductions in connection with cooperative housing corporations), and the deductions allowed by section 162 for educator expenses (as defined in subsection (g)).

(c) Disallowance of indirect deduction through pass-thru entity The Secretary shall prescribe regulations which prohibit the indirect deduction through pass-thru entities of amounts which are not allowable as a deduction if paid or incurred directly by an individual and which contain such reporting requirements as may be necessary to carry out the purposes of this subsection. Paragraph (1) shall not apply with respect to any publicly offered regulated investment company. For purposes of this subsection— The term “publicly offered regulated investment company” means a regulated investment company the shares of which are— continuously offered pursuant to a public offering (within the meaning of section 4 of the Securities Act of 1933, as amended ( 15 U.S.C. 77a to 77aa)), regularly traded on an established securities market, or held by or for no fewer than 500 persons at all times during the taxable year. The Secretary may by regulation decrease the minimum shareholder requirement of clause (i)(III) in the case of regulated investment companies which experience a loss of shareholders through net redemptions of their shares. Paragraph (1) shall not apply— with respect to cooperatives and real estate investment trusts, and except as provided in regulations, with respect to estates and trusts.

(d) Impairment-related work expenses For purposes of this section, the term “impairment-related work expenses” means expenses— of a handicapped individual (as defined in section 190(b)(3)) for attendant care services at the individual’s place of employment and other expenses in connection with such place of employment which are necessary for such individual to be able to work, and with respect to which a deduction is allowable under section 162 (determined without regard to this section).

(e) Determination of adjusted gross income in case of estates and trusts For purposes of this section, the adjusted gross income of an estate or trust shall be computed in the same manner as in the case of an individual, except that— the deductions for costs which are paid or incurred in connection with the administration of the estate or trust and which would not have been incurred if the property were not held in such trust or estate, and the deductions allowable under sections 642(b), 651, and 661, shall be treated as allowable in arriving at adjusted gross income. Under regulations, appropriate adjustments shall be made in the application of part I of subchapter J of this chapter to take into account the provisions of this section.

(f) Coordination with other limitation This section shall be applied before the application of the dollar limitation of the second sentence of section 162(a) (relating to trade or business expenses).

(g) Educator expenses For purposes of subsection (b)(13), the term “educator expenses” means expenses of a type which would be described in section 62(a)(2)(D) if— such section were applied— without regard to the dollar limitation, without regard to “(other than nonathletic supplies for courses of instruction in health or physical education)” in clause (ii) thereof, and by substituting “as part of instructional activity” for “in the classroom” in clause (ii) thereof, and section 62(d)(1)(A) were applied by inserting “, interscholastic sports administrator or coach,” after “counselor”

(h) Suspension for taxable years beginning after 2017 Notwithstanding subsection (a), no miscellaneous itemized deduction shall be allowed for any taxable year beginning after December 31, 2017 .

§ 68 Overall limitation on itemized deductions

(a) In general In the case of an individual, the amount of the itemized deductions otherwise allowable for the taxable year (determined without regard to this section) shall be reduced by 2 ⁄ 37 of the lesser of— such amount of itemized deductions, or so much of the taxable income of the taxpayer for the taxable year (determined without regard to this section and increased by such amount of itemized deductions) as exceeds the dollar amount at which the 37 percent rate bracket under section 1 begins with respect to the taxpayer.

(b) Coordination with other limitations This section shall be applied after the application of any other limitation on the allowance of any itemized deduction.

[§ 71 Repealed. Pub. L. 115–97, title I, § 11051(b)(1)(B), Dec. 22, 2017, 131 Stat. 2089]

§ 72 Annuities; certain proceeds of endowment and life insurance contracts

(a) General rules for annuities Except as otherwise provided in this chapter, gross income includes any amount received as an annuity (whether for a period certain or during one or more lives) under an annuity, endowment, or life insurance contract. If any amount is received as an annuity for a period of 10 years or more or during one or more lives under any portion of an annuity, endowment, or life insurance contract— such portion shall be treated as a separate contract for purposes of this section, for purposes of applying subsections (b), (c), and (e), the investment in the contract shall be allocated pro rata between each portion of the contract from which amounts are received as an annuity and the portion of the contract from which amounts are not received as an annuity, and a separate annuity starting date under subsection (c)(4) shall be determined with respect to each portion of the contract from which amounts are received as an annuity.

(b) Exclusion ratio Gross income does not include that part of any amount received as an annuity under an annuity, endowment, or life insurance contract which bears the same ratio to such amount as the investment in the contract (as of the annuity starting date) bears to the expected return under the contract (as of such date). The portion of any amount received as an annuity which is excluded from gross income under paragraph (1) shall not exceed the unrecovered investment in the contract immediately before the receipt of such amount. If— after the annuity starting date, payments as an annuity under the contract cease by reason of the death of an annuitant, and as of the date of such cessation, there is unrecovered investment in the contract, the amount of such unrecovered investment (in excess of any amount specified in subsection (e)(5) which was not included in gross income) shall be allowed as a deduction to the annuitant for his last taxable year. In the case of any contract which provides for payments meeting the requirements of subparagraphs (B) and (C) of subsection (c)(2), the deduction under subparagraph (A) shall be allowed to the person entitled to such payments for the taxable year in which such payments are received. For purposes of section 172, a deduction allowed under this paragraph shall be treated as if it were attributable to a trade or business of the taxpayer. For purposes of this subsection, the unrecovered investment in the contract as of any date is— the investment in the contract (determined without regard to subsection (c)(2)) as of the annuity starting date, reduced by the aggregate amount received under the contract on or after such annuity starting date and before the date as of which the determination is being made, to the extent such amount was excludable from gross income under this subtitle.

(c) Definitions For purposes of subsection (b), the investment in the contract as of the annuity starting date is— the aggregate amount of premiums or other consideration paid for the contract, minus the aggregate amount received under the contract before such date, to the extent that such amount was excludable from gross income under this subtitle or prior income tax laws. If— the expected return under the contract depends in whole or in part on the life expectancy of one or more individuals; the contract provides for payments to be made to a beneficiary (or to the estate of an annuitant) on or after the death of the annuitant or annuitants; and such payments are in the nature of a refund of the consideration paid, then the value (computed without discount for interest) of such payments on the annuity starting date shall be subtracted from the amount determined under paragraph (1). Such value shall be computed in accordance with actuarial tables prescribed by the Secretary. For purposes of this paragraph and of subsection (e)(2)(A), the term “refund of the consideration paid” includes amounts payable after the death of an annuitant by reason of a provision in the contract for a life annuity with minimum period of payments certain, but (if part of the consideration was contributed by an employer) does not include that part of any payment to a beneficiary (or to the estate of the annuitant) which is not attributable to the consideration paid by the employee for the contract as determined under paragraph (1)(A). For purposes of subsection (b), the expected return under the contract shall be determined as follows: If the expected return under the contract, for the period on and after the annuity starting date, depends in whole or in part on the life expectancy of one or more individuals, the expected return shall be computed with reference to actuarial tables prescribed by the Secretary. If subparagraph (A) does not apply, the expected return is the aggregate of the amounts receivable under the contract as an annuity. For purposes of this section, the annuity starting date in the case of any contract is the first day of the first period for which an amount is received as an annuity under the contract.

(d) Special rules for qualified employer retirement plans In the case of any amount received as an annuity under a qualified employer retirement plan— subsection (b) shall not apply, and the investment in the contract shall be recovered as provided in this paragraph. Gross income shall not include so much of any monthly annuity payment under a qualified employer retirement plan as does not exceed the amount obtained by dividing— the investment in the contract (as of the annuity starting date), by the number of anticipated payments determined under the table contained in clause (iii) (or, in the case of a contract to which subsection (c)(3)(B) applies, the number of monthly annuity payments under such contract). Rules similar to the rules of paragraphs (2) and (3) of subsection (b) shall apply for purposes of this paragraph. If the annuity is payable over the life of a single individual, the number of anticipated payments shall be determined as follows: If the age of the annuitant on the annuity starting date is: The number of anticipated payments is: Not more than 55 360 More than 55 but not more than 60 310 More than 60 but not more than 65 260 More than 65 but not more than 70 210 More than 70 160. If the annuity is payable over the lives of more than 1 individual, the number of anticipated payments shall be determined as follows: If the combined ages of annuitants are: The number is: Not more than 110 410 More than 110 but not more than 120 360 More than 120 but not more than 130 310 More than 130 but not more than 140 260 More than 140 210. For purposes of this paragraph, investment in the contract shall be determined under subsection (c)(1) without regard to subsection (c)(2). If, in connection with the commencement of annuity payments under any qualified employer retirement plan, the taxpayer receives a lump-sum payment— such payment shall be taxable under subsection (e) as if received before the annuity starting date, and the investment in the contract for purposes of this paragraph shall be determined as if such payment had been so received. This paragraph shall not apply in any case where the primary annuitant has attained age 75 on the annuity starting date unless there are fewer than 5 years of guaranteed payments under the annuity. In any case where the annuity payments are not made on a monthly basis, appropriate adjustments in the application of this paragraph shall be made to take into account the period on the basis of which such payments are made. For purposes of this paragraph, the term “qualified employer retirement plan” means any plan or contract described in paragraph (1), (2), or (3) of section 4974(c). For purposes of this section, employee contributions (and any income allocable thereto) under a defined contribution plan may be treated as a separate contract. For purposes of this section, contributions to a pension-linked emergency savings account to which section 402A(e) applies (and any income allocable thereto) may be treated as a separate contract.

(e) Amounts not received as annuities This subsection shall apply to any amount which— is received under an annuity, endowment, or life insurance contract, and is not received as an annuity, if no provision of this subtitle (other than this subsection) applies with respect to such amount. For purposes of this section, any amount received which is in the nature of a dividend or similar distribution shall be treated as an amount not received as an annuity. Any amount to which this subsection applies— if received on or after the annuity starting date, shall be included in gross income, or if received before the annuity starting date— shall be included in gross income to the extent allocable to income on the contract, and shall not be included in gross income to the extent allocable to the investment in the contract. For purposes of paragraph (2)(B)— Any amount to which this subsection applies shall be treated as allocable to income on the contract to the extent that such amount does not exceed the excess (if any) of— the cash value of the contract (determined without regard to any surrender charge) immediately before the amount is received, over the investment in the contract at such time. Any amount to which this subsection applies shall be treated as allocable to investment in the contract to the extent that such amount is not allocated to income under subparagraph (A). For purposes of paragraph (2)(B)— If, during any taxable year, an individual— receives (directly or indirectly) any amount as a loan under any contract to which this subsection applies, or assigns or pledges (or agrees to assign or pledge) any portion of the value of any such contract, such amount or portion shall be treated as received under the contract as an amount not received as an annuity. The preceding sentence shall not apply for purposes of determining investment in the contract, except that the investment in the contract shall be increased by any amount included in gross income by reason of the amount treated as received under the preceding sentence. Any amount described in paragraph (1)(B) shall not be included in gross income under paragraph (2)(B)(i) to the extent such amount is retained by the insurer as a premium or other consideration paid for the contract. If an individual who holds an annuity contract transfers it without full and adequate consideration, such individual shall be treated as receiving an amount equal to the excess of— the cash surrender value of such contract at the time of transfer, over the investment in such contract at such time, under the contract as an amount not received as an annuity. Clause (i) shall not apply to any transfer to which section 1041(a) (relating to transfers of property between spouses or incident to divorce) applies. If under clause (i) an amount is included in the gross income of the transferor of an annuity contract, the investment in the contract of the transferee in such contract shall be increased by the amount so included. In any case to which this paragraph applies— paragraphs (2)(B) and (4)(A) shall not apply, and if paragraph (2)(A) does not apply, the amount shall be included in gross income, but only to the extent it exceeds the investment in the contract. This paragraph shall apply to contracts entered into before August 14, 1982 . Any amount allocable to investment in the contract after August 13, 1982 , shall be treated as from a contract entered into after such date. Except as provided in paragraph (10) and except to the extent prescribed by the Secretary by regulations, this paragraph shall apply to any amount not received as an annuity which is received under a life insurance or endowment contract. Except as provided in paragraph (8), this paragraph shall apply to any amount received— from a trust described in section 401(a) which is exempt from tax under section 501(a), from a contract— purchased by a trust described in clause (i), purchased as part of a plan described in section 403(a), described in section 403(b), or provided for employees of a life insurance company under a plan described in section 818(a)(3), or from an individual retirement account or an individual retirement annuity. Any dividend described in section 404(k) which is received by a participant or beneficiary shall, for purposes of this subparagraph, be treated as paid under a separate contract to which clause (ii)(I) applies. This paragraph shall apply to— any amount received, whether in a single sum or otherwise, under a contract in full discharge of the obligation under the contract which is in the nature of a refund of the consideration paid for the contract, and any amount received under a contract on its complete surrender, redemption, or maturity. In the case of any amount to which the preceding sentence applies, the rule of paragraph (2)(A) shall not apply. For purposes of this subsection, the investment in the contract as of any date is— the aggregate amount of premiums or other consideration paid for the contract before such date, minus the aggregate amount received under the contract before such date, to the extent that such amount was excludable from gross income under this subtitle or prior income tax laws. Notwithstanding any other provision of this subsection, in the case of any amount received before the annuity starting date from a trust or contract described in paragraph (5)(D), paragraph (2)(B) shall apply to such amounts. For purposes of paragraph (2)(B), the amount allocated to the investment in the contract shall be the portion of the amount described in subparagraph (A) which bears the same ratio to such amount as the investment in the contract bears to the account balance. The determination under the preceding sentence shall be made as of the time of the distribution or at such other time as the Secretary may prescribe. If an employee does not have a nonforfeitable right to any amount under any trust or contract to which subparagraph (A) applies, such amount shall not be treated as part of the account balance. In the case of a plan which on May 5, 1986 , permitted withdrawal of any employee contributions before separation from service, subparagraph (A) shall apply only to the extent that amounts received before the annuity starting date (when increased by amounts previously received under the contract after December 31, 1986 ) exceed the investment in the contract as of December 31, 1986 . Notwithstanding any other provision of this subsection, paragraph (2)(B) shall apply to amounts received under a qualified tuition program (as defined in section 529(b)) or under a Coverdell education savings account (as defined in section 530(b)). The rule of paragraph (8)(B) shall apply for purposes of this paragraph. Notwithstanding paragraph (5)(C), in the case of any modified endowment contract (as defined in section 7702A)— paragraphs (2)(B) and (4)(A) shall apply, and in applying paragraph (4)(A), “any person” shall be substituted for “an individual”. Notwithstanding subparagraph (A), paragraph (4)(A) shall not apply to any assignment (or pledge) of a modified endowment contract if such assignment (or pledge) is solely to cover the payment of expenses referred to in section 7702(e)(2)(C)(iii) and if the maximum death benefit under such contract does not exceed $25,000. Notwithstanding paragraphs (2), (5)(C), and (10), in the case of any charge against the cash value of an annuity contract or the cash surrender value of a life insurance contract made as payment for coverage under a qualified long-term care insurance contract which is part of or a rider on such annuity or life insurance contract— the investment in the contract shall be reduced (but not below zero) by such charge, and such charge shall not be includible in gross income. For purposes of determining the amount includible in gross income under this subsection— all modified endowment contracts issued by the same company to the same policyholder during any calendar year shall be treated as 1 modified endowment contract, and all annuity contracts issued by the same company to the same policyholder during any calendar year shall be treated as 1 annuity contract. The preceding sentence shall not apply to any contract described in paragraph (5)(D). The Secretary may by regulations prescribe such additional rules as may be necessary or appropriate to prevent avoidance of the purposes of this subsection through serial purchases of contracts or otherwise.

(f) Special rules for computing employees’ contributions In computing, for purposes of subsection (c)(1)(A), the aggregate amount of premiums or other consideration paid for the contract, and for purposes of subsection (e)(6), the aggregate premiums or other consideration paid, amounts contributed by the employer shall be included, but only to the extent that— such amounts were includible in the gross income of the employee under this subtitle or prior income tax laws; or if such amounts had been paid directly to the employee at the time they were contributed, they would not have been includible in the gross income of the employee under the law applicable at the time of such contribution. Paragraph (2) shall not apply to amounts which were contributed by the employer after December 31, 1962 , and which would not have been includible in the gross income of the employee by reason of the application of section 911 if such amounts had been paid directly to the employee at the time of contribution. The preceding sentence shall not apply to amounts which were contributed by the employer, as determined under regulations prescribed by the Secretary, to provide pension or annuity credits, to the extent such credits are attributable to services performed before January 1, 1963 , and are provided pursuant to pension or annuity plan provisions in existence on March 12, 1962 , and on that date applicable to such services, or to the extent such credits are attributable to services performed as a foreign missionary (within the meaning of section 403(b)(2)(D)(iii), as in effect before the enactment of the Economic Growth and Tax Relief Reconciliation Act of 2001).

(g) Rules for transferee where transfer was for value Where any contract (or any interest therein) is transferred (by assignment or otherwise) for a valuable consideration, to the extent that the contract (or interest therein) does not, in the hands of the transferee, have a basis which is determined by reference to the basis in the hands of the transferor, then— for purposes of this section, only the actual value of such consideration, plus the amount of the premiums and other consideration paid by the transferee after the transfer, shall be taken into account in computing the aggregate amount of the premiums or other consideration paid for the contract; for purposes of subsection (c)(1)(B), there shall be taken into account only the aggregate amount received under the contract by the transferee before the annuity starting date, to the extent that such amount was excludable from gross income under this subtitle or prior income tax laws; and the annuity starting date is the first day of the first period for which the transferee received an amount under the contract as an annuity. For purposes of this subsection, the term “transferee” includes a beneficiary of, or the estate of, the transferee.

(h) Option to receive annuity in lieu of lump sum If— a contract provides for payment of a lump sum in full discharge of an obligation under the contract, subject to an option to receive an annuity in lieu of such lump sum; the option is exercised within 60 days after the day on which such lump sum first became payable; and part or all of such lump sum would (but for this subsection) be includible in gross income by reason of subsection (e)(1), then, for purposes of this subtitle, no part of such lump sum shall be considered as includible in gross income at the time such lump sum first became payable.

([(i) Repealed. Pub. L. 94–455, title XIX, § 1951(b)(1)(A), Oct. 4, 1976, 90 Stat. 1836]

(j) Interest Notwithstanding any other provision of this section, if any amount is held under an agreement to pay interest thereon, the interest payments shall be included in gross income.

([(k) Repealed. Pub. L. 98–369, div. A, title IV, § 421(b)(1), July 18, 1984, 98 Stat. 794]

(l) Face-amount certificates For purposes of this section, the term “endowment contract” includes a face-amount certificate, as defined in section 2(a)(15) of the Investment Company Act of 1940 (15 U.S.C., sec. 80a–2), issued after December 31, 1954 .

(m) Special rules applicable to employee annuities and distributions under employee plans In computing— the aggregate amount of premiums or other consideration paid for the contract for purposes of subsection (c)(1)(A) (relating to the investment in the contract), and the aggregate premiums or other consideration paid for purposes of subsection (e)(6) (relating to certain amounts not received as an annuity), any amount allowed as a deduction with respect to the contract under section 404 which was paid while the employee was an employee within the meaning of section 401(c)(1) shall be treated as consideration contributed by the employer, and there shall not be taken into account any portion of the premiums or other consideration for the contract paid while the employee was an owner-employee which is properly allocable (as determined under regulations prescribed by the Secretary) to the cost of life, accident, health, or other insurance. This paragraph shall apply to any life insurance contract— purchased as a part of a plan described in section 403(a), or purchased by a trust described in section 401(a) which is exempt from tax under section 501(a) if the proceeds of such contract are payable directly or indirectly to a participant in such trust or to a beneficiary of such participant. Any contribution to a plan described in subparagraph (A)(i) or a trust described in subparagraph (A)(ii) which is allowed as a deduction under section 404, and any income of a trust described in subparagraph (A)(ii), which is determined in accordance with regulations prescribed by the Secretary to have been applied to purchase the life insurance protection under a contract described in subparagraph (A), is includible in the gross income of the participant for the taxable year when so applied. In the case of the death of an individual insured under a contract described in subparagraph (A), an amount equal to the cash surrender value of the contract immediately before the death of the insured shall be treated as a payment under such plan or a distribution by such trust, and the excess of the amount payable by reason of the death of the insured over such cash surrender value shall not be includible in gross income under this section and shall be treated as provided in section 101. This paragraph applies to amounts which are received from a qualified trust described in section 401(a) or under a plan described in section 403(a) at any time by an individual who is, or has been, a 5-percent owner, or by a successor of such an individual, but only to the extent such amounts are determined, under regulations prescribed by the Secretary, to exceed the benefits provided for such individual under the plan formula. If a person receives an amount to which this paragraph applies, his tax under this chapter for the taxable year in which such amount is received shall be increased by an amount equal to 10 percent of the portion of the amount so received which is includible in his gross income for such taxable year. For purposes of this paragraph, the term “5-percent owner” means any individual who, at any time during the 5 plan years preceding the plan year ending in the taxable year in which the amount is received, is a 5-percent owner (as defined in section 416(i)(1)(B)). For purposes of this subsection, the term “owner-employee” has the meaning assigned to it by section 401(c)(3) and includes an individual for whose benefit an individual retirement account or annuity described in section 408(a) or (b) is maintained. For purposes of the preceding sentence, the term “owner-employee” shall include an employee within the meaning of section 401(c)(1). For purposes of this section, an individual shall be considered to be disabled if he is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or to be of long-continued and indefinite duration. An individual shall not be considered to be disabled unless he furnishes proof of the existence thereof in such form and manner as the Secretary may require. Under regulations prescribed by the Secretary, in the case of a distribution or payment made to an alternate payee who is the spouse or former spouse of the participant pursuant to a qualified domestic relations order (as defined in section 414(p)), the investment in the contract as of the date prescribed in such regulations shall be allocated on a pro rata basis between the present value of such distribution or payment and the present value of all other benefits payable with respect to the participant to which such order relates.

(n) Annuities under retired serviceman’s family protection plan or survivor benefit plan Subsection (b) shall not apply in the case of amounts received after December 31, 1965 , as an annuity under chapter 73 of title 10 of the United States Code, but all such amounts shall be excluded from gross income until there has been so excluded (under section 122(b)(1) or this section, including amounts excluded before January 1, 1966 ) an amount equal to the consideration for the contract (as defined by section 122(b)(2)), plus any amount treated pursuant to section 101(b)(2)(D) (as in effect on the day before the date of the enactment of the Small Business Job Protection Act of 1996) as additional consideration paid by the employee. Thereafter all amounts so received shall be included in gross income.

(o) Special rules for distributions from qualified plans to which employee made deductible contributions For purposes of this section and sections 402 and 403, notwithstanding section 414(h), any deductible employee contribution made to a qualified employer plan or government plan shall be treated as an amount contributed by the employer which is not includible in the gross income of the employee. For purposes of this subsection, rules similar to the rules provided by subsection (p) (other than the exception contained in paragraph (2) thereof) shall apply. To the extent any amount of accumulated deductible employee contributions of an employee are applied to the purchase of life insurance contracts, such amount shall be treated as distributed to the employee in the year so applied. For purposes of sections 402(c), 403(a)(4), 403(b)(8), 408(d)(3), and 457(e)(16), the Secretary shall prescribe regulations providing for such allocations of amounts attributable to accumulated deductible employee contributions, and for such other rules, as may be necessary to insure that such accumulated deductible employee contributions do not become eligible for additional tax benefits (or freed from limitations) through the use of rollovers. For purposes of this subsection— The term “deductible employee contributions” means any qualified voluntary employee contribution (as defined in section 219(e)(2)) made after December 31, 1981 , in a taxable year beginning after such date and made for a taxable year beginning before January 1, 1987 , and allowable as a deduction under section 219(a) for such taxable year. The term “accumulated deductible employee contributions” means the deductible employee contributions— increased by the amount of income and gain allocable to such contributions, and reduced by the sum of the amount of loss and expense allocable to such contributions and the amounts distributed with respect to the employee which are attributable to such contributions (or income or gain allocable to such contributions). The term “qualified employer plan” has the meaning given to such term by subsection (p)(3)(A)(i). The term “government plan” has the meaning given such term by subsection (p)(3)(B). Unless the plan specifies otherwise, any distribution from such plan shall not be treated as being made from the accumulated deductible employee contributions, until all other amounts to the credit of the employee have been distributed.

(p) Loans treated as distributions For purposes of this section— If during any taxable year a participant or beneficiary receives (directly or indirectly) any amount as a loan from a qualified employer plan, such amount shall be treated as having been received by such individual as a distribution under such plan. If during any taxable year a participant or beneficiary assigns (or agrees to assign) or pledges (or agrees to pledge) any portion of his interest in a qualified employer plan, such portion shall be treated as having been received by such individual as a loan from such plan. Paragraph (1) shall not apply to any loan to the extent that such loan (when added to the outstanding balance of all other loans from such plan whether made on, before, or after August 13, 1982 ), does not exceed the lesser of— $50, 000, re d u ce d b y t h ee x cess (i f an y) o f — t h e hi g h es t o u t s t an d in g ba l an ceo f l o an s f ro m t h e pl an d u r in g t h e 1 - ye a r p er i o d e n d in g o n t h e d a y b e f ore t h e d a t eo n w hi c h s u c h l o an w a s ma d e, o v er t h eo u t s t an d in g ba l an ceo f l o an s f ro m t h e pl an o n t h e d a t eo n w hi c h s u c h l o an w a s ma d e, or t h e g re a t ero f (I) o n e - ha l f o f t h e p rese n t v a l u eo f t h e n o n f or f e i t ab l e a ccr u e d b e n e f i t o f t h ee m pl oyee u n d er t h e pl an, or (II)$ 10,000. For purposes of clause (ii), the present value of the nonforfeitable accrued benefit shall be determined without regard to any accumulated deductible employee contributions (as defined in subsection ( o )(5)(B)). Subparagraph (A) shall not apply to any loan unless such loan, by its terms, is required to be repaid within 5 years. Clause (i) shall not apply to any loan used to acquire any dwelling unit which within a reasonable time is to be used (determined at the time the loan is made) as the principal residence of the participant. Except as provided in regulations, this paragraph shall not apply to any loan unless substantially level amortization of such loan (with payments not less frequently than quarterly) is required over the term of the loan. Subparagraph (A) shall not apply to any loan which is made through the use of any credit card or any other similar arrangement. For purposes of this paragraph— the rules of subsections (b), (c), and (m) of section 414 shall apply, and all plans of an employer (determined after the application of such subsections) shall be treated as 1 plan. No deduction otherwise allowable under this chapter shall be allowed under this chapter for any interest paid or accrued on any loan to which paragraph (1) does not apply by reason of paragraph (2) during the period described in subparagraph (B). For purposes of subparagraph (A), the period described in this subparagraph is the period— on or after the 1st day on which the individual to whom the loan is made is a key employee (as defined in section 416(i)), or such loan is secured by amounts attributable to elective deferrals described in subparagraph (A) or (C) of section 402(g)(3). For purposes of this subsection— The term “qualified employer plan” means— a plan described in section 401(a) which includes a trust exempt from tax under section 501(a), an annuity plan described in section 403(a), and a plan under which amounts are contributed by an individual’s employer for an annuity contract described in section 403(b). The term “qualified employer plan” shall include any plan which was (or was determined to be) a qualified employer plan or a government plan. The term “government plan” means any plan, whether or not qualified, established and maintained for its employees by the United States, by a State or political subdivision thereof, or by an agency or instrumentality of any of the foregoing. For purposes of this subsection, any amount received as a loan under a contract purchased under a qualified employer plan (and any assignment or pledge with respect to such a contract) shall be treated as a loan under such employer plan. In the case of any loan from a qualified employer plan to a qualified individual made during the applicable period— clause (i) of paragraph (2)(A) shall be applied by substituting “ $100, 000” f or “$ 50,000”, and clause (ii) of such paragraph shall be applied by substituting “the present value of the nonforfeitable accrued benefit of the employee under the plan” for “one-half of the present value of the nonforfeitable accrued benefit of the employee under the plan”. In the case of a qualified individual with respect to any qualified disaster with an outstanding loan from a qualified employer plan on or after the applicable date with respect to the qualified disaster— if the due date pursuant to subparagraph (B) or (C) of paragraph (2) for any repayment with respect to such loan occurs during the period beginning on the first day of the incident period of such qualified disaster and ending on the date which is 180 days after the last day of such incident period, such due date may be delayed for 1 year, any subsequent repayments with respect to any such loan may be appropriately adjusted to reflect the delay in the due date under clause (i) and any interest accruing during such delay, and in determining the 5-year period and the term of a loan under subparagraph (B) or (C) of paragraph (2), the period described in clause (i) may be disregarded. For purposes of this paragraph— The term “qualified individual” means any individual— whose principal place of abode at any time during the incident period of any qualified disaster is located in the qualified disaster area with respect to such qualified disaster, and who has sustained an economic loss by reason of such qualified disaster. The applicable period with respect to any disaster is the period— beginning on the applicable date with respect to such disaster, and ending on the date that is 180 days after such applicable date. For purposes of this paragraph— the terms “applicable date”, “qualified disaster”, “qualified disaster area”, and “incident period” have the meaning given such terms under subsection (t)(11), and the term “applicable period” has the meaning given such term under subsection (t)(8).

(q) 10-percent penalty for premature distributions from annuity contracts If any taxpayer receives any amount under an annuity contract, the taxpayer’s tax under this chapter for the taxable year in which such amount is received shall be increased by an amount equal to 10 percent of the portion of such amount which is includible in gross income. Paragraph (1) shall not apply to any distribution— made on or after the date on which the taxpayer attains age 59½, made on or after the death of the holder (or, where the holder is not an individual, the death of the primary annuitant (as defined in subsection (s)(6)(B))), attributable to the taxpayer’s becoming disabled within the meaning of subsection (m)(7), which is a part of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the taxpayer or the joint lives (or joint life expectancies) of such taxpayer and his designated beneficiary, from a plan, contract, account, trust, or annuity described in subsection (e)(5)(D), allocable to investment in the contract before August 14, 1982 , or 2 under a qualified funding asset (within the meaning of section 130(d), but without regard to whether there is a qualified assignment), to which subsection (t) applies (without regard to paragraph (2) thereof), under an immediate annuity contract (within the meaning of section 72(u)(4)), or which is purchased by an employer upon the termination of a plan described in section 401(a) or 403(a) and which is held by the employer until such time as the employee separates from service. For purposes of subparagraph (D), periodic payments shall not fail to be treated as substantially equal merely because they are amounts received as an annuity, and such periodic payments shall be deemed to be substantially equal if they are payable over a period described in subparagraph (D) and would satisfy the requirements applicable to annuity payments under section 401(a)(9) if such requirements applied. If— paragraph (1) does not apply to a distribution by reason of paragraph (2)(D), and the series of payments under such paragraph are subsequently modified (other than by reason of death or disability)— before the close of the 5-year period beginning on the date of the first payment and after the taxpayer attains age 59½, or before the taxpayer attains age 59½, the taxpayer’s tax for the 1st taxable year in which such modification occurs shall be increased by an amount, determined under regulations, equal to the tax which (but for paragraph (2)(D)) would have been imposed, plus interest for the deferral period (within the meaning of subsection (t)(4)(B)). If— payments described in paragraph (2)(D) are being made from an annuity contract, an exchange of all or a portion of such contract for another contract is made under section 1035, and the aggregate distributions from the contracts involved in the exchange continue to satisfy the requirements of paragraph (2)(D) as if the exchange had not taken place, such exchange shall not be treated as a modification under subparagraph (A)(ii), and compliance with paragraph (2)(D) shall be determined on the basis of the combined distributions described in clause (iii).

(r) Certain railroad retirement benefits treated as received under employer plans Notwithstanding any other provision of law, any benefit provided under the Railroad Retirement Act of 1974 (other than a tier 1 railroad retirement benefit) shall be treated for purposes of this title as a benefit provided under an employer plan which meets the requirements of section 401(a). For purposes of paragraph (1)— the tier 2 portion of the tax imposed by section 3201 (relating to tax on employees) shall be treated as an employee contribution, the tier 2 portion of the tax imposed by section 3211 (relating to tax on employee representatives) shall be treated as an employee contribution, and the tier 2 portion of the tax imposed by section 3221 (relating to tax on employers) shall be treated as an employer contribution. For purposes of subparagraph (A)— With respect to compensation paid after 1984, the tier 2 portion shall be the taxes imposed by sections 3201(b), 3211(b), and 3221(b). With respect to compensation paid before 1985 for services rendered after September 30, 1981 , the tier 2 portion shall be— so much of the tax imposed by section 3201 as is determined at the 2 percent rate, and so much of the taxes imposed by sections 3211 and 3221 as is determined at the 11.75 percent rate. With respect to compensation paid for services rendered after December 31, 1983 , and before 1985, subclause (I) shall be applied by substituting “2.75 percent” for “2 percent”, and subclause (II) shall be applied by substituting “12.75 percent” for “11.75 percent”. With respect to compensation paid for services rendered during any period before October 1, 1981 , the tier 2 portion shall be the excess (if any) of— the tax imposed for such period by section 3201, 3211, or 3221, as the case may be (other than any tax imposed with respect to man-hours), over the tax which would have been imposed by such section for such period had the rates of the comparable taxes imposed by chapter 21 for such period applied under such section. For purposes of paragraph (1), no amount treated as an employee contribution under this paragraph shall be allocated to— any supplemental annuity paid under section 2(b) of the Railroad Retirement Act of 1974, or any benefit paid under section 3(h), 4(e), or 4(h) of such Act. For purposes of paragraph (1), the term “tier 1 railroad retirement benefit” has the meaning given such term by section 86(d)(4).

(s) Required distributions where holder dies before entire interest is distributed A contract shall not be treated as an annuity contract for purposes of this title unless it provides that— if any holder of such contract dies on or after the annuity starting date and before the entire interest in such contract has been distributed, the remaining portion of such interest will be distributed at least as rapidly as under the method of distributions being used as of the date of his death, and if any holder of such contract dies before the annuity starting date, the entire interest in such contract will be distributed within 5 years after the death of such holder. If— any portion of the holder’s interest is payable to (or for the benefit of) a designated beneficiary, such portion will be distributed (in accordance with regulations) over the life of such designated beneficiary (or over a period not extending beyond the life expectancy of such beneficiary), and such distributions begin not later than 1 year after the date of the holder’s death or such later date as the Secretary may by regulations prescribe, then for purposes of paragraph (1), the portion referred to in subparagraph (A) shall be treated as distributed on the day on which such distributions begin. If the designated beneficiary referred to in paragraph (2)(A) is the surviving spouse of the holder of the contract, paragraphs (1) and (2) shall be applied by treating such spouse as the holder of such contract. For purposes of this subsection, the term “designated beneficiary” means any individual designated a beneficiary by the holder of the contract. This subsection shall not apply to any annuity contract— which is provided— under a plan described in section 401(a) which includes a trust exempt from tax under section 501, or under a plan described in section 403(a), which is described in section 403(b), which is an individual retirement annuity or provided under an individual retirement account or annuity, or which is a qualified funding asset (as defined in section 130(d), but without regard to whether there is a qualified assignment). For purposes of this subsection, if the holder of the contract is not an individual, the primary annuitant shall be treated as the holder of the contract. For purposes of subparagraph (A), the term “primary annuitant” means the individual, the events in the life of whom are of primary importance in affecting the timing or amount of the payout under the contract. For purposes of this subsection, in the case of a holder of an annuity contract which is not an individual, if there is a change in a primary annuitant (as defined in paragraph (6)(B)), such change shall be treated as the death of the holder.

(t) 10-percent additional tax on early distributions from qualified retirement plans If any taxpayer receives any amount from a qualified retirement plan (as defined in section 4974(c)), the taxpayer’s tax under this chapter for the taxable year in which such amount is received shall be increased by an amount equal to 10 percent of the portion of such amount which is includible in gross income. Except as provided in paragraphs (3) and (4), paragraph (1) shall not apply to any of the following distributions: Distributions which are— made on or after the date on which the employee attains age 59½, made to a beneficiary (or to the estate of the employee) on or after the death of the employee, attributable to the employee’s being disabled within the meaning of subsection (m)(7), part of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the employee or the joint lives (or joint life expectancies) of such employee and his designated beneficiary, made to an employee after separation from service after attainment of age 55, dividends paid with respect to stock of a corporation which are described in section 404(k), made on account of a levy under section 6331 on the qualified retirement plan, payments under a phased retirement annuity under section 8366a(a)(5) 3 or 8412a(a)(5) of title 5, United States Code, or a composite retirement annuity under section 8366a(a)(1) 3 or 8412a(a)(1) of such title, or attributable to withdrawal of net income attributable to a contribution which is distributed pursuant to section 408(d)(4). For purposes of clause (iv), periodic payments shall not fail to be treated as substantially equal merely because they are amounts received as an annuity, and such periodic payments shall be deemed to be substantially equal if they are payable over a period described in clause (iv) and satisfy the requirements applicable to annuity payments under section 401(a)(9). Distributions made to the employee (other than distributions described in subparagraph (A), (C), or (D)) to the extent such distributions do not exceed the amount allowable as a deduction under section 213 to the employee for amounts paid during the taxable year for medical care (determined without regard to whether the employee itemizes deductions for such taxable year). Any distribution to an alternate payee pursuant to a qualified domestic relations order (within the meaning of section 414(p)(1)). Distributions from an individual retirement plan to an individual after separation from employment— if such individual has received unemployment compensation for 12 consecutive weeks under any Federal or State unemployment compensation law by reason of such separation, if such distributions are made during any taxable year during which such unemployment compensation is paid or the succeeding taxable year, and to the extent such distributions do not exceed the amount paid during the taxable year for insurance described in section 213(d)(1)(D) with respect to the individual and the individual’s spouse and dependents (as defined in section 152, determined without regard to subsections (b)(1), (b)(2), and (d)(1)(B) thereof). Clause (i) shall not apply to any distribution made after the individual has been employed for at least 60 days after the separation from employment to which clause (i) applies. To the extent provided in regulations, a self-employed individual shall be treated as meeting the requirements of clause (i)(I) if, under Federal or State law, the individual would have received unemployment compensation but for the fact the individual was self-employed. Distributions to an individual from an individual retirement plan to the extent such distributions do not exceed the qualified higher education expenses (as defined in paragraph (7)) of the taxpayer for the taxable year. Distributions shall not be taken into account under the preceding sentence if such distributions are described in subparagraph (A), (C), or (D) or to the extent paragraph (1) does not apply to such distributions by reason of subparagraph (B). Distributions to an individual from an individual retirement plan which are qualified first-time homebuyer distributions (as defined in paragraph (8)). Distributions shall not be taken into account under the preceding sentence if such distributions are described in subparagraph (A), (C), (D), or (E) or to the extent paragraph (1) does not apply to such distributions by reason of subparagraph (B). Any qualified reservist distribution. Any individual who receives a qualified reservist distribution may, at any time during the 2-year period beginning on the day after the end of the active duty period, make one or more contributions to an individual retirement plan of such individual in an aggregate amount not to exceed the amount of such distribution. The dollar limitations otherwise applicable to contributions to individual retirement plans shall not apply to any contribution made pursuant to the preceding sentence. No deduction shall be allowed for any contribution pursuant to this clause. For purposes of this subparagraph, the term “qualified reservist distribution” means any distribution to an individual if— such distribution is from an individual retirement plan, or from amounts attributable to employer contributions made pursuant to elective deferrals described in subparagraph (A) or (C) of section 402(g)(3) or section 501(c)(18)(D)(iii), such individual was (by reason of being a member of a reserve component (as defined in section 101 of title 37 , United States Code)) ordered or called to active duty for a period in excess of 179 days or for an indefinite period, and such distribution is made during the period beginning on the date of such order or call and ending at the close of the active duty period. This subparagraph applies to individuals ordered or called to active duty after September 11, 2001 . In no event shall the 2-year period referred to in clause (ii) end before the date which is 2 years after the date of the enactment of this subparagraph. Any qualified birth or adoption distribution. The aggregate amount which may be treated as qualified birth or adoption distributions by any individual with respect to any birth or adoption shall not exceed $5, 000. F or p u r p oseso f t hi ss u b p a r a g r a p h — T h e t er m “ q u a l i f i e d bi r t h or a d o pt i o n d i s t r ib u t i o n ” m e an s an y d i s t r ib u t i o n f ro mana ppl i c ab l ee l i g ib l ere t i re m e n tpl an t o anin d i v i d u a l i f ma d e d u r in g t h e 1 - ye a r p er i o d b e g innin g o n t h e d a t eo n w hi c ha c hi l d o f t h e in d i v i d u a l i s b or n oro n w hi c h t h e l e g a l a d o pt i o nb y t h e in d i v i d u a l o f an e l i g ib l e a d o pt ee i s f ina l i ze d . T h e t er m “ e l i g ib l e a d o pt ee ” m e an s an y in d i v i d u a l (o t h er t hana c hi l d o f t h e t a x p a yer ’ ss p o u se) w h o ha s n o t a tt ain e d a g e 18 or i s p h ys i c a ll yor m e n t a ll y in c a p ab l eo f se l f - s u pp or t . I f a d i s t r ib u t i o n t o anin d i v i d u a lw o u l d (w i t h o u t re g a r d t oc l a u se (ii)) b e a q u a l i f i e d bi r t h or a d o pt i o n d i s t r ib u t i o n, a pl an s ha ll n o t b e t re a t e d a s f ai l in g t o m ee t an yre q u i re m e n t o f t hi s t i tl e m ere l y b ec a u se t h e pl an t re a t s t h e d i s t r ib u t i o na s a q u a l i f i e d bi r t h or a d o pt i o n d i s t r ib u t i o n, u n l ess t h e a gg re g a t e am o u n t o f s u c h d i s t r ib u t i o n s f ro ma llpl an s main t ain e d b y t h ee m pl oyer (an d an y m e mb ero f an yco n t ro ll e d g ro u pw hi c hin c l u d es t h ee m pl oyer) t os u c hin d i v i d u a l e x cee d s$ 5,000. For purposes of subclause (I), the term “controlled group” means any group treated as a single employer under subsection (b), (c), (m), or ( o ) of section 414. Any individual who receives a qualified birth or adoption distribution may, at any time during the 3-year period beginning on the day after the date on which such distribution was received, make one or more contributions in an aggregate amount not to exceed the amount of such distribution to an applicable eligible retirement plan of which such individual is a beneficiary and to which a rollover contribution of such distribution could be made under section 402(c), 403(a)(4), 403(b)(8), 408(d)(3), or 457(e)(16), as the case may be. The aggregate amount of contributions made by an individual under subclause (I) to any applicable eligible retirement plan which is not an individual retirement plan shall not exceed the aggregate amount of qualified birth or adoption distributions which are made from such plan to such individual. Subclause (I) shall not apply to contributions to any applicable eligible retirement plan which is not an individual retirement plan unless the individual is eligible to make contributions (other than those described in subclause (I)) to such applicable eligible retirement plan. If a contribution is made under subclause (I) with respect to a qualified birth or adoption distribution from an applicable eligible retirement plan other than an individual retirement plan, then the taxpayer shall, to the extent of the amount of the contribution, be treated as having received such distribution in an eligible rollover distribution (as defined in section 402(c)(4)) and as having transferred the amount to the applicable eligible retirement plan in a direct trustee to trustee transfer within 60 days of the distribution. If a contribution is made under subclause (I) with respect to a qualified birth or adoption distribution from an individual retirement plan, then, to the extent of the amount of the contribution, such distribution shall be treated as a distribution described in section 408(d)(3) and as having been transferred to the applicable eligible retirement plan in a direct trustee to trustee transfer within 60 days of the distribution. For purposes of this subparagraph— The term “applicable eligible retirement plan” means an eligible retirement plan (as defined in section 402(c)(8)(B)) other than a defined benefit plan. For purposes of sections 401(a)(31), 402(f), and 3405, a qualified birth or adoption distribution shall not be treated as an eligible rollover distribution. A distribution shall not be treated as a qualified birth or adoption distribution with respect to any child or eligible adoptee unless the taxpayer includes the name, age, and TIN of such child or eligible adoptee on the taxpayer’s return of tax for the taxable year. Any qualified birth or adoption distribution shall be treated as meeting the requirements of sections 401(k)(2)(B)(i), 403(b)(7)(A)(i), 403(b)(11), and 457(d)(1)(A). Any emergency personal expense distribution. Not more than 1 distribution per calendar year may be treated as an emergency personal expense distribution by any individual. The amount which may be treated as an emergency personal expense distribution by any individual in any calendar year shall not exceed the lesser of $1, 000 or anam o u n t e q u a lt o t h ee x cesso f — t h e in d i v i d u a l ’ s t o t a l n o n f or f e i t ab l e a ccr u e d b e n e f i t u n d er t h e pl an (t h e in d i v i d u a l ’ s t o t a l in t eres t in t h e pl anin t h ec a seo f anin d i v i d u a l re t i re m e n tpl an), d e t er min e d a so f t h e d a t eo f e a c h s u c h d i s t r ib u t i o n, o v er$ 1,000. For purposes of this subparagraph, the term “emergency personal expense distribution” means any distribution from an applicable eligible retirement plan (as defined in subparagraph (H)(vi)(I)) to an individual for purposes of meeting unforeseeable or immediate financial needs relating to necessary personal or family emergency expenses. The administrator of an applicable eligible retirement plan may rely on an employee’s written certification that the employee satisfies the conditions of the preceding sentence in determining whether any distribution is an emergency personal expense distribution. The Secretary may provide by regulations for exceptions to the rule of the preceding sentence in cases where the plan administrator has actual knowledge to the contrary of the employee’s certification, and for procedures for addressing cases of employee misrepresentation. If a distribution to an individual would (without regard to clause (ii) or (iii)) be an emergency personal expense distribution, a plan shall not be treated as failing to meet any requirement of this title merely because the plan treats the distribution as an emergency personal expense distribution, unless the number or the aggregate amount of such distributions from all plans maintained by the employer (and any member of any controlled group which includes the employer, determined as provided in subparagraph (H)(iv)(II)) to such individual exceeds the limitation determined under clause (ii) or (iii). Rules similar to the rules of subparagraph (H)(v) shall apply with respect to an individual who receives a distribution to which clause (i) applies. If a distribution is treated as an emergency personal expense distribution in any calendar year with respect to a plan of the employee, no amount may be treated as such a distribution during the immediately following 3 calendar years with respect to such plan unless— such previous distribution is fully repaid to such plan pursuant to clause (vi), or the aggregate of the elective deferrals and employee contributions to the plan (the total amounts contributed to the plan in the case of an individual retirement plan) subsequent to such previous distribution is at least equal to the amount of such previous distribution which has not been so repaid. Rules similar to the rules of subclauses (II) and (IV) of subparagraph (H)(vi) shall apply to any emergency personal expense distribution. Distributions from a pension-linked emergency savings account pursuant to section 402A(e). Any eligible distribution to a domestic abuse victim. The aggregate amount which may be treated as an eligible distribution to a domestic abuse victim by any individual shall not exceed an amount equal to the lesser of— 10,000 amount in clause (ii)(I) shall be increased by an amount equal to— such dollar amount, multiplied by the cost-of-living adjustment determined under section 1(f)(3) for the calendar year in which the taxable year begins, determined by substituting “calendar year 2023” for “calendar year 2016” in subparagraph (A)(ii) thereof. If any amount after adjustment under the preceding sentence is not a multiple of $100, s u c ham o u n t s ha ll b ero u n d e d t o t h e n e a res t m u lt i pl eo f$ 100. Distributions which are made to the employee who is a terminally ill individual on or after the date on which such employee has been certified by a physician as having a terminal illness. For purposes of this subparagraph, the term “terminally ill individual” has the same meaning given such term under section 101(g)(4)(A), except that “84 months” shall be substituted for “24 months”. For purposes of this subparagraph, an employee shall not be considered to be a terminally ill individual unless such employee furnishes sufficient evidence to the plan administrator in such form and manner as the Secretary may require. Rules similar to the rules of subparagraph (H)(v) shall apply with respect to an individual who receives a distribution to which clause (i) applies. Any qualified disaster recovery distribution. Any qualified long-term care distribution to which section 401(a)(39) applies. If, with respect to the plan, the individual covered by the long-term care coverage to which such distribution relates is the spouse of the employee, clause (i) shall apply only if the employee and the employee’s spouse file a joint return. For purposes of sections 401(a)(31), 402(f), and 3405, any qualified long-term care distribution described in clause (i) shall not be treated as an eligible rollover distribution. Subparagraphs (A)(v) and (C) of paragraph (2) shall not apply to distributions from an individual retirement plan. Paragraph (2)(A)(iv) shall not apply to any amount paid from a trust described in section 401(a) which is exempt from tax under section 501(a) or from a contract described in section 72(e)(5)(D)(ii) unless the series of payments begins after the employee separates from service. If— paragraph (1) does not apply to a distribution by reason of paragraph (2)(A)(iv), and the series of payments under such paragraph are subsequently modified (other than by reason of death or disability or a distribution to which paragraph (10) applies)— before the close of the 5-year period beginning with the date of the first payment and after the employee attains age 59½, or before the employee attains age 59½, the taxpayer’s tax for the 1st taxable year in which such modification occurs shall be increased by an amount, determined under regulations, equal to the tax which (but for paragraph (2)(A)(iv)) would have been imposed, plus interest for the deferral period. For purposes of this paragraph, the term “deferral period” means the period beginning with the taxable year in which (without regard to paragraph (2)(A)(iv)) the distribution would have been includible in gross income and ending with the taxable year in which the modification described in subparagraph (A) occurs. If— payments described in paragraph (2)(A)(iv) are being made from a qualified retirement plan, a transfer or a rollover from such qualified retirement plan of all or a portion of the taxpayer’s benefit under the plan is made to another qualified retirement plan, and distributions from the transferor and transferee plans would in combination continue to satisfy the requirements of paragraph (2)(A)(iv) if they had been made only from the transferor plan, such transfer or rollover shall not be treated as a modification under subparagraph (A)(ii), and compliance with paragraph (2)(A)(iv) shall be determined on the basis of the combined distributions described in clause (iii). For purposes of this subsection, the term “employee” includes any participant, and in the case of an individual retirement plan, the individual for whose benefit such plan was established. In the case of any amount received from a simple retirement account (within the meaning of section 408(p)) during the 2-year period beginning on the date such individual first participated in any qualified salary reduction arrangement maintained by the individual’s employer under section 408(p)(2), paragraph (1) shall be applied by substituting “25 percent” for “10 percent”. In the case of an employee of an employer which terminates the qualified salary reduction arrangement of the employer under section 408(p) and establishes a qualified cash or deferred arrangement described in section 401(k) or purchases annuity contracts described in section 403(b), subparagraph (A) shall not apply to any amount which is paid in a rollover contribution described in section 408(d)(3) into a qualified trust under section 401(k) (but only if such contribution is subsequently subject to the rules of section 401(k)(2)(B)) or an annuity contract described in section 403(b) (but only if such contribution is subsequently subject to the rules of section 403(b)(12)) for the benefit of the employee. For purposes of paragraph (2)(E)— The term “qualified higher education expenses” means qualified higher education expenses (as defined in section 529(e)(3)) for education furnished to— the taxpayer, the taxpayer’s spouse, or any child (as defined in section 152(f)(1)) or grandchild of the taxpayer or the taxpayer’s spouse, at an eligible educational institution (as defined in section 529(e)(5)). The amount of qualified higher education expenses for any taxable year shall be reduced as provided in section 25A(g)(2). For purposes of paragraph (2)(F)— The term “qualified first-time homebuyer distribution” means any payment or distribution received by an individual to the extent such payment or distribution is used by the individual before the close of the 120th day after the day on which such payment or distribution is received to pay qualified acquisition costs with respect to a principal residence of a first-time homebuyer who is such individual, the spouse of such individual, or any child, grandchild, or ancestor of such individual or the individual’s spouse. The aggregate amount of payments or distributions received by an individual which may be treated as qualified first-time homebuyer distributions for any taxable year shall not exceed the excess (if any) of— 22,000. If a distribution to an individual would (without regard to clause (i)) be a qualified disaster recovery distribution, a plan shall not be treated as violating any requirement of this title merely because the plan treats such distribution as a qualified disaster recovery distribution, unless the aggregate amount of such distributions from all plans maintained by the employer (and any member of any controlled group which includes the employer) to such individual exceeds $22,000 with respect to the same qualified disaster. For purposes of clause (ii), the term “controlled group” means any group treated as a single employer under subsection (b), (c), (m), or ( o ) of section 414. Any individual who receives a qualified disaster recovery distribution may, at any time during the 3-year period beginning on the day after the date on which such distribution was received, make one or more contributions in an aggregate amount not to exceed the amount of such distribution to an eligible retirement plan of which such individual is a beneficiary and to which a rollover contribution of such distribution could be made under section 402(c), 403(a)(4), 403(b)(8), 408(d)(3), or 457(e)(16), as the case may be. For purposes of this title, if a contribution is made pursuant to clause (i) with respect to a qualified disaster recovery distribution from a plan other than an individual retirement plan, then the taxpayer shall, to the extent of the amount of the contribution, be treated as having received the qualified disaster recovery distribution in an eligible rollover distribution (as defined in section 402(c)(4)) and as having transferred the amount to the eligible retirement plan in a direct trustee to trustee transfer within 60 days of the distribution. For purposes of this title, if a contribution is made pursuant to clause (i) with respect to a qualified disaster recovery distribution from an individual retirement plan, then, to the extent of the amount of the contribution, the qualified disaster recovery distribution shall be treated as a distribution described in section 408(d)(3) and as having been transferred to the eligible retirement plan in a direct trustee to trustee transfer within 60 days of the distribution. In the case of any qualified disaster recovery distribution, unless the taxpayer elects not to have this subparagraph apply for any taxable year, any amount required to be included in gross income for such taxable year shall be so included ratably over the 3-taxable year period beginning with such taxable year. For purposes of clause (i), rules similar to the rules of subparagraph (E) of section 408A(d)(3) shall apply. For purposes of this paragraph and paragraph (8), the term “qualified disaster” means any disaster with respect to which a major disaster has been declared by the President under section 401 of the Robert T. Stafford Disaster Relief and Emergency Assistance Act after December 27, 2020 . For purposes of this paragraph and paragraph (8)— The term “qualified disaster area” means, with respect to any qualified disaster, the area with respect to which the major disaster was declared under the Robert T. Stafford Disaster Relief and Emergency Assistance Act. Such term shall not include any area which is a qualified disaster area solely by reason of section 301 of the Taxpayer Certainty and Disaster Tax Relief Act of 2020. The term “incident period” means, with respect to any qualified disaster, the period specified by the Federal Emergency Management Agency as the period during which such disaster occurred. The term “applicable date” means the latest of— the date of the enactment of this paragraph, the first day of the incident period with respect to the qualified disaster, or the date of the disaster declaration with respect to the qualified disaster. The term “eligible retirement plan” shall have the meaning given such term by section 402(c)(8)(B). For purposes of sections 401(a)(31), 402(f), and 3405, qualified disaster recovery distributions shall not be treated as eligible rollover distributions. For purposes of this title— a qualified disaster recovery distribution shall be treated as meeting the requirements of sections 401(k)(2)(B)(i), 403(b)(7)(A)(i), 403(b)(11), and 457(d)(1)(A), and in the case of a money purchase pension plan, a qualified disaster recovery distribution which is an in-service withdrawal shall be treated as meeting the requirements of section 401(a) applicable to distributions.

(u) Treatment of annuity contracts not held by natural persons If any annuity contract is held by a person who is not a natural person— such contract shall not be treated as an annuity contract for purposes of this subtitle (other than subchapter L), and the income on the contract for any taxable year of the policyholder shall be treated as ordinary income received or accrued by the owner during such taxable year. For purposes of this paragraph, holding by a trust or other entity as an agent for a natural person shall not be taken into account. For purposes of paragraph (1), the term “income on the contract” means, with respect to any taxable year of the policyholder, the excess of— the sum of the net surrender value of the contract as of the close of the taxable year plus all distributions under the contract received during the taxable year or any prior taxable year, reduced by the sum of the amount of net premiums under the contract for the taxable year and prior taxable years and amounts includible in gross income for prior taxable years with respect to such contract under this subsection. Where necessary to prevent the avoidance of this subsection, the Secretary may substitute “fair market value of the contract” for “net surrender value of the contract” each place it appears in the preceding sentence. For purposes of this paragraph, the term “net premiums” means the amount of premiums paid under the contract reduced by any policyholder dividends. This subsection shall not apply to any annuity contract which— is acquired by the estate of a decedent by reason of the death of the decedent, is held under a plan described in section 401(a) or 403(a), under a program described in section 403(b), or under an individual retirement plan, is a qualified funding asset (as defined in section 130(d), but without regard to whether there is a qualified assignment), is purchased by an employer upon the termination of a plan described in section 401(a) or 403(a) and is held by the employer until all amounts under such contract are distributed to the employee for whom such contract was purchased or the employee’s beneficiary, or is an immediate annuity. For purposes of this subsection, the term “immediate annuity” means an annuity— which is purchased with a single premium or annuity consideration, the annuity starting date (as defined in subsection (c)(4)) of which commences no later than 1 year from the date of the purchase of the annuity, and which provides for a series of substantially equal periodic payments (to be made not less frequently than annually) during the annuity period.

(v) 10-percent additional tax for taxable distributions from modified endowment contracts If any taxpayer receives any amount under a modified endowment contract (as defined in section 7702A), the taxpayer’s tax under this chapter for the taxable year in which such amount is received shall be increased by an amount equal to 10 percent of the portion of such amount which is includible in gross income. Paragraph (1) shall not apply to any distribution— made on or after the date on which the taxpayer attains age 59½, which is attributable to the taxpayer’s becoming disabled (within the meaning of subsection (m)(7)), or which is part of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the taxpayer or the joint lives (or joint life expectancies) of such taxpayer and his beneficiary.

(w) Application of basis rules to nonresident aliens Notwithstanding any other provision of this section, for purposes of determining the portion of any distribution which is includible in gross income of a distributee who is a citizen or resident of the United States, the investment in the contract shall not include any applicable nontaxable contributions or applicable nontaxable earnings. For purposes of this subsection, the term “applicable nontaxable contribution” means any employer or employee contribution— which was made with respect to compensation— for labor or personal services performed by an employee who, at the time the labor or services were performed, was a nonresident alien for purposes of the laws of the United States in effect at such time, and which is treated as from sources without the United States, and which was not subject to income tax (and would have been subject to income tax if paid as cash compensation when the services were rendered) under the laws of the United States or any foreign country. For purposes of this subsection, the term “applicable nontaxable earnings” means earnings— which are paid or accrued with respect to any employer or employee contribution which was made with respect to compensation for labor or personal services performed by an employee, with respect to which the employee was at the time the earnings were paid or accrued a nonresident alien for purposes of the laws of the United States, and which were not subject to income tax under the laws of the United States or any foreign country. The Secretary shall prescribe such regulations as may be necessary to carry out the provisions of this subsection, including regulations treating contributions and earnings as not subject to tax under the laws of any foreign country where appropriate to carry out the purposes of this subsection.

(x) Cross reference For limitation on adjustments to basis of annuity contracts sold, see section 1021.

§ 73 Services of child

(a) Treatment of amounts received Amounts received in respect of the services of a child shall be included in his gross income and not in the gross income of the parent, even though such amounts are not received by the child.

(b) Treatment of expenditures All expenditures by the parent or the child attributable to amounts which are includible in the gross income of the child (and not of the parent) solely by reason of subsection (a) shall be treated as paid or incurred by the child.

(c) Parent defined For purposes of this section, the term “parent” includes an individual who is entitled to the services of a child by reason of having parental rights and duties in respect of the child.

(d) Cross reference For assessment of tax against parent in certain cases, see section 6201(c).

§ 74 Prizes and awards

(a) General rule Except as otherwise provided in this section or in section 117 (relating to qualified scholarships), gross income includes amounts received as prizes and awards.

(b) Exception for certain prizes and awards transferred to charities Gross income does not include amounts received as prizes and awards made primarily in recognition of religious, charitable, scientific, educational, artistic, literary, or civic achievement, but only if— the recipient was selected without any action on his part to enter the contest or proceeding; the recipient is not required to render substantial future services as a condition to receiving the prize or award; and the prize or award is transferred by the payor to a governmental unit or organization described in paragraph (1) or (2) of section 170(c) pursuant to a designation made by the recipient.

(c) Exception for certain employee achievement awards Gross income shall not include the value of an employee achievement award (as defined in section 274(j)) received by the taxpayer if the cost to the employer of the employee achievement award does not exceed the amount allowable as a deduction to the employer for the cost of the employee achievement award. If the cost to the employer of the employee achievement award received by the taxpayer exceeds the amount allowable as a deduction to the employer, then gross income includes the greater of— an amount equal to the portion of the cost to the employer of the award that is not allowable as a deduction to the employer (but not in excess of the value of the award), or the amount by which the value of the award exceeds the amount allowable as a deduction to the employer. The remaining portion of the value of such award shall not be included in the gross income of the recipient. In the case of an employer exempt from taxation under this subtitle, any reference in this subsection to the amount allowable as a deduction to the employer shall be treated as a reference to the amount which would be allowable as a deduction to the employer if the employer were not exempt from taxation under this subtitle. For provisions excluding certain de minimis fringes from gross income, see section 132(e).

(d) Exception for Olympic and Paralympic medals and prizes Gross income shall not include the value of any medal awarded in, or any prize money received from the United States Olympic Committee on account of, competition in the Olympic Games or Paralympic Games. Paragraph (1) shall not apply to any taxpayer for any taxable year if the adjusted gross income (determined without regard to this subsection) of such taxpayer for such taxable year exceeds $1,000,000 (half of such amount in the case of a married individual filing a separate return). For purposes of sections 85(c), 86, 135, 137, 219, 221, and 469, adjusted gross income shall be determined after the application of paragraph (1) and before the application of subparagraph (A).

§ 75 Dealers in tax-exempt securities

(a) Adjustment for bond premium In computing the gross income of a taxpayer who holds during the taxable year a municipal bond (as defined in subsection (b)(1)) primarily for sale to customers in the ordinary course of his trade or business— if the gross income of the taxpayer from such trade or business is computed by the use of inventories and his inventories are valued on any basis other than cost, the cost of securities sold (as defined in subsection (b)(2)) during such year shall be reduced by an amount equal to the amortizable bond premium which would be disallowed as a deduction for such year by section 171(a)(2) (relating to deduction for amortizable bond premium) if the definition in section 171(d) of the term “bond” did not exclude such municipal bond; or if the gross income of the taxpayer from such trade or business is computed without the use of inventories, or by use of inventories valued at cost, and the municipal bond is sold or otherwise disposed of during such year, the adjusted basis (computed without regard to this paragraph) of the municipal bond shall be reduced by the amount of the adjustment which would be required under section 1016(a)(5) (relating to adjustment to basis for amortizable bond premium) if the definition in section 171(d) of the term “bond” did not exclude such municipal bond. Notwithstanding the provisions of paragraph (1), no reduction to the cost of securities sold during the taxable year shall be made in respect of any obligation described in subsection (b)(1)(A)(ii) which is held by the taxpayer at the close of the taxable year; but in the taxable year in which any such obligation is sold or otherwise disposed of, if such obligation is a municipal bond (as defined in subsection (b)(1)), the cost of securities sold during such year shall be reduced by an amount equal to the adjustment described in paragraph (2), without regard to the fact that the taxpayer values his inventories on any basis other than cost.

(b) Definitions For purposes of subsection (a)— The term “municipal bond” means any obligation issued by a government or political subdivision thereof if the interest on such obligation is excludable from gross income; but such term does not include such an obligation if— it is sold or otherwise disposed of by the taxpayer within 30 days after the date of its acquisition by him, or its earliest maturity or call date is a date more than 5 years from the date on which it was acquired by the taxpayer; and when it is sold or otherwise disposed of by the taxpayer— in the case of a sale, the amount realized, or in the case of any other disposition, its fair market value at the time of such disposition, is higher than its adjusted basis (computed without regard to this section and section 1016(a)(6)). Determinations under subparagraph (B) shall be exclusive of interest. The term “cost of securities sold” means the amount ascertained by subtracting the inventory value of the closing inventory of a taxable year from the sum of— the inventory value of the opening inventory for such year, and the cost of securities and other property purchased during such year which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year.

[§ 76 Repealed. Pub. L. 94–455, title XIX, § 1901(a)(14), Oct. 4, 1976, 90 Stat. 1765]

§ 77 Commodity credit loans

(a) Election to include loans in income Amounts received as loans from the Commodity Credit Corporation shall, at the election of the taxpayer, be considered as income and shall be included in gross income for the taxable year in which received.

(b) Effect of election on adjustments for subsequent years If a taxpayer exercises the election provided for in subsection (a) for any taxable year, then the method of computing income so adopted shall be adhered to with respect to all subsequent taxable years unless with the approval of the Secretary a change to a different method is authorized.

§ 78 Gross up for deemed paid foreign tax credit

If a domestic corporation chooses to have the benefits of subpart A of part III of subchapter N (relating to foreign tax credit) for any taxable year, an amount equal to the taxes deemed to be paid by such corporation under subsections (a) and (d) of section 960 (determined without regard to the phrase “90 percent of” in subsection (d)(1) thereof) for such taxable year shall be treated for purposes of this title (other than sections 245 and 245A) as a dividend received by such domestic corporation from the foreign corporation. (Added Pub. L. 87–834, § 9(b) , Oct. 16, 1962 , 76 Stat. 1001 ; amended Pub. L. 94–455, title X, § 1033(b)(1) , Oct. 4, 1976 , 90 Stat. 1628 ; Pub. L. 115–97, title I, § 14301(c)(1) , Dec. 22, 2017 , 131 Stat. 2222 ; Pub. L. 119–21, title VII, § 70312(a)(2) , July 4, 2025 , 139 Stat. 203 .)

“The amendments made by this section [enacting this section and amending sections 535, 545, 861, 901, and 902 of this title] shall apply— in respect of any distribution received by a domestic corporation after December 31, 1964 , and in respect of any distribution received by a domestic corporation before January 1, 1965 , in a taxable year of such corporation beginning after December 31, 1962 , but only to the extent that such distribution is made out of the accumulated profits of a foreign corporation for a taxable year (of such foreign corporation) beginning after December 31, 1962 . For purposes of paragraph (2), a distribution made by a foreign corporation out of its profits which are attributable to a distribution received from a foreign subsidiary to which [former] section 902(b) applies shall be treated as made out of the accumulated profits of a foreign corporation for a taxable year beginning before January 1, 1963 , to the extent that such distribution was paid out of the accumulated profits of such foreign subsidiary for a taxable year beginning before January 1, 1963 .”

§ 79 Group-term life insurance purchased for employees

(a) General rule There shall be included in the gross income of an employee for the taxable year an amount equal to the cost of group-term life insurance on his life provided for part or all of such year under a policy (or policies) carried directly or indirectly by his employer (or employers); but only to the extent that such cost exceeds the sum of— the cost of $50,000 of such insurance, and the amount (if any) paid by the employee toward the purchase of such insurance.

(b) Exceptions Subsection (a) shall not apply to— the cost of group-term life insurance on the life of an individual which is provided under a policy carried directly or indirectly by an employer after such individual has terminated his employment with such employer and is disabled (within the meaning of section 72(m)(7)), the cost of any portion of the group-term life insurance on the life of an employee provided during part or all of the taxable year of the employee under which— the employer is directly or indirectly the beneficiary, or a person described in section 170(c) is the sole beneficiary, for the entire period during such taxable year for which the employee receives such insurance, and the cost of any group-term life insurance which is provided under a contract to which section 72(m)(3) applies.

(c) Determination of cost of insurance For purposes of this section and section 6052, the cost of group-term insurance on the life of an employee provided during any period shall be determined on the basis of uniform premiums (computed on the basis of 5-year age brackets) prescribed by regulations by the Secretary.

(d) Nondiscrimination requirements In the case of a discriminatory group-term life insurance plan— subsection (a)(1) shall not apply with respect to any key employee, and the cost of group-term life insurance on the life of any key employee shall be the greater of— such cost determined without regard to subsection (c), or such cost determined with regard to subsection (c). For purposes of this subsection, the term “discriminatory group-term life insurance plan” means any plan of an employer for providing group-term life insurance unless— the plan does not discriminate in favor of key employees as to eligibility to participate, and the type and amount of benefits available under the plan do not discriminate in favor of participants who are key employees. A plan does not meet requirements of subparagraph (A) of paragraph (2) unless— such plan benefits 70 percent or more of all employees of the employer, at least 85 percent of all employees who are participants under the plan are not key employees, such plan benefits such employees as qualify under a classification set up by the employer and found by the Secretary not to be discriminatory in favor of key employees, or in the case of a plan which is part of a cafeteria plan, the requirements of section 125 are met. For purposes of subparagraph (A), there may be excluded from consideration— employees who have not completed 3 years of service; part-time or seasonal employees; employees not included in the plan who are included in a unit of employees covered by an agreement between employee representatives and one or more employers which the Secretary finds to be a collective bargaining agreement, if the benefits provided under the plan were the subject of good faith bargaining between such employee representatives and such employer or employers; and employees who are nonresident aliens and who receive no earned income (within the meaning of section 911(d)(2)) from the employer which constitutes income from sources within the United States (within the meaning of section 861(a)(3)). A plan does not meet the requirements of paragraph (2)(B) unless all benefits available to participants who are key employees are available to all other participants. A plan shall not fail to meet the requirements of paragraph (2)(B) merely because the amount of life insurance on behalf of the employees under the plan bears a uniform relationship to the total compensation or the basic or regular rate of compensation of such employees. For purposes of this subsection, the term “key employee” has the meaning given to such term by paragraph (1) of section 416(i). Such term also includes any former employee if such employee when he retired or separated from service was a key employee. This subsection shall not apply to a church plan maintained for church employees. For purposes of subparagraph (A), the terms “church plan” and “church employee” have the meaning given such terms by paragraphs (1) and (3)(B) of section 414(e), respectively, except that— section 414(e) shall be applied by substituting “section 501(c)(3)” for “section 501” each place it appears, and the term “church employee” shall not include an employee of— an organization described in section 170(b)(1)(A)(ii) above the secondary school level (other than a school for religious training), an organization described in section 170(b)(1)(A)(iii), and an organization described in section 501(c)(3), the basis of the exemption for which is substantially similar to the basis for exemption of an organization described in subclause (II). To the extent provided in regulations, this subsection shall be applied separately with respect to former employees.

(e) Employee includes former employee For purposes of this section, the term “employee” includes a former employee.

(f) Exception for life insurance purchased in connection with qualified transfer of excess pension assets Subsection (b)(3) and section 72(m)(3) shall not apply in the case of any cost paid (whether directly or indirectly) with assets held in an applicable life insurance account (as defined in section 420(e)(4)) under a defined benefit plan.

§ 80 Restoration of value of certain securities

(a) General rule In the case of a domestic corporation subject to the tax imposed by section 11 or 801, if the value of any security (as defined in section 165(g)(2))— which became worthless by reason of the expropriation, intervention, seizure, or similar taking by the government of any foreign country, any political subdivision thereof, or any agency or instrumentality of the foregoing of property to which such security was related, and which was taken into account as a loss from the sale or exchange of a capital asset or with respect to which a deduction for a loss was allowed under section 165, is restored in whole or in part during any taxable year by reason of any recovery of money or other property in respect of the property to which such security was related, the value so restored (to the extent that, when added to the value so restored during prior taxable years, it does not exceed the amount of the loss described in paragraph (2)) shall, except as provided in subsection (b), be included in gross income for the taxable year in which such restoration occurs.

(b) Reduction for failure to receive tax benefit The amount otherwise includible in gross income under subsection (a) in respect of any security shall be reduced by an amount equal to the amount (if any) of the loss described in subsection (a)(2) which did not result in a reduction of the taxpayer’s tax under this subtitle for any taxable year, determined under regulations prescribed by the Secretary.

(c) Character of income For purposes of this subtitle— Except as provided in paragraph (2), the amount included in gross income under this section shall be treated as ordinary income. If the loss described in subsection (a)(2) was taken into account as a loss from the sale or exchange of a capital asset, the amount included in gross income under this section shall be treated as long-term capital gain.

(d) Treatment under foreign expropriation loss recovery provisions This section shall not apply to any recovery of a foreign expropriation loss to which section 1351 applies.

[§ 81 Repealed. Pub. L. 100–203, title X, § 10201(b)(1), Dec. 22, 1987, 101 Stat. 1330–387]

§ 82 Reimbursement of moving expenses

Except as provided in section 132(a)(6), there shall be included in gross income (as compensation for services) any amount received or accrued, directly or indirectly, by an individual as a payment for or reimbursement of expenses of moving from one residence to another residence which is attributable to employment or self-employment. (Added Pub. L. 91–172, title II, § 231(b) , Dec. 30, 1969 , 83 Stat. 579 ; amended Pub. L. 103–66, title XIII, § 13213(d)(3)(A) , Aug. 10, 1993 , 107 Stat. 474 ; Pub. L. 115–141, div. U, title IV, § 401(a)(34) , Mar. 23, 2018 , 132 Stat. 1186 .)

§ 83 Property transferred in connection with performance of services

(a) General rule If, in connection with the performance of services, property is transferred to any person other than the person for whom such services are performed, the excess of— the fair market value of such property (determined without regard to any restriction other than a restriction which by its terms will never lapse) at the first time the rights of the person having the beneficial interest in such property are transferable or are not subject to a substantial risk of forfeiture, whichever occurs earlier, over the amount (if any) paid for such property, shall be included in the gross income of the person who performed such services in the first taxable year in which the rights of the person having the beneficial interest in such property are transferable or are not subject to a substantial risk of forfeiture, whichever is applicable. The preceding sentence shall not apply if such person sells or otherwise disposes of such property in an arm’s length transaction before his rights in such property become transferable or not subject to a substantial risk of forfeiture.

(b) Election to include in gross income in year of transfer Any person who performs services in connection with which property is transferred to any person may elect to include in his gross income for the taxable year in which such property is transferred, the excess of— the fair market value of such property at the time of transfer (determined without regard to any restriction other than a restriction which by its terms will never lapse), over the amount (if any) paid for such property. If such election is made, subsection (a) shall not apply with respect to the transfer of such property, and if such property is subsequently forfeited, no deduction shall be allowed in respect of such forfeiture. An election under paragraph (1) with respect to any transfer of property shall be made in such manner as the Secretary prescribes and shall be made not later than 30 days after the date of such transfer. Such election may not be revoked except with the consent of the Secretary.

(c) Special rules For purposes of this section— The rights of a person in property are subject to a substantial risk of forfeiture if such person’s rights to full enjoyment of such property are conditioned upon the future performance of substantial services by any individual. The rights of a person in property are transferable only if the rights in such property of any transferee are not subject to a substantial risk of forfeiture. So long as the sale of property at a profit could subject a person to suit under section 16(b) of the Securities Exchange Act of 1934, such person’s rights in such property are— subject to a substantial risk of forfeiture, and not transferable. For purposes of determining an individual’s basis in property transferred in connection with the performance of services, rules similar to the rules of section 72(w) shall apply.

(d) Certain restrictions which will never lapse In the case of property subject to a restriction which by its terms will never lapse, and which allows the transferee to sell such property only at a price determined under a formula, the price so determined shall be deemed to be the fair market value of the property unless established to the contrary by the Secretary, and the burden of proof shall be on the Secretary with respect to such value. If, in the case of property subject to a restriction which by its terms will never lapse, the restriction is canceled, then, unless the taxpayer establishes— that such cancellation was not compensatory, and that the person, if any, who would be allowed a deduction if the cancellation were treated as compensatory, will treat the transaction as not compensatory, as evidenced in such manner as the Secretary shall prescribe by regulations, the excess of the fair market value of the property (computed without regard to the restrictions) at the time of cancellation over the sum of— the fair market value of such property (computed by taking the restriction into account) immediately before the cancellation, and the amount, if any, paid for the cancellation, shall be treated as compensation for the taxable year in which such cancellation occurs.

(e) Applicability of section This section shall not apply to— a transaction to which section 421 applies, a transfer to or from a trust described in section 401(a) or a transfer under an annuity plan which meets the requirements of section 404(a)(2), the transfer of an option without a readily ascertainable fair market value, the transfer of property pursuant to the exercise of an option with a readily ascertainable fair market value at the date of grant, or group-term life insurance to which section 79 applies.

(f) Holding period In determining the period for which the taxpayer has held property to which subsection (a) applies, there shall be included only the period beginning at the first time his rights in such property are transferable or are not subject to a substantial risk of forfeiture, whichever occurs earlier.

(g) Certain exchanges If property to which subsection (a) applies is exchanged for property subject to restrictions and conditions substantially similar to those to which the property given in such exchange was subject, and if section 354, 355, 356, or 1036 (or so much of section 1031 as relates to section 1036) applied to such exchange, or if such exchange was pursuant to the exercise of a conversion privilege— such exchange shall be disregarded for purposes of subsection (a), and the property received shall be treated as property to which subsection (a) applies.

(h) Deduction by employer In the case of a transfer of property to which this section applies or a cancellation of a restriction described in subsection (d), there shall be allowed as a deduction under section 162, to the person for whom were performed the services in connection with which such property was transferred, an amount equal to the amount included under subsection (a), (b), or (d)(2) in the gross income of the person who performed such services. Such deduction shall be allowed for the taxable year of such person in which or with which ends the taxable year in which such amount is included in the gross income of the person who performed such services.

(i) Qualified equity grants For purposes of this subtitle— If qualified stock is transferred to a qualified employee who makes an election with respect to such stock under this subsection, subsection (a) shall be applied by including the amount determined under such subsection with respect to such stock in income of the employee in the taxable year determined under subparagraph (B) in lieu of the taxable year described in subsection (a). The taxable year determined under this subparagraph is the taxable year of the employee which includes the earliest of— the first date such qualified stock becomes transferable (including, solely for purposes of this clause, becoming transferable to the employer), the date the employee first becomes an excluded employee, the first date on which any stock of the corporation which issued the qualified stock becomes readily tradable on an established securities market (as determined by the Secretary, but not including any market unless such market is recognized as an established securities market by the Secretary for purposes of a provision of this title other than this subsection), the date that is 5 years after the first date the rights of the employee in such stock are transferable or are not subject to a substantial risk of forfeiture, whichever occurs earlier, or the date on which the employee revokes (at such time and in such manner as the Secretary provides) the election under this subsection with respect to such stock. For purposes of this subsection, the term “qualified stock” means, with respect to any qualified employee, any stock in a corporation which is the employer of such employee, if— such stock is received— in connection with the exercise of an option, or in settlement of a restricted stock unit, and such option or restricted stock unit was granted by the corporation— in connection with the performance of services as an employee, and during a calendar year in which such corporation was an eligible corporation. The term “qualified stock” shall not include any stock if the employee may sell such stock to, or otherwise receive cash in lieu of stock from, the corporation at the time that the rights of the employee in such stock first become transferable or not subject to a substantial risk of forfeiture. For purposes of subparagraph (A)(ii)(II)— The term “eligible corporation” means, with respect to any calendar year, any corporation if— no stock of such corporation (or any predecessor of such corporation) is readily tradable on an established securities market (as determined under paragraph (1)(B)(iii)) during any preceding calendar year, and such corporation has a written plan under which, in such calendar year, not less than 80 percent of all employees who provide services to such corporation in the United States (or any possession of the United States) are granted stock options, or are granted restricted stock units, with the same rights and privileges to receive qualified stock. For purposes of clause (i)(II)— except as provided in subclauses (II) and (III), the determination of rights and privileges with respect to stock shall be made in a similar manner as under section 423(b)(5), employees shall not fail to be treated as having the same rights and privileges to receive qualified stock solely because the number of shares available to all employees is not equal in amount, so long as the number of shares available to each employee is more than a de minimis amount, and rights and privileges with respect to the exercise of an option shall not be treated as the same as rights and privileges with respect to the settlement of a restricted stock unit. For purposes of clause (i)(II), the term “employee” shall not include any employee described in section 4980E(d)(4) or any excluded employee. In the case of any calendar year beginning before January 1, 2018 , clause (i)(II) shall be applied without regard to whether the rights and privileges with respect to the qualified stock are the same. For purposes of this subsection— The term “qualified employee” means any individual who— is not an excluded employee, and agrees in the election made under this subsection to meet such requirements as are determined by the Secretary to be necessary to ensure that the withholding requirements of the corporation under chapter 24 with respect to the qualified stock are met. The term “excluded employee” means, with respect to any corporation, any individual— who is a 1-percent owner (within the meaning of section 416(i)(1)(B)(ii)) at any time during the calendar year or who was such a 1 percent owner at any time during the 10 preceding calendar years, who is or has been at any prior time— the chief executive officer of such corporation or an individual acting in such a capacity, or the chief financial officer of such corporation or an individual acting in such a capacity, who bears a relationship described in section 318(a)(1) to any individual described in subclause (I) or (II) of clause (ii), or who is one of the 4 highest compensated officers of such corporation for the taxable year, or was one of the 4 highest compensated officers of such corporation for any of the 10 preceding taxable years, determined with respect to each such taxable year on the basis of the shareholder disclosure rules for compensation under the Securities Exchange Act of 1934 (as if such rules applied to such corporation). An election with respect to qualified stock shall be made under this subsection no later than 30 days after the first date the rights of the employee in such stock are transferable or are not subject to a substantial risk of forfeiture, whichever occurs earlier, and shall be made in a manner similar to the manner in which an election is made under subsection (b). No election may be made under this section with respect to any qualified stock if— the qualified employee has made an election under subsection (b) with respect to such qualified stock, any stock of the corporation which issued the qualified stock is readily tradable on an established securities market (as determined under paragraph (1)(B)(iii)) at any time before the election is made, or such corporation purchased any of its outstanding stock in the calendar year preceding the calendar year which includes the first date the rights of the employee in such stock are transferable or are not subject to a substantial risk of forfeiture, unless— not less than 25 percent of the total dollar amount of the stock so purchased is deferral stock, and the determination of which individuals from whom deferral stock is purchased is made on a reasonable basis. For purposes of this paragraph, the term “deferral stock” means stock with respect to which an election is in effect under this subsection. Stock purchased by a corporation from any individual shall not be treated as deferral stock for purposes of subparagraph (B)(iii) if such individual (immediately after such purchase) holds any deferral stock with respect to which an election has been in effect under this subsection for a longer period than the election with respect to the stock so purchased. The requirements of subclauses (I) and (II) of subparagraph (B)(iii) shall be treated as met if the stock so purchased includes all of the corporation’s outstanding deferral stock. Any corporation which has outstanding deferral stock as of the beginning of any calendar year and which purchases any of its outstanding stock during such calendar year shall include on its return of tax for the taxable year in which, or with which, such calendar year ends the total dollar amount of its outstanding stock so purchased during such calendar year and such other information as the Secretary requires for purposes of administering this paragraph. For purposes of this subsection, all persons treated as a single employer under section 414(b) shall be treated as 1 corporation. Any corporation which transfers qualified stock to a qualified employee shall, at the time that (or a reasonable period before) an amount attributable to such stock would (but for this subsection) first be includible in the gross income of such employee— certify to such employee that such stock is qualified stock, and notify such employee— that the employee may be eligible to elect to defer income on such stock under this subsection, and that, if the employee makes such an election— the amount of income recognized at the end of the deferral period will be based on the value of the stock at the time at which the rights of the employee in such stock first become transferable or not subject to substantial risk of forfeiture, notwithstanding whether the value of the stock has declined during the deferral period, the amount of such income recognized at the end of the deferral period will be subject to withholding under section 3401(i) at the rate determined under section 3402(t), and the responsibilities of the employee (as determined by the Secretary under paragraph (3)(A)(ii)) with respect to such withholding. This section (other than this subsection), including any election under subsection (b), shall not apply to restricted stock units.

“In the case of any transfer of property in connection with the performance of services on or before November 18, 1982 , the election permitted by section 83(b) of the Internal Revenue Code of 1986 [formerly I.R.C. 1954] may be made, notwithstanding paragraph (2) of such section 83(b), with the income tax return for any taxable year ending after July 18, 1984 , and beginning before the date of the enactment of the Tax Reform Act of 1986 [ Oct. 22, 1986 ] if— the amount paid for such property was not less than its fair market value at the time of transfer (determined without regard to any restriction other than a restriction which by its terms will never lapse), and the election is consented to by the person transferring such property. The election shall contain that information required by the Secretary of the Treasury or his delegate for elections permitted by such section 83(b). The period for assessing any tax attributable to a transfer of property which is the subject of an election made pursuant to this section shall not expire before the date which is 3 years after the date such election was made.”

§ 84 Transfer of appreciated property to political organizations

(a) General rule If— any person transfers property to a political organization, and the fair market value of such property exceeds its adjusted basis, then for purposes of this chapter the transferor shall be treated as having sold such property to the political organization on the date of the transfer, and the transferor shall be treated as having realized an amount equal to the fair market value of such property on such date.

(b) Basis of property In the case of a transfer of property to a political organization to which subsection (a) applies, the basis of such property in the hands of the political organization shall be the same as it would be in the hands of the transferor, increased by the amount of gain recognized to the transferor by reason of such transfer.

(c) Political organization defined For purposes of this section, the term “political organization” has the meaning given to such term by section 527(e)(1).

§ 85 Unemployment compensation

(a) General rule In the case of an individual, gross income includes unemployment compensation.

(b) Unemployment compensation defined For purposes of this section, the term “unemployment compensation” means any amount received under a law of the United States or of a State which is in the nature of unemployment compensation.

(c) Special rule for 2020 In the case of any taxable year beginning in 2020, if the adjusted gross income of the taxpayer for such taxable year is less than $150, 000, t h e g ross in co m eo f s u c h t a x p a yers ha ll n o t in c l u d eso m u c h o f t h e u n e m pl oy m e n t co m p e n s a t i o n rece i v e d b ys u c h t a x p a yer (or, in t h ec a seo f aj o in t re t u r n, rece i v e d b ye a c h s p o u se) a s d oes n o t e x cee d$ 10,200. For purposes of paragraph (1), the adjusted gross income of the taxpayer shall be determined— after application of sections 86, 135, 137, 219, 221, 222, and 469, and without regard to this section.

(a) In general Except as provided in paragraph (2), gross income for the taxable year of any taxpayer described in subsection (b) (notwithstanding section 207 of the Social Security Act) includes social security benefits in an amount equal to the lesser of— one-half of the social security benefits received during the taxable year, or one-half of the excess described in subsection (b)(1). In the case of a taxpayer with respect to whom the amount determined under subsection (b)(1)(A) exceeds the adjusted base amount, the amount included in gross income under this section shall be equal to the lesser of— the sum of— 85 percent of such excess, plus the lesser of the amount determined under paragraph (1) or an amount equal to one-half of the difference between the adjusted base amount and the base amount of the taxpayer, or 85 percent of the social security benefits received during the taxable year.

(b) Taxpayers to whom subsection (a) applies A taxpayer is described in this subsection if— the sum of— the modified adjusted gross income of the taxpayer for the taxable year, plus one-half of the social security benefits received during the taxable year, exceeds the base amount. For purposes of this subsection, the term “modified adjusted gross income” means adjusted gross income— determined without regard to this section and sections 85(c), 135, 137, 221, 911, 931, and 933, and increased by the amount of interest received or accrued by the taxpayer during the taxable year which is exempt from tax.

(c) Base amount and adjusted base amount For purposes of this section— The term “base amount” means— except as otherwise provided in this paragraph, $25, 000,$ 32,000 in the case of a joint return, and zero in the case of a taxpayer who— is married as of the close of the taxable year (within the meaning of section 7703) but does not file a joint return for such year, and does not live apart from his spouse at all times during the taxable year. The term “adjusted base amount” means— except as otherwise provided in this paragraph, $34, 000,$ 44,000 in the case of a joint return, and zero in the case of a taxpayer described in paragraph (1)(C).

(d) Social security benefit For purposes of this section, the term “social security benefit” means any amount received by the taxpayer by reason of entitlement to— a monthly benefit under title II of the Social Security Act, or a tier 1 railroad retirement benefit. For purposes of this section, the amount of social security benefits received during any taxable year shall be reduced by any repayment made by the taxpayer during the taxable year of a social security benefit previously received by the taxpayer (whether or not such benefit was received during the taxable year). If (but for this subparagraph) any portion of the repayments referred to in subparagraph (A) would have been allowable as a deduction for the taxable year under section 165, such portion shall be allowable as a deduction only to the extent it exceeds the social security benefits received by the taxpayer during the taxable year (and not repaid during such taxable year). For purposes of this section, if, by reason of section 224 of the Social Security Act (or by reason of section 3(a)(1) of the Railroad Retirement Act of 1974), any social security benefit is reduced by reason of the receipt of a benefit under a workmen’s compensation act, the term “social security benefit” includes that portion of such benefit received under the workmen’s compensation act which equals such reduction. For purposes of paragraph (1), the term “tier 1 railroad retirement benefit” means— the amount of the annuity under the Railroad Retirement Act of 1974 equal to the amount of the benefit to which the taxpayer would have been entitled under the Social Security Act if all of the service after December 31, 1936 , of the employee (on whose employment record the annuity is being paid) had been included in the term “employment” as defined in the Social Security Act, and a monthly annuity amount under section 3(f)(3) of the Railroad Retirement Act of 1974. For purposes of subsection (a), in any case where section 708 of the Social Security Act causes social security benefit checks to be delivered before the end of the calendar month for which they are issued, the benefits involved shall be deemed to have been received in the succeeding calendar month.

(e) Limitation on amount included where taxpayer receives lump-sum payment If— any portion of a lump-sum payment of social security benefits received during the taxable year is attributable to prior taxable years, and the taxpayer makes an election under this subsection for the taxable year, then the amount included in gross income under this section for the taxable year by reason of the receipt of such portion shall not exceed the sum of the increases in gross income under this chapter for prior taxable years which would result solely from taking into account such portion in the taxable years to which it is attributable. For purposes of this subsection, a social security benefit is attributable to a taxable year if the generally applicable payment date for such benefit occurred during such taxable year. An election under this subsection shall be made at such time and in such manner as the Secretary shall by regulations prescribe. Such election, once made, may be revoked only with the consent of the Secretary.

(f) Treatment as pension or annuity for certain purposes For purposes of— section 22(c)(3)(A) (relating to reduction for amounts received as pension or annuity), section 32(c)(2) (defining earned income), section 219(f)(1) (defining compensation), and section 911(b)(1) (defining foreign earned income), any social security benefit shall be treated as an amount received as a pension or annuity.

§ 87 Alcohol and biodiesel fuels credits

Gross income includes— the amount of the alcohol fuel credit determined with respect to the taxpayer for the taxable year under section 40(a), the biodiesel fuels credit determined with respect to the taxpayer for the taxable year under section 40A(a), and the sustainable aviation fuel credit determined with respect to the taxpayer for the taxable year under section 40B(a). (Added Pub. L. 96–223, title II, § 232(c)(1) , Apr. 2, 1980 , 94 Stat. 276 , § 86; renumbered § 87, Pub. L. 98–21, title I, § 121(a) , Apr. 20, 1983 , 97 Stat. 80 ; amended Pub. L. 98–369, div. A, title IV, § 474(r)(3) , July 18, 1984 , 98 Stat. 839 ; Pub. L. 108–357, title III, § 302(c)(1)(A) , Oct. 22, 2004 , 118 Stat. 1465 ; Pub. L. 117–169, title I, § 13203(e) , Aug. 16, 2022 , 136 Stat. 1935 .)

§ 88 Certain amounts with respect to nuclear decommissioning costs

In the case of any taxpayer who is required to include the amount of any nuclear decommissioning costs in the taxpayer’s cost of service for ratemaking purposes, there shall be includible in the gross income of such taxpayer the amount so included for any taxable year. (Added Pub. L. 98–369, div. A, title I, § 91(f)(1) , July 18, 1984 , 98 Stat. 607 ; amended Pub. L. 99–514, title XVIII, § 1807(a)(4)(E)(vii) , Oct. 22, 1986 , 100 Stat. 2813 .)

[§ 89 Repealed. Pub. L. 101–140, title II, § 202(a), Nov. 8, 1989, 103 Stat. 830]

§ 90 Illegal Federal irrigation subsidies

(a) General rule Gross income shall include an amount equal to any illegal Federal irrigation subsidy received by the taxpayer during the taxable year.

(b) Illegal Federal irrigation subsidy For purposes of this section— The term “illegal Federal irrigation subsidy” means the excess (if any) of— the amount required to be paid for any Federal irrigation water delivered to the taxpayer during the taxpayer year, over the amount paid for such water. The term “Federal irrigation water” means any water made available for agricultural purposes from the operation of any reclamation or irrigation project referred to in paragraph (8) of section 202 of the Reclamation Reform Act of 1982.

(c) Denial of deduction No deduction shall be allowed under this subtitle by reason of any inclusion in gross income under subsection (a).

§ 91 Certain foreign branch losses transferred to specified 10-percent owned foreign corporations

(a) In general If a domestic corporation transfers substantially all of the assets of a foreign branch (within the meaning of section 367(a)(3)(C), as in effect before the date of the enactment of the Tax Cuts and Jobs Act) to a specified 10-percent owned foreign corporation (as defined in section 245A) with respect to which it is a United States shareholder after such transfer, such domestic corporation shall include in gross income for the taxable year which includes such transfer an amount equal to the transferred loss amount with respect to such transfer.

(b) Transferred loss amount For purposes of this section, the term “transferred loss amount” means, with respect to any transfer of substantially all of the assets of a foreign branch, the excess (if any) of— the sum of losses— which were incurred by the foreign branch after December 31, 2017 , and before the transfer, and with respect to which a deduction was allowed to the taxpayer, over the sum of— any taxable income of such branch for a taxable year after the taxable year in which the loss was incurred and through the close of the taxable year of the transfer, and any amount which is recognized under section 904(f)(3) on account of the transfer.

(c) Reduction for recognized gains The transferred loss amount shall be reduced (but not below zero) by the amount of gain recognized by the taxpayer on account of the transfer (other than amounts taken into account under subsection (b)(2)(B)).

(d) Source of income Amounts included in gross income under this section shall be treated as derived from sources within the United States.

(e) Basis adjustments Consistent with such regulations or other guidance as the Secretary shall prescribe, proper adjustments shall be made in the adjusted basis of the taxpayer’s stock in the specified 10-percent owned foreign corporation to which the transfer is made, and in the transferee’s adjusted basis in the property transferred, to reflect amounts included in gross income under this section.

§ 101 Certain death benefits

(a) Proceeds of life insurance contracts payable by reason of death Except as otherwise provided in paragraphs (2) and (3), subsection (d), subsection (f), and subsection (j), gross income does not include amounts received (whether in a single sum or otherwise) under a life insurance contract, if such amounts are paid by reason of the death of the insured. In the case of a transfer for a valuable consideration, by assignment or otherwise, of a life insurance contract or any interest therein, the amount excluded from gross income by paragraph (1) shall not exceed an amount equal to the sum of the actual value of such consideration and the premiums and other amounts subsequently paid by the transferee. The preceding sentence shall not apply in the case of such a transfer— if such contract or interest therein has a basis for determining gain or loss in the hands of a transferee determined in whole or in part by reference to such basis of such contract or interest therein in the hands of the transferor, or if such transfer is to the insured, to a partner of the insured, to a partnership in which the insured is a partner, or to a corporation in which the insured is a shareholder or officer. The term “other amounts” in the first sentence of this paragraph includes interest paid or accrued by the transferee on indebtedness with respect to such contract or any interest therein if such interest paid or accrued is not allowable as a deduction by reason of section 264(a)(4). The second sentence of paragraph (2) shall not apply in the case of a transfer of a life insurance contract, or any interest therein, which is a reportable policy sale. For purposes of this paragraph, the term “reportable policy sale” means the acquisition of an interest in a life insurance contract, directly or indirectly, if the acquirer has no substantial family, business, or financial relationship with the insured apart from the acquirer’s interest in such life insurance contract. For purposes of the preceding sentence, the term “indirectly” applies to the acquisition of an interest in a partnership, trust, or other entity that holds an interest in the life insurance contract.

([(b) Repealed. Pub. L. 104–188, title I, § 1402(a), Aug. 20, 1996, 110 Stat. 1789]

(c) Interest If any amount excluded from gross income by subsection (a) is held under an agreement to pay interest thereon, the interest payments shall be included in gross income.

(d) Payment of life insurance proceeds at a date later than death The amounts held by an insurer with respect to any beneficiary shall be prorated (in accordance with such regulations as may be prescribed by the Secretary) over the period or periods with respect to which such payments are to be made. There shall be excluded from the gross income of such beneficiary in the taxable year received any amount determined by such proration. Gross income includes, to the extent not excluded by the preceding sentence, amounts received under agreements to which this subsection applies. An amount held by an insurer with respect to any beneficiary shall mean an amount to which subsection (a) applies which is— held by any insurer under an agreement provided for in the life insurance contract, whether as an option or otherwise, to pay such amount on a date or dates later than the death of the insured, and equal to the value of such agreement to such beneficiary as of the date of death of the insured (as if any option exercised under the life insurance contract were exercised at such time), and as discounted on the basis of the interest rate used by the insurer in calculating payments under the agreement and mortality tables prescribed by the Secretary. This subsection shall not apply to any amount to which subsection (c) is applicable.

([(e) Repealed. Pub. L. 98–369, div. A, title IV, § 421(b)(2), July 18, 1984, 98 Stat. 794]

(f) Proceeds of flexible premium contracts issued before January 1, 1985 payable by reason of death Any amount paid by reason of the death of the insured under a flexible premium life insurance contract issued before January 1, 1985 shall be excluded from gross income only if— under such contract— the sum of the premiums paid under such contract does not at any time exceed the guideline premium limitation as of such time, and any amount payable by reason of the death of the insured (determined without regard to any qualified additional benefit) is not at any time less than the applicable percentage of the cash value of such contract at such time, or by the terms of such contract, the cash value of such contract may not at any time exceed the net single premium with respect to the amount payable by reason of the death of the insured (determined without regard to any qualified additional benefit) at such time. For purposes of this subsection— The term “guideline premium limitation” means, as of any date, the greater of— the guideline single premium, or the sum of the guideline level premiums to such date. The term “guideline single premium” means the premium at issue with respect to future benefits under the contract (without regard to any qualified additional benefit), and with respect to any charges for qualified additional benefits, at the time of a determination under subparagraph (A) or (E) and which is based on— the mortality and other charges guaranteed under the contract, and interest at the greater of an annual effective rate of 6 percent or the minimum rate or rates guaranteed upon issue of the contract. The term “guideline level premium” means the level annual amount, payable over the longest period permitted under the contract (but ending not less than 20 years from date of issue or not later than age 95, if earlier), computed on the same basis as the guideline single premium, except that subparagraph (B)(ii) shall be applied by substituting “4 percent” for “6 percent”. In computing the guideline single premium or guideline level premium under subparagraph (B) or (C)— the excess of the amount payable by reason of the death of the insured (determined without regard to any qualified additional benefit) over the cash value of the contract shall be deemed to be not greater than such excess at the time the contract was issued, the maturity date shall be the latest maturity date permitted under the contract, but not less than 20 years after the date of issue or (if earlier) age 95, and the amount of any endowment benefit (or sum of endowment benefits) shall be deemed not to exceed the least amount payable by reason of the death of the insured (determined without regard to any qualified additional benefit) at any time under the contract. The guideline single premium and guideline level premium shall be adjusted in the event of a change in the future benefits or any qualified additional benefit under the contract which was not reflected in any guideline single premiums or guideline level premium previously determined. For purposes of this subsection— The terms “flexible premium life insurance contract” and “contract” mean a life insurance contract (including any qualified additional benefits) which provides for the payment of one or more premiums which are not fixed by the insurer as to both timing and amount. Such terms do not include that portion of any contract which is treated under State law as providing any annuity benefits other than as a settlement option. The term “premiums paid” means the premiums paid under the contract less any amounts (other than amounts includible in gross income) to which section 72(e) applies. If, in order to comply with the requirements of paragraph (1)(A), any portion of any premium paid during any contract year is returned by the insurance company (with interest) within 60 days after the end of a contract year— the amount so returned (excluding interest) shall be deemed to reduce the sum of the premiums paid under the contract during such year, and notwithstanding the provisions of section 72(e), the amount of any interest so returned shall be includible in the gross income of the recipient. The term “applicable percentage” means— 140 percent in the case of an insured with an attained age at the beginning of the contract year of 40 or less, and in the case of an insured with an attained age of more than 40 as of the beginning of the contract year, 140 percent reduced (but not below 105 percent) by one percent for each year in excess of 40. The cash value of any contract shall be determined without regard to any deduction for any surrender charge or policy loan. The term “qualified additional benefits” means any— guaranteed insurability, accidental death benefit, family term coverage, or waiver of premium. The payment of a premium which would result in the sum of the premiums paid exceeding the guideline premium limitation shall be disregarded for purposes of paragraph (1)(A)(i) if the amount of such premium does not exceed the amount necessary to prevent the termination of the contract without cash value on or before the end of the contract year. In computing the net single premium under paragraph (1)(B)— the mortality basis shall be that guaranteed under the contract (determined by reference to the most recent mortality table allowed under all State laws on the date of issuance), interest shall be based on the greater of— an annual effective rate of 4 percent (3 percent for contracts issued before July 1, 1983 ), or the minimum rate or rates guaranteed upon issue of the contract, and the computational rules of paragraph (2)(D) shall apply, except that the maturity date referred to in clause (ii) thereof shall not be earlier than age 95. If the taxpayer establishes to the satisfaction of the Secretary that— the requirements described in paragraph (1) for any contract year was not satisfied due to reasonable error, and reasonable steps are being taken to remedy the error, the Secretary may waive the failure to satisfy such requirements. The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this subsection.

(g) Treatment of certain accelerated death benefits For purposes of this section, the following amounts shall be treated as an amount paid by reason of the death of an insured: Any amount received under a life insurance contract on the life of an insured who is a terminally ill individual. Any amount received under a life insurance contract on the life of an insured who is a chronically ill individual. If any portion of the death benefit under a life insurance contract on the life of an insured described in paragraph (1) is sold or assigned to a viatical settlement provider, the amount paid for the sale or assignment of such portion shall be treated as an amount paid under the life insurance contract by reason of the death of such insured. The term “viatical settlement provider” means any person regularly engaged in the trade or business of purchasing, or taking assignments of, life insurance contracts on the lives of insureds described in paragraph (1) if— such person is licensed for such purposes (with respect to insureds described in the same subparagraph of paragraph (1) as the insured) in the State in which the insured resides, or in the case of an insured who resides in a State not requiring the licensing of such persons for such purposes with respect to such insured, such person meets the requirements of clause (ii) or (iii), whichever applies to such insured. A person meets the requirements of this clause with respect to an insured who is a terminally ill individual if such person— meets the requirements of sections 8 and 9 of the Viatical Settlements Model Act of the National Association of Insurance Commissioners, and meets the requirements of the Model Regulations of the National Association of Insurance Commissioners (relating to standards for evaluation of reasonable payments) in determining amounts paid by such person in connection with such purchases or assignments. A person meets the requirements of this clause with respect to an insured who is a chronically ill individual if such person— meets requirements similar to the requirements referred to in clause (ii)(I), and meets the standards (if any) of the National Association of Insurance Commissioners for evaluating the reasonableness of amounts paid by such person in connection with such purchases or assignments with respect to chronically ill individuals. In the case of an insured who is a chronically ill individual— Paragraphs (1) and (2) shall not apply to any payment received for any period unless— such payment is for costs incurred by the payee (not compensated for by insurance or otherwise) for qualified long-term care services provided for the insured for such period, and the terms of the contract giving rise to such payment satisfy— the requirements of section 7702B(b)(1)(B), and the requirements (if any) applicable under subparagraph (B). For purposes of the preceding sentence, the rule of section 7702B(b)(2)(B) shall apply. The requirements applicable under this subparagraph are— those requirements of section 7702B(g) and section 4980C which the Secretary specifies as applying to such a purchase, assignment, or other arrangement, standards adopted by the National Association of Insurance Commissioners which specifically apply to chronically ill individuals (and, if such standards are adopted, the analogous requirements specified under clause (i) shall cease to apply), and standards adopted by the State in which the policyholder resides (and if such standards are adopted, the analogous requirements specified under clause (i) and (subject to section 4980C(f)) standards under clause (ii), shall cease to apply). A payment shall not fail to be described in subparagraph (A) by reason of being made on a per diem or other periodic basis without regard to the expenses incurred during the period to which the payment relates. For limitation on amount of periodic payments which are treated as described in paragraph (1), see section 7702B(d). For purposes of this subsection— The term “terminally ill individual” means an individual who has been certified by a physician as having an illness or physical condition which can reasonably be expected to result in death in 24 months or less after the date of the certification. The term “chronically ill individual” has the meaning given such term by section 7702B(c)(2); except that such term shall not include a terminally ill individual. The term “qualified long-term care services” has the meaning given such term by section 7702B(c). The term “physician” has the meaning given to such term by section 1861(r)(1) of the Social Security Act ( 42 U.S.C. 1395x(r)(1) ). This subsection shall not apply in the case of any amount paid to any taxpayer other than the insured if such taxpayer has an insurable interest with respect to the life of the insured by reason of the insured being a director, officer, or employee of the taxpayer or by reason of the insured being financially interested in any trade or business carried on by the taxpayer.

(h) Survivor benefits attributable to service by a public safety officer who is killed in the line of duty Gross income shall not include any amount paid as a survivor annuity on account of the death of a public safety officer (as such term is defined in section 1204 of the Omnibus Crime Control and Safe Streets Act of 1968, as in effect immediately before the enactment of the National Defense Authorization Act for Fiscal Year 2013) killed in the line of duty— if such annuity is provided, under a governmental plan which meets the requirements of section 401(a), to the spouse (or a former spouse) of the public safety officer or to a child of such officer; and to the extent such annuity is attributable to such officer’s service as a public safety officer. Paragraph (1) shall not apply with respect to the death of any public safety officer if, as determined in accordance with the provisions of the Omnibus Crime Control and Safe Streets Act of 1968— the death was caused by the intentional misconduct of the officer or by such officer’s intention to bring about such officer’s death; the officer was voluntarily intoxicated (as defined in section 1204 of such Act) at the time of death; the officer was performing such officer’s duties in a grossly negligent manner at the time of death; or the payment is to an individual whose actions were a substantial contributing factor to the death of the officer.

(i) Certain employee death benefits payable by reason of death of certain terrorist victims or astronauts Gross income does not include amounts (whether in a single sum or otherwise) paid by an employer by reason of the death of an employee who is a specified terrorist victim (as defined in section 692(d)(4)). Subject to such rules as the Secretary may prescribe, paragraph (1) shall not apply to amounts which would have been payable after death if the individual had died other than as a specified terrorist victim (as so defined). Subparagraph (A) shall not apply to incidental death benefits paid from a plan described in section 401(a) and exempt from tax under section 501(a). For purposes of paragraph (1), the term “employee” includes a self-employed individual (as defined in section 401(c)(1)). The provisions of this subsection shall apply to any astronaut whose death occurs in the line of duty.

(j) Treatment of certain employer-owned life insurance contracts In the case of an employer-owned life insurance contract, the amount excluded from gross income of an applicable policyholder by reason of paragraph (1) of subsection (a) shall not exceed an amount equal to the sum of the premiums and other amounts paid by the policyholder for the contract. In the case of an employer-owned life insurance contract with respect to which the notice and consent requirements of paragraph (4) are met, paragraph (1) shall not apply to any of the following: Any amount received by reason of the death of an insured who, with respect to an applicable policyholder— was an employee at any time during the 12-month period before the insured’s death, or is, at the time the contract is issued— a director, a highly compensated employee within the meaning of section 414(q) (without regard to paragraph (1)(B)(ii) thereof), or a highly compensated individual within the meaning of section 105(h)(5), except that “35 percent” shall be substituted for “25 percent” in subparagraph (C) thereof. Any amount received by reason of the death of an insured to the extent— the amount is paid to a member of the family (within the meaning of section 267(c)(4)) of the insured, any individual who is the designated beneficiary of the insured under the contract (other than the applicable policyholder), a trust established for the benefit of any such member of the family or designated beneficiary, or the estate of the insured, or the amount is used to purchase an equity (or capital or profits) interest in the applicable policyholder from any person described in clause (i). For purposes of this subsection, the term “employer-owned life insurance contract” means a life insurance contract which— is owned by a person engaged in a trade or business and under which such person (or a related person described in subparagraph (B)(ii)) is directly or indirectly a beneficiary under the contract, and covers the life of an insured who is an employee with respect to the trade or business of the applicable policyholder on the date the contract is issued. For purposes of the preceding sentence, if coverage for each insured under a master contract is treated as a separate contract for purposes of sections 817(h), 7702, and 7702A, coverage for each such insured shall be treated as a separate contract. For purposes of this subsection— The term “applicable policyholder” means, with respect to any employer-owned life insurance contract, the person described in subparagraph (A)(i) which owns the contract. The term “applicable policyholder” includes any person which— bears a relationship to the person described in clause (i) which is specified in section 267(b) or 707(b)(1), or is engaged in trades or businesses with such person which are under common control (within the meaning of subsection (a) or (b) of section 52). The notice and consent requirements of this paragraph are met if, before the issuance of the contract, the employee— is notified in writing that the applicable policyholder intends to insure the employee’s life and the maximum face amount for which the employee could be insured at the time the contract was issued, provides written consent to being insured under the contract and that such coverage may continue after the insured terminates employment, and is informed in writing that an applicable policyholder will be a beneficiary of any proceeds payable upon the death of the employee. For purposes of this subsection— The term “employee” includes an officer, director, and highly compensated employee (within the meaning of section 414(q)). The term “insured” means, with respect to an employer-owned life insurance contract, an individual covered by the contract who is a United States citizen or resident. In the case of a contract covering the joint lives of 2 individuals, references to an insured include both of the individuals.

§ 102 Gifts and inheritances

(a) General rule Gross income does not include the value of property acquired by gift, bequest, devise, or inheritance.

(b) Income Subsection (a) shall not exclude from gross income— the income from any property referred to in subsection (a); or where the gift, bequest, devise, or inheritance is of income from property, the amount of such income. Where, under the terms of the gift, bequest, devise, or inheritance, the payment, crediting, or distribution thereof is to be made at intervals, then, to the extent that it is paid or credited or to be distributed out of income from property, it shall be treated for purposes of paragraph (2) as a gift, bequest, devise, or inheritance of income from property. Any amount included in the gross income of a beneficiary under subchapter J shall be treated for purposes of paragraph (2) as a gift, bequest, devise, or inheritance of income from property.

(c) Employee gifts Subsection (a) shall not exclude from gross income any amount transferred by or for an employer to, or for the benefit of, an employee. For provisions excluding certain employee achievement awards from gross income, see section 74(c). For provisions excluding certain de minimis fringes from gross income, see section 132(e).

§ 103 Interest on State and local bonds

(a) Exclusion Except as provided in subsection (b), gross income does not include interest on any State or local bond.

(b) Exceptions Subsection (a) shall not apply to— Any private activity bond which is not a qualified bond (within the meaning of section 141). Any arbitrage bond (within the meaning of section 148). Any bond unless such bond meets the applicable requirements of section 149.

(c) Definitions For purposes of this section and part IV— The term “State or local bond” means an obligation of a State or political subdivision thereof. The term “State” includes the District of Columbia and any possession of the United States.

“The amendment made by section 623 of the Tax Reform Act of 1984 [ section 623 of Pub. L. 98–369 , amending this section] shall not apply to any obligation (or series of obligations) issued to refund another tax-exempt IDB to which the amendment made by such section 623 did not apply if— the average maturity of the issue of which the refunding obligation is a part does not exceed the average maturity of the obligations to be refunded by such issue, the amount of the refunding obligation does not exceed the amount of the refunded obligation, and the proceeds of the refunding obligation are used to redeem the refunded obligation not later than 90 days after the date of the issuance of the refunding obligation. For purposes of the preceding sentence, the term ‘tax-exempt IDB’ means any industrial development bond (as defined in section 103(b) of the Internal Revenue Code of 1954 [now 1986]) the interest on which is exempt from tax under section 103(a) of such Code. For purposes of paragraph (1), average maturity shall be determined in accordance with subsection (b)(14)(B)(i) of such Code.”

“If— the proceeds of any issue are to be used to finance a facility or facilities located on a public airport, and the governmental unit issuing such obligations is the owner or operator of such airport, such governmental unit shall be deemed to be the only governmental unit having jurisdiction over such airport for purposes of subsection (k) of section 103 of the Internal Revenue Code of 1986 [formerly I.R.C. 1954] (relating to public approval for industrial development bonds).”

[§ 103A Repealed. Pub. L. 99–514, title XIII, § 1301(j)(1), Oct. 22, 1986, 100 Stat. 2657]

§ 104 Compensation for injuries or sickness

(a) In general Except in the case of amounts attributable to (and not in excess of) deductions allowed under section 213 (relating to medical, etc., expenses) for any prior taxable year, gross income does not include— amounts received under workmen’s compensation acts as compensation for personal injuries or sickness; the amount of any damages (other than punitive damages) received (whether by suit or agreement and whether as lump sums or as periodic payments) on account of personal physical injuries or physical sickness; amounts received through accident or health insurance (or through an arrangement having the effect of accident or health insurance) for personal injuries or sickness (other than amounts received by an employee, to the extent such amounts (A) are attributable to contributions by the employer which were not includible in the gross income of the employee, or (B) are paid by the employer); amounts received as a pension, annuity, or similar allowance for personal injuries or sickness resulting from active service in the armed forces of any country or in the Coast and Geodetic Survey or the Public Health Service, or as a disability annuity payable under the provisions of section 808 of the Foreign Service Act of 1980; amounts received by an individual as disability income attributable to injuries incurred as a direct result of a terroristic or military action (as defined in section 692(c)(2)); and amounts received pursuant to— section 1201 of the Omnibus Crime Control and Safe Streets Act of 1968 ( 42 U.S.C. 3796 ); 1 or a program established under the laws of any State which provides monetary compensation for surviving dependents of a public safety officer who has died as the direct and proximate result of a personal injury sustained in the line of duty, except that subparagraph (B) shall not apply to any amounts that would have been payable if death of the public safety officer had occurred other than as the direct and proximate result of a personal injury sustained in the line of duty. For purposes of paragraph (3), in the case of an individual who is, or has been, an employee within the meaning of section 401(c)(1) (relating to self-employed individuals), contributions made on behalf of such individual while he was such an employee to a trust described in section 401(a) which is exempt from tax under section 501(a), or under a plan described in section 403(a), shall, to the extent allowed as deductions under section 404, be treated as contributions by the employer which were not includible in the gross income of the employee. For purposes of paragraph (2), emotional distress shall not be treated as a physical injury or physical sickness. The preceding sentence shall not apply to an amount of damages not in excess of the amount paid for medical care (described in subparagraph (A) or (B) of section 213(d)(1)) attributable to emotional distress.

(b) Termination of application of subsection (a)(4) in certain cases Subsection (a)(4) shall not apply in the case of any individual who is not described in paragraph (2). An individual is described in this paragraph if— on or before September 24, 1975 , he was entitled to receive any amount described in subsection (a)(4), on September 24, 1975 , he was a member of any organization (or reserve component thereof) referred to in subsection (a)(4) or under a binding written commitment to become such a member, he receives an amount described in subsection (a)(4) by reason of a combat-related injury, or on application therefor, he would be entitled to receive disability compensation from the Department of Veterans Affairs. For purposes of this subsection, the term “combat-related injury” means personal injury or sickness— which is incurred— as a direct result of armed conflict, while engaged in extrahazardous service, or under conditions simulating war; or which is caused by an instrumentality of war. In the case of an individual who is not described in subparagraph (A) or (B) of paragraph (2), except as provided in paragraph (4), the only amounts taken into account under subsection (a)(4) shall be the amounts which he receives by reason of a combat-related injury. In the case of any individual described in paragraph (2), the amounts excludable under subsection (a)(4) for any period with respect to any individual shall not be less than the maximum amount which such individual, on application therefor, would be entitled to receive as disability compensation from the Veterans’ Administration.

(c) Application of prior law in certain cases The phrase “(other than punitive damages)” shall not apply to punitive damages awarded in a civil action— which is a wrongful death action, and with respect to which applicable State law (as in effect on September 13, 1995 and without regard to any modification after such date) provides, or has been construed to provide by a court of competent jurisdiction pursuant to a decision issued on or before September 13, 1995 , that only punitive damages may be awarded in such an action. This subsection shall cease to apply to any civil action filed on or after the first date on which the applicable State law ceases to provide (or is no longer construed to provide) the treatment described in paragraph (2).

(d) Cross references For exclusion from employee’s gross income of employer contributions to accident and health plans, see section 106. For exclusion of part of disability retirement pay from the application of subsection (a)(4) of this section, see section 1403 of title 10 , United States Code (relating to career compensation laws).

§ 105 Amounts received under accident and health plans

(a) Amounts attributable to employer contributions Except as otherwise provided in this section, amounts received by an employee through accident or health insurance for personal injuries or sickness shall be included in gross income to the extent such amounts (1) are attributable to contributions by the employer which were not includible in the gross income of the employee, or (2) are paid by the employer.

(b) Amounts expended for medical care Except in the case of amounts attributable to (and not in excess of) deductions allowed under section 213 (relating to medical, etc., expenses) for any prior taxable year, gross income does not include amounts referred to in subsection (a) if such amounts are paid, directly or indirectly, to the taxpayer to reimburse the taxpayer for expenses incurred by him for the medical care (as defined in section 213(d)) of the taxpayer, his spouse, his dependents (as defined in section 152, determined without regard to subsections (b)(1), (b)(2), and (d)(1)(B) thereof), and any child (as defined in section 152(f)(1)) of the taxpayer who as of the end of the taxable year has not attained age 27. Any child to whom section 152(e) applies shall be treated as a dependent of both parents for purposes of this subsection.

(c) Payments unrelated to absence from work Gross income does not include amounts referred to in subsection (a) to the extent such amounts— constitute payment for the permanent loss or loss of use of a member or function of the body, or the permanent disfigurement, of the taxpayer, his spouse, or a dependent (as defined in section 152, determined without regard to subsections (b)(1), (b)(2), and (d)(1)(B) thereof), and are computed with reference to the nature of the injury without regard to the period the employee is absent from work.

([(d) Repealed. Pub. L. 98–21, title I, § 122(b), Apr. 20, 1983, 97 Stat. 87]

(e) Accident and health plans For purposes of this section and section 104— amounts received under an accident or health plan for employees, and amounts received from a sickness and disability fund for employees maintained under the law of a State or the District of Columbia, shall be treated as amounts received through accident or health insurance.

(f) Rules for application of section 213 For purposes of section 213(a) (relating to medical, dental, etc., expenses) amounts excluded from gross income under subsection (c) shall not be considered as compensation (by insurance or otherwise) for expenses paid for medical care.

(g) Self-employed individual not considered an employee For purposes of this section, the term “employee” does not include an individual who is an employee within the meaning of section 401(c)(1) (relating to self-employed individuals).

(h) Amount paid to highly compensated individuals under a discriminatory self-insured medical expense reimbursement plan In the case of amounts paid to a highly compensated individual under a self-insured medical reimbursement plan which does not satisfy the requirements of paragraph (2) for a plan year, subsection (b) shall not apply to such amounts to the extent they constitute an excess reimbursement of such highly compensated individual. A self-insured medical reimbursement plan satisfies the requirements of this paragraph only if— the plan does not discriminate in favor of highly compensated individuals as to eligibility to participate; and the benefits provided under the plan do not discriminate in favor of participants who are highly compensated individuals. A self-insured medical reimbursement plan does not satisfy the requirements of subparagraph (A) of paragraph (2) unless such plan benefits— 70 percent or more of all employees, or 80 percent or more of all the employees who are eligible to benefit under the plan if 70 percent or more of all employees are eligible to benefit under the plan; or such employees as qualify under a classification set up by the employer and found by the Secretary not to be discriminatory in favor of highly compensated individuals. For purposes of subparagraph (A), there may be excluded from consideration— employees who have not completed 3 years of service; employees who have not attained age 25; part-time or seasonal employees; employees not included in the plan who are included in a unit of employees covered by an agreement between employee representatives and one or more employers which the Secretary finds to be a collective bargaining agreement, if accident and health benefits were the subject of good faith bargaining between such employee representatives and such employer or employers; and employees who are nonresident aliens and who receive no earned income (within the meaning of section 911(d)(2)) from the employer which constitutes income from sources within the United States (within the meaning of section 861(a)(3)). A self-insured medical reimbursement plan does not meet the requirements of subparagraph (B) of paragraph (2) unless all benefits provided for participants who are highly compensated individuals are provided for all other participants. For purposes of this subsection, the term “highly compensated individual” means an individual who is— one of the 5 highest paid officers, a shareholder who owns (with the application of section 318) more than 10 percent in value of the stock of the employer, or among the highest paid 25 percent of all employees (other than employees described in paragraph (3)(B) who are not participants). The term “self-insured medical reimbursement plan” means a plan of an employer to reimburse employees for expenses referred to in subsection (b) for which reimbursement is not provided under a policy of accident and health insurance. For purposes of this section, the excess reimbursement of a highly compensated individual which is attributable to a self-insured medical reimbursement plan is— in the case of a benefit available to highly compensated individuals but not to all other participants (or which otherwise fails to satisfy the requirements of paragraph (2)(B)), the amount reimbursed under the plan to the employee with respect to such benefit, and in the case of benefits (other than benefits described in subparagraph (A)) paid to a highly compensated individual by a plan which fails to satisfy the requirements of paragraph (2), the total amount reimbursed to the highly compensated individual for the plan year multiplied by a fraction— the numerator of which is the total amount reimbursed to all participants who are highly compensated individuals under the plan for the plan year, and the denominator of which is the total amount reimbursed to all employees under the plan for such plan year. In determining the fraction under subparagraph (B), there shall not be taken into account any reimbursement which is attributable to a benefit described in subparagraph (A). All employees who are treated as employed by a single employer under subsection (b), (c), or (m) of section 414 shall be treated as employed by a single employer for purposes of this section. The Secretary shall prescribe such regulations as may be necessary to carry out the provisions of this section. Any amount paid for a plan year that is included in income by reason of this subsection shall be treated as received or accrued in the taxable year of the participant in which the plan year ends.

(i) Sick pay under Railroad Unemployment Insurance Act Notwithstanding any other provision of law, gross income includes benefits paid under section 2(a) of the Railroad Unemployment Insurance Act for days of sickness; except to the extent such sickness (as determined in accordance with standards prescribed by the Railroad Retirement Board) is the result of on-the-job injury.

(j) Special rule for certain governmental plans For purposes of subsection (b), amounts paid (directly or indirectly) to a qualified taxpayer from an accident or health plan described in paragraph (2) shall not fail to be excluded from gross income solely because such plan, on or before January 1, 2008 , provides for reimbursements of health care expenses of a deceased employee’s beneficiary (other than an individual described in paragraph (3)(B)). An accident or health plan is described in this paragraph if such plan is funded by a medical trust that is established in connection with a public retirement system or established by or on behalf of a State or political subdivision thereof and that— has been authorized by a State legislature, or has received a favorable ruling from the Internal Revenue Service that the trust’s income is not includible in gross income under section 115 or 501(c)(9). For purposes of paragraph (1), with respect to an accident or health plan described in paragraph (2), the term “qualified taxpayer” means a taxpayer who is— an employee, or the spouse, dependent (as defined for purposes of subsection (b)), or child (as defined for purposes of such subsection) of an employee.

“In the case of any individual who— retired before January 1, 1977 , either retired on disability or was entitled to retire on disability, and on January 1, 1976 , or January 1, 1977 , was permanently and totally disabled (within the meaning of section 105(d)(4) of the Internal Revenue Code of 1986 [formerly I.R.C. 1954]), such individual shall be deemed to have met the requirements of section 105(d)(1)(B) of such Code (as amended by subsection (a) of this section).”

“In the case of an individual who— retired on disability before January 1, 1977 , and on December 31, 1975 , or December 31, 1976 , was entitled to exclude any amount with respect to such retirement disability from gross income under section 105(d) of the Internal Revenue Code of 1986 [formerly I.R.C. 1954], for purposes of section 72 the annuity starting date shall not be deemed to occur before the beginning of the taxable year in which the taxpayer attains age 65, or before the beginning of an earlier taxable year for which the taxpayer makes an irrevocable election not to seek the benefits of such section 105(d) for such year and all subsequent years.”

§ 106 Contributions by employer to accident and health plans

(a) General rule Except as otherwise provided in this section, gross income of an employee does not include employer-provided coverage under an accident or health plan.

(b) Contributions to Archer MSAs In the case of an employee who is an eligible individual, amounts contributed by such employee’s employer to any Archer MSA of such employee shall be treated as employer-provided coverage for medical expenses under an accident or health plan to the extent such amounts do not exceed the limitation under section 220(b)(1) (determined without regard to this subsection) which is applicable to such employee for such taxable year. No amount shall be included in the gross income of any employee solely because the employee may choose between the contributions referred to in paragraph (1) and employer contributions to another health plan of the employer. Any employer contribution to an Archer MSA, if otherwise allowable as a deduction under this chapter, shall be allowed only for the taxable year in which paid. Every individual required to file a return under section 6012 for the taxable year shall include on such return the aggregate amount contributed by employers to the Archer MSAs of such individual or such individual’s spouse for such taxable year. Paragraph (1) shall not apply for purposes of section 4980B. For purposes of this subsection, the terms “eligible individual” and “Archer MSA” have the respective meanings given to such terms by section 220. For penalty on failure by employer to make comparable contributions to the Archer MSAs of comparable employees, see section 4980E.

(c) Inclusion of long-term care benefits provided through flexible spending arrangements Gross income of an employee shall include employer-provided coverage for qualified long-term care services (as defined in section 7702B(c)) to the extent that such coverage is provided through a flexible spending or similar arrangement. For purposes of this subsection, a flexible spending arrangement is a benefit program which provides employees with coverage under which— specified incurred expenses may be reimbursed (subject to reimbursement maximums and other reasonable conditions), and the maximum amount of reimbursement which is reasonably available to a participant for such coverage is less than 500 percent of the value of such coverage. In the case of an insured plan, the maximum amount reasonably available shall be determined on the basis of the underlying coverage.

(d) Contributions to health savings accounts In the case of an employee who is an eligible individual (as defined in section 223(c)(1)), amounts contributed by such employee’s employer to any health savings account (as defined in section 223(d)) of such employee shall be treated as employer-provided coverage for medical expenses under an accident or health plan to the extent such amounts do not exceed the limitation under section 223(b) (determined without regard to this subsection) which is applicable to such employee for such taxable year. Rules similar to the rules of paragraphs (2), (3), (4), and (5) of subsection (b) shall apply for purposes of this subsection. For penalty on failure by employer to make comparable contributions to the health savings accounts of comparable employees, see section 4980G.

(e) FSA and HRA terminations to fund HSAs A plan shall not fail to be treated as a health flexible spending arrangement or health reimbursement arrangement under this section or section 105 merely because such plan provides for a qualified HSA distribution. The term “qualified HSA distribution” means a distribution from a health flexible spending arrangement or health reimbursement arrangement to the extent that such distribution— does not exceed the lesser of the balance in such arrangement on September 21, 2006 , or as of the date of such distribution, and is contributed by the employer directly to the health savings account of the employee before January 1, 2012 . Such term shall not include more than 1 distribution with respect to any arrangement. If, at any time during the testing period, the employee is not an eligible individual, then the amount of the qualified HSA distribution— shall be includible in the gross income of the employee for the taxable year in which occurs the first month in the testing period for which such employee is not an eligible individual, and the tax imposed by this chapter for such taxable year on the employee shall be increased by 10 percent of the amount which is so includible. Clauses (i) and (ii) of subparagraph (A) shall not apply if the employee ceases to be an eligible individual by reason of the death of the employee or the employee becoming disabled (within the meaning of section 72(m)(7)). For purposes of this subsection— The term “testing period” means the period beginning with the month in which the qualified HSA distribution is contributed to the health savings account and ending on the last day of the 12th month following such month. The term “eligible individual” has the meaning given such term by section 223(c)(1). A qualified HSA distribution shall be treated as a rollover contribution described in section 223(f)(5). For purposes of this title— A qualified HSA distribution shall be treated as a payment described in subsection (d). Except as provided in clause (ii), section 4980G shall not apply to qualified HSA distributions. In the case of a qualified HSA distribution to any employee, the failure to offer such distribution to any eligible individual covered under a high deductible health plan of the employer shall (notwithstanding section 4980G(d)) be treated for purposes of section 4980G as a failure to meet the requirements of section 4980G(b).

(f) Reimbursements for menstrual care products For purposes of this section and section 105, expenses incurred for menstrual care products (as defined in section 223(d)(2)(D)) shall be treated as incurred for medical care.

(g) Qualified small employer health reimbursement arrangement For purposes of this section and section 105, payments or reimbursements from a qualified small employer health reimbursement arrangement (as defined in section 9831(d)) of an individual for medical care (as defined in section 213(d)) shall not be treated as paid or reimbursed under employer-provided coverage for medical expenses under an accident or health plan if for the month in which such medical care is provided the individual does not have minimum essential coverage (within the meaning of section 5000A(f)).

§ 107 Rental value of parsonages

In the case of a minister of the gospel, gross income does not include— the rental value of a home furnished to him as part of his compensation; or the rental allowance paid to him as part of his compensation, to the extent used by him to rent or provide a home and to the extent such allowance does not exceed the fair rental value of the home, including furnishings and appurtenances such as a garage, plus the cost of utilities. ( Aug. 16, 1954, ch. 736 , 68A Stat. 32 ; Pub. L. 107–181, § 2(a) , May 20, 2002 , 116 Stat. 583 .)

§ 108 Income from discharge of indebtedness

(a) Exclusion from gross income Gross income does not include any amount which (but for this subsection) would be includible in gross income by reason of the discharge (in whole or in part) of indebtedness of the taxpayer if— the discharge occurs in a title 11 case, the discharge occurs when the taxpayer is insolvent, the indebtedness discharged is qualified farm indebtedness, in the case of a taxpayer other than a C corporation, the indebtedness discharged is qualified real property business indebtedness, or the indebtedness discharged is qualified principal residence indebtedness which is discharged— before January 1, 2026 , or subject to an arrangement that is entered into and evidenced in writing before January 1, 2026 . Subparagraphs (B), (C), (D), and (E) of paragraph (1) shall not apply to a discharge which occurs in a title 11 case. Subparagraphs (C) and (D) of paragraph (1) shall not apply to a discharge to the extent the taxpayer is insolvent. Paragraph (1)(B) shall not apply to a discharge to which paragraph (1)(E) applies unless the taxpayer elects to apply paragraph (1)(B) in lieu of paragraph (1)(E). In the case of a discharge to which paragraph (1)(B) applies, the amount excluded under paragraph (1)(B) shall not exceed the amount by which the taxpayer is insolvent.

(b) Reduction of tax attributes The amount excluded from gross income under subparagraph (A), (B), or (C) of subsection (a)(1) shall be applied to reduce the tax attributes of the taxpayer as provided in paragraph (2). Except as provided in paragraph (5), the reduction referred to in paragraph (1) shall be made in the following tax attributes in the following order: Any net operating loss for the taxable year of the discharge, and any net operating loss carryover to such taxable year. Any carryover to or from the taxable year of a discharge of an amount for purposes for determining the amount allowable as a credit under section 38 (relating to general business credit). The amount of the minimum tax credit available under section 53(b) as of the beginning of the taxable year immediately following the taxable year of the discharge. Any net capital loss for the taxable year of the discharge, and any capital loss carryover to such taxable year under section 1212. The basis of the property of the taxpayer. For provisions for making the reduction described in clause (i), see section 1017. Any passive activity loss or credit carryover of the taxpayer under section 469(b) from the taxable year of the discharge. Any carryover to or from the taxable year of the discharge for purposes of determining the amount of the credit allowable under section 27. Except as provided in subparagraph (B), the reductions described in paragraph (2) shall be one dollar for each dollar excluded by subsection (a). The reductions described in subparagraphs (B), (C), and (G) shall be 33⅓ cents for each dollar excluded by subsection (a). The reduction described in subparagraph (F) in any passive activity credit carryover shall be 33⅓ cents for each dollar excluded by subsection (a). The reductions described in paragraph (2) shall be made after the determination of the tax imposed by this chapter for the taxable year of the discharge. The reductions described in subparagraph (A) or (D) of paragraph (2) (as the case may be) shall be made first in the loss for the taxable year of the discharge and then in the carryovers to such taxable year in the order of the taxable years from which each such carryover arose. The reductions described in subparagraphs (B) and (G) of paragraph (2) shall be made in the order in which carryovers are taken into account under this chapter for the taxable year of the discharge. The taxpayer may elect to apply any portion of the reduction referred to in paragraph (1) to the reduction under section 1017 of the basis of the depreciable property of the taxpayer. The amount to which an election under subparagraph (A) applies shall not exceed the aggregate adjusted bases of the depreciable property held by the taxpayer as of the beginning of the taxable year following the taxable year in which the discharge occurs. Paragraph (2) shall not apply to any amount to which an election under this paragraph applies.

(c) Treatment of discharge of qualified real property business indebtedness The amount excluded from gross income under subparagraph (D) of subsection (a)(1) shall be applied to reduce the basis of the depreciable real property of the taxpayer. For provisions making the reduction described in subparagraph (A), see section 1017. The amount excluded under subparagraph (D) of subsection (a)(1) with respect to any qualified real property business indebtedness shall not exceed the excess (if any) of— the outstanding principal amount of such indebtedness (immediately before the discharge), over the fair market value of the real property described in paragraph (3)(A) (as of such time), reduced by the outstanding principal amount of any other qualified real property business indebtedness secured by such property (as of such time). The amount excluded under subparagraph (D) of subsection (a)(1) shall not exceed the aggregate adjusted bases of depreciable real property (determined after any reductions under subsections (b) and (g)) held by the taxpayer immediately before the discharge (other than depreciable real property acquired in contemplation of such discharge). The term “qualified real property business indebtedness” means indebtedness which— was incurred or assumed by the taxpayer in connection with real property used in a trade or business and is secured by such real property, was incurred or assumed before January 1, 1993 , or if incurred or assumed on or after such date, is qualified acquisition indebtedness, and with respect to which such taxpayer makes an election to have this paragraph apply. Such term shall not include qualified farm indebtedness. Indebtedness under subparagraph (B) shall include indebtedness resulting from the refinancing of indebtedness under subparagraph (B) (or this sentence), but only to the extent it does not exceed the amount of the indebtedness being refinanced. For purposes of paragraph (3)(B), the term “qualified acquisition indebtedness” means, with respect to any real property described in paragraph (3)(A), indebtedness incurred or assumed to acquire, construct, reconstruct, or substantially improve such property. The Secretary shall issue such regulations as are necessary to carry out this subsection, including regulations preventing the abuse of this subsection through cross-collateralization or other means.

(d) Meaning of terms; special rules relating to certain provisions For purposes of this section, the term “indebtedness of the taxpayer” means any indebtedness— for which the taxpayer is liable, or subject to which the taxpayer holds property. For purposes of this section, the term “title 11 case” means a case under title 11 of the United States Code (relating to bankruptcy), but only if the taxpayer is under the jurisdiction of the court in such case and the discharge of indebtedness is granted by the court or is pursuant to a plan approved by the court. For purposes of this section, the term “insolvent” means the excess of liabilities over the fair market value of assets. With respect to any discharge, whether or not the taxpayer is insolvent, and the amount by which the taxpayer is insolvent, shall be determined on the basis of the taxpayer’s assets and liabilities immediately before the discharge. The term “depreciable property” has the same meaning as when used in section 1017. In the case of a partnership, subsections (a), (b), (c), and (g) shall be applied at the partner level. In the case of an S corporation, subsections (a), (b), (c), and (g) shall be applied at the corporate level, including by not taking into account under section 1366(a) any amount excluded under subsection (a) of this section. In the case of an S corporation, for purposes of subparagraph (A) of subsection (b)(2), any loss or deduction which is disallowed for the taxable year of the discharge under section 1366(d)(1) shall be treated as a net operating loss for such taxable year. The preceding sentence shall not apply to any discharge to the extent that subsection (a)(1)(D) applies to such discharge. For purposes of subsection (e)(6), a shareholder’s adjusted basis in indebtedness of an S corporation shall be determined without regard to any adjustments made under section 1367(b)(2). In any case under chapter 7 or 11 of title 11 of the United States Code to which section 1398 applies, for purposes of paragraphs (1) and (5) of subsection (b) the estate (and not the individual) shall be treated as the taxpayer. The preceding sentence shall not apply for purposes of applying section 1017 to property transferred by the estate to the individual. An election under paragraph (5) of subsection (b) or under paragraph (3)(C) of subsection (c) shall be made on the taxpayer’s return for the taxable year in which the discharge occurs or at such other time as may be permitted in regulations prescribed by the Secretary. An election referred to in subparagraph (A), once made, may be revoked only with the consent of the Secretary. An election referred to in subparagraph (A) shall be made in such manner as the Secretary may by regulations prescribe. For provision that no reduction is to be made in the basis of exempt property of an individual debtor, see section 1017(c)(1).

(e) General rules for discharge of indebtedness (including discharges not in title 11 cases or insolvency) For purposes of this title— Except as otherwise provided in this section, there shall be no insolvency exception from the general rule that gross income includes income from the discharge of indebtedness. No income shall be realized from the discharge of indebtedness to the extent that payment of the liability would have given rise to a deduction. The amount taken into account with respect to any discharge shall be properly adjusted for unamortized premium and unamortized discount with respect to the indebtedness discharged. For purposes of determining income of the debtor from discharge of indebtedness, to the extent provided in regulations prescribed by the Secretary, the acquisition of outstanding indebtedness by a person bearing a relationship to the debtor specified in section 267(b) or 707(b)(1) from a person who does not bear such a relationship to the debtor shall be treated as the acquisition of such indebtedness by the debtor. Such regulations shall provide for such adjustments in the treatment of any subsequent transactions involving the indebtedness as may be appropriate by reason of the application of the preceding sentence. For purposes of this paragraph, sections 267(b) and 707(b)(1) shall be applied as if section 267(c)(4) provided that the family of an individual consists of the individual’s spouse, the individual’s children, grandchildren, and parents, and any spouse of the individual’s children or grandchildren. For purposes of this paragraph, two entities which are treated as a single employer under subsection (b) or (c) of section 414 shall be treated as bearing a relationship to each other which is described in section 267(b). If— the debt of a purchaser of property to the seller of such property which arose out of the purchase of such property is reduced, such reduction does not occur— in a title 11 case, or when the purchaser is insolvent, and but for this paragraph, such reduction would be treated as income to the purchaser from the discharge of indebtedness, then such reduction shall be treated as a purchase price adjustment. Except as provided in regulations, for purposes of determining income of the debtor from discharge of indebtedness, if a debtor corporation acquires its indebtedness from a shareholder as a contribution to capital— section 118 shall not apply, but such corporation shall be treated as having satisfied the indebtedness with an amount of money equal to the shareholder’s adjusted basis in the indebtedness. If a creditor acquires stock of a debtor corporation in satisfaction of such corporation’s indebtedness, for purposes of section 1245— such stock (and any other property the basis of which is determined in whole or in part by reference to the adjusted basis of such stock) shall be treated as section 1245 property, the aggregate amount allowed to the creditor— as deductions under subsection (a) or (b) of section 166 (by reason of the worthlessness or partial worthlessness of the indebtedness), or as an ordinary loss on the exchange, shall be treated as an amount allowed as a deduction for depreciation, and an exchange of such stock qualifying under section 354(a), 355(a), or 356(a) shall be treated as an exchange to which section 1245(b)(3) applies. The amount determined under clause (ii) shall be reduced by the amount (if any) included in the creditor’s gross income on the exchange. In the case of any creditor who computes his taxable income under the cash receipts and disbursements method, proper adjustment shall be made in the amount taken into account under clause (ii) of subparagraph (A) for any amount which was not included in the creditor’s gross income but which would have been included in such gross income if such indebtedness had been satisfied in full. For purposes of this paragraph, stock of a corporation in control (within the meaning of section 368(c)) of the debtor corporation shall be treated as stock of the debtor corporation. For purposes of this paragraph, the term “debtor corporation” includes a successor corporation. Under regulations prescribed by the Secretary, rules similar to the rules of the foregoing subparagraphs of this paragraph shall apply with respect to the indebtedness of a partnership. For purposes of determining income of a debtor from discharge of indebtedness, if— a debtor corporation transfers stock, or a debtor partnership transfers a capital or profits interest in such partnership, to a creditor in satisfaction of its recourse or nonrecourse indebtedness, such corporation or partnership shall be treated as having satisfied the indebtedness with an amount of money equal to the fair market value of the stock or interest. In the case of any partnership, any discharge of indebtedness income recognized under this paragraph shall be included in the distributive shares of taxpayers which were the partners in the partnership immediately before such discharge. Any amount included in gross income by reason of the discharge of indebtedness shall not be taken into account for purposes of paragraphs (2) and (3) of section 856(c). For purposes of determining income of a debtor from discharge of indebtedness, if a debtor issues a debt instrument in satisfaction of indebtedness, such debtor shall be treated as having satisfied the indebtedness with an amount of money equal to the issue price of such debt instrument. For purposes of subparagraph (A), the issue price of any debt instrument shall be determined under sections 1273 and 1274. For purposes of the preceding sentence, section 1273(b)(4) shall be applied by reducing the stated redemption price of any instrument by the portion of such stated redemption price which is treated as interest for purposes of this chapter.

(f) Student loans In the case of an individual, gross income does not include any amount which (but for this subsection) would be includible in gross income by reason of the discharge (in whole or in part) of any student loan if such discharge was pursuant to a provision of such loan under which all or part of the indebtedness of the individual would be discharged if the individual worked for a certain period of time in certain professions for any of a broad class of employers. For purposes of this subsection, the term “student loan” means any loan to an individual to assist the individual in attending an educational organization described in section 170(b)(1)(A)(ii) made by— the United States, or an instrumentality or agency thereof, a State, territory, or possession of the United States, or the District of Columbia, or any political subdivision thereof, a public benefit corporation— which is exempt from taxation under section 501(c)(3), which has assumed control over a State, county, or municipal hospital, and whose employees have been deemed to be public employees under State law, or any educational organization described in section 170(b)(1)(A)(ii) if such loan is made— pursuant to an agreement with any entity described in subparagraph (A), (B), or (C) under which the funds from which the loan was made were provided to such educational organization, or pursuant to a program of such educational organization which is designed to encourage its students to serve in occupations with unmet needs or in areas with unmet needs and under which the services provided by the students (or former students) are for or under the direction of a governmental unit or an organization described in section 501(c)(3) and exempt from tax under section 501(a). The term “student loan” includes any loan made by an educational organization described in section 170(b)(1)(A)(ii) or by an organization exempt from tax under section 501(a) to refinance a loan to an individual to assist the individual in attending any such educational organization but only if the refinancing loan is pursuant to a program of the refinancing organization which is designed as described in subparagraph (D)(ii). Paragraph (1) shall not apply to the discharge of a loan made by an organization described in paragraph (2)(D) if the discharge is on account of services performed for either such organization. In the case of an individual, gross income shall not include any amount received under section 338B(g) of the Public Health Service Act, under a State program described in section 338I of such Act, or under any other State loan repayment or loan forgiveness program that is intended to provide for the increased availability of health care services in underserved or health professional shortage areas (as determined by such State). In the case of an individual, gross income does not include any amount which (but for this subsection) would be includible in gross income for such taxable year by reason of the discharge (in whole or in part) of any loan described in subparagraph (B), if such discharge was— pursuant to subsection (a) or (d) of section 437 of the Higher Education Act of 1965 or the parallel benefit under part D of title IV of such Act (relating to the repayment of loan liability), pursuant to section 464(c)(1)(F) of such Act, or otherwise discharged on account of death or total and permanent disability of the student. A loan is described in this subparagraph if such loan is— a student loan (as defined in paragraph (2)), or a private education loan (as defined in section 140(a) of the Consumer Credit Protection Act ( 15 U.S.C. 1650(a) ). 1 Subparagraph (A) shall not apply with respect to any discharge during any taxable year unless the taxpayer includes the taxpayer’s social security number on the return of tax for such taxable year. For purposes of this subparagraph, the term “social security number” has the meaning given such term in section 24(h)(7).

(g) Special rules for discharge of qualified farm indebtedness Subparagraph (C) of subsection (a)(1) shall apply only if the discharge is by a qualified person. For purposes of subparagraph (A), the term “qualified person” has the meaning given to such term by section 49(a)(1)(D)(iv); except that such term shall include any Federal, State, or local government or agency or instrumentality thereof. For purposes of this section, indebtedness of a taxpayer shall be treated as qualified farm indebtedness if— such indebtedness was incurred directly in connection with the operation by the taxpayer of the trade or business of farming, and 50 percent or more of the aggregate gross receipts of the taxpayer for the 3 taxable years preceding the taxable year in which the discharge of such indebtedness occurs is attributable to the trade or business of farming. The amount excluded under subparagraph (C) of subsection (a)(1) shall not exceed the sum of— the adjusted tax attributes of the taxpayer, and the aggregate adjusted bases of qualified property held by the taxpayer as of the beginning of the taxable year following the taxable year in which the discharge occurs. For purposes of subparagraph (A), the term “adjusted tax attributes” means the sum of the tax attributes described in subparagraphs (A), (B), (C), (D), (F), and (G) of subsection (b)(2) determined by taking into account $3 f ore a c h$ 1 of the attributes described in subparagraphs (B), (C), and (G) of subsection (b)(2) and the attribute described in subparagraph (F) of subsection (b)(2) to the extent attributable to any passive activity credit carryover. For purposes of this paragraph, the term “qualified property” means any property which is used or is held for use in a trade or business or for the production of income. For purposes of this paragraph, the adjusted basis of any qualified property and the amount of the adjusted tax attributes shall be determined after any reduction under subsection (b) by reason of amounts excluded from gross income under subsection (a)(1)(B).

(h) Special rules relating to qualified principal residence indebtedness The amount excluded from gross income by reason of subsection (a)(1)(E) shall be applied to reduce (but not below zero) the basis of the principal residence of the taxpayer. For purposes of this section, the term “qualified principal residence indebtedness” means acquisition indebtedness (within the meaning of section 163(h)(3)(B), applied by substituting “ $750, 000 ($ 375,000” for “ $1, 000, 000 ($ 500,000” in clause (ii) thereof and determined without regard to the substitution described in section 163(h)(3)(F)(i)(II)) with respect to the principal residence of the taxpayer. Subsection (a)(1)(E) shall not apply to the discharge of a loan if the discharge is on account of services performed for the lender or any other factor not directly related to a decline in the value of the residence or to the financial condition of the taxpayer. If any loan is discharged, in whole or in part, and only a portion of such loan is qualified principal residence indebtedness, subsection (a)(1)(E) shall apply only to so much of the amount discharged as exceeds the amount of the loan (as determined immediately before such discharge) which is not qualified principal residence indebtedness. For purposes of this subsection, the term “principal residence” has the same meaning as when used in section 121.

(i) Deferral and ratable inclusion of income arising from business indebtedness discharged by the reacquisition of a debt instrument At the election of the taxpayer, income from the discharge of indebtedness in connection with the reacquisition after December 31, 2008 , and before January 1, 2011 , of an applicable debt instrument shall be includible in gross income ratably over the 5-taxable-year period beginning with— in the case of a reacquisition occurring in 2009, the fifth taxable year following the taxable year in which the reacquisition occurs, and in the case of a reacquisition occurring in 2010, the fourth taxable year following the taxable year in which the reacquisition occurs. If, as part of a reacquisition to which paragraph (1) applies, any debt instrument is issued for the applicable debt instrument being reacquired (or is treated as so issued under subsection (e)(4) and the regulations thereunder) and there is any original issue discount determined under subpart A of part V of subchapter P of this chapter with respect to the debt instrument so issued— except as provided in clause (ii), no deduction otherwise allowable under this chapter shall be allowed to the issuer of such debt instrument with respect to the portion of such original issue discount which— accrues before the 1st taxable year in the 5-taxable-year period in which income from the discharge of indebtedness attributable to the reacquisition of the debt instrument is includible under paragraph (1), and does not exceed the income from the discharge of indebtedness with respect to the debt instrument being reacquired, and the aggregate amount of deductions disallowed under clause (i) shall be allowed as a deduction ratably over the 5-taxable-year period described in clause (i)(I). If the amount of the original issue discount accruing before such 1st taxable year exceeds the income from the discharge of indebtedness with respect to the applicable debt instrument being reacquired, the deductions shall be disallowed in the order in which the original issue discount is accrued. For purposes of subparagraph (A), if any debt instrument is issued by an issuer and the proceeds of such debt instrument are used directly or indirectly by the issuer to reacquire an applicable debt instrument of the issuer, the debt instrument so issued shall be treated as issued for the debt instrument being reacquired. If only a portion of the proceeds from a debt instrument are so used, the rules of subparagraph (A) shall apply to the portion of any original issue discount on the newly issued debt instrument which is equal to the portion of the proceeds from such instrument used to reacquire the outstanding instrument. For purposes of this subsection— The term “applicable debt instrument” means any debt instrument which was issued by— a C corporation, or any other person in connection with the conduct of a trade or business by such person. The term “debt instrument” means a bond, debenture, note, certificate, or any other instrument or contractual arrangement constituting indebtedness (within the meaning of section 1275(a)(1)). For purposes of this subsection— The term “reacquisition” means, with respect to any applicable debt instrument, any acquisition of the debt instrument by— the debtor which issued (or is otherwise the obligor under) the debt instrument, or a related person to such debtor. The term “acquisition” shall, with respect to any applicable debt instrument, include an acquisition of the debt instrument for cash, the exchange of the debt instrument for another debt instrument (including an exchange resulting from a modification of the debt instrument), the exchange of the debt instrument for corporate stock or a partnership interest, and the contribution of the debt instrument to capital. Such term shall also include the complete forgiveness of the indebtedness by the holder of the debt instrument. For purposes of this subsection— The determination of whether a person is related to another person shall be made in the same manner as under subsection (e)(4). An election under this subsection with respect to any applicable debt instrument shall be made by including with the return of tax imposed by chapter 1 for the taxable year in which the reacquisition of the debt instrument occurs a statement which— clearly identifies such instrument, and includes the amount of income to which paragraph (1) applies and such other information as the Secretary may prescribe. Such election, once made, is irrevocable. In the case of a partnership, S corporation, or other pass-thru entity, the election under this subsection shall be made by the partnership, the S corporation, or other entity involved. If a taxpayer elects to have this subsection apply to an applicable debt instrument, subparagraphs (A), (B), (C), and (D) of subsection (a)(1) shall not apply to the income from the discharge of such indebtedness for the taxable year of the election or any subsequent taxable year. In the case of the death of the taxpayer, the liquidation or sale of substantially all the assets of the taxpayer (including in a title 11 or similar case), the cessation of business by the taxpayer, or similar circumstances, any item of income or deduction which is deferred under this subsection (and has not previously been taken into account) shall be taken into account in the taxable year in which such event occurs (or in the case of a title 11 or similar case, the day before the petition is filed). The rule of clause (i) shall also apply in the case of the sale or exchange or redemption of an interest in a partnership, S corporation, or other pass-thru entity by a partner, shareholder, or other person holding an ownership interest in such entity. In the case of a partnership, any income deferred under this subsection shall be allocated to the partners in the partnership immediately before the discharge in the manner such amounts would have been included in the distributive shares of such partners under section 704 if such income were recognized at such time. Any decrease in a partner’s share of partnership liabilities as a result of such discharge shall not be taken into account for purposes of section 752 at the time of the discharge to the extent it would cause the partner to recognize gain under section 731. Any decrease in partnership liabilities deferred under the preceding sentence shall be taken into account by such partner at the same time, and to the extent remaining in the same amount, as income deferred under this subsection is recognized. The Secretary may prescribe such regulations, rules, or other guidance as may be necessary or appropriate for purposes of applying this subsection, including— extending the application of the rules of paragraph (5)(D) to other circumstances where appropriate, requiring reporting of the election (and such other information as the Secretary may require) on returns of tax for subsequent taxable years, and rules for the application of this subsection to partnerships, S corporations, and other pass-thru entities, including for the allocation of deferred deductions.

§ 109 Improvements by lessee on lessor’s property

Gross income does not include income (other than rent) derived by a lessor of real property on the termination of a lease, representing the value of such property attributable to buildings erected or other improvements made by the lessee. ( Aug. 16, 1954, ch. 736 , 68A Stat. 33 .)

§ 110 Qualified lessee construction allowances for short-term leases

(a) In general Gross income of a lessee does not include any amount received in cash (or treated as a rent reduction) by a lessee from a lessor— under a short-term lease of retail space, and for the purpose of such lessee’s constructing or improving qualified long-term real property for use in such lessee’s trade or business at such retail space, but only to the extent that such amount does not exceed the amount expended by the lessee for such construction or improvement.

(b) Consistent treatment by lessor Qualified long-term real property constructed or improved in connection with any amount excluded from a lessee’s income by reason of subsection (a) shall be treated as nonresidential real property of the lessor (including for purposes of section 168(i)(8)(B)).

(c) Definitions For purposes of this section— The term “qualified long-term real property” means nonresidential real property which is part of, or otherwise present at, the retail space referred to in subsection (a) and which reverts to the lessor at the termination of the lease. The term “short-term lease” means a lease (or other agreement for occupancy or use) of retail space for 15 years or less (as determined under the rules of section 168(i)(3)). The term “retail space” means real property leased, occupied, or otherwise used by a lessee in its trade or business of selling tangible personal property or services to the general public.

(d) Information required to be furnished to Secretary Under regulations, the lessee and lessor described in subsection (a) shall, at such times and in such manner as may be provided in such regulations, furnish to the Secretary— information concerning the amounts received (or treated as a rent reduction) and expended as described in subsection (a), and any other information which the Secretary deems necessary to carry out the provisions of this section.

§ 111 Recovery of tax benefit items

(a) Deductions Gross income does not include income attributable to the recovery during the taxable year of any amount deducted in any prior taxable year to the extent such amount did not reduce the amount of tax imposed by this chapter.

(b) Credits If— a credit was allowable with respect to any amount for any prior taxable year, and during the taxable year there is a downward price adjustment or similar adjustment, the tax imposed by this chapter for the taxable year shall be increased by the amount of the credit attributable to the adjustment. Paragraph (1) shall not apply to the extent that the credit allowable for the recovered amount did not reduce the amount of tax imposed by this chapter. This subsection shall not apply with respect to the credit determined under section 46 and the foreign tax credit.

(c) Treatment of carryovers For purposes of this section, an increase in a carryover which has not expired before the beginning of the taxable year in which the recovery or adjustment takes place shall be treated as reducing tax imposed by this chapter.

(d) Special rules for accumulated earnings tax and for personal holding company tax In applying subsection (a) for the purpose of determining the accumulated earnings tax under section 531 or the tax under section 541 (relating to personal holding companies)— any excluded amount under subsection (a) allowed for the purposes of this subtitle (other than section 531 or section 541) shall be allowed whether or not such amount resulted in a reduction of the tax under section 531 or the tax under section 541 for the prior taxable year; and where any excluded amount under subsection (a) was not allowable as a deduction for the prior taxable year for purposes of this subtitle other than of section 531 or section 541 but was allowable for the same taxable year under section 531 or section 541, then such excluded amount shall be allowable if it did not result in a reduction of the tax under section 531 or the tax under section 541.

§ 112 Certain combat zone compensation of members of the Armed Forces

(a) Enlisted personnel Gross income does not include compensation received for active service as a member below the grade of commissioned officer in the Armed Forces of the United States for any month during any part of which such member— served in a combat zone, or was hospitalized as a result of wounds, disease, or injury incurred while serving in a combat zone; but this paragraph shall not apply for any month beginning more than 2 years after the date of the termination of combatant activities in such zone. With respect to service in the combat zone designated for purposes of the Vietnam conflict, paragraph (2) shall not apply to any month after January 1978.

(b) Commissioned officers Gross income does not include so much of the compensation as does not exceed the maximum enlisted amount received for active service as a commissioned officer in the Armed Forces of the United States for any month during any part of which such officer— served in a combat zone, or was hospitalized as a result of wounds, disease, or injury incurred while serving in a combat zone; but this paragraph shall not apply for any month beginning more than 2 years after the date of the termination of combatant activities in such zone. With respect to service in the combat zone designated for purposes of the Vietnam conflict, paragraph (2) shall not apply to any month after January 1978.

(c) Definitions For purposes of this section— The term “commissioned officer” does not include a commissioned warrant officer. The term “combat zone” means any area which the President of the United States by Executive Order designates, for purposes of this section or corresponding provisions of prior income tax laws, as an area in which Armed Forces of the United States are or have engaged in combat. Service is performed in a combat zone only if performed on or after the date designated by the President by Executive Order as the date of the commencing of combatant activities in such zone, and on or before the date designated by the President by Executive Order as the date of the termination of combatant activities in such zone. The term “compensation” does not include pensions and retirement pay. The term “maximum enlisted amount” means, for any month, the sum of— the highest rate of basic pay payable for such month to any enlisted member of the Armed Forces of the United States at the highest pay grade applicable to enlisted members, and in the case of an officer entitled to special pay under section 310, or paragraph (1) or (3) of section 351(a), of title 37, United States Code, for such month, the amount of such special pay payable to such officer for such month.

(d) Prisoners of war, etc. Gross income does not include compensation received for active service as a member of the Armed Forces of the United States for any month during any part of which such member is in a missing status (as defined in section 551(2) of title 37 , United States Code) during the Vietnam conflict as a result of such conflict, other than a period with respect to which it is officially determined under section 552(c) of such title 37 that he is officially absent from his post of duty without authority. Gross income does not include compensation received for active service as an employee for any month during any part of which such employee is in a missing status during the Vietnam conflict as a result of such conflict. For purposes of this paragraph, the terms “active service”, “employee”, and “missing status” have the respective meanings given to such terms by section 5561 of title 5 of the United States Code. For purposes of this subsection, the Vietnam conflict began February 28, 1961 , and ends on the date designated by the President by Executive order as the date of the termination of combatant activities in Vietnam. For purposes of this subsection, an individual is in a missing status as a result of the Vietnam conflict if immediately before such status began he was performing service in Vietnam or was performing service in Southeast Asia in direct support of military operations in Vietnam.

[§ 113 Repealed. Pub. L. 101–508, title XI, § 11801(a)(7), Nov. 5, 1990, 104 Stat. 1388–520]

[§ 114 Repealed. Pub. L. 108–357, title I, § 101(a), Oct. 22, 2004, 118 Stat. 1423]

§ 115 Income of States, municipalities, etc.

Gross income does not include— income derived from any public utility or the exercise of any essential governmental function and accruing to a State or any political subdivision thereof, or the District of Columbia; or income accruing to the government of any possession of the United States, or any political subdivision thereof. ( Aug. 16, 1954, ch. 736 , 68A Stat. 35 ; Pub. L. 94–455, title XIX, § 1901(a)(19) , Oct. 4, 1976 , 90 Stat. 1766 .)

[§ 116 Repealed. Pub. L. 99–514, title VI, § 612(a), Oct. 22, 1986, 100 Stat. 2250]

§ 117 Qualified scholarships

(a) General rule Gross income does not include any amount received as a qualified scholarship by an individual who is a candidate for a degree at an educational organization described in section 170(b)(1)(A)(ii).

(b) Qualified scholarship For purposes of this section— The term “qualified scholarship” means any amount received by an individual as a scholarship or fellowship grant to the extent the individual establishes that, in accordance with the conditions of the grant, such amount was used for qualified tuition and related expenses. For purposes of paragraph (1), the term “qualified tuition and related expenses” means— tuition and fees required for the enrollment or attendance of a student at an educational organization described in section 170(b)(1)(A)(ii), and fees, books, supplies, and equipment required for courses of instruction at such an educational organization.

(c) Limitation Except as provided in paragraph (2), subsections (a) and (d) shall not apply to that portion of any amount received which represents payment for teaching, research, or other services by the student required as a condition for receiving the qualified scholarship or qualified tuition reduction. Paragraph (1) shall not apply to any amount received by an individual under— the National Health Service Corps Scholarship Program under section 338A(g)(1)(A) of the Public Health Service Act, the Armed Forces Health Professions Scholarship and Financial Assistance program under subchapter I of chapter 105 of title 10, United States Code, or a comprehensive student work-learning-service program (as defined in section 448(e) of the Higher Education Act of 1965) operated by a work college (as defined in such section).

(d) Qualified tuition reduction Gross income shall not include any qualified tuition reduction. For purposes of this subsection, the term “qualified tuition reduction” means the amount of any reduction in tuition provided to an employee of an organization described in section 170(b)(1)(A)(ii) for the education (below the graduate level) at such organization (or another organization described in section 170(b)(1)(A)(ii)) of— such employee, or any person treated as an employee (or whose use is treated as an employee use) under the rules of section 132(h). Paragraph (1) shall apply with respect to any qualified tuition reduction provided with respect to any highly compensated employee only if such reduction is available on substantially the same terms to each member of a group of employees which is defined under a reasonable classification set up by the employer which does not discriminate in favor of highly compensated employees (within the meaning of section 414(q)). For purposes of this paragraph, the term “highly compensated employee” has the meaning given such term by section 414(q). In the case of the education of an individual who is a graduate student at an educational organization described in section 170(b)(1)(A)(ii) and who is engaged in teaching or research activities for such organization, paragraph (2) shall be applied as if it did not contain the phrase “(below the graduate level)”.

§ 118 Contributions to the capital of a corporation

(a) General rule In the case of a corporation, gross income does not include any contribution to the capital of the taxpayer.

(b) Exceptions For purposes of subsection (a), except as provided in subsection (c), the term “contribution to the capital of the taxpayer” does not include— any contribution in aid of construction or any other contribution as a customer or potential customer, and any contribution by any governmental entity or civic group (other than a contribution made by a shareholder as such).

(c) Special rules for water and sewerage disposal utilities For purposes of this section, the term “contribution to the capital of the taxpayer” includes any amount of money or other property received from any person (whether or not a shareholder) by a regulated public utility which provides water or sewerage disposal services if— such amount is— a contribution in aid of construction, or a contribution to the capital of such utility by a governmental entity providing for the protection, preservation, or enhancement of drinking water or sewerage disposal services, in the case of a contribution in aid of construction which is property other than water or sewerage disposal facilities, such amount meets the requirements of the expenditure rule of paragraph (2), and such amount (or any property acquired or constructed with such amount) is not included in the taxpayer’s rate base for ratemaking purposes. An amount meets the requirements of this paragraph if— an amount equal to such amount is expended for the acquisition or construction of tangible property described in section 1231(b)— which is the property for which the contribution was made or is of the same type as such property, and which is used predominantly in the trade or business of furnishing water or sewerage disposal services, the expenditure referred to in subparagraph (A) occurs before the end of the second taxable year after the year in which such amount was received, and accurate records are kept of the amounts contributed and expenditures made, the expenditures to which contributions are allocated, and the year in which the contributions and expenditures are received and made. For purposes of this subsection— The term “contribution in aid of construction” shall be defined by regulations prescribed by the Secretary, except that such term shall not include amounts paid as service charges for starting or stopping services. The term “predominantly” means 80 percent or more. The term “regulated public utility” has the meaning given such term by section 7701(a)(33), except that such term shall not include any utility which is not required to provide water or sewerage disposal services to members of the general public in its service area. Notwithstanding any other provision of this subtitle, no deduction or credit shall be allowed for, or by reason of, any expenditure which constitutes a contribution in aid of construction to which this subsection applies. The adjusted basis of any property acquired with contributions in aid of construction to which this subsection applies shall be zero.

(d) Statute of limitations If the taxpayer for any taxable year treats an amount as a contribution to the capital of the taxpayer described in subsection (c)(1)(A)(i), then— the statutory period for the assessment of any deficiency attributable to any part of such amount shall not expire before the expiration of 3 years from the date the Secretary is notified by the taxpayer (in such manner as the Secretary may prescribe) of— the amount of the expenditure referred to in subparagraph (A) of subsection (c)(2), the taxpayer’s intention not to make the expenditures referred to in such subparagraph, or a failure to make such expenditure within the period described in subparagraph (B) of subsection (c)(2), and such deficiency may be assessed before the expiration of such 3-year period notwithstanding the provisions of any other law or rule of law which would otherwise prevent such assessment.

(e) Cross references For basis of property acquired by a corporation through a contribution to its capital, see section 362. For special rules in the case of contributions of indebtedness, see section 108(e)(6).

§ 119 Meals or lodging furnished for the convenience of the employer

(a) Meals and lodging furnished to employee, his spouse, and his dependents, pursuant to employment There shall be excluded from gross income of an employee the value of any meals or lodging furnished to him, his spouse, or any of his dependents by or on behalf of his employer for the convenience of the employer, but only if— in the case of meals, the meals are furnished on the business premises of the employer, or in the case of lodging, the employee is required to accept such lodging on the business premises of his employer as a condition of his employment.

(b) Special rules For purposes of subsection (a)— In determining whether meals or lodging are furnished for the convenience of the employer, the provisions of an employment contract or of a State statute fixing terms of employment shall not be determinative of whether the meals or lodging are intended as compensation. In determining whether meals are furnished for the convenience of the employer, the fact that a charge is made for such meals, and the fact that the employee may accept or decline such meals, shall not be taken into account. If— an employee is required to pay on a periodic basis a fixed charge for his meals, and such meals are furnished by the employer for the convenience of the employer, there shall be excluded from the employee’s gross income an amount equal to such fixed charge. Subparagraph (A) shall apply— whether the employee pays the fixed charge out of his stated compensation or out of his own funds, and only if the employee is required to make the payment whether he accepts or declines the meals. All meals furnished on the business premises of an employer to such employer’s employees shall be treated as furnished for the convenience of the employer if, without regard to this paragraph, more than half of the employees to whom such meals are furnished on such premises are furnished such meals for the convenience of the employer.

(c) Employees living in certain camps In the case of an individual who is furnished lodging in a camp located in a foreign country by or on behalf of his employer, such camp shall be considered to be part of the business premises of the employer. For purposes of this section, a camp constitutes lodging which is— provided by or on behalf of the employer for the convenience of the employer because the place at which such individual renders services is in a remote area where satisfactory housing is not available on the open market, located, as near as practicable, in the vicinity of the place at which such individual renders services, and furnished in a common area (or enclave) which is not available to the public and which normally accommodates 10 or more employees.

(d) Lodging furnished by certain educational institutions to employees In the case of an employee of an educational institution, gross income shall not include the value of qualified campus lodging furnished to such employee during the taxable year. Paragraph (1) shall not apply to the extent of the excess of— the lesser of— 5 percent of the appraised value of the qualified campus lodging, or the average of the rentals paid by individuals (other than employees or students of the educational institution) during such calendar year for lodging provided by the educational institution which is comparable to the qualified campus lodging provided to the employee, over the rent paid by the employee for the qualified campus lodging during such calendar year. The appraised value under subparagraph (A)(i) shall be determined as of the close of the calendar year in which the taxable year begins, or, in the case of a rental period not greater than 1 year, at any time during the calendar year in which such period begins. For purposes of this subsection, the term “qualified campus lodging” means lodging to which subsection (a) does not apply and which is— located on, or in the proximity of, a campus of the educational institution, and furnished to the employee, his spouse, and any of his dependents by or on behalf of such institution for use as a residence. For purposes of this subsection— The term “educational institution” means— an institution described in section 170(b)(1)(A)(ii) (or an entity organized under State law and composed of public institutions so described), or an academic health center. For purposes of subparagraph (A), the term “academic health center” means an entity— which is described in section 170(b)(1)(A)(iii), which receives (during the calendar year in which the taxable year of the taxpayer begins) payments under subsection (d)(5)(B) or (h) of section 1886 of the Social Security Act (relating to graduate medical education), and which has as one of its principal purposes or functions the providing and teaching of basic and clinical medical science and research with the entity’s own faculty.

[§ 120 Repealed. Pub. L. 113–295, div. A, title II, § 221(a)(19)(A), Dec. 19, 2014, 128 Stat. 4039]

§ 121 Exclusion of gain from sale of principal residence

(a) Exclusion Gross income shall not include gain from the sale or exchange of property if, during the 5-year period ending on the date of the sale or exchange, such property has been owned and used by the taxpayer as the taxpayer’s principal residence for periods aggregating 2 years or more.

(b) Limitations The amount of gain excluded from gross income under subsection (a) with respect to any sale or exchange shall not exceed $250, 000. I n t h ec a seo f ah u s ban d an d w i f e w h o mak e aj o in t re t u r n f or t h e t a x ab l eye a ro f t h es a l eore x c han g eo f t h e p ro p er t y — P a r a g r a p h (1) s ha ll b e a ppl i e d b ys u b s t i t u t in g “$ 500,000” for “ $250, 000” i f — e i t h ers p o u se m ee t s t h eo w n ers hi p re q u i re m e n t so f s u b sec t i o n (a) w i t h res p ec tt os u c h p ro p er t y; b o t h s p o u ses m ee tt h e u sere q u i re m e n t so f s u b sec t i o n (a) w i t h res p ec tt os u c h p ro p er t y; an d n e i t h ers p o u se i s in e l i g ib l e f or t h e b e n e f i t so f s u b sec t i o n (a) w i t h res p ec tt os u c h p ro p er t y b yre a so n o f p a r a g r a p h (3) . I f s u c h s p o u ses d o n o t m ee tt h ere q u i re m e n t so f s u b p a r a g r a p h (A), t h e l imi t a t i o n u n d er p a r a g r a p h (1) s ha ll b e t h es u m o f t h e l imi t a t i o n s u n d er p a r a g r a p h (1) t o w hi c h e a c h s p o u se w o u l d b ee n t i tl e d i f s u c h s p o u ses ha d n o t b ee nma rr i e d . F or p u r p oseso f t h e p rece d in g se n t e n ce, e a c h s p o u ses ha ll b e t re a t e d a so w nin g t h e p ro p er t y d u r in g t h e p er i o d t ha t e i t h ers p o u seo w n e d t h e p ro p er t y . S u b sec t i o n (a) s ha ll n o t a ppl y t o an ys a l eore x c han g e b y t h e t a x p a yer i f, d u r in g t h e 2 - ye a r p er i o d e n d in g o n t h e d a t eo f s u c h s a l eore x c han g e, t h ere w a s an yo t h ers a l eore x c han g e b y t h e t a x p a yer t o w hi c h s u b sec t i o n (a) a ppl i e d . I n t h ec a seo f a s a l eore x c han g eo f p ro p er t y b y an u nma rr i e d in d i v i d u a lw h oses p o u se i s d ece a se d o n t h e d a t eo f s u c h s a l e, p a r a g r a p h (1) s ha ll b e a ppl i e d b ys u b s t i t u t in g “$ 500,000” for “$250,000” if such sale occurs not later than 2 years after the date of death of such spouse and the requirements of paragraph (2)(A) were met immediately before such date of death. Subsection (a) shall not apply to so much of the gain from the sale or exchange of property as is allocated to periods of nonqualified use. For purposes of subparagraph (A), gain shall be allocated to periods of nonqualified use based on the ratio which— the aggregate periods of nonqualified use during the period such property was owned by the taxpayer, bears to the period such property was owned by the taxpayer. For purposes of this paragraph— The term “period of nonqualified use” means any period (other than the portion of any period preceding January 1, 2009 ) during which the property is not used as the principal residence of the taxpayer or the taxpayer’s spouse or former spouse. The term “period of nonqualified use” does not include— any portion of the 5-year period described in subsection (a) which is after the last date that such property is used as the principal residence of the taxpayer or the taxpayer’s spouse, any period (not to exceed an aggregate period of 10 years) during which the taxpayer or the taxpayer’s spouse is serving on qualified official extended duty (as defined in subsection (d)(9)(C)) described in clause (i), (ii), or (iii) of subsection (d)(9)(A), and any other period of temporary absence (not to exceed an aggregate period of 2 years) due to change of employment, health conditions, or such other unforeseen circumstances as may be specified by the Secretary. For purposes of this paragraph— subparagraph (A) shall be applied after the application of subsection (d)(6), and subparagraph (B) shall be applied without regard to any gain to which subsection (d)(6) applies.

(c) Exclusion for taxpayers failing to meet certain requirements In the case of a sale or exchange to which this subsection applies, the ownership and use requirements of subsection (a), and subsection (b)(3), shall not apply; but the dollar limitation under paragraph (1) or (2) of subsection (b), whichever is applicable, shall be equal to— the amount which bears the same ratio to such limitation (determined without regard to this paragraph) as the shorter of— the aggregate periods, during the 5-year period ending on the date of such sale or exchange, such property has been owned and used by the taxpayer as the taxpayer’s principal residence; or the period after the date of the most recent prior sale or exchange by the taxpayer to which subsection (a) applied and before the date of such sale or exchange, bears to 2 years. This subsection shall apply to any sale or exchange if— subsection (a) would not (but for this subsection) apply to such sale or exchange by reason of— a failure to meet the ownership and use requirements of subsection (a), or subsection (b)(3), and such sale or exchange is by reason of a change in place of employment, health, or, to the extent provided in regulations, unforeseen circumstances.

(d) Special rules If a husband and wife make a joint return for the taxable year of the sale or exchange of the property, subsections (a) and (c) shall apply if either spouse meets the ownership and use requirements of subsection (a) with respect to such property. For purposes of this section, in the case of an unmarried individual whose spouse is deceased on the date of the sale or exchange of property, the period such unmarried individual owned and used such property shall include the period such deceased spouse owned and used such property before death. For purposes of this section— In the case of an individual holding property transferred to such individual in a transaction described in section 1041(a), the period such individual owns such property shall include the period the transferor owned the property. Solely for purposes of this section, an individual shall be treated as using property as such individual’s principal residence during any period of ownership while such individual’s spouse or former spouse is granted use of the property under a divorce or separation instrument. For purposes of this paragraph, the term “divorce or separation instrument” means— a decree of divorce or separate maintenance or a written instrument incident to such a decree, a written separation agreement, or a decree (not described in clause (i)) requiring a spouse to make payments for the support or maintenance of the other spouse. For purposes of this section, if the taxpayer holds stock as a tenant-stockholder (as defined in section 216) in a cooperative housing corporation (as defined in such section), then— the holding requirements of subsection (a) shall be applied to the holding of such stock, and the use requirements of subsection (a) shall be applied to the house or apartment which the taxpayer was entitled to occupy as such stockholder. For purposes of this section, the destruction, theft, seizure, requisition, or condemnation of property shall be treated as the sale of such property. In applying section 1033 (relating to involuntary conversions), the amount realized from the sale or exchange of property shall be treated as being the amount determined without regard to this section, reduced by the amount of gain not included in gross income pursuant to this section. If the basis of the property sold or exchanged is determined (in whole or in part) under section 1033(b) (relating to basis of property acquired through involuntary conversion), then the holding and use by the taxpayer of the converted property shall be treated as holding and use by the taxpayer of the property sold or exchanged. Subsection (a) shall not apply to so much of the gain from the sale of any property as does not exceed the portion of the depreciation adjustments (as defined in section 1250(b)(3)) attributable to periods after May 6, 1997 , in respect of such property. In the case of a taxpayer who— becomes physically or mentally incapable of self-care, and owns property and uses such property as the taxpayer’s principal residence during the 5-year period described in subsection (a) for periods aggregating at least 1 year, then the taxpayer shall be treated as using such property as the taxpayer’s principal residence during any time during such 5-year period in which the taxpayer owns the property and resides in any facility (including a nursing home) licensed by a State or political subdivision to care for an individual in the taxpayer’s condition. For purposes of this section— At the election of the taxpayer, this section shall not fail to apply to the sale or exchange of an interest in a principal residence by reason of such interest being a remainder interest in such residence, but this section shall not apply to any other interest in such residence which is sold or exchanged separately. Subparagraph (A) shall not apply to any sale to, or exchange with, any person who bears a relationship to the taxpayer which is described in section 267(b) or 707(b). At the election of an individual with respect to a property, the running of the 5-year period described in subsections (a) and (c)(1)(B) and paragraph (7) of this subsection with respect to such property shall be suspended during any period that such individual or such individual’s spouse is serving on qualified official extended duty— as a member of the uniformed services, as a member of the Foreign Service of the United States, or as an employee of the intelligence community. The 5-year period described in subsection (a) shall not be extended more than 10 years by reason of subparagraph (A). For purposes of this paragraph— The term “qualified official extended duty” means any extended duty while serving at a duty station which is at least 50 miles from such property or while residing under Government orders in Government quarters. The term “uniformed services” has the meaning given such term by section 101(a)(5) of title 10 , United States Code, as in effect on the date of the enactment of this paragraph. The term “member of the Foreign Service of the United States” has the meaning given the term “member of the Service” by paragraph (1), (2), (3), (4), or (5) of section 103 of the Foreign Service Act of 1980, as in effect on the date of the enactment of this paragraph. The term “employee of the intelligence community” means an employee (as defined by section 2105 of title 5 , United States Code) of— the Office of the Director of National Intelligence, the Central Intelligence Agency, the National Security Agency, the Defense Intelligence Agency, the National Geospatial-Intelligence Agency, the National Reconnaissance Office, any other office within the Department of Defense for the collection of specialized national intelligence through reconnaissance programs, any of the intelligence elements of the Army, the Navy, the Air Force, the Marine Corps, the Federal Bureau of Investigation, the Department of Treasury, the Department of Energy, and the Coast Guard, the Bureau of Intelligence and Research of the Department of State, or any of the elements of the Department of Homeland Security concerned with the analyses of foreign intelligence information. The term “extended duty” means any period of active duty pursuant to a call or order to such duty for a period in excess of 90 days or for an indefinite period. An election under subparagraph (A) with respect to any property may not be made if such an election is in effect with respect to any other property. An election under subparagraph (A) may be revoked at any time. If a taxpayer acquires property in an exchange with respect to which gain is not recognized (in whole or in part) to the taxpayer under subsection (a) or (b) of section 1031, subsection (a) shall not apply to the sale or exchange of such property by such taxpayer (or by any person whose basis in such property is determined, in whole or in part, by reference to the basis in the hands of such taxpayer) during the 5-year period beginning with the date of such acquisition. At the election of an individual with respect to a property, the running of the 5-year period described in subsections (a) and (c)(1)(B) and paragraph (7) of this subsection with respect to such property shall be suspended during any period that such individual or such individual’s spouse is serving outside the United States— on qualified official extended duty (as defined in paragraph (9)(C)) as an employee of the Peace Corps, or as an enrolled volunteer or volunteer leader under section 5 or 6 (as the case may be) of the Peace Corps Act ( 22 U.S.C. 2504 , 2505). For purposes of subparagraph (A), rules similar to the rules of subparagraphs (B) and (D) of paragraph (9) shall apply.

(e) Denial of exclusion for expatriates This section shall not apply to any sale or exchange by an individual if the treatment provided by section 877(a)(1) applies to such individual.

(f) Election to have section not apply This section shall not apply to any sale or exchange with respect to which the taxpayer elects not to have this section apply.

(g) Residences acquired in rollovers under section 1034 For purposes of this section, in the case of property the acquisition of which by the taxpayer resulted under section 1034 1 (as in effect on the day before the date of the enactment of this section) in the nonrecognition of any part of the gain realized on the sale or exchange of another residence, in determining the period for which the taxpayer has owned and used such property as the taxpayer’s principal residence, there shall be included the aggregate periods for which such other residence (and each prior residence taken into account under section 1223(6) 1 in determining the holding period of such property) had been so owned and used.

§ 122 Certain reduced uniformed services retirement pay

(a) General rule In the case of a member or former member of the uniformed services of the United States, gross income does not include the amount of any reduction in his retired or retainer pay pursuant to the provisions of chapter 73 of title 10, United States Code.

(b) Special rule In the case of any individual referred to in subsection (a), all amounts received as retired or retainer pay shall be excluded from gross income until there has been so excluded an amount equal to the consideration for the contract. The preceding sentence shall apply only to the extent that the amounts received would, but for such sentence, be includible in gross income. For purposes of paragraph (1) and section 72(n), the term “consideration for the contract” means, in respect of any individual, the sum of— the total amount of the reductions before January 1, 1966 , in his retired or retainer pay by reason of an election under chapter 73 of title 10 of the United States Code, and any amounts deposited at any time by him pursuant to section 1438 or 1452(d) of such title 10.

§ 123 Amounts received under insurance contracts for certain living expenses

(a) General rule In the case of an individual whose principal residence is damaged or destroyed by fire, storm, or other casualty, or who is denied access to his principal residence by governmental authorities because of the occurrence or threat of occurrence of such a casualty, gross income does not include amounts received by such individual under an insurance contract which are paid to compensate or reimburse such individual for living expenses incurred for himself and members of his household resulting from the loss of use or occupancy of such residence.

(b) Limitation Subsection (a) shall apply to amounts received by the taxpayer for living expenses incurred during any period only to the extent the amounts received do not exceed the amount by which— the actual living expenses incurred during such period for himself and members of his household resulting from the loss of use or occupancy of their residence, exceed the normal living expenses which would have been incurred for himself and members of his household during such period.

[§ 124 Repealed. Pub. L. 101–508, title XI, § 11801(a)(9), Nov. 5, 1990, 104 Stat. 1388–520]

§ 125 Cafeteria plans

(a) General rule Except as provided in subsection (b), no amount shall be included in the gross income of a participant in a cafeteria plan solely because, under the plan, the participant may choose among the benefits of the plan.

(b) Exception for highly compensated participants and key employees In the case of a highly compensated participant, subsection (a) shall not apply to any benefit attributable to a plan year for which the plan discriminates in favor of— highly compensated individuals as to eligibility to participate, or highly compensated participants as to contributions and benefits. In the case of a key employee (within the meaning of section 416(i)(1)), subsection (a) shall not apply to any benefit attributable to a plan for which the qualified benefits provided to key employees exceed 25 percent of the aggregate of such benefits provided for all employees under the plan. For purposes of the preceding sentence, qualified benefits shall be determined without regard to the second sentence of subsection (f). For purposes of determining the taxable year of inclusion, any benefit described in paragraph (1) or (2) shall be treated as received or accrued in the taxable year of the participant or key employee in which the plan year ends.

(c) Discrimination as to benefits or contributions For purposes of subparagraph (B) of subsection (b)(1), a cafeteria plan does not discriminate where qualified benefits and total benefits (or employer contributions allocable to qualified benefits and employer contributions for total benefits) do not discriminate in favor of highly compensated participants.

(d) Cafeteria plan defined For purposes of this section— The term “cafeteria plan” means a written plan under which— all participants are employees, and the participants may choose among 2 or more benefits consisting of cash and qualified benefits. The term “cafeteria plan” does not include any plan which provides for deferred compensation. Subparagraph (A) shall not apply to a profit-sharing or stock bonus plan or rural cooperative plan (within the meaning of section 401(k)(7)) which includes a qualified cash or deferred arrangement (as defined in section 401(k)(2)) to the extent of amounts which a covered employee may elect to have the employer pay as contributions to a trust under such plan on behalf of the employee. Subparagraph (A) shall not apply to a plan maintained by an educational organization described in section 170(b)(1)(A)(ii) to the extent of amounts which a covered employee may elect to have the employer pay as contributions for post-retirement group life insurance if— all contributions for such insurance must be made before retirement, and such life insurance does not have a cash surrender value at any time. For purposes of section 79, any life insurance described in the preceding sentence shall be treated as group-term life insurance. Subparagraph (A) shall not apply to a plan to the extent of amounts which a covered employee may elect to have the employer pay as contributions to a health savings account established on behalf of the employee.

(e) Highly compensated participant and individual defined For purposes of this section— The term “highly compensated participant” means a participant who is— an officer, a shareholder owning more than 5 percent of the voting power or value of all classes of stock of the employer, highly compensated, or a spouse or dependent (within the meaning of section 152, determined without regard to subsections (b)(1), (b)(2), and (d)(1)(B) thereof) of an individual described in subparagraph (A), (B), or (C). The term “highly compensated individual” means an individual who is described in subparagraph (A), (B), (C), or (D) of paragraph (1).

(f) Qualified benefits defined For purposes of this section— The term “qualified benefit” means any benefit which, with the application of subsection (a), is not includible in the gross income of the employee by reason of an express provision of this chapter (other than section 106(b), 117, 127, or 132). Such term includes any group term life insurance which is includible in gross income only because it exceeds the dollar limitation of section 79 and such term includes any other benefit permitted under regulations. The term “qualified benefit” shall not include any product which is advertised, marketed, or offered as long-term care insurance. The term “qualified benefit” shall not include any qualified health plan (as defined in section 1301(a) of the Patient Protection and Affordable Care Act) offered through an Exchange established under section 1311 of such Act. Subparagraph (A) shall not apply with respect to any employee if such employee’s employer is a qualified employer (as defined in section 1312(f)(2) of the Patient Protection and Affordable Care Act) offering the employee the opportunity to enroll through such an Exchange in a qualified health plan in a group market.

(g) Special rules For purposes of this section, a plan shall not be treated as discriminatory if the plan is maintained under an agreement which the Secretary finds to be a collective bargaining agreement between employee representatives and one or more employers. For purposes of subparagraph (B) of subsection (b)(1), a cafeteria plan which provides health benefits shall not be treated as discriminatory if— contributions under the plan on behalf of each participant include an amount which— equals 100 percent of the cost of the health benefit coverage under the plan of the majority of the highly compensated participants similarly situated, or equals or exceeds 75 percent of the cost of the health benefit coverage of the participant (similarly situated) having the highest cost health benefit coverage under the plan, and contributions or benefits under the plan in excess of those described in subparagraph (A) bear a uniform relationship to compensation. For purposes of subparagraph (A) of subsection (b)(1), a classification shall not be treated as discriminatory if the plan— benefits a group of employees described in section 410(b)(2)(A)(i), and meets the requirements of clauses (i) and (ii): No employee is required to complete more than 3 years of employment with the employer or employers maintaining the plan as a condition of participation in the plan, and the employment requirement for each employee is the same. Any employee who has satisfied the employment requirement of clause (i) and who is otherwise entitled to participate in the plan commences participation no later than the first day of the first plan year beginning after the date the employment requirement was satisfied unless the employee was separated from service before the first day of that plan year. All employees who are treated as employed by a single employer under subsection (b), (c), or (m) of section 414 shall be treated as employed by a single employer for purposes of this section.

(h) Special rule for unused benefits in health flexible spending arrangements of individuals called to active duty For purposes of this title, a plan or other arrangement shall not fail to be treated as a cafeteria plan or health flexible spending arrangement (and shall not fail to be treated as an accident or health plan) merely because such arrangement provides for qualified reservist distributions. For purposes of this subsection, the term “qualified reservist distribution” means any distribution to an individual of all or a portion of the balance in the employee’s account under such arrangement if— such individual was (by reason of being a member of a reserve component (as defined in section 101 of title 37 , United States Code)) ordered or called to active duty for a period in excess of 179 days or for an indefinite period, and such distribution is made during the period beginning on the date of such order or call and ending on the last date that reimbursements could otherwise be made under such arrangement for the plan year which includes the date of such order or call.

(i) Limitation on health flexible spending arrangements For purposes of this section, if a benefit is provided under a cafeteria plan through employer contributions to a health flexible spending arrangement, such benefit shall not be treated as a qualified benefit unless the cafeteria plan provides that an employee may not elect for any taxable year to have salary reduction contributions in excess of $2, 500 ma d e t os u c ha rr an g e m e n t . I n t h ec a seo f an y t a x ab l eye a r b e g innin g a f t erDece mb er 31, 2013, t h e d o ll a r am o u n t in p a r a g r a p h (1) s ha ll b e in cre a se d b y anam o u n t e q u a lt o — s u c ham o u n t, m u lt i pl i e d b y t h ecos t - o f - l i v in g a d j u s t m e n t d e t er min e d u n d ersec t i o n 1 (f) (3) f or t h ec a l e n d a rye a r in w hi c h s u c h t a x ab l eye a r b e g in s b ys u b s t i t u t in g “ c a l e n d a rye a r 2012” f or “ c a l e n d a rye a r 2016” in s u b p a r a g r a p h (A) (ii) t h ereo f . I f an y in cre a se d e t er min e d u n d er t hi s p a r a g r a p hi s n o t am u lt i pl eo f$ 50, such increase shall be rounded to the next lowest multiple of $50.

(j) Simple cafeteria plans for small businesses An eligible employer maintaining a simple cafeteria plan with respect to which the requirements of this subsection are met for any year shall be treated as meeting any applicable nondiscrimination requirement during such year. For purposes of this subsection, the term “simple cafeteria plan” means a cafeteria plan— which is established and maintained by an eligible employer, and with respect to which the contribution requirements of paragraph (3), and the eligibility and participation requirements of paragraph (4), are met. The requirements of this paragraph are met if, under the plan the employer is required, without regard to whether a qualified employee makes any salary reduction contribution, to make a contribution to provide qualified benefits under the plan on behalf of each qualified employee in an amount equal to— a uniform percentage (not less than 2 percent) of the employee’s compensation for the plan year, or an amount which is not less than the lesser of— 6 percent of the employee’s compensation for the plan year, or twice the amount of the salary reduction contributions of each qualified employee. The requirements of subparagraph (A)(ii) shall not be treated as met if, under the plan, the rate of contributions with respect to any salary reduction contribution of a highly compensated or key employee at any rate of contribution is greater than that with respect to an employee who is not a highly compensated or key employee. Subject to subparagraph (B), nothing in this paragraph shall be treated as prohibiting an employer from making contributions to provide qualified benefits under the plan in addition to contributions required under subparagraph (A). For purposes of this paragraph— The term “salary reduction contribution” means, with respect to a cafeteria plan, any amount which is contributed to the plan at the election of the employee and which is not includible in gross income by reason of this section. The term “qualified employee” means, with respect to a cafeteria plan, any employee who is not a highly compensated or key employee and who is eligible to participate in the plan. The term “highly compensated employee” has the meaning given such term by section 414(q). The term “key employee” has the meaning given such term by section 416(i). The requirements of this paragraph shall be treated as met with respect to any year if, under the plan— all employees who had at least 1,000 hours of service for the preceding plan year are eligible to participate, and each employee eligible to participate in the plan may, subject to terms and conditions applicable to all participants, elect any benefit available under the plan. For purposes of subparagraph (A)(i), an employer may elect to exclude under the plan employees— who have not attained the age of 21 before the close of a plan year, who have less than 1 year of service with the employer as of any day during the plan year, who are covered under an agreement which the Secretary of Labor finds to be a collective bargaining agreement if there is evidence that the benefits covered under the cafeteria plan were the subject of good faith bargaining between employee representatives and the employer, or who are described in section 410(b)(3)(C) (relating to nonresident aliens working outside the United States). A plan may provide a shorter period of service or younger age for purposes of clause (i) or (ii). For purposes of this subsection— The term “eligible employer” means, with respect to any year, any employer if such employer employed an average of 100 or fewer employees on business days during either of the 2 preceding years. For purposes of this subparagraph, a year may only be taken into account if the employer was in existence throughout the year. If an employer was not in existence throughout the preceding year, the determination under subparagraph (A) shall be based on the average number of employees that it is reasonably expected such employer will employ on business days in the current year. If— an employer was an eligible employer for any year (a “qualified year”), and such employer establishes a simple cafeteria plan for its employees for such year, then, notwithstanding the fact the employer fails to meet the requirements of subparagraph (A) for any subsequent year, such employer shall be treated as an eligible employer for such subsequent year with respect to employees (whether or not employees during a qualified year) of any trade or business which was covered by the plan during any qualified year. This subparagraph shall cease to apply if the employer employs an average of 200 or more employees on business days during any year preceding any such subsequent year. Any reference in this paragraph to an employer shall include a reference to any predecessor of such employer. All persons treated as a single employer under subsection (a) or (b) of section 52, or subsection (n) or ( o ) of section 414, shall be treated as one person. For purposes of this subsection, the term “applicable nondiscrimination requirement” means any requirement under subsection (b) of this section, section 79(d), section 105(h), or paragraph (2), (3), (4), or (8) of section 129(d). The term “compensation” has the meaning given such term by section 414(s).

(k) Cross reference For reporting and recordkeeping requirements, see section 6039D.

(l) Regulations The Secretary shall prescribe such regulations as may be necessary to carry out the provisions of this section.

(a) General rule Gross income does not include the excludable portion of payments received under— The rural clean water program authorized by section 208(j) of the Federal Water Pollution Control Act ( 33 U.S.C. 1288(j) ). The rural abandoned mine program authorized by section 406 of the Surface Mining Control and Reclamation Act of 1977 ( 30 U.S.C. 1236 ). The water bank program authorized by the Water Bank Act ( 16 U.S.C. 1301 et seq.). The emergency conservation measures program authorized by title IV of the Agricultural Credit Act of 1978. The agricultural conservation program authorized by the Soil Conservation and Domestic Allotment Act ( 16 U.S.C. 590a ). The resource conservation and development program authorized by the Bankhead-Jones Farm Tenant Act and by the Soil Conservation and Domestic Allotment Act ( 7 U.S.C. 1010 ; 16 U.S.C. 590a et seq.). Any small watershed program administered by the Secretary of Agriculture which is determined by the Secretary of the Treasury or his delegate to be substantially similar to the type of programs described in paragraphs (1) through (8). Any program of a State, possession of the United States, a political subdivision of any of the foregoing, or the District of Columbia under which payments are made to individuals primarily for the purpose of conserving soil, protecting or restoring the environment, improving forests, or providing a habitat for wildlife.

(b) Excludable portion For purposes of this section— The term “excludable portion” means that portion (or all) of a payment made to any person under any program described in subsection (a) which— is determined by the Secretary of Agriculture to be made primarily for the purpose of conserving soil and water resources, protecting or restoring the environment, improving forests, or providing a habitat for wildlife, and is determined by the Secretary of the Treasury or his delegate as not increasing substantially the annual income derived from the property. The term “excludable portion” does not include that portion of any payment which is properly associated with an amount which is allowable as a deduction for the taxable year in which such amount is paid or incurred.

(c) Election for section not to apply The taxpayer may elect not to have this section (and section 1255) apply to any excludable portion (or portion thereof). Any election under paragraph (1) shall be made in the manner prescribed by the Secretary by regulations and shall be made not later than the due date prescribed by law (including extensions) for filing the return of tax under this chapter for the taxable year in which the payment was received or accrued.

(d) Denial of double benefits No deduction or credit shall be allowed with respect to any expenditure which is properly associated with any amount excluded from gross income under subsection (a).

(e) Basis of property not increased by reason of excludable payments Notwithstanding any provision of section 1016 to the contrary, no adjustment to basis shall be made with respect to property acquired or improved through the use of any payment, to the extent that such adjustment would reflect any amount which is excluded from gross income under subsection (a).

§ 127 Educational assistance programs

(a) Exclusion from gross income Gross income of an employee does not include amounts paid or expenses incurred by the employer for educational assistance to the employee if the assistance is furnished pursuant to a program which is described in subsection (b). If, but for this paragraph, this section would exclude from gross income more than $5, 250 o f e d u c a t i o na l a ss i s t an ce f u r ni s h e d t o anin d i v i d u a l d u r in g a c a l e n d a rye a r, t hi ssec t i o n s ha ll a ppl yo n l y t o t h e f i rs t$ 5,250 of such assistance so furnished.

(b) Educational assistance program For purposes of this section an educational assistance program is a separate written plan of an employer for the exclusive benefit of his employees to provide such employees with educational assistance. The program must meet the requirements of paragraphs (2) through (6) of this subsection. The program shall benefit employees who qualify under a classification set up by the employer and found by the Secretary not to be discriminatory in favor of employees who are highly compensated employees (within the meaning of section 414(q)) or their dependents. For purposes of this paragraph, there shall be excluded from consideration employees not included in the program who are included in a unit of employees covered by an agreement which the Secretary of Labor finds to be a collective bargaining agreement between employee representatives and one or more employers, if there is evidence that educational assistance benefits were the subject of good faith bargaining between such employee representatives and such employer or employers. Not more than 5 percent of the amounts paid or incurred by the employer for educational assistance during the year may be provided for the class of individuals who are shareholders or owners (or their spouses or dependents), each of whom (on any day of the year) owns more than 5 percent of the stock or of the capital or profits interest in the employer. A program must not provide eligible employees with a choice between educational assistance and other remuneration includible in gross income. For purposes of this section, the business practices of the employer (as well as the written program) will be taken into account. A program referred to in paragraph (1) is not required to be funded. Reasonable notification of the availability and terms of the program must be provided to eligible employees.

(c) Definitions; special rules For purposes of this section— The term “educational assistance” means— the payment, by an employer, of expenses incurred by or on behalf of an employee for education of the employee (including, but not limited to, tuition, fees, and similar payments, books, supplies, and equipment), the payment by an employer, whether paid to the employee or to a lender, of principal or interest on any qualified education loan (as defined in section 221(d)(1)) incurred by the employee for education of the employee, and the provision, by an employer, of courses of instruction for such employee (including books, supplies, and equipment), but does not include payment for, or the provision of, tools or supplies which may be retained by the employee after completion of a course of instruction, or meals, lodging, or transportation. The term “educational assistance” also does not include any payment for, or the provision of any benefits with respect to, any course or other education involving sports, games, or hobbies. The term “employee” includes, for any year, an individual who is an employee within the meaning of section 401(c)(1) (relating to self-employed individuals). An individual who owns the entire interest in an unincorporated trade or business shall be treated as his own employer. A partnership shall be treated as the employer of each partner who is an employee within the meaning of paragraph (2). Ownership of stock in a corporation shall be determined in accordance with the rules provided under subsections (d) and (e) of section 1563 (without regard to section 1563(e)(3)(C)). The interest of an employee in a trade or business which is not incorporated shall be determined in accordance with regulations prescribed by the Secretary, which shall be based on principles similar to the principles which apply in the case of subparagraph (A). An educational assistance program shall not be held or considered to fail to meet any requirements of subsection (b) merely because— of utilization rates for the different types of educational assistance made available under the program; or successful completion, or attaining a particular course grade, is required for or considered in determining reimbursement under the program. This section shall not be construed to affect the deduction or inclusion in income of amounts (not within the exclusion under this section) which are paid or incurred, or received as reimbursement, for educational expenses under section 117, 162 or 212. No deduction or credit shall be allowed to the employee under any other section of this chapter for any amount excluded from income by reason of this section.

(d) Inflation adjustment In the case of any taxable year beginning after 2026, both of the $5, 250 am o u n t s in s u b sec t i o n (a) (2) s ha ll e a c hb e in cre a se d b y anam o u n t e q u a lt o — s u c h d o ll a r am o u n t, m u lt i pl i e d b y t h ecos t - o f - l i v in g a d j u s t m e n t d e t er min e d u n d ersec t i o n 1 (f) (3) f or t h ec a l e n d a rye a r in w hi c h t h e t a x ab l eye a r b e g in s, d e t er min e d b ys u b s t i t u t in g “ c a l e n d a rye a r 2025” f or “ c a l e n d a rye a r 2016” in s u b p a r a g r a p h (A) (ii) t h ereo f . I f an y in cre a se u n d er p a r a g r a p h (1) i s n o t am u lt i pl eo f$ 50, such increase shall be rounded to the nearest multiple of $50.

(e) Cross reference For reporting and recordkeeping requirements, see section 6039D.

§ 128 Employer contributions to Trump accounts

(a) In general Gross income of an employee does not include amounts paid by the employer as a contribution to the Trump account of such employee or of any dependent of such employee if the amounts are paid or incurred pursuant to a program which is described in subsection (c).

(b) Limitation The amount which may be excluded under subsection (a) with respect to any employee shall not exceed $2, 500. I n t h ec a seo f an y t a x ab l eye a r b e g innin g a f t er 2027, t h e$ 2,500 amount in paragraph (1) shall be increased by an amount equal to— such dollar amount, multiplied by the cost-of-living adjustment determined under section 1(f)(3) for the calendar year in which the taxable year begins by substituting “calendar year 2026” for “calendar year 2016” in subparagraph (A)(ii) thereof. If any increase determined under subparagraph (A) is not a multiple of $100, s u c hin cre a ses ha ll b ero u n d e d t o t h e n e x tl o w es t m u lt i pl eo f$ 100.

(c) Trump account contribution program For purposes of this section, a Trump account contribution program is a separate written plan of an employer for the exclusive benefit of his employees to provide contributions to the Trump accounts of such employees or dependents of such employees which meets requirements similar to the requirements of paragraphs (2), (3), (6), (7), and (8) of section 129(d).

§ 129 Dependent care assistance programs

(a) Exclusion Gross income of an employee does not include amounts paid or incurred by the employer for dependent care assistance provided to such employee if the assistance is furnished pursuant to a program which is described in subsection (d). The amount which may be excluded under paragraph (1) for dependent care assistance with respect to dependent care services provided during a taxable year shall not exceed $7, 500 ($ 3,750 in the case of a separate return by a married individual). The amount of any excess under subparagraph (A) shall be included in gross income in the taxable year in which the dependent care services were provided (even if payment of dependent care assistance for such services occurs in a subsequent taxable year). For purposes of this paragraph, marital status shall be determined under the rules of paragraphs (3) and (4) of section 21(e). In the case of any taxable year beginning after December 31, 2020 , and before January 1, 2022 , subparagraph (A) shall be applied by substituting “ $10, 500 (ha l f s u c h d o ll a r am o u n t ” f or “$ 5,000 ($2,500”.

(b) Earned income limitation The amount excluded from the income of an employee under subsection (a) for any taxable year shall not exceed— in the case of an employee who is not married at the close of such taxable year, the earned income of such employee for such taxable year, or in the case of an employee who is married at the close of such taxable year, the lesser of— the earned income of such employee for such taxable year, or the earned income of the spouse of such employee for such taxable year. For purposes of paragraph (1), the provisions of section 21(d)(2) shall apply in determining the earned income of a spouse who is a student or incapable of caring for himself.

(c) Payments to related individuals No amount paid or incurred during the taxable year of an employee by an employer in providing dependent care assistance to such employee shall be excluded under subsection (a) if such amount was paid or incurred to an individual— with respect to whom, for such taxable year, a deduction is allowable under section 151(c) (relating to personal exemptions for dependents) to such employee or the spouse of such employee, or who is a child of such employee (within the meaning of section 152(f)(1)) under the age of 19 at the close of such taxable year.

(d) Dependent care assistance program For purposes of this section a dependent care assistance program is a separate written plan of an employer for the exclusive benefit of his employees to provide such employees with dependent care assistance which meets the requirements of paragraphs (2) through (8) of this subsection. If any plan would qualify as a dependent care assistance program but for a failure to meet the requirements of this subsection, then, notwithstanding such failure, such plan shall be treated as a dependent care assistance program in the case of employees who are not highly compensated employees. The contributions or benefits provided under the plan shall not discriminate in favor of employees who are highly compensated employees (within the meaning of section 414(q)) or their dependents. The program shall benefit employees who qualify under a classification set up by the employer and found by the Secretary not to be discriminatory in favor of employees described in paragraph (2), or their dependents. Not more than 25 percent of the amounts paid or incurred by the employer for dependent care assistance during the year may be provided for the class of individuals who are shareholders or owners (or their spouses or dependents), each of whom (on any day of the year) owns more than 5 percent of the stock or of the capital or profits interest in the employer. A program referred to in paragraph (1) is not required to be funded. Reasonable notification of the availability and terms of the program shall be provided to eligible employees. The plan shall furnish to an employee, on or before January 31, a written statement showing the amounts paid or expenses incurred by the employer in providing dependent care assistance to such employee during the previous calendar year. A plan meets the requirements of this paragraph if the average benefits provided to employees who are not highly compensated employees under all plans of the employer is at least 55 percent of the average benefits provided to highly compensated employees under all plans of the employer. For purposes of subparagraph (A), in the case of any benefits provided through a salary reduction agreement, a plan may disregard any employees whose compensation is less than $25,000. For purposes of this subparagraph, the term “compensation” has the meaning given such term by section 414(q)(4), except that, under rules prescribed by the Secretary, an employer may elect to determine compensation on any other basis which does not discriminate in favor of highly compensated employees. For purposes of paragraphs (3) and (8), there shall be excluded from consideration— subject to rules similar to the rules of section 410(b)(4), employees who have not attained the age of 21 and completed 1 year of service (as defined in section 410(a)(3)), and employees not included in a dependent care assistance program who are included in a unit of employees covered by an agreement which the Secretary finds to be a collective bargaining agreement between employee representatives and 1 or more employees, if there is evidence that dependent care benefits were the subject of good faith bargaining between such employee representatives and such employer or employers.

(e) Definitions and special rules For purposes of this section— The term “dependent care assistance” means the payment of, or provision of, those services which if paid for by the employee would be considered employment-related expenses under section 21(b)(2) (relating to expenses for household and dependent care services necessary for gainful employment). The term “earned income” shall have the meaning given such term in section 32(c)(2), but such term shall not include any amounts paid or incurred by an employer for dependent care assistance to an employee. The term “employee” includes, for any year, an individual who is an employee within the meaning of section 401(c)(1) (relating to self-employed individuals). An individual who owns the entire interest in an unincorporated trade or business shall be treated as his own employer. A partnership shall be treated as the employer of each partner who is an employee within the meaning of paragraph (3). Ownership of stock in a corporation shall be determined in accordance with the rules provided under subsections (d) and (e) of section 1563 (without regard to section 1563(e)(3)(C)). The interest of an employee in a trade or business which is not incorporated shall be determined in accordance with regulations prescribed by the Secretary, which shall be based on principles similar to the principles which apply in the case of subparagraph (A). A dependent care assistance program shall not be held or considered to fail to meet any requirements of subsection (d) (other than paragraphs (4) and (8) thereof) merely because of utilization rates for the different types of assistance made available under the program. No deduction or credit shall be allowed to the employee under any other section of this chapter for any amount excluded from the gross income of the employee by reason of this section. In the case of an onsite facility maintained by an employer, except to the extent provided in regulations, the amount of dependent care assistance provided to an employee excluded with respect to any dependent shall be based on— utilization of the facility by a dependent of the employee, and the value of the services provided with respect to such dependent. No amount paid or incurred by an employer for dependent care assistance provided to an employee shall be excluded from the gross income of such employee unless— the name, address, and taxpayer identification number of the person performing the services are included on the return to which the exclusion relates, or if such person is an organization described in section 501(c)(3) and exempt from tax under section 501(a), the name and address of such person are included on the return to which the exclusion relates. In the case of a failure to provide the information required under the preceding sentence, the preceding sentence shall not apply if it is shown that the taxpayer exercised due diligence in attempting to provide the information so required.

§ 130 Certain personal injury liability assignments

(a) In general Any amount received for agreeing to a qualified assignment shall not be included in gross income to the extent that such amount does not exceed the aggregate cost of any qualified funding assets.

(b) Treatment of qualified funding asset In the case of any qualified funding asset— the basis of such asset shall be reduced by the amount excluded from gross income under subsection (a) by reason of the purchase of such asset, and any gain recognized on a disposition of such asset shall be treated as ordinary income.

(c) Qualified assignment For purposes of this section, the term “qualified assignment” means any assignment of a liability to make periodic payments as damages (whether by suit or agreement), or as compensation under any workmen’s compensation act, on account of personal injury or sickness (in a case involving physical injury or physical sickness)— if the assignee assumes such liability from a person who is a party to the suit or agreement, or the workmen’s compensation claim, and if— such periodic payments are fixed and determinable as to amount and time of payment, such periodic payments cannot be accelerated, deferred, increased, or decreased by the recipient of such payments, the assignee’s obligation on account of the personal injuries or sickness is no greater than the obligation of the person who assigned the liability, and such periodic payments are excludable from the gross income of the recipient under paragraph (1) or (2) of section 104(a). The determination for purposes of this chapter of when the recipient is treated as having received any payment with respect to which there has been a qualified assignment shall be made without regard to any provision of such assignment which grants the recipient rights as a creditor greater than those of a general creditor.

(d) Qualified funding asset For purposes of this section, the term “qualified funding asset” means any annuity contract issued by a company licensed to do business as an insurance company under the laws of any State, or any obligation of the United States, if— such annuity contract or obligation is used by the assignee to fund periodic payments under any qualified assignment, the periods of the payments under the annuity contract or obligation are reasonably related to the periodic payments under the qualified assignment, and the amount of any such payment under the contract or obligation does not exceed the periodic payment to which it relates, such annuity contract or obligation is designated by the taxpayer (in such manner as the Secretary shall by regulations prescribe) as being taken into account under this section with respect to such qualified assignment, and such annuity contract or obligation is purchased by the taxpayer not more than 60 days before the date of the qualified assignment and not later than 60 days after the date of such assignment.

§ 131 Certain foster care payments

(a) General rule Gross income shall not include amounts received by a foster care provider during the taxable year as qualified foster care payments.

(b) Qualified foster care payment defined For purposes of this section— The term “qualified foster care payment” means any payment made pursuant to a foster care program of a State or political subdivision thereof— which is paid by— a State or political subdivision thereof, or a qualified foster care placement agency, and which is— paid to the foster care provider for caring for a qualified foster individual in the foster care provider’s home, or a difficulty of care payment. The term “qualified foster individual” means any individual who is living in a foster family home in which such individual was placed by— an agency of a State or political subdivision thereof, or a qualified foster care placement agency. The term “qualified foster care placement agency” means any placement agency which is licensed or certified by— a State or political subdivision thereof, or an entity designated by a State or political subdivision thereof, for the foster care program of such State or political subdivision to make foster care payments to providers of foster care. In the case of any foster home in which there is a qualified foster care individual who has attained age 19, foster care payments (other than difficulty of care payments) for any period to which such payments relate shall not be excludable from gross income under subsection (a) to the extent such payments are made for more than 5 such qualified foster individuals.

(c) Difficulty of care payments For purposes of this section— The term “difficulty of care payments” means payments to individuals which are not described in subsection (b)(1)(B)(i), and which— are compensation for providing the additional care of a qualified foster individual which is— required by reason of a physical, mental, or emotional handicap of such individual with respect to which the State has determined that there is a need for additional compensation, and provided in the home of the foster care provider, and are designated by the payor as compensation described in subparagraph (A). In the case of any foster home, difficulty of care payments for any period to which such payments relate shall not be excludable from gross income under subsection (a) to the extent such payments are made for more than— 10 qualified foster individuals who have not attained age 19, and 5 qualified foster individuals not described in subparagraph (A).

§ 132 Certain fringe benefits

(a) Exclusion from gross income Gross income shall not include any fringe benefit which qualifies as a— no-additional-cost service, qualified employee discount, working condition fringe, de minimis fringe, qualified transportation fringe, qualified moving expense reimbursement, qualified retirement planning services, or qualified military base realignment and closure fringe.

(b) No-additional-cost service defined For purposes of this section, the term “no-additional-cost service” means any service provided by an employer to an employee for use by such employee if— such service is offered for sale to customers in the ordinary course of the line of business of the employer in which the employee is performing services, and the employer incurs no substantial additional cost (including forgone revenue) in providing such service to the employee (determined without regard to any amount paid by the employee for such service).

(c) Qualified employee discount defined For purposes of this section— The term “qualified employee discount” means any employee discount with respect to qualified property or services to the extent such discount does not exceed— in the case of property, the gross profit percentage of the price at which the property is being offered by the employer to customers, or in the case of services, 20 percent of the price at which the services are being offered by the employer to customers. The term “gross profit percentage” means the percent which— the excess of the aggregate sales price of property sold by the employer to customers over the aggregate cost of such property to the employer, is of the aggregate sale price of such property. Gross profit percentage shall be determined on the basis of— all property offered to customers in the ordinary course of the line of business of the employer in which the employee is performing services (or a reasonable classification of property selected by the employer), and the employer’s experience during a representative period. The term “employee discount” means the amount by which— the price at which the property or services are provided by the employer to an employee for use by such employee, is less than the price at which such property or services are being offered by the employer to customers. The term “qualified property or services” means any property (other than real property and other than personal property of a kind held for investment) or services which are offered for sale to customers in the ordinary course of the line of business of the employer in which the employee is performing services.

(d) Working condition fringe defined For purposes of this section, the term “working condition fringe” means any property or services provided to an employee of the employer to the extent that, if the employee paid for such property or services, such payment would be allowable as a deduction under section 162 or 167.

(e) De minimis fringe defined For purposes of this section— The term “de minimis fringe” means any property or service the value of which is (after taking into account the frequency with which similar fringes are provided by the employer to the employer’s employees) so small as to make accounting for it unreasonable or administratively impracticable. The operation by an employer of any eating facility for employees shall be treated as a de minimis fringe if— such facility is located on or near the business premises of the employer, and revenue derived from such facility normally equals or exceeds the direct operating costs of such facility. The preceding sentence shall apply with respect to any highly compensated employee only if access to the facility is available on substantially the same terms to each member of a group of employees which is defined under a reasonable classification set up by the employer which does not discriminate in favor of highly compensated employees. For purposes of subparagraph (B), an employee entitled under section 119 to exclude the value of a meal provided at such facility shall be treated as having paid an amount for such meal equal to the direct operating costs of the facility attributable to such meal.

(f) Qualified transportation fringe For purposes of this section, the term “qualified transportation fringe” means any of the following provided by an employer to an employee: Transportation in a commuter highway vehicle if such transportation is in connection with travel between the employee’s residence and place of employment. Any transit pass. Qualified parking. The amount of the fringe benefits which are provided by an employer to any employee and which may be excluded from gross income under subsection (a)(5) shall not exceed— $175 p er m o n t hin t h ec a seo f t h e a gg re g a t eo f t h e b e n e f i t s d escr ib e d in s u b p a r a g r a p h s (A) an d (B) o f p a r a g r a p h (1), an d$ 175 per month in the case of qualified parking. For purposes of this subsection, the term “qualified transportation fringe” includes a cash reimbursement by an employer to an employee for a benefit described in paragraph (1). The preceding sentence shall apply to a cash reimbursement for any transit pass only if a voucher or similar item which may be exchanged only for a transit pass is not readily available for direct distribution by the employer to the employee. No amount shall be included in the gross income of an employee solely because the employee may choose between any qualified transportation fringe and compensation which would otherwise be includible in gross income of such employee. For purposes of this subsection— The term “transit pass” means any pass, token, farecard, voucher, or similar item entitling a person to transportation (or transportation at a reduced price) if such transportation is— on mass transit facilities (whether or not publicly owned), or provided by any person in the business of transporting persons for compensation or hire if such transportation is provided in a vehicle meeting the requirements of subparagraph (B)(i). The term “commuter highway vehicle” means any highway vehicle— the seating capacity of which is at least 6 adults (not including the driver), and at least 80 percent of the mileage use of which can reasonably be expected to be— for purposes of transporting employees in connection with travel between their residences and their place of employment, and on trips during which the number of employees transported for such purposes is at least ½ of the adult seating capacity of such vehicle (not including the driver). The term “qualified parking” means parking provided to an employee on or near the business premises of the employer or on or near a location from which the employee commutes to work by transportation described in subparagraph (A), in a commuter highway vehicle, or by carpool. Such term shall not include any parking on or near property used by the employee for residential purposes. Transportation referred to in paragraph (1)(A) shall be considered to be provided by an employer if such transportation is furnished in a commuter highway vehicle operated by or for the employer. For purposes of this subsection, the term “employee” does not include an individual who is an employee within the meaning of section 401(c)(1). In the case of any taxable year beginning in a calendar year after 1999, the dollar amounts contained in subparagraphs (A) and (B) of paragraph (2) shall be increased by an amount equal to— such dollar amount, multiplied by the cost-of-living adjustment determined under section 1(f)(3) for the calendar year in which the taxable year begins, by substituting “calendar year 1997” for “calendar year 2016” in subparagraph (A)(ii) thereof. If any increase determined under subparagraph (A) is not a multiple of $5, s u c hin cre a ses ha ll b ero u n d e d t o t h e n e x tl o w es t m u lt i pl eo f$ 5. For purposes of this section, the terms “working condition fringe” and “de minimis fringe” shall not include any qualified transportation fringe (determined without regard to paragraph (2)).

(g) Qualified moving expense reimbursement For purposes of this section— The term “qualified moving expense reimbursement” means any amount received (directly or indirectly) by an individual from an employer as a payment for (or a reimbursement of) expenses which would be deductible as moving expenses under section 217 if directly paid or incurred by the individual. Such term shall not include any payment for (or reimbursement of) an expense actually deducted by the individual in a prior taxable year. Except in the case of a member of the Armed Forces of the United States on active duty who moves pursuant to a military order and incident to a permanent change of station, or an employee or new appointee of the intelligence community (as defined in section 3 of the National Security Act of 1947 ( 50 U.S.C. 3003 )) (other than a member of the Armed Forces of the United States) who moves pursuant to a change in assignment that requires relocation, subsection (a)(6) shall not apply to any taxable year beginning after December 31, 2017 .

(h) Certain individuals treated as employees for purposes of subsections (a)(1) and (2) For purposes of paragraphs (1) and (2) of subsection (a)— With respect to a line of business of an employer, the term “employee” includes— any individual who was formerly employed by such employer in such line of business and who separated from service with such employer in such line of business by reason of retirement or disability, and any widow or widower of any individual who died while employed by such employer in such line of business or while an employee within the meaning of subparagraph (A). Any use by the spouse or a dependent child of the employee shall be treated as use by the employee. For purposes of subparagraph (A), the term “dependent child” means any child (as defined in section 152(f)(1)) of the employee— who is a dependent of the employee, or both of whose parents are deceased and who has not attained age 25. For purposes of the preceding sentence, any child to whom section 152(e) applies shall be treated as the dependent of both parents. Any use of air transportation by a parent of an employee (determined without regard to paragraph (1)(B)) shall be treated as use by the employee.

(i) Reciprocal agreements For purposes of paragraph (1) of subsection (a), any service provided by an employer to an employee of another employer shall be treated as provided by the employer of such employee if— such service is provided pursuant to a written agreement between such employers, and neither of such employers incurs any substantial additional costs (including foregone revenue) in providing such service or pursuant to such agreement.

(j) Special rules Paragraphs (1) and (2) of subsection (a) shall apply with respect to any fringe benefit described therein provided with respect to any highly compensated employee only if such fringe benefit is available on substantially the same terms to each member of a group of employees which is defined under a reasonable classification set up by the employer which does not discriminate in favor of highly compensated employees. For purposes of paragraph (2) of subsection (a), in the case of a leased section of a department store— such section shall be treated as part of the line of business of the person operating the department store, and employees in the leased section shall be treated as employees of the person operating the department store. For purposes of subparagraph (A), a leased section of a department store is any part of a department store where over-the-counter sales of property are made under a lease or similar arrangement where it appears to the general public that individuals making such sales are employed by the person operating the department store. For purposes of subsection (a)(3), qualified automobile demonstration use shall be treated as a working condition fringe. For purposes of subparagraph (A), the term “qualified automobile demonstration use” means any use of an automobile by a full-time automobile salesman in the sales area in which the automobile dealer’s sales office is located if— such use is provided primarily to facilitate the salesman’s performance of services for the employer, and there are substantial restrictions on the personal use of such automobile by such salesman. Gross income shall not include the value of any on-premises athletic facility provided by an employer to his employees. For purposes of this paragraph, the term “on-premises athletic facility” means any gym or other athletic facility— which is located on the premises of the employer, which is operated by the employer, and substantially all the use of which is by employees of the employer, their spouses, and their dependent children (within the meaning of subsection (h)). If— a qualified affiliate is a member of an affiliated group another member of which operates an airline, and employees of the qualified affiliate who are directly engaged in providing airline-related services are entitled to no-additional-cost service with respect to air transportation provided by such other member, then, for purposes of applying paragraph (1) of subsection (a) to such no-additional-cost service provided to such employees, such qualified affiliate shall be treated as engaged in the same line of business as such other member. For purposes of this paragraph, the term “qualified affiliate” means any corporation which is predominantly engaged in airline-related services. For purposes of this paragraph, the term “airline-related services” means any of the following services provided in connection with air transportation: Catering. Baggage handling. Ticketing and reservations. Flight planning and weather analysis. Restaurants and gift shops located at an airport. Such other similar services provided to the airline as the Secretary may prescribe. For purposes of this paragraph, the term “affiliated group” has the meaning given such term by section 1504(a). For purposes of this section, the term “highly compensated employee” has the meaning given such term by section 414(q). For purposes of subsection (b), the transportation of cargo by air and the transportation of passengers by air shall be treated as the same service. Amounts paid or expenses incurred by the employer for education or training provided to the employee which are not excludable from gross income under section 127 shall be excluded from gross income under this section if (and only if) such amounts or expenses are a working condition fringe.

(k) Customers not to include employees For purposes of this section (other than subsection (c)(2)), the term “customers” shall only include customers who are not employees.

(l) Section not to apply to fringe benefits expressly provided for elsewhere This section (other than subsections (e) and (g)) shall not apply to any fringe benefits of a type the tax treatment of which is expressly provided for in any other section of this chapter.

(m) Qualified retirement planning services For purposes of this section, the term “qualified retirement planning services” means any retirement planning advice or information provided to an employee and his spouse by an employer maintaining a qualified employer plan. Subsection (a)(7) shall apply in the case of highly compensated employees only if such services are available on substantially the same terms to each member of the group of employees normally provided education and information regarding the employer’s qualified employer plan. For purposes of this subsection, the term “qualified employer plan” means a plan, contract, pension, or account described in section 219(g)(5).

(n) Qualified military base realignment and closure fringe For purposes of this section— The term “qualified military base realignment and closure fringe” means 1 or more payments under the authority of section 1013 of the Demonstration Cities and Metropolitan Development Act of 1966 ( 42 U.S.C. 3374 ) (as in effect on the date of the enactment of the American Recovery and Reinvestment Tax Act of 2009). With respect to any property, such term shall not include any payment referred to in paragraph (1) to the extent that the sum of all of such payments related to such property exceeds the maximum amount described in subsection (c) of such section (as in effect on such date).

(o) Regulations The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section.

“If, as of September 12, 1984 — an individual— was an employee (within the meaning of section 132 of the Internal Revenue Code of 1986 [formerly I.R.C. 1954], including subsection (f) [now (h)] thereof) of one member of an affiliated group (as defined in section 1504 of such Code), hereinafter referred to as the ‘first corporation’, and was eligible for no-additional-cost service in the form of air transportation provided by another member of such affiliated group, hereinafter referred to as the ‘second corporation’, at least 50 percent of the individuals performing service for the first corporation were or had been employees of, or had previously performed services for, the second corporation, and the primary business of the affiliated group was air transportation of passengers, then, for purposes of applying paragraphs (1) and (2) of section 132(a) of the Internal Revenue Code of 1986, with respect to no-additional-cost services and qualified employee discounts provided after December 31, 1984 , for such individual by the second corporation, the first corporation shall be treated as engaged in the same air transportation line of business as the second corporation. For purposes of the preceding sentence, an employee of the second corporation who is performing services for the first corporation shall also be treated as an employee of the first corporation.”

“If— as of October 5, 1983 , the employees of one member of an affiliated group (as defined in section 1504 of the Internal Revenue Code of 1986 [formerly I.R.C. 1954] without regard to subsections (b)(2) and (b)(4) thereof) were entitled to employee discounts at the retail department stores operated by another member of such affiliated group, and the primary business of the affiliated group is the operation of retail department stores, then, for purpose of applying section 132(a)(2) of the Internal Revenue Code of 1986, with respect to discounts provided for such employees at the retail department stores operated by such other member, the employer shall be treated as engaged in the same line of business as such other member.”

[§ 133 Repealed. Pub. L. 104–188, title I, § 1602(a), Aug. 20, 1996, 110 Stat. 1833]

§ 134 Certain military benefits

(a) General rule Gross income shall not include any qualified military benefit.

(b) Qualified military benefit For purposes of this section— The term “qualified military benefit” means any allowance or in-kind benefit (other than personal use of a vehicle) which— is received by any member or former member of the uniformed services of the United States or any dependent of such member by reason of such member’s status or service as a member of such uniformed services, and was excludable from gross income on September 9, 1986 , under any provision of law, regulation, or administrative practice which was in effect on such date (other than a provision of this title). Notwithstanding any other provision of law, no benefit shall be treated as a qualified military benefit unless such benefit— is a benefit described in paragraph (1), or is excludable from gross income under this title without regard to any provision of law which is not contained in this title and which is not contained in a revenue Act. Except as provided in subparagraphs (B) and (C) and paragraphs (4) and (5), no modification or adjustment of any qualified military benefit after September 9, 1986 , shall be taken into account. Subparagraph (A) shall not apply to any adjustment to any qualified military benefit payable in cash which— is pursuant to a provision of law or regulation (as in effect on September 9, 1986 ), and is determined by reference to any fluctuation in cost, price, currency, or other similar index. Subparagraph (A) shall not apply to any adjustment to the amount of death gratuity payable under chapter 75 of title 10, United States Code, which is pursuant to a provision of law enacted after September 9, 1986 . For purposes of paragraph (1), such term includes any dependent care assistance program (as in effect on the date of the enactment of this paragraph) for any individual described in paragraph (1)(A). The term “qualified military benefit” includes a travel benefit provided under section 2613 of title 10 , United States Code (as in effect on the date of the enactment of this paragraph). The term “qualified military benefit” includes any bonus payment by a State or political subdivision thereof to any member or former member of the uniformed services of the United States or any dependent of such member only by reason of such member’s service in a combat zone (as defined in section 112(c)(2), determined without regard to the parenthetical).

§ 135 Income from United States savings bonds used to pay higher education tuition and fees

(a) General rule In the case of an individual who pays qualified higher education expenses during the taxable year, no amount shall be includible in gross income by reason of the redemption during such year of any qualified United States savings bond.

(b) Limitations If— the aggregate proceeds of qualified United States savings bonds redeemed by the taxpayer during the taxable year exceed the qualified higher education expenses paid by the taxpayer during such taxable year, the amount excludable from gross income under subsection (a) shall not exceed the applicable fraction of the amount excludable from gross income under subsection (a) without regard to this subsection. For purposes of subparagraph (A), the term “applicable fraction” means the fraction the numerator of which is the amount described in subparagraph (A)(ii) and the denominator of which is the amount described in subparagraph (A)(i). If the modified adjusted gross income of the taxpayer for the taxable year exceeds $40, 000 ($ 60,000 in the case of a joint return), the amount which would (but for this paragraph) be excludable from gross income under subsection (a) shall be reduced (but not below zero) by the amount which bears the same ratio to the amount which would be so excludable as such excess bears to $15, 000 ($ 30,000 in the case of a joint return). In the case of any taxable year beginning in a calendar year after 1990, the $40, 000 an d$ 60,000 amounts contained in subparagraph (A) shall be increased by an amount equal to— such dollar amount, multiplied by the cost-of-living adjustment under section 1(f)(3) for the calendar year in which the taxable year begins, determined by substituting “calendar year 1989” for “calendar year 2016” in subparagraph (A)(ii) thereof. If any amount as adjusted under subparagraph (B) is not a multiple of $50, s u c ham o u n t s ha ll b ero u n d e d t o t h e n e a res t m u lt i pl eo f$ 50 (or if such amount is a multiple of $25, s u c ham o u n t s ha ll b ero u n d e d t o t h e n e x t hi g h es t m u lt i pl eo f$ 50).

(c) Definitions For purposes of this section— The term “qualified United States savings bond” means any United States savings bond issued— after December 31, 1989 , to an individual who has attained age 24 before the date of issuance, and at discount under section 3105 of title 31 , United States Code. The term “qualified higher education expenses” means tuition and fees required for the enrollment or attendance of— the taxpayer, the taxpayer’s spouse, or any dependent of the taxpayer with respect to whom the taxpayer is allowed a deduction under section 151, at an eligible educational institution. Such term shall not include expenses with respect to any course or other education involving sports, games, or hobbies other than as part of a degree program. Such term shall include any contribution to a qualified tuition program (as defined in section 529) on behalf of a designated beneficiary (as defined in such section), or to a Coverdell education savings account (as defined in section 530) on behalf of an account beneficiary, who is an individual described in subparagraph (A); but there shall be no increase in the investment in the contract for purposes of applying section 72 by reason of any portion of such contribution which is not includible in gross income by reason of this subparagraph. The term “eligible educational institution” has the meaning given such term by section 529(e)(5). The term “modified adjusted gross income” means the adjusted gross income of the taxpayer for the taxable year determined— without regard to this section and sections 85(c), 137, 221, 911, 931, and 933, and after the application of sections 86, 469, and 219.

(d) Special rules The amount of qualified higher education expenses otherwise taken into account under subsection (a) with respect to the education of an individual shall be reduced (before the application of subsection (b)) by the sum of the amounts received with respect to such individual for the taxable year as— a qualified scholarship which under section 117 is not includable in gross income, an educational assistance allowance under chapter 30, 31, 32, 34, or 35 of title 38, United States Code, a payment (other than a gift, bequest, devise, or inheritance within the meaning of section 102(a)) for educational expenses, or attributable to attendance at an eligible educational institution, which is exempt from income taxation by any law of the United States, or a payment, waiver, or reimbursement of qualified higher education expenses under a qualified tuition program (within the meaning of section 529(b)). The amount of the qualified higher education expenses otherwise taken into account under subsection (a) with respect to the education of an individual shall be reduced (before the application of subsection (b)) by— the amount of such expenses which are taken into account in determining the credit allowed to the taxpayer or any other person under section 25A with respect to such expenses; and the amount of such expenses which are taken into account in determining the exclusions under sections 529(c)(3)(B) and 530(d)(2). If the taxpayer is a married individual (within the meaning of section 7703), this section shall apply only if the taxpayer and his spouse file a joint return for the taxable year. The Secretary may prescribe such regulations as may be necessary or appropriate to carry out this section, including regulations requiring record keeping and information reporting.

§ 136 Energy conservation subsidies provided by public utilities

(a) Exclusion Gross income shall not include the value of any subsidy provided (directly or indirectly) by a public utility to a customer for the purchase or installation of any energy conservation measure.

(b) Denial of double benefit Notwithstanding any other provision of this subtitle, no deduction or credit shall be allowed for, or by reason of, any expenditure to the extent of the amount excluded under subsection (a) for any subsidy which was provided with respect to such expenditure. The adjusted basis of any property shall be reduced by the amount excluded under subsection (a) which was provided with respect to such property.

(c) Energy conservation measure For purposes of this section, the term “energy conservation measure” means any installation or modification primarily designed to reduce consumption of electricity or natural gas or to improve the management of energy demand with respect to a dwelling unit. For purposes of this subsection— The term “dwelling unit” has the meaning given such term by section 280A(f)(1). The term “public utility” means a person engaged in the sale of electricity or natural gas to residential, commercial, or industrial customers for use by such customers. For purposes of the preceding sentence, the term “person” includes the Federal Government, a State or local government or any political subdivision thereof, or any instrumentality of any of the foregoing.

(d) Exception This section shall not apply to any payment to or from a qualified cogeneration facility or qualifying small power production facility pursuant to section 210 of the Public Utility Regulatory Policy Act of 1978.

§ 137 Adoption assistance programs

(a) Exclusion Gross income of an employee does not include amounts paid or expenses incurred by the employer for qualified adoption expenses in connection with the adoption of a child by an employee if such amounts are furnished pursuant to an adoption assistance program. In the case of an adoption of a child with special needs which becomes final during a taxable year, the qualified adoption expenses with respect to such adoption for such year shall be increased by an amount equal to the excess (if any) of $10,000 over the actual aggregate qualified adoption expenses with respect to such adoption during such taxable year and all prior taxable years.

(b) Limitations The aggregate of the amounts paid or expenses incurred which may be taken into account under subsection (a) for all taxable years with respect to the adoption of a child by the taxpayer shall not exceed $10, 000. T h e am o u n t e x c l u d ab l e f ro m g ross in co m e u n d ers u b sec t i o n (a) f or an y t a x ab l eye a rs ha ll b ere d u ce d (b u t n o t b e l o w zero) b y anam o u n tw hi c hb e a rs t h es am er a t i o t o t h e am o u n t soe x c l u d ab l e (d e t er min e d w i t h o u t re g a r d t o t hi s p a r a g r a p hb u tw i t h re g a r d t o p a r a g r a p h (1)) a s — t h e am o u n t (i f an y) b y w hi c h t h e t a x p a yer ’ s a d j u s t e d g ross in co m ee x cee d s$ 150,000, bears to $40,000. For purposes of paragraph (2), adjusted gross income shall be determined— without regard to this section and sections 85(c) 1 221, 911, 931, and 933, and after the application of sections 86, 135, 219, and 469.

(c) Adoption assistance program For purposes of this section, an adoption assistance program is a separate written plan of an employer for the exclusive benefit of such employer’s employees— under which the employer provides such employees with adoption assistance, and which meets requirements similar to the requirements of paragraphs (2), (3), (5), and (6) of section 127(b). An adoption reimbursement program operated under section 1052 of title 10 , United States Code (relating to armed forces) or section 541 2 of title 14, United States Code (relating to members of the Coast Guard) shall be treated as an adoption assistance program for purposes of this section.

(d) Qualified adoption expenses For purposes of this section, the term “qualified adoption expenses” has the meaning given such term by section 23(d) (determined without regard to reimbursements under this section).

(e) Certain rules to apply Rules similar to the rules of subsections (e), (f), and (g) of section 23 shall apply for purposes of this section.

(f) Adjustments for inflation In the case of a taxable year beginning after December 31, 2002 , each of the dollar amounts in subsection (a)(2) and paragraphs (1) and (2)(A) of subsection (b) shall be increased by an amount equal to— such dollar amount, multiplied by the cost-of-living adjustment determined under section 1(f)(3) for the calendar year in which the taxable year begins, determined by substituting “calendar year 2001” for “calendar year 2016” in subparagraph (A)(ii) thereof. If any amount as increased under the preceding sentence is not a multiple of $10, s u c ham o u n t s ha ll b ero u n d e d t o t h e n e a res t m u lt i pl eo f$ 10.

§ 138 Medicare Advantage MSA

(a) Exclusion Gross income shall not include any payment to the Medicare Advantage MSA of an individual by the Secretary of Health and Human Services under part C of title XVIII of the Social Security Act.

(b) Medicare Advantage MSA For purposes of this section, the term “Medicare Advantage MSA” means an Archer MSA (as defined in section 220(d))— which is designated as a Medicare Advantage MSA, with respect to which no contribution may be made other than— a contribution made by the Secretary of Health and Human Services pursuant to part C of title XVIII of the Social Security Act, or a trustee-to-trustee transfer described in subsection (c)(4), the governing instrument of which provides that trustee-to-trustee transfers described in subsection (c)(4) may be made to and from such account, and which is established in connection with an MSA plan described in section 1859(b)(3) of the Social Security Act.

(c) Special rules for distributions In applying section 220 to a Medicare Advantage MSA— qualified medical expenses shall not include amounts paid for medical care for any individual other than the account holder, and section 220(d)(2)(C) shall not apply. The tax imposed by this chapter for any taxable year in which there is a payment or distribution from a Medicare Advantage MSA which is not used exclusively to pay the qualified medical expenses of the account holder shall be increased by 50 percent of the excess (if any) of— the amount of such payment or distribution, over the excess (if any) of— the fair market value of the assets in such MSA as of the close of the calendar year preceding the calendar year in which the taxable year begins, over an amount equal to 60 percent of the deductible under the Medicare Advantage MSA plan covering the account holder as of January 1 of the calendar year in which the taxable year begins. Section 220(f)(4) shall not apply to any payment or distribution from a Medicare Advantage MSA. Subparagraph (A) shall not apply if the payment or distribution is made on or after the date the account holder— becomes disabled within the meaning of section 72(m)(7), or dies. For purposes of subparagraph (A)— all Medicare Advantage MSAs of the account holder shall be treated as 1 account, all payments and distributions not used exclusively to pay the qualified medical expenses of the account holder during any taxable year shall be treated as 1 distribution, and any distribution of property shall be taken into account at its fair market value on the date of the distribution. Section 220(f)(2) and paragraph (2) of this subsection shall not apply to any payment or distribution from a Medicare Advantage MSA to the Secretary of Health and Human Services of an erroneous contribution to such MSA and of the net income attributable to such contribution. Section 220(f)(2) and paragraph (2) of this subsection shall not apply to any trustee-to-trustee transfer from a Medicare Advantage MSA of an account holder to another Medicare Advantage MSA of such account holder.

(d) Special rules for treatment of account after death of account holder In applying section 220(f)(8)(A) to an account which was a Medicare Advantage MSA of a decedent, the rules of section 220(f) shall apply in lieu of the rules of subsection (c) of this section with respect to the spouse as the account holder of such Medicare Advantage MSA.

(e) Reports In the case of a Medicare Advantage MSA, the report under section 220(h)— shall include the fair market value of the assets in such Medicare Advantage MSA as of the close of each calendar year, and shall be furnished to the account holder— not later than January 31 of the calendar year following the calendar year to which such reports relate, and in such manner as the Secretary prescribes in such regulations.

(f) Coordination with limitation on number of taxpayers having Archer MSAs Subsection (i) of section 220 shall not apply to an individual with respect to a Medicare Advantage MSA, and Medicare Advantage MSAs shall not be taken into account in determining whether the numerical limitations under section 220(j) are exceeded.

§ 139 Disaster relief payments

(a) General rule Gross income shall not include any amount received by an individual as a qualified disaster relief payment.

(b) Qualified disaster relief payment defined For purposes of this section, the term “qualified disaster relief payment” means any amount paid to or for the benefit of an individual— to reimburse or pay reasonable and necessary personal, family, living, or funeral expenses incurred as a result of a qualified disaster, to reimburse or pay reasonable and necessary expenses incurred for the repair or rehabilitation of a personal residence or repair or replacement of its contents to the extent that the need for such repair, rehabilitation, or replacement is attributable to a qualified disaster, by a person engaged in the furnishing or sale of transportation as a common carrier by reason of the death or personal physical injuries incurred as a result of a qualified disaster, or if such amount is paid by a Federal, State, or local government, or agency or instrumentality thereof, in connection with a qualified disaster in order to promote the general welfare, but only to the extent any expense compensated by such payment is not otherwise compensated for by insurance or otherwise.

(c) Qualified disaster defined For purposes of this section, the term “qualified disaster” means— a disaster which results from a terroristic or military action (as defined in section 692(c)(2)), a federally declared disaster (as defined by section 165(i)(5)(A)), a disaster which results from an accident involving a common carrier, or from any other event, which is determined by the Secretary to be of a catastrophic nature, or with respect to amounts described in subsection (b)(4), a disaster which is determined by an applicable Federal, State, or local authority (as determined by the Secretary) to warrant assistance from the Federal, State, or local government or agency or instrumentality thereof.

(d) Coordination with employment taxes For purposes of chapter 2 and subtitle C, qualified disaster relief payments and qualified disaster mitigation payments shall not be treated as net earnings from self-employment, wages, or compensation subject to tax.

(e) No relief for certain individuals Subsections (a), (f), and (g) shall not apply with respect to any individual identified by the Attorney General to have been a participant or conspirator in a terroristic action (as so defined), or a representative of such individual.

(f) Exclusion of certain additional payments Gross income shall not include any amount received as payment under section 406 of the Air Transportation Safety and System Stabilization Act.

(g) Qualified disaster mitigation payments Gross income shall not include any amount received as a qualified disaster mitigation payment. For purposes of this section, the term “qualified disaster mitigation payment” means any amount which is paid pursuant to the Robert T. Stafford Disaster Relief and Emergency Assistance Act (as in effect on the date of the enactment of this subsection) or the National Flood Insurance Act (as in effect on such date) to or for the benefit of the owner of any property for hazard mitigation with respect to such property. Such term shall not include any amount received for the sale or disposition of any property. Notwithstanding any other provision of this subtitle, no increase in the basis or adjusted basis of any property shall result from any amount excluded under this subsection with respect to such property.

(h) Denial of double benefit Notwithstanding any other provision of this subtitle, no deduction or credit shall be allowed (to the person for whose benefit a qualified disaster relief payment or qualified disaster mitigation payment is made) for, or by reason of, any expenditure to the extent of the amount excluded under this section with respect to such expenditure.

§ 139A Federal subsidies for prescription drug plans

Gross income shall not include any special subsidy payment received under section 1860D–22 of the Social Security Act. (Added Pub. L. 108–173, title XII, § 1202(a) , Dec. 8, 2003 , 117 Stat. 2480 ; amended Pub. L. 111–148, title IX, § 9012(a) , Mar. 23, 2010 , 124 Stat. 868 .)

§ 139B Benefits provided to volunteer firefighters and emergency medical responders

(a) In general In the case of any member of a qualified volunteer emergency response organization, gross income shall not include— any qualified State and local tax benefit, and any qualified payment.

(b) Denial of double benefits In the case of any member of a qualified volunteer emergency response organization— the deduction under 164 shall be determined with regard to any qualified State and local tax benefit, and expenses paid or incurred by the taxpayer in connection with the performance of services as such a member shall be taken into account under section 170 only to the extent such expenses exceed the amount of any qualified payment excluded from gross income under subsection (a).

(c) Definitions For purposes of this section— The term “qualified state and local tax benefit” means any reduction or rebate of a tax described in paragraph (1), (2), or (3) of section 164(a) provided by a State or political division thereof on account of services performed as a member of a qualified volunteer emergency response organization. The term “qualified payment” means any payment (whether reimbursement or otherwise) provided by a State or political division thereof on account of the performance of services as a member of a qualified volunteer emergency response organization. The amount determined under subparagraph (A) for any taxable year shall not exceed $50 multiplied by the number of months during such year that the taxpayer performs such services. The term “qualified volunteer emergency response organization” means any volunteer organization— which is organized and operated to provide firefighting or emergency medical services for persons in the State or political subdivision, as the case may be, and which is required (by written agreement) by the State or political subdivision to furnish firefighting or emergency medical services in such State or political subdivision.

(a) In general In the case of an individual who receives qualified first responder retirement payments for any taxable year, gross income shall not include so much of such payments as do not exceed the annualized excludable disability amount with respect to such individual.

(b) Qualified first responder retirement payments For purposes of this section, the term “qualified first responder retirement payments” means, with respect to any taxable year, any pension or annuity which but for this section would be includible in gross income for such taxable year and which is received— from a plan described in clause (iii), (iv), (v), or (vi) of section 402(c)(8)(B), and in connection with such individual’s qualified first responder service.

(c) Annualized excludable disability amount For purposes of this section— The term “annualized excludable disability amount” means, with respect to any individual, the service-connected excludable disability amounts which are properly attributable to the 12-month period immediately preceding the date on which such individual attains retirement age. The term “service-connected excludable disability amount” means periodic payments received by an individual which— are not includible in such individual’s gross income under section 104(a)(1), are received in connection with such individual’s qualified first responder service, and terminate when such individual attains retirement age. In the case of an individual who only receives service-connected excludable disability amounts properly attributable to a portion of the 12-month period described in paragraph (1), such paragraph shall be applied by multiplying such amounts by the ratio of 365 to the number of days in such period to which such amounts were properly attributable.

(d) Qualified first responder service For purposes of this section, the term “qualified first responder service” means service as a law enforcement officer, firefighter, paramedic, or emergency medical technician.

§ 139D Indian health care benefits

(a) General rule Except as otherwise provided in this section, gross income does not include the value of any qualified Indian health care benefit.

(b) Qualified Indian health care benefit For purposes of this section, the term “qualified Indian health care benefit” means— any health service or benefit provided or purchased, directly or indirectly, by the Indian Health Service through a grant to or a contract or compact with an Indian tribe or tribal organization, or through a third-party program funded by the Indian Health Service, medical care provided or purchased by, or amounts to reimburse for such medical care provided by, an Indian tribe or tribal organization for, or to, a member of an Indian tribe, including a spouse or dependent of such a member, coverage under accident or health insurance (or an arrangement having the effect of accident or health insurance), or an accident or health plan, provided by an Indian tribe or tribal organization for medical care to a member of an Indian tribe, include a spouse or dependent of such a member, and any other medical care provided by an Indian tribe or tribal organization that supplements, replaces, or substitutes for a program or service relating to medical care provided by the Federal government to Indian tribes or members of such a tribe.

(c) Definitions For purposes of this section— The term “Indian tribe” has the meaning given such term by section 45A(c)(6). The term “tribal organization” has the meaning given such term by section 4( l ) of the Indian Self-Determination and Education Assistance Act. The term “medical care” has the same meaning as when used in section 213. The terms “accident or health insurance” and “accident or health plan” have the same meaning as when used in section 105. The term “dependent” has the meaning given such term by section 152, determined without regard to subsections (b)(1), (b)(2), and (d)(1)(B) thereof.

(d) Denial of double benefit Subsection (a) shall not apply to the amount of any qualified Indian health care benefit which is not includible in gross income of the beneficiary of such benefit under any other provision of this chapter, or to the amount of any such benefit for which a deduction is allowed to such beneficiary under any other provision of this chapter.

§ 139E Indian general welfare benefits

(a) In general Gross income does not include the value of any Indian general welfare benefit.

(b) Indian general welfare benefit For purposes of this section, the term “Indian general welfare benefit” includes any payment made or services provided to or on behalf of a member of an Indian tribe (or any spouse or dependent of such a member) pursuant to an Indian tribal government program, but only if— the program is administered under specified guidelines and does not discriminate in favor of members of the governing body of the tribe, and the benefits provided under such program— are available to any tribal member who meets such guidelines, are for the promotion of general welfare, are not lavish or extravagant, and are not compensation for services.

(c) Definitions and special rules For purposes of this section— For purposes of this section, the term “Indian tribal government” includes any agencies or instrumentalities of an Indian tribal government and any Alaska Native regional or village corporation, as defined in, or established pursuant to, the Alaska Native Claims Settlement Act ( 43 U.S.C. 1601 et seq.). The term “dependent” has the meaning given such term by section 152, determined without regard to subsections (b)(1), (b)(2), and (d)(1)(B). The Secretary shall, in consultation with the Tribal Advisory Committee (as established under section 3(a) of the Tribal General Welfare Exclusion Act of 2014), establish guidelines for what constitutes lavish or extravagant benefits with respect to Indian tribal government programs. A program shall not fail to be treated as an Indian tribal government program solely by reason of the program being established by tribal custom or government practice. Any items of cultural significance, reimbursement of costs, or cash honorarium for participation in cultural or ceremonial activities for the transmission of tribal culture shall not be treated as compensation for services.

§ 139F Certain amounts received by wrongfully incarcerated individuals

(a) Exclusion from gross income In the case of any wrongfully incarcerated individual, gross income shall not include any civil damages, restitution, or other monetary award (including compensatory or statutory damages and restitution imposed in a criminal matter) relating to the incarceration of such individual for the covered offense for which such individual was convicted.

(b) Wrongfully incarcerated individual For purposes of this section, the term “wrongfully incarcerated individual” means an individual— who was convicted of a covered offense, who served all or part of a sentence of imprisonment relating to that covered offense, and who was pardoned, granted clemency, or granted amnesty for that covered offense because that individual was innocent of that covered offense, or for whom the judgment of conviction for that covered offense was reversed or vacated, and for whom the indictment, information, or other accusatory instrument for that covered offense was dismissed or who was found not guilty at a new trial after the judgment of conviction for that covered offense was reversed or vacated.

(c) Covered offense For purposes of this section, the term “covered offense” means any criminal offense under Federal or State law, and includes any criminal offense arising from the same course of conduct as that criminal offense.

§ 139G Assignments to Alaska Native Settlement Trusts

(a) In general In the case of a Native Corporation, gross income shall not include the value of any payments that would otherwise be made, or treated as being made, to such Native Corporation pursuant to, or as required by, any provision of the Alaska Native Claims Settlement Act ( 43 U.S.C. 1601 et seq.), including any payment that would otherwise be made to a Village Corporation pursuant to section 7(j) of the Alaska Native Claims Settlement Act ( 43 U.S.C. 1606(j) ), provided that any such payments— are assigned in writing to a Settlement Trust, and were not received by such Native Corporation prior to the assignment described in paragraph (1).

(b) Inclusion in gross income In the case of a Settlement Trust which has been assigned payments described in subsection (a), gross income shall include such payments when received by such Settlement Trust pursuant to the assignment and shall have the same character as if such payments were received by the Native Corporation.

(c) Amount and scope of assignment The amount and scope of any assignment under subsection (a) shall be described with reasonable particularity and may either be in a percentage of one or more such payments or in a fixed dollar amount.

(d) Duration of assignment; revocability Any assignment under subsection (a) shall specify— a duration either in perpetuity or for a period of time, and whether such assignment is revocable.

(e) Prohibition on deduction Notwithstanding section 247, no deduction shall be allowed to a Native Corporation for purposes of any amounts described in subsection (a).

(f) Definitions For purposes of this section, the terms “Native Corporation” and “Settlement Trust” have the same meaning given such terms under section 646(h).

§ 139H Interest received in action to recover property seized by the Internal Revenue Service based on structuring transaction

Gross income shall not include any interest received from the Federal Government in connection with an action to recover property seized by the Internal Revenue Service pursuant to section 5317(c)(2) of title 31 , United States Code, by reason of a claimed violation of section 5324 of such title. (Added Pub. L. 116–25, title I, § 1202(a) , July 1, 2019 , 133 Stat. 987 .)

§ 139I Continuation coverage premium assistance

In the case of an assistance eligible individual (as defined in subsection (a)(3) of section 9501 of the American Rescue Plan Act of 2021), gross income does not include any premium assistance provided under subsection (a)(1) of such section. (Added Pub. L. 117–2, title IX, § 9501(b)(4)(A) , Mar. 11, 2021 , 135 Stat. 137 .)

§ 139J Certain contributions to Trump accounts

(a) In general Gross income of an account beneficiary shall not include any qualified general contribution to a Trump account of the account beneficiary.

(b) Definitions Any term used in this section which is used in section 530A shall have the meaning given such term under section 530A.

§ 139K Scholarships for qualified elementary or secondary education expenses of eligible students

(a) In general In the case of an individual, gross income shall not include any amounts provided to such individual or any dependent of such individual pursuant to a scholarship for qualified elementary or secondary education expenses of an eligible student which is provided by a scholarship granting organization.

(b) Definitions In this section, the terms “qualified elementary or secondary education expense”, “eligible student”, and “scholarship granting organization” have the same meaning given such terms under section 25F(c).

§ 139L Interest on loans secured by rural or agricultural real property

(a) In general Gross income shall not include 25 percent of the interest received by a qualified lender on any qualified real estate loan.

(b) Qualified lender For purposes of this section, the term “qualified lender” means— any bank or savings association the deposits of which are insured under the Federal Deposit Insurance Act ( 12 U.S.C. 1811 et seq.), any State- or federally-regulated insurance company, any entity wholly owned, directly or indirectly, by a company that is treated as a bank holding company for purposes of section 8 of the International Banking Act of 1978 ( 12 U.S.C. 3106 ) if— such entity is organized, incorporated, or established under the laws of the United States or any State, and the principal place of business of such entity is in the United States (including any territory of the United States), any entity wholly owned, directly or indirectly, by a company that is considered an insurance holding company under the laws of any State if such entity satisfies the requirements described in subparagraphs (A) and (B) of paragraph (3), and with respect to interest received on a qualified real estate loan secured by real estate described in subsection (c)(3)(A), any federally chartered instrumentality of the United States established under section 8.1(a) of the Farm Credit Act of 1971 ( 12 U.S.C. 2279aa–1(a) ).

(c) Qualified real estate loan For purposes of this section— The term “qualified real estate loan” means any loan— secured by— rural or agricultural real estate, or a leasehold mortgage (with a status as a lien) on rural or agricultural real estate, made to a person other than a specified foreign entity (as defined in section 7701(a)(51)), and made after the date of the enactment of this section. For purposes of the preceding sentence, the determination of whether property securing such loan is rural or agricultural real estate shall be made as of the time the interest income on such loan is accrued. For purposes of subparagraphs (A) and (C) of paragraph (1), a loan shall not be treated as made after the date of the enactment of this section to the extent that the proceeds of such loan are used to refinance a loan which was made on or before the date of the enactment of this section (or, in the case of any series of refinancings, the original loan was made on or before such date). The term “rural or agricultural real estate” means— any real property which is substantially used for the production of one or more agricultural products, any real property which is substantially used in the trade or business of fishing or seafood processing, and any aquaculture facility. Such term shall not include any property which is not located in a State or a possession of the United States. The term “aquaculture facility” means any land, structure, or other appurtenance that is used for aquaculture (including any hatchery, rearing pond, raceway, pen, or incubator).

(d) Coordination with section 265 In the case of any qualified real estate loan, section 265 shall be applied— by treating any qualified real estate loan for purposes of subsection (a)(2) thereof as an obligation the interest on which is wholly exempt from the taxes imposed by this subtitle, by substituting “25 percent of the interest on indebtedness” for “Interest on indebtedness” in such subsection (a)(2), by treating 25 percent of the adjusted basis of any qualified real estate loan as adjusted basis of a tax-exempt obligation described in subsection (b)(4)(B) thereof, and by substituting “25 percent of the amount of such indebtedness” for “the amount of such indebtedness” in subsection (b)(6)(A)(a)(ii) 1 thereof.

§ 140 Cross references to other Acts

(a) For exemption of— Allowances and expenditures to meet losses sustained by persons serving the United States abroad, due to appreciation of foreign currencies, see section 5943 of title 5 , United States Code. Benefits under laws administered by the Department of Veterans Affairs, see section 5301 of title 38 , United States Code. Earnings of ship contractors deposited in special reserve funds, see section 53507 of title 46 , United States Code. Income derived from Federal Reserve banks, including capital stock and surplus, see section 7 of the Federal Reserve Act ( 12 U.S.C. 531 ). Special pensions of persons on Army and Navy medal of honor roll, see 38 U.S.C. 1562(a) –(c).

(b) For extension of military income tax-exemption benefits to commissioned officers of Public Health Service in certain circumstances, see section 212 of the Public Health Service Act ( 42 U.S.C. 213 ).

§ 141 Private activity bond; qualified bond

(a) Private activity bond For purposes of this title, the term “private activity bond” means any bond issued as part of an issue— which meets— the private business use test of paragraph (1) of subsection (b), and the private security or payment test of paragraph (2) of subsection (b), or which meets the private loan financing test of subsection (c).

(b) Private business tests Except as otherwise provided in this subsection, an issue meets the test of this paragraph if more than 10 percent of the proceeds of the issue are to be used for any private business use. Except as otherwise provided in this subsection, an issue meets the test of this paragraph if the payment of the principal of, or the interest on, more than 10 percent of the proceeds of such issue is (under the terms of such issue or any underlying arrangement) directly or indirectly— secured by any interest in— property used or to be used for a private business use, or payments in respect of such property, or to be derived from payments (whether or not to the issuer) in respect of property, or borrowed money, used or to be used for a private business use. An issue shall be treated as meeting the tests of paragraphs (1) and (2) if such tests would be met if such paragraphs were applied— by substituting “5 percent” for “10 percent” each place it appears, and by taking into account only— the proceeds of the issue which are to be used for any private business use which is not related to any government use of such proceeds, the disproportionate related business use proceeds of the issue, and payments, property, and borrowed money with respect to any use of proceeds described in subclause (I) or (II). For purposes of subparagraph (A), the disproportionate related business use proceeds of an issue is an amount equal to the aggregate of the excesses (determined under the following sentence) for each private business use of the proceeds of an issue which is related to a government use of such proceeds. The excess determined under this sentence is the excess of— the proceeds of the issue which are to be used for the private business use, over the proceeds of the issue which are to be used for the government use to which such private business use relates. An issue 5 percent or more of the proceeds of which are to be used with respect to any output facility (other than a facility for the furnishing of water) shall be treated as meeting the tests of paragraphs (1) and (2) if the nonqualified amount with respect to such issue exceeds the excess of— $15, 000, 000, o v er t h e a gg re g a t e n o n q u a l i f i e d am o u n t s w i t h res p ec tt o a llp r i or t a x - e x e m pt i ss u es 5 p erce n t or m oreo f t h e p rocee d so f w hi c ha reor w i ll b e u se d w i t h res p ec tt os u c h f a c i l i t y (or an yo t h er f a c i l i t y w hi c hi s p a r t o f t h es am e p ro j ec t) . T h eres ha ll n o t b e t ak e nin t o a cco u n t u n d ers u b p a r a g r a p h (B) an y b o n d w hi c hi s n o t o u t s t an d in g a tt h e t im eo f t h e l a t er i ss u eor w hi c hi s t o b ere d ee m e d (o t h er t haninana d v an cere f u n d in g) f ro m t h e n e tp rocee d so f t h e l a t er i ss u e . I f t h e n o n q u a l i f i e d am o u n tw i t h res p ec tt o ani ss u e — e x cee d s$ 15,000,000, but does not exceed the amount which would cause a bond which is part of such issue to be treated as a private activity bond without regard to this paragraph, such bond shall nonetheless be treated as a private activity bond unless the issuer allocates a portion of its volume cap under section 146 to such issue in an amount equal to the excess of such nonqualified amount over $15,000,000. For purposes of this subsection, the term “private business use” means use (directly or indirectly) in a trade or business carried on by any person other than a governmental unit. For purposes of the preceding sentence, use as a member of the general public shall not be taken into account. For purposes of the 1st sentence of subparagraph (A), any activity carried on by a person other than a natural person shall be treated as a trade or business. For purposes of this subsection, the sale of carbon dioxide produced by a qualified carbon dioxide capture facility (as defined in section 142( o )) which is owned by a governmental unit shall not constitute private business use. The term “government use” means any use other than a private business use. For purposes of this subsection, the term “nonqualified amount” means, with respect to an issue, the lesser of— the proceeds of such issue which are to be used for any private business use, or the proceeds of such issue with respect to which there are payments (or property or borrowed money) described in paragraph (2). There shall not be taken into account under this subsection or subsection (c) the portion of the proceeds of an issue which (if issued as a separate issue) would be treated as a qualified 501(c)(3) bond if the issuer elects to treat such portion as a qualified 501(c)(3) bond.

(c) Private loan financing test An issue meets the test of this subsection if the amount of the proceeds of the issue which are to be used (directly or indirectly) to make or finance loans (other than loans described in paragraph (2)) to persons other than governmental units exceeds the lesser of— 5 percent of such proceeds, or $5,000,000. For purposes of paragraph (1), a loan is described in this paragraph if such loan— enables the borrower to finance any governmental tax or assessment of general application for a specific essential governmental function, is a nonpurpose investment (within the meaning of section 148(f)(6)(A)), or is a qualified natural gas supply contract (as defined in section 148(b)(4)).

(d) Certain issues used to acquire nongovernmental output property treated as private activity bonds For purposes of this title, the term “private activity bond” includes any bond issued as part of an issue if the amount of the proceeds of the issue which are to be used (directly or indirectly) for the acquisition by a governmental unit of nongovernmental output property exceeds the lesser of— 5 percent of such proceeds, or $5,000,000. Except as otherwise provided in this subsection, for purposes of paragraph (1), the term “nongovernmental output property” means any property (or interest therein) which before such acquisition was used (or held for use) by a person other than a governmental unit in connection with an output facility (within the meaning of subsection (b)(4)) (other than a facility for the furnishing of water). For purposes of the preceding sentence, use (or the holding for use) before October 14, 1987 , shall not be taken into account. For purposes of paragraph (1)— The term “nongovernmental output property” shall not include any property which is to be used in connection with an output facility 95 percent or more of the output of which will be consumed in— a qualified service area of the governmental unit acquiring the property, or a qualified annexed area of such unit. For purposes of subparagraph (A)— The term “qualified service area” means, with respect to the governmental unit acquiring the property, any area throughout which such unit provided (at all times during the 10-year period ending on the date such property is acquired by such unit) output of the same type as the output to be provided by such property. For purposes of the preceding sentence, the period before October 14, 1987 , shall not be taken into account. The term “qualified annexed area” means, with respect to the governmental unit acquiring the property, any area if— such area is contiguous to, and annexed for general governmental purposes into, a qualified service area of such unit, output from such property is made available to all members of the general public in the annexed area, and the annexed area is not greater than 10 percent of such qualified service area. Subclause (III) of subparagraph (B)(ii) shall not apply to an annexation of an area by a governmental unit if the output capacity of the property acquired in connection with the annexation, when added to the output capacity of all other property which is not treated as nongovernmental output property by reason of subparagraph (A)(ii) with respect to such annexed area, does not exceed 10 percent of the output capacity of the property providing output of the same type to the qualified service area into which it is annexed. For purposes of subparagraphs (B)(ii) and (C)— The size of any qualified service area and the output capacity of property serving such area shall be determined as the close of the calendar year preceding the calendar year in which the acquisition of nongovernmental output property or the annexation occurs. A qualified annexed area shall be treated as part of the qualified service area into which it is annexed for purposes of determining whether any other area annexed in a later year is a qualified annexed area. For purposes of paragraph (1)— The term “nongovernmental output property” shall not include any property which is to be converted to a use not in connection with an output facility. Subparagraph (A) shall not apply to any property which is part of the output function of a nuclear power facility. In the case of a bond which is a private activity bond solely by reason of this subsection— subsections (c) and (d) of section 147 (relating to limitations on acquisition of land and existing property) shall not apply, and paragraph (8) of section 142(a) shall be applied as if it did not contain “local”. With respect to nongovernmental output property acquired by a joint action agency the members of which are governmental units, this subsection shall be applied at the member level by treating each member as acquiring its proportionate share of such property. The term “nongovernmental output property” shall not include any contract for the prepayment of electricity or natural gas which is not investment property under section 148(b)(2).

(e) Qualified bond For purposes of this part, the term “qualified bond” means any private activity bond if— Such bond is— an exempt facility bond, a qualified mortgage bond, a qualified veterans’ mortgage bond, a qualified small issue bond, a qualified student loan bond, a qualified redevelopment bond, or a qualified 501(c)(3) bond. Such bond is issued as part of an issue which meets the applicable requirements of section 146, and 1 Such bond meets the applicable requirements of each subsection of section 147.

“SEC. 1311 GENERAL EFFECTIVE DATES.

(“(a) In General.— Except as otherwise provided in this subtitle, the amendments made by section 1301 [enacting sections 141 to 150 and 7703 of this title, amending sections 2, 22, 25, 32, 86, 103, 105, 152, 153, 163, 194, 269A, 414, 879, 1398, 3402, 4701, 4940, 4942, 4988, 6362, 6652, and 7871 of this title, repealing section 103A of this title , omitting former section 143 of this title , enacting provisions set out as notes under sections 141 and 148 of this title, and amending provisions set out as a note under section 103A of this title ] shall apply to bonds issued after August 15, 1986 .

(“(b) Section 1301(f).— The amendments made by paragraph (1) of section 1301(f) [amending section 25 of this title ] shall apply to nonissued bond amounts elected after August 15, 1986 . The amendments made by paragraph (2) of section 1301(f) [amending section 25 of this title ] shall apply to certificates issued with respect to non-issued bond amounts elected after August 15, 1986 .

(“(c) Changes in Use, Etc., of Facilities Financed With Private Activity Bonds.— Subsection (b) of section 150 of the 1986 Code shall apply to changes in use (and ownership) after August 15, 1986 , but only with respect to financing (including refinancings) provided after such date.

(“(d) Public Approval and Information Reporting.— Sections 147(f) and 149(e) of the 1986 Code shall apply to bonds issued after December 31, 1986 .

(“(e) Rebate Requirement for Qualified Scholarship Funding Bonds.— Section 150(d) of the 1986 Code shall apply to payments made after August 15, 1986 .

(“(f) Section 1303.— The amendments made by section 1303 [amending sections 172, 1016, and 3402 of this title and repealing sections 1391 to 1397 and 6039B of this title] shall take effect on the date of the enactment of this Act [ Oct. 22, 1986 ].

“SEC. 1312 TRANSITIONAL RULES FOR CONSTRUCTION OR BINDING AGREEMENTS AND CERTAIN GOVERNMENT BONDS ISSUED AFTER AUGUST 15, 1986.

(“(a) Exception for Construction or Binding Agreements.— The amendments made by section 1301 [for classification see section 1311(a) of this note] shall not apply to bonds (other than a refunding bond) with respect to a facility— the original use of which commences with the taxpayer, and the construction, reconstruction, or rehabilitation of which began before September 26, 1985 , and was completed on or after such date, the original use of which begins with the taxpayer and with respect to which a binding contract to incur significant expenditures for construction, reconstruction, or rehabilitation was entered into before September 26, 1985 , and some of such expenditures are incurred on or after such date, or acquired on or after September 26, 1985 , pursuant to a binding contract entered into before such date, and described in an inducement resolution or other comparable preliminary approval adopted by an issuing authority (or by a voter referendum) before September 26, 1985 . For purposes of paragraph (1)(A), the term ‘significant expenditures’ means expenditures greater than 10 percent of the reasonably anticipated cost of the construction, reconstruction, or rehabilitation of the facility involved.

(“(b) Certain Amendments To Apply to Bonds Under Subsection (a) Transitional Rule.— In the case of a bond issued after August 15, 1986 , and to which subsection (a) of this section applies, the requirements of the following provisions shall be treated as included in section 103 and section 103A (as appropriate) of the 1954 Code: The requirement that 95 percent or more of the net proceeds of an issue are to be used for a purpose described in section 103(b)(4) or (5) of such Code in order for section 103(b)(4) or (5) of such Code to apply, including the application of section 142(b)(2) of the 1986 Code (relating to limitation on office space). The requirement that 95 percent or more of the net proceeds of an issue are to be used for a purpose described in section 103(b)(6)(A) of the 1954 Code in order for section 103(b)(6)(A) of such Code to apply. The requirements of section 143 of the 1986 Code (relating to qualified mortgage bonds and qualified veterans’ mortgage bonds) in order for section 103A(b)(2) of the 1954 Code to apply. The requirements of section 144(a)(11) of the 1986 Code (relating to limitation on acquisition of depreciable farm property) in order for section 103(b)(6)(A) of the 1954 Code to apply. The requirements of section 147(b) of the 1986 Code (relating to maturity may not exceed 120 percent of economic life). The requirements of section 147(f) of the 1986 Code (relating to public approval required for private activity bonds). The requirements of section 147(g) of the 1986 Code (relating to restriction on issuance costs financed by issue). The requirements of section 148 of the 1986 Code (relating to arbitrage). The requirements of section 149(e) of the 1986 Code (relating to information reporting). The provisions of section 150(b) of the 1986 Code (relating to changes in use). In the case of subparagraphs (F) and (I) of paragraphs (1), paragraph (1) shall be applied by substituting ‘ December 31, 1986 ’ for ‘ August 15, 1986 ’. Except as provided in section 1315, any bond to which this subsection applies shall be treated as a private activity bond for purposes of section 146 of the 1986 Code if such bond would have been taken into account under section 103(n) or 103A(g) of the 1954 Code (determined without regard to any carryforward election) were such bond issued before August 16, 1986 . For purposes of applying the requirements referred to in any subparagraph of paragraph (1) or of subsection (a)(3) or (b)(3) of section 1313 to any bond, such bond shall be treated as described in the subparagraph of section 141(d)(1) of the 1986 Code to which the use of the proceeds of such bond most closely relates.

(“(c) Special Rules for Certain Government Bonds Issued After August 15, 1986.— In the case of any bond described in paragraph (2)— section 1311(a) and (c) and subsection (b) of this section shall be applied by substituting ‘ August 31, 1986 ’ for ‘ August 15, 1986 ’ each place it appears, subsection (b)(1) shall be applied without regard to subparagraphs (F), (G), and (J), and such bond shall not be treated as a private activity bond for purposes of applying the requirements referred to in subparagraphs (H) and (I) of subsection (b)(1). A bond is described in this paragraph if such bond is not— an industrial development bond, as defined in section 103(b)(2) of the 1954 Code but determined— by inserting ‘directly or indirectly’ after ‘is’ in the material preceding clause (i) of subparagraph (B) thereof, and without regard to subparagraph (B) of section 103(b)(3) of such Code, a mortgage subsidy bond (as defined in section 103A(b)(1) of such Code, without regard to any exception from such definition), or a private loan bond (as defined in section 103( o )(2)(A) of such Code, without regard to any exception from such definition other than section 103( o )(2)(C) of such Code).

(“(d) Election Out.— This section shall not apply to any issue with respect to which the issuer elects not to have this section apply.

“SEC. 1313 TRANSITIONAL RULES RELATING TO REFUNDINGS.

(“(a) Certain Current Refundings.— Except as provided in paragraph (3), the amendments made by section 1301 [for classification see section 1311(a) of this note] shall not apply to any bond the proceeds of which are used exclusively to refund (other than to advance refund) a qualified bond (or a bond which is part of a series of refundings of a qualified bond) if— the amount of the refunding bond does not exceed the outstanding amount of the refunded bond, and the average maturity of the issue of which the refunding bond is a part does not exceed 120 percent of the average reasonably expected economic life of the facilities being financed with the net proceeds of such issue (determined under section 147(b) of the 1986 Code), or the refunding bond has a maturity date not later than the date which is 17 years after the date on which the qualified bond was issued. In the case of a qualified bond which was (when issued) a qualified mortgage bond or a qualified veterans’ mortgage bond, subparagraph (B)(i) shall not apply and subparagraph (B)(ii) shall be applied by substituting ‘32 years’ for ‘17 years’. For purposes of paragraph (1), the term ‘qualified bond’ means any bond (other than a refunding bond)— issued before August 16, 1986 , or issued after August 15, 1986 , if section 1312(a) applies to such bond. The following provisions of the 1986 Code shall be treated as included in section 103 and section 103A (as appropriate) of the 1954 Code and shall apply to refunding bonds described in paragraph (1): The requirements of section 147(f) (relating to public approval required for private activity bonds) but only if the maturity date of the refunding bond is later than the maturity date of the refunded bond. The requirements of section 147(g) (relating to restriction on issuance costs financed by issue). The requirements of sections 143(g) and 148 (relating to arbitrage). The requirements of section 149(e) (relating to information reporting). The provisions of section 150(b) (relating to changes in use). Subparagraphs (A) and (D) shall apply only if the refunding bond is issued after December 31, 1986 . In the case of a refunding bond described in paragraph (1) with respect to a qualified bond described in paragraph (2)(B), the requirements of section 1312(b)(1) which applied to such qualified bond shall be treated as specified in this paragraph with respect to such refunding bond. In the case of any bond described in section 1312(c)(2)— paragraph (2) of this subsection shall be applied by substituting ‘ August 31, 1986 ’ for ‘ August 15, 1986 ’ and by substituting ‘ September 1, 1986 ’ for ‘ August 16, 1986 ’, paragraph (3) shall be applied without regard to subparagraphs (A), (B), and (E), and such bond shall not be treated as a private activity bond for purposes of applying the requirements referred to in subparagraphs (C) and (D) of paragraph (3).

(“(b) Certain Advance Refundings.— Except as provided in paragraph (3), the amendments made by section 1301 [for classification see section 1311(a) of this note] shall not apply to any bond the proceeds of which are used exclusively to advance refund a bond if— the refunded bond is described in paragraph (2), and the requirements of subsection (a)(1)(B) are met. A bond is described in this paragraph if such bond is not described in subsection (b)(2) or ( o )(2)(A) of section 103 of the 1954 Code and was issued (or was issued to refund a bond issued) before August 16, 1986 . For purposes of the preceding sentence, the determination of whether a bond is described in such subsection ( o )(2)(A) shall be made without regard to any exception other than section 103( o )(2)(C) of such Code. The following provisions of the 1986 Code shall be treated as included in section 103 and section 103A (as appropriate) of the 1954 Code and shall apply to refunding bonds described in paragraph (1): The requirements of section 147(f) (relating to public approval required for private activity bonds). The requirements of section 147(g) (relating to restriction on issuance costs financed by issue). The requirements of section 148 (relating to arbitrage), except that section 148(d)(3) shall not apply to proceeds of such bonds to be used to discharge the refunded bonds. The requirements of [former] paragraphs (3) and (4) of section 149(d) (relating to advance refundings). The requirements of section 149(e) (relating to information reporting). The provisions of section 150(b) (relating to changes in use). Except as provided in the last sentence of subsection (c)(2) of this section, the requirements of section 145(b) (relating to $150,000,000 limitation on bonds other than hospital bonds). Subparagraphs (A) and (E) shall apply only if the refunding bond is issued after December 31, 1986 . In the case of any bond described in section 1312(c)(2)— paragraph (2) of this subsection shall be applied by substituting ‘ September 1, 1986 ’ for ‘ August 16, 1986 ’, paragraph (3) shall be applied without regard to subparagraphs (A), (B), and (F), and such bond shall not be treated as a private activity bond for purposes of applying the requirements referred to in subparagraphs (C) and (E). Any refunding bond described in paragraph (1) the proceeds of which are used to refund a bond issued as part of an issue 5 percent or more of the net proceeds of which are or will be used to provide an output facility (within the meaning of section 141(b)(4) of the 1986 Code) shall be treated as a private activity bond for purposes of section 146 of the 1986 Code (to the extent of the nongovernmental use of such issue, under rules similar to the rules of section 146(m)(2) of such Code). For purposes of the preceding sentence, use by a 501(c)(3) organization with respect to its activities which do not constitute unrelated trades or businesses (determined by applying section 513(a) of the 1986 Code) shall not be taken into account.

(“(c) Treatment of Certain Refundings of Certain IDB’s and 501(c)(3) Bonds.— Paragraph (10) of section 144(a) of the 1986 Code shall not apply to any bond (or series of bonds) the proceeds of which are used exclusively to refund a tax-exempt bond to which such paragraph and the corresponding provision of prior law did not apply if— the average maturity date of the issue of which the refunding bond is a part is not later than the average maturity date of the bonds to be refunded by such issue, the amount of the refunding bond does not exceed the outstanding amount of the refunded bond, and the net proceeds of the refunding bond are used to redeem the refunded bond not later than 90 days after the date of the issuance of the refunding bond. For purposes of subparagraph (A), average maturity shall be determined in accordance with section 147(b)(2)(A) of the 1986 Code. Subsection (b) of section 145 of the 1986 Code (relating to $150,000,000 limitation for nonhospital bonds) shall not apply to any bond (or series of bonds) the proceeds of which are used exclusively to refund a tax-exempt bond to which such subsection did not apply if— the average maturity of the issue of which the refunding bond is a part does not exceed 120 percent of the average reasonably expected economic life of the facilities being financed with the net proceeds of such issue (determined under section 147(b) of the 1986 Code), or the refunding bond has a maturity date not later than the later of the date which is 17 years after the date on which the qualified bond (as defined in subsection (a)(2)) was issued, and the requirements of subparagraphs (B) and (C) of paragraph (1) are met with respect to the refunding bond. Subsection (b) of section 145 of the 1986 Code shall not apply to the 1st advance refunding after March 14, 1986 , of a bond issued before January 1, 1986 . Any bond to which section 144(a)(10) or 145(b) of the 1986 Code does not apply by reason of this section shall be taken into account in determining whether such section applies to any later issue.

(“(d) Mortgage and Student Loan Targeting Rules To Apply to Loans Made More Than 3 Years After the Date of the Original Issue.— Subsections (a)(3) and (b)(3) shall be treated as including the requirements of subsections (e) and (f) of section 143 and paragraphs (3) and (4) of section 144(b) of the 1986 Code with respect to bonds the proceeds of which are used to finance loans made more than 3 years after the date of the issuance of the original bond.

“SEC. 1314 SPECIAL RULES WHICH OVERRIDE OTHER RULES IN THIS SUBTITLE.

(“(a) Arbitrage Restriction on Investments in Annuities.— In the case of a bond issued after September 25, 1985 , section 103(c) of the 1954 Code shall be applied by treating the reference to securities in paragraph (2) thereof as including a reference to an annuity contract. The preceding sentence shall not apply to the first advance refunding after September 25, 1985 , if a bond issued before September 26, 1985 .

(“(b) Temporary Period for Advance Refundings.— In the case of a bond issued after December 31, 1985 , to advance refund a bond, the initial temporary period under section 103(c) of the 1954 Code with respect to the proceeds of the refunding bond shall end not later than 30 days after the date of issue of the refunding bond.

(“(c) Determination of Yield.— In the case of a bond issued after December 31, 1985 , for purposes of section 103(c) of the 1954 Code, the yield on an issue shall be determined on the basis of the issue price (within the meaning of sections 1273 and 1274 of the 1986 Code).

(“(d) Arbitrage Rebate Requirement.— Except as otherwise provided in this subsection, in the case of a bond issued after December 31, 1985 , section 103 of the 1954 Code shall be treated as including the requirements of section 148(f) of the 1986 Code in order for section 103(a) of the 1954 Code to apply. In the case of a bond described in section 1312(c)(2) (and not described in paragraph (3) of this subsection), paragraph (1) shall be applied by substituting ‘ August 31, 1986 ’ for ‘ December 31, 1985 ’. In the case of a bond described in section 1312(c)(2) and issued as part of an issue described in subparagraph (B), (C), (D), or (E), paragraph (1) shall be applied by substituting ‘3 p.m. E.D.T., July 17, 1986 ’ for ‘ December 31, 1985 ’. Such a bond shall not be treated as a private activity bond for purposes of applying section 148(f) of the 1986 Code. An issue is described in this subparagraph if any portion of the proceeds of the issue is to be used to make or finance loans to any governmental unit other than any governmental unit which is subordinate to the issuer and the jurisdiction of which is within— the jurisdiction of the issuer, or the jurisdiction of the governmental unit on behalf of which such issuer issued the issue. An issue is described in this subparagraph if less than 75 percent of the proceeds of the issue is to be used to make or finance loans to initial borrowers to finance projects identified (with specificity) by the issuer, on or before the date of issuance of the issue, as projects to be financed with the proceeds of the issue. An issue is described in this subparagraph if, on or before the date of issuance of the issue, commitments have not been entered into by initial borrowers to borrow at least 25 percent of the proceeds of the issue. An issue is described in this subparagraph if— the maturity date of any bond issued as part of such issue exceeds 30 years, and any principal payment on any loan made or financed by the proceeds of the issue is to be used to make or finance additional loans. An issue shall not be treated as described in subparagraph (C) or (D) with respect to any issue to make or finance loans to governmental units if— the issuer, before 1986, issued 1 or more similar issues to make or finance loans to governmental units, and the aggregate face amount of such issues issued during 1986 does not exceed 250 percent of the average of the annual aggregate face amounts of such similar issues issued during 1983, 1984, or 1985. For purposes of subparagraph (A), an issue shall not be treated as issued until— the bonds issued as part of such issue are offered to the public (pursuant to final offering materials), and at least 25 percent of such bonds is sold to the public. For purposes of the preceding sentence, the sale of a bond to a securities firm, broker, or other person acting in the capacity of an underwriter or wholesaler shall not be treated as a sale to the public.

(“(e) Information Reporting.— In the case of a bond issued after December 31, 1986 , nothing in section 103(a) of the 1986 Code or any other provision of law shall be construed to provide an exemption from Federal income tax for interest on any bond unless such bond satisfies the requirements of section 149(e) of the 1986 Code. A bond described in section 1312(c)(2) shall not be treated as a private activity bond for purposes of applying such requirements.

(“(f) Abusive Transaction Limitation on Advance Refundings To Apply.— In the case of a bond issued after August 31, 1986 , nothing in section 103(a) of the 1986 Code or any other provision of law shall be construed to provide an exemption from Federal income tax for interest on any bond if the issue of which such bond is a part is described in [former] paragraph (4) of section 149(d) of the 1986 Code (relating to abusive transactions).

(“(g) Termination of Mortgage Bond Policy Statement Requirement.— Paragraph (5) of section 103A(j) of the 1954 Code (relating to policy statement) shall not apply to any bond issued after August 15, 1986 , and shall not apply to nonissued bond amounts elected under section 25 of the 1986 Code after such date.

(“(h) Arbitrage Restriction on Investments in Investment-Type Property.— In the case of a bond issued before August 16, 1986 ( September 1, 1986 in the case of a bond described in section 1312(c)(2)), section 103(c) of the 1954 Code shall be applied by treating the reference to securities in paragraph (2) thereof as including a reference to investment-type property but only for purposes of determining whether any bond issued after October 16, 1987 , to advance refund such bond (or a bond which is part of a series of refundings of such bond) is an arbitrage bond (within the meaning of section 148(a) of the 1986 Code).

(“(i) Section To Override Other Rules.— Except as otherwise expressly provided by reference to a provision to which a subsection of this section applies, nothing in any other section of this subtitle shall be construed as exempting any bond from the application of such provision.

“SEC. 1315 TRANSITIONAL RULES RELATING TO VOLUME CAP.

(“(a) In General.— Except as otherwise provided in this section, section 146(f) of the 1986 Code shall not apply with respect to an issuing authority’s volume cap under section 103(n) of the 1954 Code, and no carryforward under such section 103(n) shall be recognized for bonds issued after August 15, 1986 .

(“(b) Certain Bonds for Carryforward Projects Outside of Volume Cap.— Bonds issued pursuant to an election under section 103(n)(10) of the 1954 Code (relating to elective carryforward of unused limitation for specified project) made before November 1, 1985 , shall not be taken into account under section 146 of the 1986 Code if the carryforward project is a facility to which the amendments made by section 1301 [for classification see section 1311(a) of this note] do not apply by reason of section 1312(a) of this Act.

(“(c) Volume Cap Not To Apply With Respect to Certain Facilities and Purposes.— Section 146 of the 1986 Code shall not apply to any bond issued with respect to any facility or purpose described in a paragraph of subsection (d) if— such bond would not have been taken into account under section 103(n) of the 1954 Code for calendar year 1986 (determined without regard to any carryforward election) were such bond issued on August 15, 1986 , or such bond would not have been taken into account under section 103(n) of the 1954 Code for calendar year 1986 (determined with regard to any carryforward election made before January 1, 1986 ) were such bond issued on August 15, 1986 . The preceding sentence shall not apply to the extent section 1313(b)(5) treats any bond as a private activity bond for purposes of section 146 of the 1986 Code.

(“(d) Facilities and Purposes Described.— A facility is described in this paragraph if the amendments made by section 201 of this Act [amending sections 46, 167, 168, 178, 179, 280F, 291, 312, 465, 467, 514, 751, 1245, 4162, 6111, and 7701 of this title] (relating to depreciation) do not apply to such facility by reason of section 204(a)(8) of this Act [set out as a note under section 168 of this title ] (or, in the case of a facility which is governmentally owned, would not apply to such facility were it owned by a nongovernmental person). A facility or purpose is described in this paragraph if the facility or purpose is described in a paragraph of section 1317. A facility is described in this paragraph if the facility— serves Los Osos, California, and would be described in paragraph (1) were it a solid waste disposal facility. The aggregate face amount of bonds to which this paragraph applies shall not exceed $35, 000, 000. A f a c i l i t y i s d escr ib e d in t hi s p a r a g r a p hi f i t i s a se w a g e d i s p os a l f a c i l i t y w i t h res p ec tt o w hi c h — o n S e pt e mb er 13, 1985, t h e St a t e p u b l i c f a c i l i t i es a u t h or i t y t oo k o ff i c ia l a c t i o na u t h or i z in g t h e i ss u an ceo f b o n d s f ors u c h f a c i l i t y, an d o n Dece mb er 30, 1985, t h ere w a s an e x ec u t i v eor d ero f t h e St a t e G o v er n or g r an t in g a ll oc a t i o n o f t h e St a t ece i l in gu n d ersec t i o n 103 (n) o f t h e 1954 C o d e in t h e am o u n t o f$ 250,000,000 to the Industrial Development Board of the Parish of East Baton Rouge, Louisiana. The aggregate face amount of bonds to which this paragraph applies shall not exceed $98, 500, 000. A f a c i l i t y i s d escr ib e d in t hi s p a r a g r a p hi f — s u c h f a c i l i t y i s a so l i d w a s t e d i s p os a l f a c i l i t y in C ha r l es t o n, S o u t h C a ro l ina, an d a St a t e p o l i t i c a l s u b d i v i s i o n t oo k f or ma l a c t i o n o n A p r i l 1, 1980, t oco mmi t d e v e l o p m e n t f u n d s f ors u c h f a c i l i t y . F or p u r p oseso fd e t er minin g w h e t h er ab o n d i ss u e d a s p a r t o f ani ss u e f or a f a c i l i t y d escr ib e d in t h e p rece d in g se n t e n ce i s an e x e m pt f a c i l i t y b o n df or p u r p oseso f p a r t I V o f s u b c ha pt er B o f c ha pt er 1 o f t h e 1986 C o d e, ‘90 p erce n t ’ s ha ll b es u b s t i t u t e df or ‘95 p erce n t ’ in sec t i o n 142 (a) o f t h e 1986 C o d e .“ T h e a gg re g a t e f a ce am o u n t o f b o n d s t o w hi c h t hi s p a r a g r a p ha ppl i ess ha ll n o t e x cee d$ 75,000,000. A facility is described in this paragraph if— such facility is a wastewater treatment facility for which site preparation commenced before September 1985, and a parish council approved a service agreement with respect to such facility on December 4, 1985 . The aggregate face amount of bonds to which this paragraph applies shall not exceed $120,000,000.

(“(e) Treatment of Redevelopment Bonds.— Any bond to which section 1317(6) of this Act applies shall be treated for purposes of this section as described in subsection (c)(1). The preceding sentence shall not apply to any bond which (if issued on August 15, 1986 ) would have been an industrial development bond (as defined in section 103(b)(2) of the 1954 Code).

“SEC. 1316 PROVISIONS RELATING TO CERTAIN ESTABLISHED STATE PROGRAMS.

(“(a) Certain Loans to Veterans for the Purchase of Land.— A bond described in paragraph (2) shall be treated as described in section 141(d)(1) of the 1986 Code and as having a carryforward purpose described in section 146(f)(5) of such Code, but subsections (a), (b), (c), and (d) of section 147 of such Code shall not apply to such bond. A bond is described in this paragraph if— such bond is a private activity bond solely by reason of section 141(c) of such Code, and such bond is issued as part of an issue 95 percent or more of the net proceeds of which are to be used to carry out a program established under State law to provide loans to veterans for the purchase of land and which has been in effect in substantially the same form during the 30-year period ending on July 18, 1984 , but only if such proceeds are used to make loans or to fund similar obligations— in the same manner in which, in the same (or lesser) amount or multiple of acres per participant, and for the same purposes for which, such program was operated on March 15, 1984 .

(“(b) Renewable Energy Property.— A bond described in paragraph (2) shall be treated as described in section 141(d)(1) of the 1986 Code and as having a carryforward purpose described in section 146(f)(5) of such Code. A bond is described in this paragraph if paragraph (1) of section 103(b) of the 1954 Code would not (without regard to the amendments made by this title) have applied to such bond by reason of section 243 of the Crude Oil Windfall Profit Tax Act of 1980 [ section 243 of Pub. L. 96–223 , set out as a note under section 103 of this title ] if— such section 243 were applied by substituting ‘95 percent or more of the net proceeds’ for ‘substantially all of the proceeds’ in subsection (a)(1) thereof, and subparagraph (E) of subsection (a)(1) thereof referred to section 149(b) of the 1986 Code.

(“(c) Certain State Programs.— A bond described in paragraph (2) shall be treated as described in section 141(d)(1) of the 1986 Code and as having a carryforward purpose described in section 146(f)(5) of such Code. A bond is described in this paragraph if such bond is issued as part of an issue 95 percent or more of the net proceeds of which are to be used to carry out a program established under sections 280A, 280B, and 280C of the Iowa Code, but only if— such program has been in effect in substantially the same form since July 1, 1983 , and such proceeds are to be used to make loans or fund similar obligations for the same purposes as permitted under such program on July 1, 1986 . The aggregate face amount of outstanding bonds to which this subsection applies shall not exceed $100,000,000. A bond to which this subsection applies (other than a refunding bond) shall be treated as meeting the requirements of section 147(b) of the 1986 Code if the average maturity (determined in accordance with section 147(b)(2)(A) of such Code) of the issue of which such bond is a part does not exceed 20 years. A bond issued to refund (or which is part of a series of bonds issued to refund) a bond described in the preceding sentence shall be treated as meeting the requirements of such section if the refunding bond has a maturity date not later than the date which is 20 years after the date on which the original bond was issued.

(“(d) Use by Certain Federal Instrumentalities Treated as Use by Governmental Units.— Use by an instrumentality of the United States shall be treated as use by a State or local governmental unit for purposes of section 103, and part IV of subchapter B of chapter 1, of the 1986 Code with respect to a program approved by Congress before August 3, 1972 , but only if— a portion of such program has been financed by bonds issued before such date, to which section 103(a) of the 1954 Code applied pursuant to a ruling issued by the Commissioner of the Internal Revenue Service, and construction of 1 or more facilities comprising a part of such program commenced before such date.

(“(e) Refunding Permitted of Certain Bonds Invested in Federally Insured Deposits.— Section 149(b)(2)(B)(ii) of the 1986 Code (and section 103(h)(2)(B)(ii) of the 1954 Code) shall not apply to any bond issued to refund a bond— which, when issued, would have been treated as federally guaranteed by reason of being described in clause (ii) of section 103(h)(2)(B) of the 1954 Code if such section had applied to such bond, and which was issued before April 15, 1983 , or to which such clause did not apply by reason of the except clause in section 631(c)(2) of the Tax Reform Act of 1984 [ section 631(c)(2) of Pub. L. 98–369 , set out as a note under section 103 of this title ]. Section 147(c) of the 1986 Code (and section 103(b)(16) of the 1954 Code) shall not apply to any refunding bond permitted under the preceding sentence if section 103(b)(16) of the 1954 Code did not apply to the refunded bond when issued. A refunding bond meets the requirements of this paragraph if— the refunding bond has a maturity date not later than the maturity date of the refunded bond, the amount of the refunding bond does not exceed the outstanding amount of the refunded bond, the weighted average interest rate on the refunding bond is lower than the weighted average interest rate on the refunded bond, and the net proceeds of the refunding bond are used to redeem the refunded bond not later than 90 days after the date of the issuance of the refunding bond.

(“(f) Certain Hydroelectric Generating Property.— A bond described in paragraph (2) shall be treated as described in section 141(d)(1) of the 1986 Code and as having a carryforward purpose described in section 146(f)(5) of such Code. A bond is described in this paragraph if such bond is issued as part of an issue 95 percent or more of the net proceeds of which are to be used to provide a facility described in section 103(b)(4)(H) of the 1954 Code determined— by substituting ‘an application for a license’ for ‘an application’ in section 103(b)(8)(E)(ii) of the 1954 Code, and by applying the requirements of section 142(b)(2) of the 1986 Code.

(“(g) Treatment of Bonds Subject to Transitional Rules Under Tax Reform Act of 1984.— Subsections (d)(3) and (f) of section 148 of the 1986 Code shall not apply to any bond described in section 624(c)(2) of the Tax Reform Act of 1984 [ section 624(c)(2) of Pub. L. 98–369 , set out as a note under section 103 of this title ]. There shall not be taken into account under section 146 of the 1986 Code any bond issued to provide a facility described in paragraph (3) of section 631(a) of the Tax Reform Act of 1984 [ section 631(a)(3) of Pub. L. 98–369 , set out as a note under section 103 of this title ] relating to exception for certain bonds for a convention center and resource recovery project. If a bond issued as part of an issue substantially all of the proceeds of which are used to provide the convention center to which such paragraph (3) applies, such bond shall be treated as an exempt facility bond as defined in section 142(a) of the 1986 Code. If a bond which is issued as part of an issue substantially all of the proceeds of which are used to provide the resource recovery project to which such paragraph (3) applies, such bond shall be treated as an exempt facility bond as defined in section 142(a) of the 1986 Code and section 149(b) of such Code shall not apply. The amendments made by section 1301 [for classification see section 1311(a) of this note] shall not apply to bonds issued to finance any property described in section 631(d)(4) of the Tax Reform Act of 1984 [ section 631(d)(4) of Pub. L. 98–369 , set out as a note under section 103 of this title ]. The amendments made by section 1301 [for classification see section 1311(a) of this note] shall not apply to— any bond issued to finance property described in section 631(d)(5) of the Tax Reform Act of 1984 [ section 631(d)(5) of Pub. L. 98–369 , set out as a note under section 103 of this title ], any bond described in paragraph (2), (3), (4), (5), (6), or (7) of section 632(a), or section 632(b), of such Act [ Pub. L. 98–369, div. A, title VI, § 632 , July 18, 1984 , 98 Stat. 937 ], and any bond to which section 632(g)(2) of such Act applies. In the case of bonds to which this paragraph applies, the requirements of sections 148 and 149(d) shall be treated as included in section 103 of the 1954 Code and shall apply to such bonds. The preceding provisions of this subsection shall not apply to any bond issued after December 31, 1988 . The amendments made by section 1301 [for classification see section 1311(a) of this note] (and the provisions of section 1314) shall not apply to any bond issued to finance property described in section 216(b)(3) of the Tax Equity and Fiscal Responsibility Act of 1982 [ section 216(b)(3) of Pub. L. 97–248 , set out as a note under section 168 of this title ]. In the case of a bond described in section 632(d) of the Tax Reform Act of 1984 [ Pub. L. 98–369, div. A, title VI, § 632(d) , July 18, 1984 , 98 Stat. 938 ]— section 141 of the 1986 Code shall be applied without regard to subsection (a)(2) and paragraphs (4) and (5) of subsection (b), paragraphs (1) and (2) of section 141(b) of the 1986 Code shall be applied by substituting ‘25 percent’ for ‘10 percent’ each place it appears, and section 149(b) of the 1986 Code shall not apply. This paragraph shall not apply to any bond issued after December 31, 1990 . The amendments made by section 1301 [for classification see section 1311(a) of this note] shall not apply to any bond to which section 629(a)(1) of the Tax Reform Act of 1984 [ section 629(a)(1) of Pub. L. 98–369 , set out as a note under section 103 of this title ] applies, but such bond shall be treated as a private activity bond for purposes of section 146 of the 1986 Code and as having a carryforward purpose described in section 146(f)(5) of such Code. Section 629 of the Tax Reform Act of 1984 [ section 629 of Pub. L. 98–369 , set out as a note under section 103 of this title ] is amended— in subsection (c)(2), by striking out ‘ $625, 000, 000’ an d in ser t in g in l i e u t h ereo f ‘$ 911,000,000’, in subsection (c)(3), by adding at the end thereof the following new subparagraphs: “ ‘(D) Improvements to existing generating facilities. “ ‘(E) Transmission lines. “ ‘(F) Electric generating facilities.’, and in subsection (a), by adding at the end thereof the following new sentence: ‘The preceding sentence shall be applied by inserting “and a rural electric cooperative utility” after “regulated public utility” but only if not more than 1 percent of the load of the public power authority is sold to such rural electric cooperative utility.’

(“(h) Certain Pollution Bonds.— Any bond which is treated as described in section 103(b)(4)(F) of the 1954 Code by reason of section 13209 of the Consolidated Omnibus Budget Reconciliation Act of 1985 [ Pub. L. 99–272, title XIII, § 13209 , Apr. 7, 1986 , 100 Stat. 322 ] shall be treated as an exempt facility bond for purposes of part IV of subchapter B of chapter 1 of the 1986 Code, and section 147(d) of the 1986 Code shall not apply to such bond.

(“(i) Transition Rule for Aggregate Limit per Taxpayer.— For purposes of section 144(a)(10) of the 1986 Code, tax increment bonds described in section 1869(c)(3) of this Act [set out as a note under section 103 of this title ] which are issued before August 16, 1986 , shall not be taken into account under subparagraph (B)(ii) thereof.

(“(j) Extension of Advance Refunding Exception for Qualified Public Facility.— Paragraph (4) of section 631(c) of the Tax Reform Act of 1984 [ section 631(c)(4) of Pub. L. 98–369 , set out as a note under section 103 of this title ] is amended— by striking out ‘or the Dade County, Florida, airport’ in the last sentence, and by adding at the end thereof the following new sentence: ‘In the case of refunding obligations not to exceed $100,000,000 issued after October 21, 1986 , by Dade County, Florida, for the purpose of advance refunding its Aviation Revenue Bonds (Series J), the first sentence of this paragraph shall be applied by substituting “the date which is 1 year after the date of the enactment of the Technical and Miscellaneous Revenue Act of 1988” [ Nov. 10, 1988 ] for “ December 31, 1984 ” and the amendments made by section 1301 of the Tax Reform Act of 1986 shall not apply.’

(“(k) Expansion of Exception for River Place Project.— Section 1104 of the Mortgage Subsidy Bond Tax Act of 1980 [ section 1104 of Pub. L. 96–499 , formerly set out as a note under section 103A of this title ], as added by the Tax Reform Act of 1984, is amended— by striking out ‘ December 31, 1984 ,’ in subsection (p) and inserting in lieu thereof ‘ December 31, 1984 (other than obligations described in subsection (r)(1)),’, and by striking out ‘ $55, 000, 000, ’ in s u b sec t i o n (r) (1) (B) an d in ser t in g in l i e u t h ereo f ‘$ 110,000,000 of which no more than $55,000,000 shall be outstanding later than November 1, 1987 ’.

“SEC. 1317 TRANSITIONAL RULES FOR SPECIFIC FACILITIES.

A bond issued as part of an issue 95 percent or more of the net proceeds of which are to be used to provide any dock or wharf (within the meaning of section 103(b)(4)(D) of the 1954 Code) shall be treated as an exempt facility bond (for a facility described in section 142(a)(2) of the 1986 Code) for purposes of part IV of subchapter B of chapter 1 of the 1986 Code if such dock or wharf is described in any of the following subparagraphs: A dock or wharf is described in this subparagraph if— the issue to finance such dock or wharf was approved by official city action on September 3, 1985 , and by voters on November 5, 1985 , and such dock or wharf is for a slack water harbor with respect to which a Corps of Engineers grant of approximately $2, 000, 000 ha s b ee nma d e u n d ersec t i o n 107 o f t h e R i v ers an d H a r b ors A c t [33 U . S . C .577] . T h e a gg re g a t e f a ce am o u n t o f b o n d s t o w hi c h t hi ss u b p a r a g r a p ha ppl i ess ha ll n o t e x cee d$ 2,500,000. A dock or wharf is described in this subparagraph if— inducement resolutions were adopted on May 23, 1985 , September 18, 1985 , and September 24, 1985 , for the issuance of the bonds to finance such dock or wharf, a harbor dredging contract with respect thereto was entered into on August 2, 1985 , and a construction management and joint venture agreement with respect thereto was entered into on October 1, 1984 . The aggregate face amount of bonds to which this subparagraph applies shall not exceed $625, 000, 000. A f a c i l i t y i s d escr ib e d in t hi ss u b p a r a g r a p hi f — t h e l e g i s l a t u re f i rs t a u t h or i ze d o n J u n e 29, 1981, t h e St a t e a g e n cy i ss u in g t h e b o n d t o i ss u e a tl e a s t$ 30,000,000 of bonds, the developer of the facility was selected on April 26, 1985 , and an inducement resolution for the issuance of such issue was adopted on October 9, 1985 . The aggregate face amount of bonds to which this subparagraph applies shall not exceed $200, 000, 000. A f a c i l i t y i s d escr ib e d in t hi ss u b p a r a g r a p hi f — anin d u ce m e n t reso l u t i o n w a s a d o pt e d o n O c t o b er 17, 1985, f ors u c hi ss u e, an d t h ec i t yco u n c i l f or t h ec i t y in w hi c h t h e f a c i l i t y i s t o b e l oc a t e d a pp ro v e d o n J u l y 30, 1985, ana ppl i c a t i o n f or an u r ban d e v e l o p m e n t a c t i o n g r an tw i t h res p ec tt os u c h f a c i l i t y . T h e a gg re g a t e f a ce am o u n t o f b o n d s t o w hi c h t hi ss u b p a r a g r a p ha ppl i ess ha ll n o t e x cee d$ 36,500,000. A facility shall be treated as described in this subparagraph if it would be so described if ‘90 percent’ were substituted for ‘95 percent’ in the material preceding subparagraph (A) of this paragraph. A bond issued as part of an issue 95 percent or more of the net proceeds of which are to be used to provide air or water pollution control facilities (within the meaning of section 103(b)(4)(F) of the 1954 Code) shall be treated as an exempt facility bond for purposes of part IV of subchapter B of chapter 1 of the 1986 Code if such facility is described in any of the following subparagraphs: A facility is described in this subparagraph if— inducement resolutions with respect to such facility were adopted on September 23, 1974 , and on April 5, 1985 , a bond resolution for such facility was adopted on September 6, 1985 , and the issuance of the bonds to finance such facility was delayed by action of the Securities and Exchange Commission (file number 70–7127). The aggregate face amount of bonds to which this subparagraph applies shall not exceed $120, 000, 000. A f a c i l i t y i s d escr ib e d in t hi ss u b p a r a g r a p hi f — t h ere w a s anin d u ce m e n t reso l u t i o n f ors u c h f a c i l i t yo n N o v e mb er 19, 1985, an dd es i g nan d e n g in eer in g s t u d i es f ors u c h f a c i l i t y w ereco m pl e t e d in M a rc h o f 1985. T h e a gg re g a t e f a ce am o u n t o f b o n d s t o w hi c h t hi ss u b p a r a g r a p ha ppl i ess ha ll n o t e x cee d$ 25,000,000. A facility is described in this subparagraph if— a resolution was adopted by the county board of supervisors pertaining to an issuance of bonds with respect to such facility on April 10, 1974 , and such facility was placed in service on June 12, 1985 . The aggregate face amount of bonds to which this subparagraph applies shall not exceed $90, 000, 000. F or p u r p oseso f t hi ss u b p a r a g r a p h, a p o ll u t i o n co n t ro l f a c i l i t y in c l u d es a se w a g eorso l i d w a s t e d i s p os a l f a c i l i t y (w i t hin t h e m e anin g o f sec t i o n 103 (b) (4) (E) o f t h e 1954 C o d e) . A f a c i l i t y i s d escr ib e d in t hi ss u b p a r a g r a p hi f — t h e i ss u an ceo f t h e b o n d s f ors u c h f a c i l i t y w a s a pp ro v e d b y a St a t e a g e n cyo n A ugu s t 22, 1979, an d t h e a u t h or i t y t o i ss u es u c hb o n d s w a ssc h e d u l e d t oe x p i re (u n d er t er m so f t h e St a t e a pp ro v a l) o n A ugu s t 22, 1989. T h e a gg re g a t e f a ce am o u n t o f b o n d s t o w hi c h t hi ss u b p a r a g r a p ha ppl i ess ha ll n o t e x cee d$ 198,000,000. A facility is described in this subparagraph if— such facility is 1 of 4 such facilities in 4 States with respect to which the Ball Corporation transmitted a letter of intent to purchase such facilities on February 26, 1986 , and inducement resolutions were issued on December 30, 1985 , January 15, 1986 , January 22, 1986 , and March 17, 1986 with respect to bond issuance in the 4 respective States. The aggregate face amount of bonds to which this subparagraph applies shall not exceed $6, 000, 000. A f a c i l i t y i s d escr ib e d in t hi ss u b p a r a g r a p hi f — in d u ce m e n t reso l u t i o n s f or b o n d s w i t h res p ec tt os u c h f a c i l i t y w ere a d o pt e d o n S e pt e mb er 27, 1977, M a y 27, 1980, an d O c t o b er 8, 1981, an d s u c h f a c i l i t y i s l oc a t e d a t a g eo t h er ma lp o w erco m pl e x o w n e d an d o p er a t e d b y a s in g l e in v es t or - o w n e d u t i l i t y . F or p u r p oseso f t hi ss u b p a r a g r a p han d sec t i o n 103 o f t h e 1986 C o d e, a ll h y d ro g e n s u l f i d e ai r an d w a t er p o ll u t i o n co n t ro l e q u i p m e n t, t o g e t h er w i t h f u n c t i o na ll yre l a t e d an d s u b or d ina t ee q u i p m e n t an d s t r u c t u res, l oc a t e d or t o b e l oc a t e d a t s u c h p o w erco m pl e x s ha ll b e t re a t e d a s a s in g l e p o ll u t i o n co n t ro l f a c i l i t y . T h e a gg re g a t e f a ce am o u n t o f b o n d s t o w hi c h t hi ss u b p a r a g r a p ha ppl i ess ha ll n o t e x cee d$ 600,000,000. A facility is described in this subparagraph if— such facility is an air pollution control facility approved by a State bureau of pollution control on July 10, 1986 , and by a State board of economic development on July 17, 1986 , and on August 15, 1986 , the State bond attorney gave notice to the clerk to initiate validation proceedings with respect to such issue and on August 28, 1986 , the validation decree was entered. The aggregate face amount of bonds to which this subparagraph applies shall not exceed $900, 000. A f a c i l i t y i s d escr ib e d in t hi ss u b p a r a g r a p hi f — a p r i v a t eco m p an y m e tw i t ha St a t e ai rco n t ro l b o a r d o n N o v e mb er 14, 1985, t o p ro p oseco n s t r u c t i o n o f a s u l f t e n u ni t, an d t h es u l f t e n u ni t i s b e in g co n s t r u c t e d u n d er a l e tt ero f in t e n tt oco n s t r u c tw hi c h w a ss i g n e d o n A p r i l 8, 1986. T h e a gg re g a t e f a ce am o u n t o f b o n d s t o w hi c h t hi ss u b p a r a g r a p ha ppl i ess ha ll n o t e x cee d$ 11,000,000. A facility is described in this subparagraph if it is part of a 250 megawatt coal-fired electric plant in northeastern Nevada on which the Sierra Pacific Power Company, a subsidiary of Sierra Pacific Resources, began in 1980 work to design, finance, construct, and operate. The aggregate face amount of bonds to which this subparagraph applies shall not exceed $200, 000, 000. A f a c i l i t y i s d escr ib e d in t hi ss u b p a r a g r a p hi f — t h ere w a s anin d u ce m e n t reso l u t i o na d o pt e d b y a St a t e in d u s t r ia l d e v e l o p m e n t a u t h or i t yo n J an u a ry 14, 1976, an d s u c h f a c i l i t y i s nam e d ina reso l u t i o n o f s u c ha u t h or i t yre l a t in g t oc a rry f or w a r d o f t h e St a t e ’ s u n u se d 1985 p r i v a t e a c t i v i t y b o n d l imi tp a sse d b ys u c hin d u s t r ia l d e v e l o p m e n t a u t h or i t yo n Dece mb er 18, 1985. T hi ss u b p a r a g r a p h s ha ll a ppl yo n l y t oo b l i g a t i o n s i ss u e d a tt h ere q u es t o f t h e p a r t y p u rs u an tt o w h osere q u es tt h e J an u a ry 14, 1976, in d u ce m e n tw a s g i v e n . T h e a gg re g a t e f a ce am o u n t o f b o n d s t o w hi c h t hi ss u b p a r a g r a p ha ppl i ess ha ll n o t e x cee d$ 75,000,000. A facility is described in this subparagraph if a city council passed an ordinance (ordinance number 4626) agreeing to issue bonds for such project, December 16, 1985 . The aggregate face amount of obligations to which this subparagraph applies shall not exceed $45, 000, 000. A b o n d i ss u e d a s p a r t o f ani ss u e 95 p erce n t or m oreo f t h e n e tp rocee d so f w hi c ha re t o b e u se d t o p ro v i d es p or t s f a c i l i t i es (w i t hin t h e m e anin g o f sec t i o n 103 (b) (4) (B) o f t h e 1954 C o d e) s ha ll b e t re a t e d a s an e x e m pt f a c i l i t y b o n df or p u r p oseso f p a r t I V o f s u b c ha pt er B o f c ha pt er 1 o f t h e 1986 C o d e i f s u c h f a c i l i t i es a re d escr ib e d inan yo f t h e f o ll o w in g s u b p a r a g r a p h s : A f a c i l i t y i s d escr ib e d in t hi ss u b p a r a g r a p hi f i t i s a s t a d i u m — w hi c h w a s t h es u bj ec t o f a c i t yor d inan ce p a sse d o n S e pt e mb er 23, 1985, f or w hi c ha l o an o f a pp ro x ima t e l y$ 4,000,000 for land acquisition was approved on October 28, 1985 , by the State Controlling Board, and a stadium operating corporation with respect to which was incorporated on March 20, 1985 . The aggregate face amount of bonds to which this subparagraph applies shall not exceed $200, 000, 000. A f a c i l i t y i s d escr ib e d in t hi ss u b p a r a g r a p hi f — i t i s a s t a d i u m w i t h res p ec tt o w hi c ha l e a se a g ree m e n t f or t h e g ro u n d o n w hi c h t h es t a d i u mi s t o b e b u i ltw a se n t ere d in t o b e tw ee na co u n t y an d t h es t a d i u m cor p or a t i o n f ors u c h s t a d i u m o n J u l y 3, 1984, t h ere w a s a reso l u t i o na pp ro v e d o n N o v e mb er 14, 1984, b y anin d u s t r ia l d e v e l o p m e n t a u t h or i t yse tt in g f or t h t h e t er m s u n d er w hi c h t h e b o n d s t o b e i ss u e d t o f inan ces u c h s t a d i u m w o u l d b e i ss u e d, an d t h ere w a s ana g ree m e n t f orco n s u lt an t an d e n g in eer in g ser v i ces f ors u c h s t a d i u m e n t ere d in t oo n S e pt e mb er 28, 1984. T h e a gg re g a t e f a ce am o u n t o f b o n d s t o w hi c h t hi ss u b p a r a g r a p ha ppl i ess ha ll n o t e x cee d$ 90,000,000. A facility is described in this subparagraph if— it is one or more stadiums to be used either by an American League baseball team or a National Football League team currently using a stadium in a city having a population in excess of 2,500,000 and described in section 146(d)(3) of the 1986 Code, the bonds to be used to provide financing for one or more such stadiums are issued by a political subdivision or a State agency pursuant to a resolution approving an inducement resolution adopted by a State agency on November 20, 1985 , as it may be amended (whether or not the beneficiaries of such issue or issues are the beneficiaries (if any) specified in such inducement resolution and whether or not the number of such stadiums and the locations thereof are as specified in such inducement resolution) or pursuant to P.A. 84–1470 of the State in which such city is located (and by an agency created thereby), and such stadium or stadiums are located in the city described in (i). The aggregate face amount of bonds to which this subparagraph applies shall not exceed $250, 000, 000. I n t h ec a seo f an yc a rry f or w a r d o f v o l u m ec a p f oro n eor m ores t a d i u m s d escr ib e d in t h e f i rs t se n t e n ceo f t hi ss u b p a r a g r a p h, s u c h c a rry f or w a r d s ha ll b e v a l i d w i t h res p ec tt o b o n d s i ss u e df ors u c h s t a d i u m s n o tw i t h s t an d in g an yo t h er p ro v i s i o n o f t h e 1986 C o d eor t h e 1954 C o d e, an d w h e t h eror n o t (i) t h ere i s a c han g e in t h e n u mb ero f s t a d i u m sor t h e b e n e f i c ia r i esors i t eso f t h es t a d i u m ors t a d i u m s an d (ii) t h e b o n d s a re i ss u e d b ye i t h ero f t h es t a t e a g e n c i es d escr ib e d in t h e f i rs t se n t e n ceo f t hi ss u b p a r a g r a p h . A f a c i l i t y i s d escr ib e d in t hi ss u b p a r a g r a p hi f — s u c h f a c i l i t y i s a s t a d i u m ors p or t s a re na f or M e m p hi s, T e nn essee, t h ere w a s anin d u ce m e n t reso l u t i o na d o pt e d o n N o v e mb er 12, 1985, f or t h e i ss u an ceo f b o n d s t oe x p an d orre n o v a t e an e x i s t in g s t a d i u man d s p or t s a re naan d / or t oco n s t r u c t an e w a re na, an d t h ec i t yco u n c i l f ors u c h c i t y a d o pt e d a reso l u t i o n o n A p r i l 19, 1983, t o in c l u d e f u n d s in t h ec a p i t a l b u d g e t o f t h ec i t y f ors u c h f a c i l i t yor f a c i l i t i es . T h e a gg re g a t e f a ce am o u n t o f b o n d s t o w hi c h t hi ss u b p a r a g r a p ha ppl i ess ha ll n o t e x cee d$ 35,000,000. A facility is described in this subparagraph if such facility is a baseball stadium located in Bergen, Essex, Union, Middlesex, or Hudson County, New Jersey with respect to which governmental action occurred on November 7, 1985 . The aggregate face amount of bonds to which this subparagraph applies shall not exceed $150, 000, 000. A f a c i l i t y i s d escr ib e d in t hi ss u b p a r a g r a p hi f — i t i s a f a c i l i t y w i t h res p ec tt o w hi c h — anin d u ce m e n t reso l u t i o n d a t e d Dece mb er 24, 1985, w a s a d o pt e d b y t h eco u n t y in d u s t r ia l d e v e l o p m e n t a u t h or i t y, a p u b l i c h e a r in g o f t h eco u n t y in d u s t r ia l d e v e l o p m e n t a u t h or i t y w a s h e l d o n F e b r u a ry 6, 1986, re g a r d in g s u c h f a c i l i t y, an d a co n t r a c tw a se n t ere d in t o b y t h eco u n t y, d a t e d F e b r u a ry 19, 1986, f ore n g in eer in g ser v i ces f or ahi g h w a y im p ro v e m e n t in co nn ec t i o n w i t h s u c h p ro j ec t, or i t i s a d o m e df oo t ba ll s t a d i u ma d ja ce n tt o C er v an t es C o n v e n t i o n C e n t er in St . L o u i s, M i sso u r i, w i t h res p ec tt o w hi c ha p ro p os a lt oe v a l u a t e ma r k e t d e man d, f inan c ia l o p er a t i o n s, an d eco n o mi c im p a c tw a s d a t e d M a y 9, 1986. T h e a gg re g a t e f a ce am o u n t o f b o n d s t o w hi c h t hi ss u b p a r a g r a p ha ppl i ess ha ll n o t e x cee d$ 175,000,000. A project to provide a roof or dome for an existing sports facility is described in this subparagraph if— in December 1984 the county sports complex authority filed a carryforward election under section 103(n) of the 1954 Code with respect to such project, in January 1985, the State authorized issuance of $30, 000, 000 inb o n d s in t h e n e x t 3 ye a rs f ors u c h p ro j ec t, an d an 11 - m e mb er t a s k f orce w a s a pp o in t e d b y t h eco u n t ye x ec u t i v e in J u n e 1985, t o f u r t h ers t u d y t h e f e a s ibi l i t yo f t h e p ro j ec t . T h e a gg re g a t e f a ce am o u n t o f b o n d s t o w hi c h t hi ss u b p a r a g r a p ha ppl i ess ha ll n o t e x cee d$ 30,000,000. A sports facility renovation or expansion project is described in this subparagraph if— an amendment to the sports team’s lease agreement for such facility was entered into on May 23, 1985 , and the lease agreement had previously been amended in January 1976, on July 6, 1984 , on April 1, 1985 , and on May 7, 1985 . The aggregate face amount of bonds to which this subparagraph applies shall not exceed $20, 000, 000. A f a c i l i t y i s d escr ib e d in t hi ss u b p a r a g r a p hi f — ana pp r ai s a l f ors u c h f a c i l i t y w a sco m pl e t e d o n M a rc h 6, 1985, anin d u ce m e n t reso l u t i o n w a s a d o pt e d w i t h res p ec tt os u c h f a c i l i t yo n J u n e 7, 1985, an d a St a t e b o n d co mmi ss i o n g r an t e d p re l imina ry a pp ro v a l f ors u c h p ro j ec t o n S e pt e mb er 3, 1985. T h e a gg re g a t e f a ce am o u n t o f b o n d s t o w hi c h t hi ss u b p a r a g r a p ha ppl i ess ha ll n o t e x cee d$ 3,200,000. A sports facility renovation or expansion project is described in this subparagraph if— such facility is a domed stadium which commenced operations in 1965, such facility has been the subject of an ongoing construction, expansion, or renovation program of planned improvements, part 1 of such improvements began in 1982 with a preliminary renovation program financed by tax-exempt bonds, part 2 of such program was previously scheduled for a bond election on February 25, 1986 , pursuant to a Commissioners Court Order of November 5, 1985 , and the bond election for improvements to such facility was subsequently postponed on December 10, 1985 , in order to provide for more comprehensive construction planning. The aggregate face amount of bonds to which this subparagraph applies shall not exceed $60, 000, 000. A f a c i l i t y i s d escr ib e d in t hi ss u b p a r a g r a p hi f — t h e 1985 St a t e l e g i s l a t u re a pp ro p r ia t e d ama x im u m s u m o f$ 22,500,000 to the State urban development corporation to be made available for such project, and a development and operation agreement was entered into among such corporation, the city, the State budget director, and the county industrial development agency, as of March 1, 1986 . The aggregate face amount of bonds to which this subparagraph applies shall not exceed $28, 000, 000. A f a c i l i t y i s d escr ib e d in t hi ss u b p a r a g r a p hi f — i t i s t oco n s i s t o f 1 or 2 s t a d i u m s a pp ro p r ia t e f or f oo t ba ll g am es an d ba se ba ll g am es w i t h re l a t e d s t r u c t u res an df a c i l i t i es, g o v er nm e n t a l a c t i o n w a s t ak e n o n A ugu s t 7, 1985, b y t h eco u n t yco mmi ss i o n, an d o n Dece mb er 19, 1985, b y t h ec i t yco u n c i l, co n cer nin g s u c h f a c i l i t y, an d s u c h f a c i l i t y i s l oc a t e d ina c i t y ha v in g a N a t i o na l L e a gu e ba se ba llt e am . T h e a gg re g a t e f a ce am o u n t o f b o n d s t o w hi c h t hi ss u b p a r a g r a p ha ppl i ess ha ll n o t e x cee d$ 200,000,000. A facility is described in this subparagraph if— such facility consists of 1 or 2 stadium projects (1 of which may be a stadium renovation or expansion project) with related structures and facilities, a special advisory commission commissioned a study by a national accounting firm with respect to a project for such facility, which study was released in September 1985, and recommended construction of either a new multipurpose or a new baseball-only stadium, a nationally recognized design and architectural firm released a feasibility study with respect to such project in April 1985, and the metropolitan area in which the facility is located is presently the home of an American League baseball team. The aggregate face amount of bonds to which this subparagraph applies shall not exceed $200, 000, 000. A f a c i l i t y i s d escr ib e d in t hi ss u b p a r a g r a p hi f — i t i s t oco n s i s t o f 1 or 2 s t a d i u m s a pp ro p r ia t e f or f oo t ba ll g am es an d ba se ba ll g am es w i t h re l a t e d s t r u c t u res an df a c i l i t i es, t h es i t e f ors u c h f a c i l i t y w a s a pp ro v e d b y t h eco u n c i l o f t h ec i t y in w hi c h s u c h f a c i l i t y i s t o b e l oc a t e d o n J u l y 9, 1985, an d t h ere q u es t f or p ro p os a l s p rocess w a s a u t h or i ze d b y t h eco u n c i l o f t h ec i t y in w hi c h s u c h f a c i l i t y i s t o b e l oc a t e d o n N o v e mb er 5, 1985, an d s u c h re q u es t s w ere d i s t r ib u t e d t o p o t e n t ia l d e v e l o p erso n N o v e mb er 15, 1985, w i t h res p o n ses d u e b y F e b r u a ry 14, 1986. T h e a gg re g a t e f a ce am o u n t o f b o n d s t o w hi c h t hi ss u b p a r a g r a p ha ppl i ess ha ll n o t e x cee d$ 200,000,000. A facility is described in this subparagraph if— such facility is described in a feasibility study dated September 1985, and resolutions were adopted or other actions taken on February 21, 1985 , July 18, 1985 , August 8, 1985 , October 17, 1985 , and November 7, 1985 , by the Board of Supervisors of the county in which such facility will be located with respect to such feasibility study, appropriations to obtain land for such facility, and approving the location of such facility in the county. The aggregate face amount of bonds to which this subparagraph applies shall not exceed $20, 000, 000. A f a c i l i t y i s d escr ib e d in t hi ss u b p a r a g r a p hi f s u c h f a c i l i t yco n s t r u c t e d o na s i t e a c q u i re d w i t h t h es a l eo f re v e n u e b o n d s a u t h or i ze d b y a c i t yco u n c i l o n Dece mb er 2, 1985, (O r d inan ces N o .669 an d 670, ser i es 1985) . T h e a gg re g a t e f a ce am o u n t o f b o n d s t o w hi c h t hi ss u b p a r a g r a p ha ppl i ess ha ll n o t e x cee d$ 90,000,000. A facility is described in this subparagraph if— resolutions were adopted approving a ground lease dated June 27, 1983 , by a sports authority (created by a State legislature) with respect to the land on which the facility will be erected, such facility is described in a market study dated June 13, 1983 , and such facility was the subject of an Act of the State legislature which was signed on July 1, 1983 . The aggregate face amount of bonds to which this subparagraph applies shall not exceed $81, 000, 000. A f a c i l i t y i s d escr ib e d in t hi ss u b p a r a g r a p hi f s u c h f a c i l i t y i s aba se ba ll s t a d i u man d a d ja ce n tp a r kin g f a c i l i t i es w i t h res p ec tt o w hi c ha c i t y ma d e a c a rry f or w a r d e l ec t i o n o f$ 52,514,000 on February 25, 1985 . The aggregate face amount of bonds to which this subparagraph applies shall not exceed $50, 000, 000. A f a c i l i t y i s d escr ib e d in t hi ss u b p a r a g r a p hi f — s u c h f a c i l i t y i s t o b e u se d b y b o t ha N a t i o na l Hoc k ey L e a gu e t e aman d a N a t i o na lB a s k e t ba ll A ssoc ia t i o n t e am, s u c h f a c i l i t y i s t o b eco n s t r u c t e d o na pl a t f or m u s in g ai rr i g h t so v er l an d a c q u i re d b y a St a t e a u t h or i t y an d i d e n t i f i e d a ss i t e B ina re p or t d a t e d M a y 30, 1984, p re p a re df or a St a t e u r ban d e v e l o p m e n t cor p or a t i o n, an d s u c h f a c i l i t y i se l i g ib l e f orre a lp ro p er t y t a x (an d p o w er an d e n er g y) b e n e f i t s p u rs u an tt o St a t e l e g i s l a t i o na pp ro v e d an d e ff ec t i v e a so fJ u l y 7, 1982. T h e a gg re g a t e f a ce am o u n t o f b o n d s t o w hi c h t hi ss u b p a r a g r a p ha ppl i ess ha ll n o t e x cee d$ 225,000,000. A facility is described in this subparagraph if— a resolution authorizing the financing of the facility through an issuance of revenue bonds was adopted by the City Commission on August 5, 1986 , and the metropolitan area in which the facility is to be located is currently the spring training home of an American league baseball team located during the regular season in a city described in subparagraph (C). The aggregate face amount of bonds to which this subparagraph applies shall not exceed $10, 000, 000. A f a c i l i t y i s d escr ib e d in t hi ss u b p a r a g r a p hi f i t i s a f oo t ba ll s t a d i u m l oc a t e d in O ak l an d, C a l i f or nia, w i t h res p ec tt o w hi c ha d es i g n w a sco m pl e t e d b y ana t i o na ll yreco g ni ze d a rc hi t ec t u r a l f i r m f or a s t a d i u m se a t in g a pp ro x ima t e l y 72, 000, t o b e l oc a t e d o n p ro p er t y a d ja ce n tt o an e x i s t in g co l i se u m co m pl e x, or i s a re n o v a t i o n o f an e x i s t in g s t a d i u m l oc a t e d in O ak l an d, C a l i f or nia, an d u se d b y an A m er i c an L e a gu e ba se ba llt e am . T h e a gg re g a t e f a ce am o u n t o f b o n d s t o w hi c h t hi ss u b p a r a g r a p ha ppl i ess ha ll n o t e x cee d$ 100,000,000. A facility is described in this subparagraph if it is a sports arena (and related parking facility) for Grand Rapids, Michigan. The aggregate face amount of bonds to which this subparagraph applies shall not exceed $80, 000, 000. A f a c i l i t y i s d escr ib e d in t hi ss u b p a r a g r a p hi f s u c h f a c i l i t y i s l oc a t e d a d ja ce n tt o t h e A na cos t ia R i v er in t h eD i s t r i c t o f C o l u mbia . T h e a gg re g a t e f a ce am o u n t o f b o n d s t o w hi c h t hi ss u b p a r a g r a p ha ppl i ess ha ll n o t e x cee d$ 25,000,000. A facility is described in this subparagraph if it is a spectator sports facility for the City of San Antonio, Texas. The aggregate face amount of bonds to which this subparagraph applies shall not exceed $125, 000, 000. A f a c i l i t y i s d escr ib e d in t hi ss u b p a r a g r a p hi f i tw i ll b e p a r t o f, or a d ja ce n tt o, an e x i s t in g s t a d i u m w hi c hha s b ee n o w n e d an d o p er a t e d b y a St a t e u ni v ers i t y an d i f — t h es t a d i u m w a s t h es u bj ec t o f a f e a s ibi l i t yre p or t b y a cer t i f i e d p u b l i c a cco u n t in g f i r m w hi c hi s d a t e d Dece mb er 28, 1984, an d a re p or t b y anin d e p e n d e n t rese a rc h or g ani z a t i o n w a s p re p a re d in Dece mb er 1985 d e m o n s t r a t in g s u pp or t am o n g d o n ors an d se a so n t i c k e t h o l d ers f or t h e a dd i t i o n o f a d o m e t o t h es t a d i u m . T h e a gg re g a t e f a ce am o u n t o f b o n d s t o w hi c h t hi ss u b p a r a g r a p ha ppl i ess ha ll n o t e x cee d$ 50,000,000. A facility is described in this subparagraph if— such facility was a redevelopment project that was approved in concept by the city council sitting as the redevelopment agency in October 1984, and $20, 000, 000 in f u n d s f ors u c h f a c i l i t y w a s i d e n t i f i e d ina 5 - ye a r b u d g e t a pp ro v e d b y t h ec i t yre d e v e l o p m e n t a g e n cyo n O c t o b er 25, 1984. T h e a gg re g a t e f a ce am o u n t o f b o n d s t o w hi c h t hi ss u b p a r a g r a p ha ppl i ess ha ll n o t e x cee d$ 80,000,000. A bond issued as part of an issue 95 percent or more of the net proceeds of which are to be used to finance a residential rental project within the meaning of section 103(b)(4) of the 1954 Code shall be treated as an exempt facility bond within the meaning of section 142(a)(7) of the 1986 Code if the facility with respect to the bond is issued satisfies all low-income occupancy requirements applicable to such bonds before August 15, 1986 , and the bonds are issued pursuant to— a contract to purchase such property dated August 12, 1985 ; the county housing authority approved the property and the financing thereof on September 24, 1985 , and there was an inducement resolution adopted on October 10, 1985 , by the county industrial development authority. The aggregate face amount of bonds to which this paragraph applies shall not exceed $25, 400, 000. A b o n d i ss u e d a s a p a r t o f ani ss u e 95 p erce n t or m oreo f t h e n e tp rocee d so f w hi c ha re t o b e u se d t o p ro v i d e anai r p or t (w i t hin t h e m e anin g o f sec t i o n 103 (b) (4) (D) o f t h e 1954 C o d e) s ha ll b e t re a t e d a s an e x e m pt f a c i l i t y b o n d (f or f a c i l i t i es d escr ib e d in sec t i o n 142 (a) (1) o f t h e 1986 C o d e) f or p u r p oseso f p a r t I V o f s u b c ha pt er B o f c ha pt er 1 o f t h e 1986 C o d e i f t h e f a c i l i t y i s d escr ib e d inan yo f t h e f o ll o w in g s u b p a r a g r a p h s : A f a c i l i t y i s d escr ib e d in t hi ss u b p a r a g r a p hi f s u c h f a c i l i t y i s ah o t e l a t anai r p or t f a c i l i t yser v in g a c i t y d escr ib e d in sec t i o n 631 (a) (3) o f t h e T a x R e f or m A c t o f 1984 [sec t i o n 631 (a) (3) o f P u b . L .98-369, se t o u t a s an o t e u n d ersec t i o n 103 o f t hi s t i tl e] (re l a t in g t ocer t ainb o n d s f or a co n v e n t i o n ce n t er an d reso u rcereco v ery p ro j ec t) . T h e a gg re g a t e f a ce am o u n t o f b o n d s t o w hi c h t hi ss u b p a r a g r a p ha ppl i ess ha ll n o t e x cee d$ 40,000,000. A facility is described in this subparagraph if such facility is the primary airport for a city described in paragraph (3)(C). The aggregate face amount of bonds to which this subparagraph applies shall not exceed $500, 000, 000. S ec t i o n 148 (d) (2) o f t h e 1986 C o d es ha ll n o t a ppl y t o an y i ss u e t o w hi c h t hi ss u b p a r a g r a p ha ppl i es . A f a c i l i t ys ha ll b e d escr ib e d in t hi ss u b p a r a g r a p hi f i tw o u l d b eso d escr ib e d i f ‘90 p erce n t ’ w eres u b s t i t u t e df or ‘95 p erce n t ’ in t h e ma t er ia lp rece d in g s u b p a r a g r a p h (A) . A f a c i l i t y i s d escr ib e d in t hi ss u b p a r a g r a p hi f s u c h f a c i l i t y i s ah o t e l a t L o g anai r p or t an d s u c hh o t e l i s l oc a t e d o n l an d l e a se df ro ma St a t e a u t h or i t y u n d er a l e a seco n t e m pl a t in g d e v e l o p m e n t o f s u c hh o t e l d a t e d M a y 1, 1983, or u n d er anam e n d m e n t, re n e w a l, ore x t e n s i o n o f s u c ha l e a se . T h e a gg re g a t e f a ce am o u n t o f b o n d s t o w hi c h t hi ss u b p a r a g r a p ha ppl i ess ha ll n o t e x cee d$ 40,000,000. A facility is described in this subparagraph if such facility is the airport for the County of Sacramento, California. The aggregate face amount of bonds to which this subparagraph applies shall not exceed $150, 000, 000. A b o n d i ss u e d a s p a r t o f ani ss u e 95 p erce n t or m oreo f t h e n e tp rocee d so f w hi c ha re t o b e u se d t o f inan cere d e v e l o p m e n t a c t i v i t i es a s p a r t o f a p ro j ec tw i t hina s p ec i f i c d es i g na t e d a re a s ha ll b e t re a t e d a s a q u a l i f i e d re d e v e l o p m e n t b o n df or p u r p oseso f p a r t I V o f s u b c ha pt er B o f c ha pt er 1 o f t h e 1986 C o d e i f s u c h p ro j ec t i s d escr ib e d inan yo f t h e f o ll o w in g s u b p a r a g r a p h s : A p ro j ec t i s d escr ib e d in t hi ss u b p a r a g r a p hi f i tw a s t h es u bj ec t o f a c i t yor d inan ce n u mb ere d 82-115 an d a d o pt e d o n Dece mb er 2, 1982, or n u mb ere d 9590 an d a d o pt e d o n A p r i l 6, 1983. T h e a gg re g a t e f a ce am o u n t o f b o n d s t o w hi c h t hi ss u b p a r a g r a p ha ppl i ess ha ll n o t e x cee d$ 9,000,000. A project is described in this subparagraph if it is a redevelopment project for an area in a city described in paragraph (3)(C) which was designated as commercially blighted on November 14, 1975 , by the city council and the redevelopment plan for which will be approved by the city council before January 31, 1987 . The aggregate face amount of bonds to which this subparagraph applies shall not exceed $20, 000, 000. A p ro j ec t i s d escr ib e d in t hi ss u b p a r a g r a p hi f i t i s a re d e v e l o p m e n tp ro j ec t f or ana re aina c i t y d escr ib e d in p a r a g r a p h (3) (C) w hi c h w a s d es i g na t e d a sco mm erc ia ll y b l i g h t e d o n M a rc h 28, 1979, b y t h ec i t yco u n c i l an d t h ere d e v e l o p m e n tpl an f or w hi c h w a s a pp ro v e d b y t h ec i t yco u n c i l o n J u n e 20, 1984. T h e a gg re g a t e f a ce am o u n t o f b o n d s t o w hi c h t hi ss u b p a r a g r a p ha ppl i ess ha ll n o t e x cee d$ 100,000,000. A project is described in this subparagraph if it is any one of three redevelopment projects in areas in a city described in paragraph (3)(C) designated as blighted by a city council before January 31, 1987 and with respect to which the redevelopment plan is approved by the city council before January 31, 1987 . The aggregate face amount of bonds to which this subparagraph applies shall not exceed $20, 000, 000. A p ro j ec t i s d escr ib e d in t hi ss u b p a r a g r a p hi f s u c h p ro j ec t i s f or p u b l i c im p ro v e m e n t s (in c l u d in g s t ree t reco n s t r u c t i o nan d im p ro v e m e n t o f u n d er g ro u n d u t i l i t i es) f or G re a tF a ll s, M o n t ana, w i t h res p ec tt o w hi c h e n g in eer in g es t ima t es a re d u eo n O c t o b er 1, 1986. T h e a gg re g a t e f a ce am o u n t o f b o n d s t o w hi c h t hi ss u b p a r a g r a p ha ppl i ess ha ll n o t e x cee d$ 3,000,000. A project is described in this subparagraph if— such project is located in an area designated as blighted by the governing body of the city on February 15, 1983 (Resolution No. 4573), and such project is developed pursuant to a redevelopment plan adopted by the governing body of the city on March 1, 1983 (Ordinance No. 15073). The aggregate face amount of bonds to which this subparagraph applies shall not exceed $5, 000, 000. A p ro j ec t i s d escr ib e d in t hi ss u b p a r a g r a p hi f — s u c h p ro j ec t i s l oc a t e d inana re a d es i g na t e d b y t h e g o v er nin g b o d yo f t h ec i t y in 1983, s u c h p ro j ec t i s d escr ib e d ina l e tt er d a t e d A ugu s t 8, 1985, f ro m t h e d e v e l o p er ’ s l e g a l co u n se lt o t h e d e v e l o p m e n t a g e n cyo f t h ec i t y, an d s u c h p ro j ec t co n s i s t s p r ima r i l yo f re t ai l f a c i l i t i es t o b e b u i lt b y t h e d e v e l o p er nam e d ina reso l u t i o n o f t h e g o v er nin g b o d yo f t h ec i t yo n A ugu s t 30, 1985. T h e a gg re g a t e f a ce am o u n t o f b o n d s t o w hi c h t hi ss u b p a r a g r a p ha ppl i ess ha ll n o t e x cee d$ 75,000,000. A project is described in this subparagraph if— such project is a project for research and development facilities to be used primarily to benefit a State university and related hospital, with respect to which an urban renewal district was created by the city council effective October 11, 1985 , and such project was announced by the university and the city in March 1985. The aggregate face amount of bonds to which this subparagraph applies shall not exceed $40, 000, 000. A p ro j ec t i s d escr ib e d in t hi ss u b p a r a g r a p hi f s u c h p ro j ec t i s a d o w n t o w n re d e v e l o p m e n tp ro j ec tw i t h res p ec tt o w hi c h — an u r ban d e v e l o p m e n t a c t i o n g r an tw a s ma d e, b u t o n l y i f s u c h g r an tw a s p re l imina r i l y a pp ro v e d o n N o v e mb er 3, 1983, an d rece i v e df ina l a pp ro v a l b e f ore J u n e 1, 1984, an d t h e i ss u ero f b o n d s w i t h res p ec tt os u c h f a c i l i t y a d o pt e d a reso l u t i o nin d i c a t in g t h e i ss u er ’ s in t e n tt o a d o pt s u c h re d e v e l o p m e n tp ro j ec t o n O c t o b er 6, 1981, an d t h e i ss u er a d o pt e d an or d inan ce a d o pt in g s u c h re d e v e l o p m e n tp ro j ec t o n Dece mb er 13, 1983. T h e a gg re g a t e f a ce am o u n t o f b o n d s t o w hi c h t hi ss u b p a r a g r a p ha ppl i ess ha ll n o t e x cee d$ 10,000,000. A project is described in this subparagraph if— with respect to such project the city council adopted on December 16, 1985 , an ordinance directing the urban renewal authority to study blight and produce an urban renewal plan, the blight survey was accepted and approved by the urban renewal authority on March 20, 1986 , and the city planning board approved the urban renewal plan on May 7, 1986 . The aggregate face amount of bonds to which this subparagraph applies shall not exceed $60, 000, 000. A p ro j ec t i s d escr ib e d in t hi ss u b p a r a g r a p hi f — t h ec i t yre d e v e l o p m e n t a g e n cy a pp ro v e d reso l u t i o n s a u t h or i z in g i ss u an ceo f l an d a c q u i s i t i o nan d p u b l i c im p ro v e m e n t s b o n d s w i t h res p ec tt os u c h p ro j ec t o n A ugu s t 8, 1978, s u c h reso l u t i o n s w ere l a t er am e n d e d in J u n e 1979, an d t h e St a t e S u p re m e C o u r t u p h e l d a l o w erco u r t d ecree v a l i d a t in g t h e b o n d so n Dece mb er 11, 1980. T h e a gg re g a t e f a ce am o u n t o f b o n d s t o w hi c h t hi ss u b p a r a g r a p ha ppl i ess ha ll n o t e x cee d$ 380,000,000. A project is described in this subparagraph if it is a mixed use redevelopment project either— in an area (known as the Near South Development Area) with respect to which the planning department of a city described in paragraph 3(C) promulgated a draft development plan dated March 1986, and which was the subject of public hearings held by a subcommittee of the plan commission of such city on May 28, 1986 , and June 10, 1986 , or in an area located within the boundaries of any 1 or more census tracts which are directly adjacent to a river whose course runs through such city. The aggregate face amount of bonds to which this subparagraph applies shall not exceed $75, 000, 000. A p ro j ec t i s d escr ib e d in t hi ss u b p a r a g r a p hi f i t i s a re d e v e l o p m e n tp ro j ec t f or ana re aina c i t y d escr ib e d in p a r a g r a p h 3 (C) an d s u c ha re a — w a s t h es u bj ec t o f a re p or t re l e a se d in M a y 1986, p re p a re d b y t h e N a t i o na lP a r k S er v i ce, an d w a s t h es u bj ec t o f a re p or t re l e a se dJ an u a ry 1986, p re p a re d b y a t a s k f orce a pp o in t e d b y t h e M a yoro f s u c h c i t y . T h e a gg re g a t e f a ce am o u n t o f b o n d s t o w hi c h t hi ss u b p a r a g r a p ha ppl i ess ha ll n o t e x cee d$ 75,000,000. A project is described in this subparagraph if it is a city-university redevelopment project approved by a city ordinance No. 152–0–84 and the development plan for which was adopted on January 28, 1985 . The aggregate face amount of bonds to which this subparagraph applies shall not exceed $23, 760, 000. A p ro j ec t i s d escr ib e d in t hi ss u b p a r a g r a p hi f — anin d u ce m e n t reso l u t i o n w a s p a sse d o n M a rc h 9, 1984, f or i ss u an ceo f b o n d s w i t h res p ec tt os u c h p ro j ec t, s u c h reso l u t i o n w a se x t e n d e d b yreso l u t i o n s p a sse d o n A ugu s t 14, 1984, A p r i l 2, 1985, A ugu s t 13, 1985, an dJ u l y 8, 1986, an u r ban d e v e l o p m e n t a c t i o n g r an tw a s p re l imina r i l y a pp ro v e df or p a r t or a ll o f s u c h p ro j ec t o n J u l y 3, 1986, an d t h e p ro j ec t i s l oc a t e d ina d i s t r i c t d es i g na t e d a s t h e P e ab o d y - G a yosoD i s t r i c t . T h e a gg re g a t e f a ce am o u n t o f b o n d s t o w hi c h t hi ss u b p a r a g r a p ha ppl i ess ha ll n o t e x cee d$ 140,000,000. A project is described in this subparagraph if the project is a 1-block area of a central business district containing a YMCA building with respect to which— the city council adopted a resolution expressing an intent to issue bonds for the project on September 27, 1985 , the city council approved project guidelines for the project on December 20, 1985 , and the city council by resolution (adopted on July 30, 1986 ) directed completion of a development agreement. The aggregate face amount of bonds to which this subparagraph applies shall not exceed $26, 000, 000. A p ro j ec t i s d escr ib e d in t hi ss u b p a r a g r a p hi f t h e p ro j ec t i s a 2 - b l oc ka re a o f a ce n t r a l b u s in ess d i s t r i c t d es i g na t e d a s b l oc k s E an d Fw i t h res p ec tt o w hi c h — t h ec i t yco u n c i l a d o pt e d gu i d e l in es an d cr i t er iaan d a u t h or i ze d a re q u es t f or d e v e l o p m e n tp ro p os a l so n J u l y 22, 1985, t h ec i t yco u n c i l a d o pt e d a reso l u t i o n e x p ress in g anin t e n tt o i ss u e b o n d s f or t h e p ro j ec t o n S e pt e mb er 27, 1985, an d t h ec i t y i ss u e d re q u es t s f or d e v e l o p m e n tp ro p os a l so n M a rc h 28, 1986. T h e a gg re g a t e f a ce am o u n t o f b o n d s t o w hi c h t hi ss u b p a r a g r a p ha ppl i ess ha ll n o t e x cee d$ 47,000,000. A project is described in this subparagraph if the project is an urban renewal project covering approximately 5.9 acres of land in the Shaw area of the northwest section of the District of Columbia and the 1st portion of such project was the subject of a District of Columbia public hearing on June 2, 1986 . The aggregate face amount of bonds to which this subparagraph applies shall not exceed $10, 000, 000. A p ro j ec t i s d escr ib e d in t hi ss u b p a r a g r a p hi f s u c h p ro j ec t i s ah o t e l, co mm erc ia l, an d res i d e n t ia lp ro j ec t o n t h ee a s t bank o f t h e G r an d R i v er in G r an d R a p i d s, M i c hi g an, w i t h res p ec tt o w hi c ha d e v e l o p er w a sse l ec t e d b y t h ec i t y in J u n e 1985 an d a pl annin g a g ree m e n tw a se x ec u t e d in A ugu s t 1985. T h e a gg re g a t e f a ce am o u n t o f b o n d s t o w hi c h t hi ss u b p a r a g r a p ha ppl i ess ha ll n o t e x cee d$ 39,000,000. A project is described in this subparagraph if such project is the Wurzburg Block Redevelopment Project in Grand Rapids, Michigan. The aggregate face amount of bonds to which this subparagraph applies shall not exceed $60, 000, 000. A p ro j ec t i s d escr ib e d in t hi ss u b p a r a g r a p hi f s u c h p ro j ec t i sco n s i s t e n tw i t han u r ban re n e w a lpl ana d o pt e d oror d ere d p re p a re d b e f ore A ugu s t 28, 1986, b y t h ec i t yco u n c i l o f t h e m os tp o p u l o u sc i t y ina s t a t e w hi c h e n t ere d t h e U ni o n o n F e b r u a ry 14, 1859. T h e a gg re g a t e f a ce am o u n t o f b o n d s t o w hi c h t hi ss u b p a r a g r a p ha ppl i ess ha ll n o t e x cee d$ 83,000,000. A project is described in this subparagraph if such project is consistent with an urban renewal plan which was adopted (or ordered prepared) before August 13, 1985 , by an appropriate jurisdiction of a state which entered the Union on February 14, 1859 . The aggregate face amount of bonds to which this subparagraph applies shall not exceed $135,000,000 and the limitation on the period during which bonds under this section may be issued shall not apply to such bonds. A project is described in this subparagraph if such project is— a part of the Kenosha Downtown Redevelopment project, and located in an area bounded— on the east by the east wall of the Army Corps of Engineers Confined Disposal Facility (extended), on the north by 48th Street (extended), on the west by the present Chicago & Northwestern Railroad tracks, and on the south by the north line of Eichelman Park (60th Street) (extended). The aggregate face amount of bonds to which this subparagraph applies shall not exceed$ 105,000,000. A project is described in this subparagraph if a redevelopment plan for such project was approved by the city council of Bell Gardens, California, on June 12, 1979 . The aggregate face amount of bonds to which this subparagraph applies shall not exceed $10, 000, 000. N o t hin g in t hi s p a r a g r a p h s ha ll b eco n s t r u e d a s ha v in g t h ee ff ec t o f e x e m pt in g f ro m t a x in t eres t o nan y b o n d i ss u e d a f t er J u n e 10, 1987, i f s u c hin t eres tw o u l d n o t ha v e b ee n e x e m pt f ro m t a x w eres u c hb o n d i ss u e d o n A ugu s t 15, 1986. A n y d es i g na t e d a re a w i t h res p ec tt o w hi c ha p ro j ec t i s d escr ib e d inan ys u b p a r a g r a p h o f t hi s p a r a g r a p h s ha ll b e t ak e nin t o a cco u n t ina ppl y in g sec t i o n 144 (c) (4) (C) o f t h e 1986 C o d e in d e t er minin g w h e t h ero t h er a re a s (n o t so d escr ib e d) ma y b e d es i g na t e d . A b o n d i ss u e d a s p a r t o f ani ss u e 95 p erce n t or m oreo f t h e n e tp rocee d so f w hi c ha re t o b e u se d t o p ro v i d e an yco n v e n t i o n or t r a d es h o w f a c i l i t y (w i t hin t h e m e anin g o f sec t i o n 103 (b) (4) (C) o f t h e 1954 C o d e) s ha ll b e t re a t e d a s an e x e m pt f a c i l i t y b o n df or p u r p oseso f p a r t I V o f s u b c ha pt er B o f c ha pt er 1 o f t h e 1986 C o d e i f s u c h f a c i l i t y i s d escr ib e d inan yo f t h e f o ll o w in g s u b p a r a g r a p h s : A f a c i l i t y i s d escr ib e d in t hi ss u b p a r a g r a p hi f — a f e a s ibi l i t yco n s u lt an t an d a d es i g n co n s u lt an tw ere hi re d o n A p r i l 3, 1985, w i t h res p ec tt os u c h f a c i l i t y, an d a d r a f t f e a s ibi l i t yre p or tw i t h res p ec tt os u c h f a c i l i t y w a s p rese n t e d o n N o v e mb er 3, 1985, t o t h e M a yoro f t h ec i t y in w hi c h s u c h f a c i l i t y i s t o b e l oc a t e d . T h e a gg re g a t e f a ce am o u n t o f b o n d s t o w hi c h t hi ss u b p a r a g r a p ha ppl i ess ha ll n o t e x cee d$ 190,000,000. For purposes of this subparagraph, not more than $20, 000, 000 o f b o n d s i ss u e d t o a d v an cere f u n d e x i s t in g co n v e n t i o n f a c i l i t y b o n d sso l d o n M a y 12, 1978, s ha ll b e t re a t e d a s b o n d s d escr ib e d in t hi ss u b p a r a g r a p han d [f or m er] sec t i o n 149 (d) (2) o f t h e 1986 C o d es ha ll n o t a ppl y t o b o n d sso t re a t e d . A f a c i l i t y i s d escr ib e d in t hi ss u b p a r a g r a p hi f — ana ppl i c a t i o n f or a St a t e l o an f ors u c h f a c i l i t y w a s a pp ro v e d b y t h ec i t yco u n c i l o n M a rc h 4, 1985, an d t h ec i t yco u n c i l o f t h ec i t y in w hi c h s u c h f a c i l i t y i s t o b e l oc a t e d a pp ro v e d o n M a rc h 25, 1985, ana ppl i c a t i o n f or an u r ban d e v e l o p m e n t a c t i o n g r an t . T h e a gg re g a t e f a ce am o u n t o f b o n d s w hi c h t hi ss u b p a r a g r a p ha ppl i ess ha ll n o t e x cee d$ 10,000,000. A facility is described in this subparagraph if— on November 1, 1983 , a convention development tax took effect and was dedicated to financing such facility, the State supreme court of the State in which the facility is to be located validated such tax on February 8, 1985 , and an agreement was entered into on November 14, 1985 , between the city and county in which such facility is to be located on the terms of the bonds to be issued with respect to such facility. The aggregate face amount of bonds to which this subparagraph applies shall not exceed $66, 000, 000. A f a c i l i t y i s d escr ib e d in t hi ss u b p a r a g r a p hi f — i t i s a co n v e n t i o n, t r a d e, ors p ec t a t or f a c i l i t y, a re g i o na l co n v e n t i o n, t r a d e, an d s p ec t a t or f a c i l i t i ess t u d yco mmi tt ee w a scre a t e d b e f ore M a rc h 19, 1985, w i t h res p ec tt os u c h f a c i l i t y, an df e a s ibi l i t y an d p re l imina ry d es i g n co n s u lt an t s w ere hi re d o n M a y 1, 1985, an d O c t o b er 31, 1985, w i t h res p ec tt os u c h f a c i l i t y . T h e a gg re g a t e f a ce am o u n t o f b o n d s t o w hi c h t hi ss u b p a r a g r a p ha ppl i ess ha ll n o t e x cee d t h ee x cesso f$ 175,000,000 over the amount of bonds to which paragraph (48)(B) applies. A facility is described in this subparagraph if— such facility is meeting rooms for a convention center, and resolutions and ordinances were adopted with respect to such meeting rooms on January 17, 1983 , July 11, 1983 , December 17, 1984 , and September 23, 1985 . The aggregate face amount of bonds to which this subparagraph applies shall not exceed $75, 000, 000. A f a c i l i t y i s d escr ib e d in t hi ss u b p a r a g r a p hi f i t i s anin t er na t i o na lt r a d ece n t er w hi c hi s p a r t o f t h e 125 t h St ree t re d e v e l o p m e n tp ro j ec t in N e w Y or k, N e w Y or k . T h e a gg re g a t e f a ce am o u n t o f o b l i g a t i o n s t o w hi c h t hi ss u b p a r a g r a p ha ppl i ess ha ll n o t e x cee d$ 165,000,000. A facility is described in this subparagraph if— such facility is located in a city which was the subject of a convention center market analysis or study dated March 1983, and prepared by a nationally recognized accounting firm, such facility’s location was approved in December 1985 by a task force created jointly by the Governor of the State within which such facility will be located and the mayor of the capital city of such State, and the size of such facility is not more than 200,000 square feet. The aggregate face amount of bonds to which this subparagraph applies shall not exceed $70, 000, 000. A f a c i l i t y i s d escr ib e d in t hi ss u b p a r a g r a p hi f anana l ys i so f o p er a t i o n s an d reco mm e n d a t i o n so f u t i l i z a t i o n o f s u c h f a c i l i t y w a s p re p a re d b y a cer t i f i e d p u b l i c a cco u n t in g f i r m p u rs u an tt o an e n g a g e m e n t a u t h or i ze d o n M a rc h 6, 1984, an d p rese n t e d o n J u n e 11, 1984, t oo ff i c ia l so f t h ec i t y in w hi c h s u c h f a c i l i t y i s l oc a t e d . T h e a gg re g a t e f a ce am o u n t o f b o n d s t o w hi c h t hi ss u b p a r a g r a p ha ppl i ess ha ll n o t e x cee d$ 75,000,000. A facility is described in this subparagraph if— voters approved a bond issue to finance the acquisition of the site for such facility on May 4, 1985 , title of the property was transferred from the Illinois Center Gulf Railroad to the city on September 30, 1985 , and a United States judge rendered a decision regarding the fair market value of the site of such facility on December 30, 1985 . The aggregate face amount of bonds to which this subparagraph applies shall not exceed $131, 000, 000. A f a c i l i t y i s d escr ib e d in t hi ss u b p a r a g r a p hi f — s u c h f a c i l i t y i s t o b e u se df or anann u a l a q u a f es t i v a l, a re f ere n d u m w a s h e l d o n A p r i l 6, 1985, in w hi c h v o t ers p er mi tt e d t h ec i t yco u n c i lt o l e a se 130 a creso fd e d i c a t e d p a r k l an df or t h e p u r p oseo f co n s t r u c t in g s u c h f a c i l i t y, an d t h ec i t yco u n c i lp a sse d anin d u ce m e n t reso l u t i o n o n J u n e 19, 1986. T h e a gg re g a t e f a ce am o u n t o f b o n d s t o w hi c h t hi ss u b p a r a g r a p ha ppl i ess ha ll n o t e x cee d$ 10,000,000. A facility is described in this subparagraph if— voters approved a bond issued to finance a portion of the cost of such facility on December 1, 1984 , and such facility was the subject of a market study and financial projections dated March 21, 1986 , prepared by a nationally recognized accounting firm. The aggregate face amount of bonds to which this subparagraph applies shall not exceed $5, 000, 000. A f a c i l i t y i s d escr ib e d in t hi ss u b p a r a g r a p hi f — o n J u l y 12, 1984, t h ec i t yco u n c i lp a sse d a reso l u t i o nin cre a s in g t h e l oc a l h o t e l an d m o t e lt a x t o 7 p erce n tt o a ss i s t in p a y in g f ors u c h f a c i l i t y, o n O c t o b er 25, 1984, t h ec i t yco u n c i l se l ec t e d a co n s u lt in g f i r m f ors u c h f a c i l i t y, an d w i t h res p ec tt os u c h f a c i l i t y, t h ec i t yco u n c i l a pp ro p r ia t e df u n d s f or a dd i t i o na lw or k o n F e b r u a ry 7, 1985, O c t o b er 3, 1985, an dJ u n e 26, 1986. T h e a gg re g a t e f a ce am o u n t o f b o n d s t o w hi c h t hi ss u b p a r a g r a p ha ppl i ess ha ll n o t e x cee d$ 120,000,000. A facility is described in this subparagraph if— a board of county commissioners, in an action dated January 21, 1986 , supported an application for official approval of the facility, and the State economic development commission adopted a resolution dated February 25, 1986 , determining the facility to be an eligible facility pursuant to State law and the rules adopted by the commission. The aggregate face amount of bonds to which this subparagraph applies shall not exceed $7, 500, 000. A b o n d i ss u e d a s a p a r t o f ani ss u e 95 p erce n t or m oreo f t h e n e tp rocee d so f w hi c ha re t o b e u se d t o p ro v i d ee i t h er a s p or t s f a c i l i t y (w i t hin t h e m e anin g o f sec t i o n 103 (b) (4) (B) o f t h e 1954 C o d e) or a co n v e n t i o n f a c i l i t y (w i t hin t h e m e anin g o f sec t i o n 103 (b) (4) (C) o f t h e 1954 C o d e) s ha ll b e t re a t e d a s an e x e m pt f a c i l i t y b o n df or p u r p oseso f p a r t I V o f s u b c ha pt er B o f c ha pt er 1 o f t h e 1986 C o d e i f s u c h f a c i l i t y i s d escr ib e d inan yo f t h e f o ll o w in g s u b p a r a g r a p h s : A co mbin e d co n v e n t i o nan d a re na f a c i l i t y, or an y p a r tt h ereo f (w h e t h ero n t h es am eor d i ff ere n t s i t es), i s d escr ib e d in t hi ss u b p a r a g r a p hi f — b o n d s f or t h ee x p an s i o n, a c q u i s i t i o n, orco n s t r u c t i o n o f s u c h co mbin e df a c i l i t y a re p a y ab l e f ro ma t a x an d a re i ss u e d u n d er a pl anini t ia ll y a pp ro v e d b y t h e v o t erso f t h e t a x in g a u t h or i t yo n A p r i l 25, 1978, an d s u c hb o n d s w ere a u t h or i ze df ore x p an d in g a co n v e n t i o n ce n t er, f or a c q u i r in g ana re na s i t e, an df or b u i l d in g ana re na or an yo f t h e f ore g o in g p u rs u an tt o a reso l u t i o na d o pt e d b y t h e g o v er nin g b o d yo f t h e b o n d i ss u ero n M a rc h 17, 1986, an d s u p erse d e d b y a reso l u t i o na d o pt e d b ys u c h g o v er nin g b o d yo n M a y 27, 1986. T h e a gg re g a t e f a ce am o u n t o f b o n d s t o w hi c h t hi ss u b p a r a g r a p ha ppl i ess ha ll n o t e x cee d$ 160,000,000. A sports or convention facility is described in this subparagraph if— on March 4, 1986 , county commissioners held public hearings on creation of a county convention facilities authority, and on March 7, 1986 , the county commissioners voted to create a county convention facilities authority and to submit to county voters a ½ cent sales and use tax to finance such facility. The aggregate face amount of bonds to which this subparagraph applies shall not exceed $150, 000, 000. A s p or t sorco n v e n t i o n f a c i l i t y i s d escr ib e d in t hi ss u b p a r a g r a p hi f — a f e a s ibi l i t yco n s u lt an t an d a d es i g n co n s u lt an tw ere hi re d p r i or t o O c t o b er 1980 w i t h res p ec tt os u c h f a c i l i t y, a f e a s ibi l i t yre p or t d a t e d O c t o b er 1980 w i t h res p ec tt os u c h f a c i l i t y w a s p rese n t e d t o a c i t yorco u n t y in w hi c h s u c h f a c i l i t y i s t o b e l oc a t e d, an d o n S e pt e mb er 7, 1982, aj o in t c i t y / co u n t yreso l u t i o na pp o in t e d a co mmi tt ee w hi c h w a sc ha r g e d w i t h t h e t a s k o f in d e p e n d e n tl yre v i e w in g t h es t u d i es an d p rese n t n ee df or t h e f a c i l i t y . T h e a gg re g a t e f a ce am o u n t o f b o n d s t o w hi c h t hi ss u b p a r a g r a p ha ppl i ess ha ll n o t e x cee d$ 60,000,000. A sports or convention facility is described in this subparagraph if— such facility is a multipurpose coliseum facility for which, before January 1, 1985 , a city, an auditorium district created by the State legislature within which such facility will be located, and a limited partnership executed an enforceable contract, significant governmental action regarding such facility was taken before May 23, 1983 , and inducement resolutions were passed for issuance of bonds with respect to such facility on May 26, 1986 . The aggregate face amount of bonds to which this subparagraph applies shall not exceed $25, 000, 000. A b o n d i ss u e d a s p a r t o f ani ss u e 95 p erce n t or m oreo f t h e n e tp rocee d so f w hi c ha re t o b e u se d t o p ro v i d e a p a r kin g f a c i l i t y (w i t hin t h e m e anin g o f sec t i o n 103 (b) (4) (D) o f t h e 1954 C o d e) s ha ll b e t re a t e d a s an e x e m pt f a c i l i t y b o n df or p u r p oseso f p a r t I V o f s u b c ha pt er B o f c ha pt er 1 o f t h e 1986 C o d e i f s u c h f a c i l i t y i s d escr ib e d inan yo f t h e f o ll o w in g s u b p a r a g r a p h s : A f a c i l i t y i s d escr ib e d in t hi ss u b p a r a g r a p hi f — t h ere w a s anin d u ce m e n t reso l u t i o n o n M a rc h 9, 1984, f or t h e i ss u an ceo f b o n d s w i t h res p ec tt os u c h f a c i l i t y, an d s u c h reso l u t i o n w a se x t e n d e d b yreso l u t i o n s p a sse d o n A ugu s t 14, 1984, A p r i l 2, 1985, A ugu s t 13, 1985, an dJ u l y 8, 1986. T h e a gg re g a t e f a ce am o u n t o f b o n d s t o w hi c h t hi ss u b p a r a g r a p ha ppl i ess ha ll n o t e x cee d$ 30,000,000. A facility is described in this subparagraph if— such facility is for a university medical school, the last parcel of land necessary for such facility was purchased on February 4, 1985 , and the amount of bonds to be issued with respect to such facility was increased by the State legislature of the State in which the facility is to be located as part of its 1983–1984 general appropriations act. The aggregate face amount of bonds to which this subparagraph applies shall not exceed $9, 000, 000. A f a c i l i t y i s d escr ib e d in t hi ss u b p a r a g r a p hi f — t h e d e v e l o p m e n t a g ree m e n tw i t h res p ec tt o t h e p ro j ec t o f w hi c h s u c h f a c i l i t y i s a p a r tw a se n t ere d in t o d u r in g M a y 1984, an d anin d u ce m e n t reso l u t i o n w a s p a sse d o n O c t o b er 9, 1985, f or t h e i ss u an ceo f b o n d s w i t h res p ec tt o t h e f a c i l i t y . T h e a gg re g a t e f a ce am o u n t o f b o n d s t o w hi c h t hi ss u b p a r a g r a p ha ppl i ess ha ll n o t e x cee d$ 35,000,000. A facility is described in this subparagraph if the city council approved a resolution of intent to issue tax-exempt bonds (Resolution 34083) for such facility on April 30, 1986 . The aggregate face amount of bonds to which this subparagraph applies shall not exceed $8, 000, 000. S o l e l y f or p u r p oseso f t hi ss u b p a r a g r a p h, ah e l i p or t co n s t r u c t e d a s p a r t o f s u c h f a c i l i t ys ha ll b e d ee m e d t o b e f u n c t i o na ll yre l a t e d an d s u b or d ina t e t os u c h f a c i l i t y . A f a c i l i t y i s d escr ib e d in t hi ss u b p a r a g r a p hi f — reso l u t i o n s w ere a d o pt e d b y a p u b l i c j o in tp o w ers a u t h or i t yre l a t in g t os u c h f a c i l i t yo n M a rc h 6, 1985, M a y 1, 1985, O c t o b er 2, 1985, Dece mb er 4, 1985, an d F e b r u a ry 5, 1986; an d s u c h f a c i l i t y i s t o b e l oc a t e d a t an e x p os i t i o n p a r k w hi c hin c l u d es a co l i se u man d s p or t s a re na . T h e a gg re g a t e f a ce am o u n t o f b o n d s t o w hi c h t hi ss u b p a r a g r a p ha ppl i ess ha ll n o t e x cee d$ 150,000,000. A facility is described in this subparagraph if— it is to be constructed as part of an overall development that is the subject of a development agreement dated October 1, 1983 , between a developer and an organization described in section 501(c)(3) of the 1986 Code, and an environmental notification form with respect to the overall development was filed with a State environmental agency on February 28, 1985 . The aggregate face amount of bonds to which this subparagraph applies shall not exceed $60, 000, 000. A f a c i l i t y i s d escr ib e d in t hi ss u b p a r a g r a p hi f — anin d u ce m e n t reso l u t i o n w a s p a sse d b y t h ec i t yre d e v e l o p m e n t a g e n cyo n Dece mb er 3, 1984, an d a reso l u t i o n t oc a rry f or w a r d t h e p r i v a t e a c t i v i t y b o n d l imi tw a s p a sse d b ys u c ha g e n cyo n Dece mb er 21, 1984, w i t h res p ec tt os u c h f a c i l i t y, an d t h eo w n er p a r t i c i p a t i o na g ree m e n tw i t h res p ec tt os u c h f a c i l i t y w a se n t ere d in t oo n J u l y 30, 1986. T h e a gg re g a t e f a ce am o u n t o f b o n d s t o w hi c h t hi ss u b p a r a g r a p ha ppl i ess ha ll n o t e x cee d$ 18,000,000. A facility is described in this subparagraph if— an application (dated August 28, 1986 ) for financial assistance was submitted to the county industrial development agency with respect to such facility, and the inducement resolution for such facility was passed by the industrial development agency on September 10, 1986 . The aggregate face amount of bonds to which this subparagraph applies shall not exceed $8, 000, 000. A f a c i l i t y i s d escr ib e d in t hi ss u b p a r a g r a p hi f — i t i s l oc a t e d ina c i t y t h e p a r kin g n ee d so f w hi c h w ereco m p re h e n s i v e l y d escr ib e d ina ‘ Do w n t o w n P a r kin g Pl an ’ d a t e dJ an u a ry 1983, an d a pp ro v e d b y t h ec i t y ’ s C i t y Pl an C o mmi ss i o n o n J u n e 1, 1983, an d o b l i g a t i o n s w i t h res p ec tt o t h eco n s t r u c t i o n o f w hi c ha re i ss u e d o nb e ha l f o f a St a t eor l oc a l g o v er nm e n t a l u ni t b y a cor p or a t i o n e m p o w ere d t o i ss u e t h es am e w hi c h w a scre a t e d b y t h e l e g i s l a t i v e b o d yo f a St a t e b y an A c t in t ro d u ce d o n M a y 21, 1985, an d t h ere a f t er p a sse d, w hi c h A c t b ec am ee ff ec t i v e w i t h o u tt h e g o v er n or ’ ss i g na t u reo n J u n e 26, 1985. T h e a gg re g a t e f a ce am o u n t o f b o n d s t o w hi c h t hi ss u b p a r a g r a p ha ppl i ess ha ll n o t e x cee d$ 50,000,000. A facility is described in this subparagraph if— such facility is located in a city which was the subject of a convention center market analysis or study dated March 1983 and prepared by a nationally recognized accounting firm, such facility is intended for use by, among others, persons attending a convention center located within the same town or city, and such facility’s location was approved in December 1985 by a task force created jointly by the governor of the State within which such facility will be located and the mayor of the capital city of such State. The aggregate face amount of bonds to which this subparagraph applies shall not exceed $30, 000, 000. A f a c i l i t y i s d escr ib e d in t hi ss u b p a r a g r a p hi f — sc a l e an d co m p o n e n t s f or t h e f a c i l i t y w ere d e t er min e d b y a c i t y d o w n t o w n pl ana d o pt e d O c t o b er 31, 1984 (reso l u t i o nn u mb er 3882), an d t h es i t e a re a f or t h e f a c i l i t y i s a pp ro x ima t e l y 51, 200 s q u a re f ee t . T h e a gg re g a t e f a ce am o u n t o f b o n d s t o w hi c h t hi ss u b p a r a g r a p ha ppl i ess ha ll n o t e x cee d$ 5,000,000. A facility is described in this subparagraph if— the property for such facility was offered for development by a city renewal agency on March 19, 1986 (resolution number 920), and the site area for the facility is approximately 25,600 square feet. The aggregate face amount of bonds to which this subparagraph applies shall not exceed $5, 000, 000. A f a c i l i t y i s d escr ib e d in t hi ss u b p a r a g r a p hi f s u c h f a c i l i t y w a s a pp ro v e d b yo ff i c ia l a c t i o n o f t h ec i t yco u n c i l o n J u l y 26, 1984 (reso l u t i o nn u mb er 33718), an d i s f or t h e M oyer T h e a t re . T h e a gg re g a t e f a ce am o u n t o f b o n d s t o w hi c h t hi ss u b p a r a g r a p ha ppl i ess ha ll n o t e x cee d$ 8,000,000. A facility is described in this subparagraph if it is part of a renovation project involving the Outlet Company building in Providence, Rhode Island. The aggregate face amount of obligations to which this subparagraph applies shall not exceed $6, 000, 000. [F or m er] S ec t i o n 149 (d) (3) o f t h e 1986 C o d es ha ll n o t a ppl y t o ab o n d i ss u e d b y a St a t e a d mi tt e d t o t h e U ni o n o n N o v e mb er 16, 1907, f or t h e a d v an cere f u n d in g o f n o t m ore t han$ 186,000,000 State turnpike obligations. A refunding of the Charleston, West Virginia Town Center Garage Bonds shall not be treated for purposes of part IV of subchapter A of chapter 1 of the 1986 Code as an advance refunding if it would not be so treated if ‘100’ were substituted for ‘90’ in section 149(d)(5) [now 149(d)(2)] of such Code. In the case of a bond issued as part of an issue the proceeds of which are to be used to provide a facility described in subparagraph (B) or (C), the determination of whether such bond is an exempt facility bond shall be made by substituting ‘90 percent’ for ‘95 percent’ in section 142(a) of the 1986 Code. A facility is described in this subparagraph if— it is a waste-to-energy project for which a contract for the sale of electricity was executed in September 1984, and the design, construction, and operation contract for such project was signed in March 1985 and the order to begin construction was issued on March 31, 1986 . The aggregate face amount of bonds to which this subparagraph applies shall not exceed $29, 100, 000. A f a c i l i t y i s d escr ib e d in t hi ss u b p a r a g r a p hi f i t i s d escr ib e d in sec t i o n 1865 (c) (2) (C) o f t hi s A c t [se t o u t a s an o t e u n d ersec t i o n 103 o f t hi s t i tl e] . S u b sec t i o n s (d) (3) an d (f) o f sec t i o n 148 o f t h e 1986 C o d es ha ll n o t a ppl y t o an y b o n d orser i eso f b o n d s t h e p rocee d so f w hi c ha re u se d e x c l u s i v e l y t ore f u n d q u a l i f i e d sc h o l a rs hi p f u n d in g b o n d s (a s d e f in e d in sec t i o n 150 o f t h e 1986 C o d e) i ss u e d b e f ore J an u a ry 1, 1986, i f — t h e am o u n t o f t h ere f u n d in g b o n d s d oes n o t e x cee d t h e a gg re g a t e f a ce am o u n t o f t h ere f u n d e d b o n d s, t h e ma t u r i t y d a t eo f s u c h re f u n d in g b o n d i s n o tl a t er t han l a t ero f — t h e ma t u r i t y d a t eo f t h e b o n d t o b ere f u n d e d, or t h e d a t e w hi c hi s 15 ye a rs a f t er t h e d a t eo n w hi c h t h ere f u n d e d b o n d w a s i ss u e d (or, in t h ec a seo f a ser i eso f re f u n d in g s, t h e d a t eo n w hi c h t h eor i g ina l b o n d w a s i ss u e d), t h e b o n d s t o b ere f u n d e d w ere i ss u e d b y t h e C a l i f or nia St u d e n t L o an F inan ce C or p or a t i o n, an d t h e f a ce am o u n t o f t h ere f u n d in g b o n d s d oes n o t e x cee d$ 175,000,000. A bond issued as part of an issue 95 percent or more of the net proceeds of which are to be used to provide a project for residential rental property which satisfies the requirements of section 103(b)(4)(A) of the 1954 Code shall be treated as an exempt facility bond (for projects described in section 142(a)(7) of the 1986 Code) for purposes of part IV of subchapter B of chapter 1 of the 1986 Code if the project is described in any of the following subparagraphs: A residential rental property project is described in this subparagraph if— a public building development corporation was formed on June 6, 1984 , with respect to such project, a partnership of which the corporation is a general partner was formed on June 8, 1984 , and the partnership entered into a preliminary agreement with the State public facilities authority effective as of May 4, 1984 , with respect to the issuance of the bonds for such project. The aggregate face amount of bonds to which this subparagraph applies shall not exceed $6, 200, 000. A res i d e n t ia l re n t a lp ro p er t y p ro j ec t i s d escr ib e d in t hi ss u b p a r a g r a p hi f — t h e B o a r d o f C o mmi ss i o n erso f t h ec i t y h o u s in g a u t h or i t yo ff i c ia ll yse l ec t e d s u c h p ro j ec t ’ s d e v e l o p ero n Dece mb er 19, 1985, t h e B o a r d o f t h e C i t y R e d e v e l o p m e n tC o mmi ss i o na g ree d o n F e b r u a ry 13, 1986, t oco n d u c t a p u b l i c h e a r in g w i t h res p ec tt o t h e p ro j ec t o n M a rc h 6, 1986, an o ff i c ia l a c t i o n reso l u t i o n f ors u c h p ro j ec tw a s a d o pt e d o n M a rc h 6, 1986, an d ana ll oc a t i o n o f a p or t i o n o f t h e St a t ece i l in g w a s ma d e w i t h res p ec tt os u c h p ro j ec t o n J u l y 29, 1986. T h e a gg re g a t e f a ce am o u n t o f b o n d s t o w hi c h t hi ss u b p a r a g r a p ha ppl i ess ha ll n o t e x cee d$ 10,000,000. A residential rental property project is described in this subparagraph if— the issuance of $1, 289, 882 o f b o n d s f ors u c h p ro j ec tw a s a pp ro v e d b y a St a t e a g e n cyo n S e pt e mb er 11, 1985, an d t h e a u t h or i t y t o i ss u es u c hb o n d s w a ssc h e d u l e d t oe x p i re (u n d er t h e t er m so f t h e St a t e a pp ro v a l) o n S e pt e mb er 9, 1986. T h e a gg re g a t e f a ce am o u n t o f b o n d s t o w hi c h t hi ss u b p a r a g r a p ha ppl i ess ha ll n o t e x cee d$ 1,300,000. A residential rental property project is described in this subparagraph if— the issuance of $7, 020, 000 o f b o n d s f ors u c h p ro j ec tw a s a pp ro v e d b y a St a t e a g e n cyo n O c t o b er 10, 1985, an d t h e a u t h or i t y t o i ss u es u c hb o n d s w a ssc h e d u l e d t oe x p i re (u n d er t h e t er m so f t h e St a t e a pp ro v a l) o n O c t o b er 9, 1986. T h e a gg re g a t e f a ce am o u n t o f b o n d s t o w hi c h t hi ss u b p a r a g r a p ha ppl i ess ha ll n o t e x cee d$ 7,020,000. A residential rental property project is described in this subparagraph if— it is to be located in a city urban renewal project area which was established pursuant to an urban renewal plan adopted by the city council on May 17, 1960 , the urban renewal plan was revised in 1972 to permit multifamily dwellings in areas of the urban renewal project designated as a central business district, an inducement resolution was adopted for such project on December 14, 1984 , and the city council approved on November 6, 1985 , an agreement which provides for conveyance to the city of fee title to such project site. The aggregate face amount of bonds to which this subparagraph applies shall not exceed $60, 000, 000. A res i d e n t ia l re n t a lp ro p er t y p ro j ec t i s d escr ib e d in t hi ss u b p a r a g r a p hi f — s u c h p ro j ec t i s t o b e l oc a t e d ina c i t y u r ban re n e w a lp ro j ec t a re a w hi c h w a ses t ab l i s h e d p u rs u an tt o an u r ban re n e w a lpl ana d o pt e d b y t h ec i t yco u n c i l o n M a y 17, 1960, t h e u r ban re n e w a lpl an w a sre v i se d in 1972 t o p er mi t m u lt i f ami l y d w e ll in g s ina re a so f t h e u r ban re n e w a lp ro j ec t d es i g na t e d a s a ce n t r a l b u s in ess d i s t r i c t, t h e am e n d e d u r ban re n e w a lpl ana d o pt e d b y t h ec i t yco u n c i l o n M a y 19, 1972, a l so p ro v i d es f or t h eco n v ers i o n o f an y p u b l i c a re a s i t e in Bl oc k J o f t h e u r ban re n e w a lp ro j ec t a re a f or t h e d e v e l o p m e n t o f res i d e n t ia l f a c i l i t i es, an d a c q u i s i t i o n o f a ll o f t h e p a rce l sco m p r i s in g t h e Bl oc k J p ro j ec t s i t e w a sco m pl e t e d b y t h ec i t yo n Dece mb er 28, 1984. T h e a gg re g a t e f a ce am o u n t o f b o n d s t o w hi c h t hi ss u b p a r a g r a p ha ppl i ess ha ll n o t e x cee d$ 60,000,000. A residential rental property project is described in this subparagraph if— such project is to be located on a city-owned site which is to become available for residential development upon the relocation of a bus maintenance facility, preliminary design studies for such project site were completed in December 1985, and such project is located in the same State as the projects described in subparagraphs (E) and (F). The aggregate face amount of bonds to which this subparagraph applies shall not exceed $100, 000, 000. A res i d e n t ia l re n t a lp ro p er t y p ro j ec t i s d escr ib e d in t hi ss u b p a r a g r a p hi f — a tl e a s t 20 p erce n t o f t h eres i d e n t ia l u ni t s in s u c h p ro j ec t a re t o b e u t i l i ze d t o f u l f i llt h ere q u i re m e n t so f a u ni l a t er a l a g ree m e n t d a t e J u l y 21, 1983, re l a t in g t o t h e p ro v i s i o n o f l o w - an d m o d er a t e - in co m e h o u s in g, t h e u ni l a t er a l a g ree m e n tw a s in cor p or a t e d in t oor d inan ce n u mb ers 83-49 an d 83-50, a d o pt e d b y t h ec i t yco u n c i l an d a pp ro v e d b y t h e ma yoro n A ugu s t 24, 1983, an d anin d u ce m e n t reso l u t i o n w a s a d o pt e df ors u c h p ro j ec t o n S e pt e mb er 25, 1985. T h e a gg re g a t e f a ce am o u n t o f b o n d s t o w hi c h t hi ss u b p a r a g r a p ha ppl i ess ha ll n o t e x cee d$ 8,000,000. A residential rental property project is described in this subparagraph if— a letter of understanding was entered into on December 11, 1985 , between the city and county housing and community development office and the project developer regarding the conveyance of land for such project, and such project is located in the same State as the projects described in subparagraphs (E), (F), (G), and (H). The aggregate face amount of bonds to which this subparagraph applies shall not exceed an amount which, together with the amounts allowed under subparagraphs (E), (F), (G), and (H), does not exceed $250, 000, 000. A res i d e n t ia l re n t a lp ro p er t y p ro j ec t i s d escr ib e d in t hi ss u b p a r a g r a p hi f i t i s am u lt i f ami l yres i d e n t ia l d e v e l o p m e n tl oc a t e d in A rro w h e a d Sp r in g s, w i t hin t h eco u n t yo f S an B er na r d in o, C a l i f or nia, an d a p or t i o n o f t h es i t eo f w hi c h c u rre n tl y i so w n e d b y t h e C am p u s C r u s a d e f or C h r i s t . T h e a gg re g a t e f a ce am o u n t o f b o n d s t o w hi c h t hi ss u b p a r a g r a p ha ppl i ess ha ll n o t e x cee d$ 350,000,000. A residential rental property project is described in this subparagraph if— it is a new residential development with approximately 309 dwelling units located in census tract No. 3202, and there was an inducement ordinance for such project adopted by a city council on November 20, 1985 . The aggregate face amount of bonds to which this subparagraph applies shall not exceed $32, 000, 000. A res i d e n t ia l re n t a lp ro p er t y p ro j ec t i s d escr ib e d in t hi ss u b p a r a g r a p hi f — i t i s an e w res i d e n t ia l d e v e l o p m e n tw i t ha pp ro x ima t e l y 70 d w e ll in gu ni t s l oc a t e d in ce n s u s t r a c tN o .3901, an d t h ere w a s anin d u ce m e n t or d inan ce f ors u c h p ro j ec t a d o pt e d b y a c i t yco u n c i l o n A ugu s t 14, 1984. T h e a gg re g a t e f a ce am o u n t o f b o n d s t o w hi c h t hi ss u b p a r a g r a p ha ppl i ess ha ll n o t e x cee d$ 4,000,000. A residential rental property project is described in this subparagraph if— it is a new residential development with approximately 98 dwelling units located in census tract No. 4701, and there was an inducement ordinance for such project adopted by a city council on August 14, 1984 . The aggregate face amount of bonds to which this subparagraph applies shall not exceed $7, 000, 000. A p ro j ec t or p ro j ec t s a re d escr ib e d in t hi ss u b p a r a g r a p hi f t h ey a re p a r t o f t h e Wi ll o wR o a d res i d e n t ia l im p ro v e m e n tpl anin M e n l o P a r k, C a l i f or nia . T h e a gg re g a t e f a ce am o u n t o f o b l i g a t i o n s t o w hi c h t hi ss u b p a r a g r a p ha ppl i ess ha ll n o t e x cee d$ 9,000,000. A residential rental property project is described in this subparagraph if— an inducement resolution for such project was approved on July 18, 1985 , by the city council, such project was approved by such council on August 11, 1986 , and such project consists of approximately 22 duplexes to be used for housing qualified low and moderate income tenants. The aggregate face amount of bonds to which this subparagraph applies shall not exceed $1, 500, 000. A res i d e n t ia l re n t a lp ro p er t y p ro j ec t i s d escr ib e d in t hi ss u b p a r a g r a p hi f — anin d u ce m e n t reso l u t i o n f ors u c h p ro j ec tw a s a pp ro v e d o n A p r i l 22, 1986, b y t h ec i t yco u n c i l, s u c h p ro j ec tw a s a pp ro v e d b ys u c h co u n c i l o n A ugu s t 11, 1986, an d s u c h p ro j ec t co n s i s t so f a u ni t a p a r t m e n t co m pl e x (ha v in g a pp ro x ima t e l y 60 u ni t s) t o b e u se df or h o u s in g q u a l i f i e d l o w an d m o d er a t e in co m e t e nan t s . T h e a gg re g a t e f a ce am o u n t o f b o n d s t o w hi c h t hi ss u b p a r a g r a p ha ppl i ess ha ll n o t e x cee d$ 1,625,000. A residential rental property project is described in this subparagraph if— a State housing authority granted a notice of official action for the project on May 24, 1985 , and a binding agreement was executed for such project with the State housing finance authority on May 14, 1986 , and such agreement was accepted by the State housing authority on June 5, 1986 . The aggregate face amount of bonds to which this subparagraph applies shall not exceed $7, 800, 000. A res i d e n t ia l re n t a lp ro p er t y p ro j ec t i s d escr ib e d in t hi ss u b p a r a g r a p hi f s u c h p ro j ec t i se i t h ero f 2 p ro j ec t s (l oc a t e d in St . L o u i s, M i sso u r i) w hi c h rece i v e d co mmi t m e n t s t o p ro v i d eco n s t r u c t i o nan d p er man e n t f inan c in g t h ro ug h t h e i ss u an ceo f b o n d s in p r in c i p a l am o u n t so f u pt o$ 242,130 and $654, 045, o n J u l y 16, 1986. T h e a gg re g a t e f a ce am o u n t o f b o n d s t o w hi c h t hi ss u b p a r a g r a p ha ppl i ess ha ll n o t e x cee d$ 1,000,000. A residential rental property project is described in this subparagraph if— a local housing authority approved an inducement resolution for such project on January 28, 1985 , and a suit relating to such project was dismissed without right of further appeal on April 4, 1986 . The aggregate face amount of bonds to which this subparagraph applies shall not exceed $13, 200, 000. A res i d e n t ia l re n t a lp ro p er t y p ro j ec t i s d escr ib e d in t hi ss u b p a r a g r a p hi f — s u c h p ro j ec t i s t h ere n o v a t i o n o f ah o t e l f orres i d e n t s f orse ni orc i t i ze n s, anin d u ce m e n t reso l u t i o n f ors u c h p ro j ec tw a s a d o pt e d o n N o v e mb er 20, 1985, b y t h e St a t eDe v e l o p m e n tF inan ce A u t h or i t y, an d s u c h p ro j ec t i s t o b e l oc a t e d in t h e m e t ro p o l i t ana re a o f t h ec i t y d escr ib e d in p a r a g r a p h (3) (C) . T h e a gg re g a t e f a ce am o u n t o f b o n d s t o w hi c h t hi ss u b p a r a g r a p ha ppl i ess ha ll n o t e x cee d$ 9,500,000. A residential rental property project is described in this subparagraph if— such project is the renovation of apartment housing, an inducement resolution for such project was adopted on December 20, 1985 , by the State Housing Development Authority, and such project is to be located in the metropolitan area of the city described in paragraph (3)(C). The aggregate face amount of bonds to which this subparagraph applies shall not exceed $12, 000, 000. A res i d e n t ia l re n t a lp ro j ec t i s d escr ib e d in t hi ss u b p a r a g r a p hi f i t i s a re n o v a t i o nan d co n s t r u c t i o n p ro j ec t f or l o w - in co m e h o u s in g in ce n t r a l L o u i s v i ll e, Ke n t u c k y, an d l oc a l b o a r d a pp ro v a l f ors u c h p ro j ec tw a s g r an t e d A p r i l 22, 1986. T h e a gg re g a t e f a ce am o u n t o f b o n d s t o w hi c h t hi ss u b p a r a g r a p ha ppl i ess ha ll n o t e x cee d$ 500,000. A residential rental project is described in this subparagraph if— such project is 1 of 6 residential rental projects having in the aggregate approximately 1,010 units, inducement resolutions for such projects were adopted by the county residential finance authority on November 21, 1985 , and a public hearing of the county residential finance authority was held by such authority on December 19, 1985 , regarding such projects to be constructed by an in-commonwealth developer. The aggregate face amount of bonds to which this subparagraph applies shall not exceed $62, 000, 000. A res i d e n t ia l re n t a lp ro j ec t i s d escr ib e d in t hi ss u b p a r a g r a p hi f — anin d u ce m e n t reso l u t i o n w i t h res p ec tt os u c h p ro j ec tw a s a d o pt e d b y t h e St a t e h o u s in g d e v e l o p m e n t a u t h or i t yo n J an u a ry 25, 1985, an d t h e i ss u an ceo f b o n d s f ors u c h p ro j ec tw a s t h es u bj ec t o f a l a w s u i t f i l e d o n O c t o b er 25, 1985. T h e a gg re g a t e f a ce am o u n t o f b o n d s t o w hi c h t hi ss u b p a r a g r a p ha ppl i ess ha ll n o t e x cee d$ 64,000,000. A project or projects are described in this subparagraph if they are financed with bonds issued by the Tulare, California, County Housing Authority. The aggregate face amount of obligations to which this subparagraph applies shall not exceed $8, 000, 000. A res i d e n t ia l re n t a lp ro j ec t i s d escr ib e d in t hi ss u b p a r a g r a p hi f s u c h p ro j ec t i s am u lt i f ami l y mi x e d - u se h o u s in g p ro j ec tl oc a t e d ina c i t y d escr ib e d in p a r a g r a p h (3) (C), t h ezo nin g f or w hi c h w a sc han g e d t ores i d e n t ia l - b u s in ess pl ann e dd e v e l o p m e n t o n N o v e mb er 26, 1985, an d w i t h res p ec tt o w hi c hb o t h t h ec i t yo n Dece mb er 4, 1985, an d t h es t a t e h o u s in g f inan ce a g e n cyo n Dece mb er 20, 1985, a d o pt e d in d u ce m e n t reso l u t i o n s . T h e a gg re g a t e f a ce am o u n t o f o b l i g a t i o n s t o w hi c h t hi ss u b p a r a g r a p ha ppl i ess ha ll n o t e x cee d$ 90,000,000. A residential rental property project is described in this subparagraph if it is the Carriage Trace residential rental project in Clinton, Tennessee. The aggregate face amount of bonds to which this subparagraph applies shall not exceed $10, 000, 000. A res i d e n t ia l re n t a lp ro p er t y p ro j ec t i s d escr ib e d in t hi ss u b p a r a g r a p hi f — a co n t r a c tt o p u rc ha ses u c h p ro p er t y w a s d a t e d a so f A ugu s t 9, 1985, t h ere w a s anin d u ce m e n t reso l u t i o na d o pt e d o n S e pt e mb er 27, 1985, f or t h e i ss u an ceo f o b l i g a t i o n s t o f inan ces u c h p ro p er t y, t h ere w a s a St a t eco u r t f ina l v a l i d a t i o n o f s u c h f inan c in g o n N o v e mb er 15, 1985, an d t h ecer t i f i c a t eo f n o na pp e a l f ro m s u c h v a l i d a t i o n w a s a v ai l ab l eo n Dece mb er 15, 1985. T h e a gg re g a t e f a ce am o u n t o f b o n d s t o w hi c h t hi ss u b p a r a g r a p ha ppl i ess ha ll n o t e x cee d$ 27,750,000. The amendments made by section 1301 [for classification see section 1311(a) of this note] shall not apply to any qualified student loan bonds (as defined in section 144 of the 1986 Code) issued by the Volunteer State Student Assistance Corporation incorporated on February 20, 1985 . The aggregate face amount of bonds to which this paragraph applies shall not exceed $130, 000, 000. I n t h ec a seo f b o n d s t o w hi c h t hi s p a r a g r a p ha ppl i es, t h ere q u i re m e n t so f sec t i o n s 148 an d 149 (d) o f t h e 1986 C o d es ha ll b e t re a t e d a s in c l u d e d in sec t i o n 103 o f t h e 1954 C o d e an d s ha ll a ppl y t os u c hb o n d s . T h e t re a t m e n t o f ann u i t yco n t r a c t s a s in v es t m e n tp ro p er t y u n d ersec t i o n 148 (b) (2) o f t h e 1986 C o d es ha ll n o t a ppl y t o an y b o n dd escr ib e d inan yo f t h e f o ll o w in g s u b p a r a g r a p h s : A b o n d i s d escr ib e d in t hi ss u b p a r a g r a p hi f s u c hb o n d i s i ss u e d b y a c i t y l oc a t e d inan o n co n t i gu o u s St a t e i f — t h e a u t h or i t y t o a c q u i res u c ha co n t r a c tw a s a pp ro v e d o n S e pt e mb er 24, 1985, b yc i t yor d inan ce A 085-176, an df or ma l bi d re q u es t s f ors u c h co n t r a c t s w ere mai l e d t o in s u r an ceco m p ani eso n S e pt e mb er 6, 1985. T h e a gg re g a t e f a ce am o u n t o f b o n d s t o w hi c h t hi ss u b p a r a g r a p ha ppl i ess ha ll n o t e x cee d$ 57,000,000. A bond is described in this subparagraph if— on or before May 12, 1985 , the governing board of the city pension fund authorized an agreement with an underwriter to provide planning and financial guidance for a possible bond issue, and the proceeds of the sale of such bond issue are to be used to purchase an annuity to fund the unfunded liability of the City of Berkeley, California’s Safety Members Pension Fund. The aggregate face amount of bonds to which this subparagraph applies shall not exceed $40, 000, 000. A b o n d i s d escr ib e d in t hi ss u b p a r a g r a p hi f s u c hb o n d i s i ss u e d b y t h e S o u t h D ak o t a B u i l d in g A u t h or i t y i f o n S e pt e mb er 18, 1985, re p rese n t a t i v eso f s u c ha u t h or i t y an d i t s u n d er w r i t ers m e tw i t hb o n d co u n se l an d a pp ro v e df inan c in g t h e p u rc ha seo f anann u i t yco n t r a c tt h ro ug h t h es a l e an d l e a se ba c k o f St a t e p ro p er t i es . T h e a gg re g a t e f a ce am o u n t o f b o n d s t o w hi c h t hi ss u b p a r a g r a p ha ppl i ess ha ll n o t e x cee d$ 175,000,000. A bond is described in this subparagraph if— such bond is issued by Los Angeles County, and such county, before September 25, 1985 , paid or incurred at least $50, 000 o f cos t sre l a t e d t o t h e i ss u an ceo f s u c hb o n d s . T h e a gg re g a t e f a ce am o u n t o f b o n d s t o w hi c h t hi ss u b p a r a g r a p ha ppl i ess ha ll n o t e x cee d$ 500,000,000. The amendments made by section 1301 [for classification see section 1311(a) of this note] shall not apply to any solid waste disposal facility if— construction of such facility was approved by State law I.C. 36–9–31, there was an inducement resolution on November 19, 1984 , for the bonds with respect to such facility, and a carryforward election of unused 1984 volume cap was made for such project on February 25, 1985 . The aggregate face amount of bonds to which this paragraph applies shall not exceed $120, 000, 000. T h eres ha ll n o t b e t ak e nin t o a cco u n t u n d ersec t i o n 146 o f t h e 1986 C o d e an yre f u n d in g o f b o n d an t i c i p a t i o nn o t es — i ss u e d in Dece mb ero f 1984 b y t h e R h o d e I s l an d Ho u s in g an d M or t g a g e F inan ce C or p or a t i o n, w hi c hma t u re in Dece mb ero f 1986, w hi c hi s n o t ana d v an cere f u n d in g w i t hin t h e m e anin g o f sec t i o n 149 (d) (5) [n o w 149 (d) (2)] o f t h e 1986 C o d e (d e t er min e d b ys u b s t i t u t in g ‘180 d a ys ’ f or ‘90 d a ys ’ t h ere in), an d t h e a gg re g a t e f a ce am o u n t o f t h ere f u n d in g b o n d s d oes n o t e x cee d$ 25,500,000. The amendments made by section 1301 [for classification see section 1311(a) of this note] shall not apply to a bond issued as part of an issue 95 percent or more of the net proceeds of which are to be used to provide any airport (within the meaning of section 103(b)(4)(D) of the 1954 Code) if such airport is a mid-field airport terminal and accompanying facilities at a major air carrier airport which during April 1980 opened a new precision instrument approach runway 10R28L. The aggregate face amount of bonds to which this subparagraph applies shall not exceed $425, 000, 000. A b o n d i ss u e d a s a p a r t o f ani ss u e 95 p erce n t or m oreo f t h e n e tp rocee d so f w hi c ha re t o b e u se d t o p ro v i d e ama ssco mm u t in g f a c i l i t y (w i t hin t h e m e anin g o f sec t i o n 103 (b) (4) (D) o f t h e 1954 C o d e) s ha ll b e t re a t e d a s an e x e m pt f a c i l i t y b o n d (f or f a c i l i t i es d escr ib e d in sec t i o n 142 (a) (3) o f t h e 1986 C o d e) f or p u r p oseso f p a r t I V o f s u b c ha pt er B o f c ha pt er 1 o f t h e 1986 C o d e i f s u c h f a c i l i t y i s d escr ib e d in 1 o f t h e f o ll o w in g s u b p a r a g r a p h s : A f a c i l i t y i s d escr ib e d in t hi ss u b p a r a g r a p hi f — s u c h f a c i l i t y p ro v i d es a ccess t o anin t er na t i o na l ai r p or t, a cor p or a t i o n w a s f or m e d in co nn ec t i o n w i t h s u c h p ro j ec t in S e pt e mb er 1984, t h e B o a r d o f D i rec t orso f s u c h cor p or a t i o na u t h or i ze d t h e hi r in g o f v a r i o u s f i r m s t oco n d u c t a f e a s ibi l i t ys t u d y w i t h res p ec tt os u c h p ro j ec t in A p r i l 1985, an d s u c h f e a s ibi l i t ys t u d y w a sco m pl e t e d in N o v e mb er 1985. T h e a gg re g a t e f a ce am o u n t o f b o n d s t o w hi c h t hi ss u b p a r a g r a p ha ppl i ess ha ll n o t e x cee d$ 150,000,000. A facility is described in this subparagraph if— enabling legislation with respect to such project was approved by the State legislature in 1979, a 1-percent local sales tax assessment to be dedicated to the financing of such project was approved by the voters on August 13, 1983 , and a capital fund with respect to such project was established upon the issuance of $90, 000, 000 o f n o t eso n O c t o b er 22, 1985. T h e a gg re g a t e f a ce am o u n t o f b o n d s t o w hi c h t hi ss u b p a r a g r a p ha ppl i ess ha ll n o t e x cee d$ 200,000,000 and such bonds must be issued before January 1, 1996 . A facility is described in this subparagraph if— bonds issued therefor are issued by or on behalf of an authority organized in 1979 pursuant to enabling legislation originally enacted by the State legislature in 1973, and such facility is part of a system connector described in a resolution adopted by the board of directors of the authority on March 27, 1986 . The aggregate face amount of bonds to which this subparagraph applies shall not exceed $400, 000, 000. N o tw i t h s t an d in g t h e l a s tp a r a g r a p h o f t hi ss u b sec t i o n, t hi ss u b p a r a g r a p h s ha ll a ppl y t o b o n d s i ss u e d b e f ore J an u a ry 1, 1996. A f a c i l i t y i s d escr ib e d in t hi ss u b p a r a g r a p hi f — t h e f a c i l i t y i s a f i x e d gu i d e w a y p ro j ec t, e nab l in g l e g i s l a t i o n w i t h res p ec tt o t h e i ss u in g a u t h or i t y w a s a pp ro v e d b y t h e St a t e l e g i s l a t u re in M a y 1973, o n O c t o b er 28, 1985, ab o a r d i ss u e d a re q u es t f orco n s u lt an t s t oco n d u c t a f e a s ibi l i t ys t u d yo nma ss t r an s i t corr i d or ana l ys i s in co nn ec t i o n w i t h t h e f a c i l i t y, an d o n M a y 12, 1986, ab o a r d a pp ro v e d a f u r t h er bin d in g co n t r a c t f ore x p e n d i t u reso f a pp ro x ima t e l y$ 1,494,963, to be expended on a facility study. The aggregate face amount of bonds to which this subparagraph applies shall not exceed $250, 000, 000. N o tw i t h s t an d in g t h e l a s tp a r a g r a p h o f t hi ss u b sec t i o n, t hi ss u b p a r a g r a p h s ha ll a ppl y t o b o n d s i ss u e d b e f ore J an u a ry 1, 1996. S u b sec t i o n s (c) (2) an d (f) o f sec t i o n 148 o f t h e 1986 C o d es ha ll n o t a ppl y t o an y b o n d w hi c hi s i ss u e d a s p a r t o f ani ss u e i f s u c hb o n d — i s i ss u e d b y a p o l i t i c a l s u b d i v i s i o n p u rs u an tt o h o m er u l e an d in t er l oc a l coo p er a t i o n p o w ersco n f erre d b y t h eco n s t i t u t i o nan d l a w so f a St a t e t o p ro v i d e f u n d s t o f inan ce t h ecos t so f t h e p u rc ha se an d co n s t r u c t i o n o f e d u c a t i o na l f a c i l i t i es f or p r i v a t eco ll e g es an d u ni v ers i t i es, an d w a s t h es u bj ec t o f a reso l u t i o n o f o ff i c ia l a c t i o nb ys u c h p o l i t i c a l s u b d i v i s i o n (R eso l u t i o n N o .86-1039) a d o pt e d b y t h e g o v er nin g b o d yo f s u c h p o l i t i c a l s u b d i v i s i o n o n M a rc h 18, 1986. T h e a gg re g a t e f a ce am o u n t o f b o n d s t o w hi c h t hi s p a r a g r a p ha ppl i ess ha ll n o t e x cee d$ 100,000,000. Section 147(b) of the 1986 Code shall not apply to any hospital pooled financing program with respect to which— a formal presentation was made to a city hospital facilities authority on January 14, 1986 , and such authority passed a resolution approving the bond issue in principle on February 5, 1986 . The aggregate face amount of bonds to which this subparagraph applies shall not exceed $95, 000, 000. S u b sec t i o n s (c) (2) an d (f) o f sec t i o n 148 o f t h e 1986 C o d es ha ll n o t a ppl y t o b o n d s f or w hi c h c l os in g occ u rre d o n J u l y 16, 1986, an df or w hi c ha St a t e m u ni c i p a ll e a gu eser v e d a s a d mini s t r a t or f or u se ina St a t e d escr ib e d in sec t i o n 103 A (g) (5) (C) o f t h e I n t er na lR e v e n u e C o d eo f 1954. T h e a gg re g a t e f a ce am o u n t o f o b l i g a t i o n s t o w hi c h t hi ss u b p a r a g r a p ha ppl i ess ha ll n o t e x cee d$ 585,000,000. Subsection (b) of section 626 of the Tax Reform Act of 1984 [ section 626(b) of Pub. L. 98–369 , set out as a note under section 103 of this title ] is amended by adding at the end thereof the following new paragraph: “ ‘(7) Exception for certain downtown redevelopment project .—The amendments made by this section shall not apply to any obligation which is issued as part of an issue 95 percent or more of the proceeds of which are to be used to provide a project to acquire and redevelop a downtown area if— “ ‘(A) on August 15, 1985 , a downtown redevelopment authority adopted a resolution to issue obligations for such project, “ ‘(B) before September 26, 1985 , the city expended, or entered into binding contracts to expend, more than $10, 000, 000 in co nn ec t i o n w i t h s u c h p ro j ec t, an d “ ‘ (C) t h e St a t es u p re m eco u r t i ss u e d a r u l in g re g a r d in g t h e p ro p ose df inan c in g s t r u c t u re f ors u c h p ro j ec t o n Dece mb er 11, 1985. T h e a gg re g a t e f a ce am o u n t o f o b l i g a t i o n s t o w hi c h t hi s p a r a g r a p ha ppl i ess ha ll n o t e x cee d$ 85,000,000 and such obligations must be issued before January 1, 1992 .’ A bond issued as part of an issue 95 percent or more of the net proceeds of which are to be used to provide any mass commuting facility or parking facility (within the meaning of section 103(b)(4)(D) of the 1954 Code) shall be treated as an exempt facility bond for purposes of part IV of subchapter B of chapter 1 of the 1986 Code if such facility is provided in connection with the rehabilitation, renovation, or other improvement to an existing railroad station owned on the date of the enactment of this Act [ Oct. 22, 1986 ] by the National Railroad Passenger Corporation in the Northeast Corridor and which was placed in partial service in 1934 and was placed in the National Register of Historic Places in 1978. The aggregate face amount of bonds to which this paragraph applies shall not exceed 750,000,000, not more than 35,000,000. Section 144(a)(12) of the 1986 Code shall not apply to any bond issued as part of an issue 95 percent or more of the net proceeds of which are to be used to provide a facility described in any of the following subparagraphs: A facility is described in this subparagraph if— the facility is a hotel and office facility located in a State capital, the economic development corporation of the city in which the facility is located adopted an initial inducement resolution on October 30, 1985 , and a feasibility consultant was retained on February 21, 1986 , with respect to such facility. The aggregate face amount of bonds to which this subparagraph applies shall not exceed $10, 000, 000. A f a c i l i t y i s d escr ib e d in t hi ss u b p a r a g r a p hi f s u c h f a c i l i t y i s f inan ce d b y b o n d s i ss u e d b y a St a t e f inan ce a u t h or i t y w hi c h w a scre a t e d in A p r i l 1985 b y A c t 1062 o f t h e St a t e G e n er a l A sse mb l y, an d t h e B o n d G u a r an t ee A c t (A c t 505 o f 1985) a ll o w e d s u c ha u t h or i t y t o pl e d g e t h e in t eres t f ro min v es t m e n t o f t h e St a t e ’ s g e n er a l f u n d a s a gu a r an t ee f or b o n d s i ss u e d b ys u c ha u t h or i t y . T h e a gg re g a t e f a ce am o u n t o f b o n d s t o w hi c h t hi ss u b p a r a g r a p ha ppl i ess ha ll n o t e x cee d$ 75,000,000. A facility is described in this subparagraph if such facility is a downtown mall and parking project for Holland, Michigan, with respect to which an initial agreement was formulated with the city in May 1985 and a formal memorandum of understanding was executed on July 2, 1986 . The aggregate face amount of bonds to which this subparagraph applies shall not exceed $18, 200, 000. A f a c i l i t y i s d escr ib e d in t hi ss u b p a r a g r a p hi f s u c h f a c i l i t y i s a d o w n t o w nma ll an d p a r kin g r am pp ro j ec t f or T r a v erse C i t y, M i c hi g an, w i t h res p ec tt o w hi c ha f ina l d e v e l o p m e n t a g ree m e n tw a ss i g n e d in J u n e 1986. T h e a gg re g a t e f a ce am o u n t o f b o n d s t o w hi c h t hi ss u b p a r a g r a p ha ppl i ess ha ll n o t e x cee d$ 21,500,000. A facility is described in this subparagraph if such facility is the rehabilitation of the Heritage Hotel in Marquette, Michigan. The aggregate face amount of bonds to which this subparagraph applies shall not exceed $5, 000, 000. A f a c i l i t y i s d escr ib e d in t hi ss u b p a r a g r a p hi f i t i s t h e L ak e l an d C e n t erHo t e l in L ak e l an d, Fl or i d a . T h e a gg re g a t e f a ce am o u n t o f o b l i g a t i o n s t o w hi c h t hi ss u b p a r a g r a p ha ppl i ess ha ll n o t e x cee d$ 10,000,000. A facility is described in this subparagraph if it is the Marble Arcade office building renovation project in Lakeland, Florida. The aggregate face amount of obligations to which this subparagraph applies shall not exceed $5, 900, 000. A f a c i l i t y i s d escr ib e d in t hi ss u b p a r a g r a p hi f i t i s am e d i c a l o ff i ce b u i l d in g in B r a d e n t o n, Fl or i d a, w i t h res p ec tt o w hi c h — am e m or an d u m o f a g ree m e n tw a se n t ere d in t oo n O c t o b er 17, 1985, an d t h ec i t yco u n c i l h e l d a p u b l i c h e a r in g an d a pp ro v e d i ss u an ceo f t h e b o n d so n N o v e mb er 13, 1985. T h e a gg re g a t e f a ce am o u n t o f o b l i g a t i o n s t o w hi c h t hi ss u b p a r a g r a p ha ppl i ess ha ll n o t e x cee d$ 8,500,000. A facility is described in this subparagraph if it consists of the rehabilitation of the Andover Town Hall in Andover, Massachusetts. The provisions of section 149(b) of the 1986 Code (relating to federally guaranteed obligations) shall not apply to obligations to finance such project solely as a result of the occupation of a portion of such building by a United States Post Office. For purposes of determining whether any bond to which this subparagraph applies is a qualified small issue bond, there shall not be taken into account under section 144(a) of the 1986 Code capital expenditures with respect to any facility of the United States Government and there shall not be taken into account any bond allocable to the United States Government. A facility is described in this subparagraph if it is the Central Bank Building renovation project in Grand Rapids, Michigan. The aggregate face amount of obligations to which this subparagraph applies shall not exceed $1, 000, 000. F or p u r p oseso fd e t er minin g w h e t h er an y b o n d i s a p r i v a t e a c t i v i t y b o n d, anam o u n t o f l o an s (b u t n o t in e x cesso f$ 75,000,000) provided from the proceeds of 1 or more issues shall not be taken into account if such loans are provided in furtherance of— a city Emergency Conservation Plan as set forth in an ordinance adopted by the city council of such city on February 17, 1983 , or a resolution adopted by the city council of such city on March 10, 1983 , committing such city to a goal of reducing the peak load of such city’s electric generation and distribution system by 553 megawatts in 15 years. The nonqualified amount of the proceeds of an issue shall not be taken into account under section 141(b)(5) of the 1986 Code or in determining whether a bond described in subparagraph (B) (which is part of such issue) is a private activity bond for purposes of section 103 and part IV of subchapter B of chapter 1 of the 1986 Code. A bond is described in this subparagraph if— such bond is issued before January 1, 1993 , by the State of Connecticut, and such bond is issued pursuant to a resolution of the State Bond Commission adopted before September 26, 1985 . The nonqualified amount to which this paragraph applies shall not exceed $150, 000, 000. F or p u r p oseso f t hi s p a r a g r a p h, t h e t er m ‘ n o n q u a l i f i e d am o u n t ’ ha s t h e m e anin gg i v e n s u c h t er mb ysec t i o n 141 (b) (8) o f t h e 1986 C o d e, e x ce ptt ha t s u c h t er m s ha ll in c l u d e t h e am o u n t o f t h e p rocee d so f ani ss u e w hi c hi s t o b e u se d (d i rec tl yor in d i rec tl y) t o mak eor f inan ce l o an s (o t h er t han l o an s d escr ib e d in sec t i o n 141 (c) (2) o f t h e 1986 C o d e) t o p erso n so t h er t han g o v er nm e n t a l u ni t s . F or p u r p oseso f sec t i o n 146 o f t h e 1986 C o d e, an ye x e m pt f a c i l i t y b o n df or t h e f o ll o w in g f a c i l i t ys ha ll n o t b e t ak e nin t o a cco u n t : T h e f a c i l i t y i s a f a c i l i t y f or t h e f u r ni s hin g o f w a t er w hi c h w a s a u t h or i ze d u n d er P u b l i c L a w 90-537 [43 U . S . C .1501 e t se q .] o f t h e U ni t e d St a t es i f — co n s t r u c t i o n o f s u c h f a c i l i t y b e g an o n M a y 6, 1973, an df or w a r df u n d in g w i ll b e p ro v i d e df or t h ere main d ero f t h e p ro j ec tp u rs u an tt o an e g o t ia t e d a g ree m e n t b e tw ee n St a t e an d l oc a lw a t er u sers an d t h e S ecre t a ryo f t h e I n t er i ors i g n e d A p r i l 15, 1986. T h e a gg re g a t e f a ce am o u n t o f b o n d s t o w hi c h t hi ss u b p a r a g r a p ha ppl i ess ha ll n o t e x cee d$ 391,000,000. A bond shall be treated as described in paragraph (2) of section 1316(f) of this Act if— such bond would be so described but for the substitution specified in such paragraph, on January 7, 1983 , an application for a preliminary permit was filed for the project for which such bond is issued and received docket no. 6986, and on September 20, 1983 , the Federal Energy Regulatory Commission issued an order granting the preliminary permit for the project. The aggregate face amount of bonds to which this paragraph applies shall not exceed $12, 000, 000. T h e St a t ece i l in g a ppl i c ab l e u n d ersec t i o n 146 o f t h e 1986 C o d e f orc a l e n d a rye a r 1987 f or t h e St a t e w hi c h r a t i f i e d t h e U ni t e d St a t es C o n s t i t u t i o n o n M a y 29, 1790, s ha ll b e$ 150,000,000 higher than the State ceiling otherwise applicable under such section for such year. Proceeds of an issue described in any of the following subparagraphs shall not be taken into account under section 145(b) of the 1986 Code. Proceeds of an issue are described in this subparagraph if— such proceeds are used to provide medical school facilities or medical research and clinical facilities for a university medical center, such proceeds are of— a $21, 550, 000 i ss u e d a t e d A ugu s t 1, 1980, a$ 84,400,000 issue dated September 1, 1984 , and a $48, 500, 000 i ss u e (S er i es 1985 A an d 1985 B) d a t e d o n Dece mb er 1, 1985, an d t h e i ss u ero f a ll s u c hi ss u es i s t h es am e . P rocee d so f ani ss u e a re d escr ib e d in t hi ss u b p a r a g r a p hi f s u c h p rocee d s a re f or u se b y Ya l e U ni v ers i t y an d — t h e b o n d s a re i ss u e d a f t er A ugu s t 8, 1986, b y t h e St a t eo f C o nn ec t i c u t He a lt han d E d u c a t i o na lF a c i l i t i es A u t h or i t y, or t h e b o n d s a re t h e 1 s t or 2 n d re f u n d in g s (in c l u d in g a d v an cere f u n d in g s) o f t h e b o n d s d escr ib e d in c l a u se (i) oro f or i g ina l b o n d s i ss u e d b e f ore A ugu s t 7, 1986, b ys u c h A u t h or i t y . T h e a gg re g a t e f a ce am o u n t o f b o n d s t o w hi c h t hi ss u b p a r a g r a p ha ppl i ess ha ll n o t e x cee d$ 90,000,000. Proceeds of an issue are described in this subparagraph if— such issue is issued on behalf of a university established by Charter granted by King George II of England on October 31, 1754 , to accomplish a refunding (including an advance refunding) of bonds issued to finance 1 or more projects, and the application or other request for the issuance of the issue to the appropriate State issuer was made by or on behalf of such university before February 26, 1986 . The aggregate face amount of bonds to which this subparagraph applies shall not exceed $250, 000, 000. P rocee d so f ani ss u e a re d escr ib e d in t hi ss u b p a r a g r a p hi f — s u c h p rocee d s a re t o b e u se df or f inan ceco n s t r u c t i o n o f an e w s t u d e n t recre a t i o n ce n t er, a co n t r a c t f or t h e d e v e l o p m e n tp ha seo f t h e p ro j ec tw a ss i g n e d b y t h e u ni v ers i t yo n M a y 21, 1986, w i t ha p r i v a t eco m p an y f or 5 p erce n t o f t h ecos t so f t h e p ro j ec t, an d a co mmi tt eeo f t h e u ni v ers i t y b o a r d o f a d mini s t r a t ors a pp ro v e d t h e maj or p ro g r am e l e m e n t s f or t h ece n t ero n A ugu s t 11, 1986. T h e a gg re g a t e f a ce am o u n t o f b o n d s t o w hi c h t hi ss u b p a r a g r a p ha ppl i ess ha ll n o t e x cee d$ 25,000,000. Proceeds of an issue are described in this subparagraph if— such proceeds are to be used in the construction of new life sciences facilities for a university for medical research and education, the president of the university authorized a faculty/administration planning committee for such facilities on September 17, 1982 , the trustees of such university authorized site and architect selection on October 30, 1984 , and the university negotiated a $2, 600, 000 co n t r a c tw i t h t h e a rc hi t ec t o n A ugu s t 9, 1985. T h e a gg re g a t e f a ce am o u n t o f b o n d s t o w hi c h t hi ss u b p a r a g r a p ha ppl i ess ha ll n o t e x cee d$ 47,500,000. Proceeds of an issue are described in this subparagraph if such proceeds are to be used to renovate undergraduate chemistry and engineering laboratories, and to rehabilitate other basic science facilities, for an institution of higher education in Philadelphia, Pennsylvania, chartered by legislative Acts of the Commonwealth of Pennsylvania, including an Act dated September 30, 1791 . The aggregate face amount of bonds to which this subparagraph applies shall not exceed $6, 500, 000. P rocee d so f ani ss u e a re d escr ib e d in t hi ss u b p a r a g r a p hi f s u c h p rocee d s a reo f b o n d s w hi c ha re t h e f i rs t a d v an cere f u n d in g o f b o n d s i ss u e dd u r in g 1985 f or t h e d e v e l o p m e n t o f a co m p u t er n e tw or k, an d co n s t r u c t i o nan d re n o v a t i o n orre habi l i t a t i o n o f o t h er f a c i l i t i es, f or anin s t i t u t i o n o f hi g h ere d u c a t i o n d escr ib e d in s u b p a r a g r a p h (F) . T h e a gg re g a t e f a ce am o u n t o f b o n d s t o w hi c h t hi ss u b p a r a g r a p ha ppl i ess ha ll n o t e x cee d$ 80,000,000. Proceeds of an issue are described in this subparagraph if— the issue is issued on behalf of a university founded in 1789, and the proceeds of the issue are to be used to finance projects (to be determined by such university and the issuer) which are similar to those projects intended to be financed by bonds that were the subject of a request transmitted to Congress on November 7, 1985 [.] The aggregate face amount of bonds to which this subparagraph applies shall not exceed $200, 000, 000. B o n d s t o w hi c h t hi ss u b p a r a g r a p ha ppl i ess ha ll b e t re a t e d a s q u a l i f i e d 501 (c) (3) b o n d s i f s u c hb o n d s w o u l d n o t (i f i ss u e d o n A ugu s t 15, 1986) b e in d u s t r ia l d e v e l o p m e n t b o n d s (a s d e f in e d in sec t i o n 103 (b) (2) o f t h e 1954 C o d e), an d sec t i o n 147 (f) o f t h e 1986 C o d es ha ll n o t a ppl y t o t h e i ss u eo f w hi c h s u c hb o n d s a re a p a r t . B o n d s i ss u e d t o f inan ce f a c i l i t i es d escr ib e d in t hi ss u b p a r a g r a p h s ha ll b e t re a t e d a s i ss u e d t o f inan ces u c h f a c i l i t i es n o tw i t h s t an d in g t h e f a c tt ha t a p er i o d in e x cesso f 1 ye a r ha se x p i re d s in ce t h e f a c i l i t i es w ere pl a ce d in ser v i ce . P rocee d so f ani ss u e a re d escr ib e d in t hi ss u b p a r a g r a p hi f t h e i ss u e i s i ss u e d o nb e ha l f o f a u ni v ers i t yes t ab l i s h e d o n A ugu s t 6, 1872, f or a p ro j ec t a pp ro v e d b y t h e t r u s t ees t h ereo f o n N o v e mb er 1, 1985. T h e a gg re g a t e f a ce am o u n t o f b o n d s t o w hi c h t hi ss u b p a r a g r a p ha ppl i ess ha ll n o t e x cee d$ 100,000,000. Proceeds of an issue are described in this subparagraph if— the issue is issued on behalf of a university for which the founding grant was signed on November 11, 1885 , and such bond is issued for the purpose of providing a Near West Campus Redevelopment Project and a Student Housing Project. The aggregate face amount of bonds to which this subparagraph applies shall not exceed $105, 000, 000. P rocee d so f ani ss u e a re d escr ib e d in t hi ss u b p a r a g r a p hi f — t h ey a re t h e p rocee d so f a d v an cere f u n d in g o b l i g a t i o n s i ss u e d o nb e ha l f o f a u ni v ers i t yes t ab l i s h e d o n A p r i l 21, 1831, an d t h e a ppl i c a t i o n oro t h erre q u es t f or t h e i ss u an ceo f s u c h o b l i g a t i o n s w a s ma d e t o t h e a pp ro p r ia t e St a t e i ss u er b e f ore J u l y 12, 1986. T h e a gg re g a t e f a ce am o u n t o f o b l i g a t i o n s t o w hi c h t hi ss u b p a r a g r a p ha ppl i ess ha ll n o t e x cee d$ 175,000,000. Proceeds of an issue are described in this subparagraph if— the issue or issues are for the purpose of financing or refinancing costs associated with university facilities including at least 900 units of housing for students, faculty, and staff in up to two buildings and an office building containing up to 245,000 square feet of space, and a bond act authorizing the issuance of such bonds for such project was adopted on July 8, 1986 , and such act under Federal law was required to be transmitted to Congress. The aggregate face amount of obligations to which this subparagraph applies shall not exceed $112, 000, 000. P rocee d so f ani ss u e a re d escr ib e d in t hi ss u b p a r a g r a p hi f s u c hi ss u e i s f or C or n e ll U ni v ers i t y inana gg re g a t e f a ce am o u n t o f n o t m ore t han$ 150,000,000. Proceeds of an issue are described in this subparagraph if such issue is issued on behalf of the Society of the New York Hospital to finance completion of a project commenced by such hospital in 1981 for construction of a diagnostic and treatment center or to refund bonds issued on behalf of such hospital in connection with the construction of such diagnostic and treatment center or to finance construction and renovation projects associated with an inpatient psychiatric care facility. The aggregate face amount of bonds to which this subparagraph applies shall not exceed $150, 000, 000. A n y b o n d t o w hi c h sec t i o n 145 (b) o f t h e 1986 C o d e d oes n o t a ppl y b yre a so n o f t hi s p a r a g r a p h (o t h er t han s u b p a r a g r a p h (A) t h ereo f) s ha ll b e t ak e nin t o a cco u n t in d e t er minin g w h e t h ers u c h sec t i o na ppl i es t o an y l a t er i ss u e . I n t h ec a seo f an yre f u n d in g b o n d — t o w hi c han ys u b p a r a g r a p h o f t hi s p a r a g r a p ha ppl i es, an d t o w hi c h t h e l a s t se n t e n ceo f sec t i o n 1313 (c) (2) a ppl i es, s u c hb o n d s ha ll b e t re a t e d a s ha v in g s u c h s u b p a r a g r a p ha ppl y (an d t h ere f u n d in g b o n d s ha ll b e t re a t e df or p u r p oseso f s u c h sec t i o na s i ss u e d b e f ore J an u a ry 1, 1986, an d a s n o t b e in g ana d v an cere f u n d in g) u n l ess t h e i ss u ere l ec t s t h eo pp os i t eres u lt . S ec t i o n 148 (f) o f t h e 1986 C o d es ha ll n o t a ppl y t o an y p er i o d b e f ore O c t o b er 1, 1990, w i t h res p ec tt o an y b o n d t h e p rocee d so f w hi c ha re t o b e u se d t o p ro v i d e ahi g h - s p ee d r ai l sys t e m f or t h e St a t eo f O hi o . T h e a gg re g a t e f a ce am o u n t o f b o n d s t o w hi c h t hi s p a r a g r a p ha ppl i ess ha ll n o t e x cee d$ 2,000,000,000. In the case of a carryforward under section 103(n)(10) of the 1954 Code of $170, 000, 000 o f b o n d l imi t f orc a l e n d a rye a r 1984 f or a p ro j ec t d escr ib e d in s u b p a r a g r a p h (B), c l a u se (i) o f sec t i o n 103 (n) (10) (C) o f t h e 1954 C o d es ha ll b e a ppl i e d b ys u b s t i t u t in g ‘6 c a l e n d a rye a rs ’ f or ‘3 c a l e n d a rye a rs ’, an d s u c h c a rry f or w a r d ma y b e u se d b y an y a u t h or i t y d es i g na t e d b y t h e St a t e in w hi c h t h e f a c i l i t y i s l oc a t e d . A p ro j ec t i s d escr ib e d in t hi ss u b p a r a g r a p hi f — s u c h p ro j ec t i s a f a c i l i t y f or l oc a l f u r ni s hin g o f e l ec t r i c i t y d escr ib e d in sec t i o n 645 o f t h e T a x R e f or m A c t o f 1984 [P u b . L .98-369, d i v . A, t i tl e V I, § 645, J u l y 18, 1984, 98 St a t .940], an d co n s t r u c t i o n o f s u c h f a c i l i t yco mm e n ce d w i t hin t h e 3 - ye a r p er i o df o ll o w in g t h ec a l e n d a rye a r in w hi c h t h ec a rry f or w a r d a rose . A b o n d i ss u e d t o f inan ce p u rc ha seo f p o w er f ro ma p o w er f a c i l i t y a t a d amb e in g re n o v a t e d p u rs u an tt o P . L .98-381 [43 U . S . C .619 e t se q .] s ha ll n o t b e t re a t e d a s a p r i v a t e a c t i v i t y b o n d i f i tw o u l d n o t b es u c h u n d ersec t i o n 141 (b) (1) an d (2) o f t h e 1986 C o d e i f 25 p erce n tw eres u b s t i t u t e df or 10 p erce n t an d t h e p ro v i s i o n so f sec t i o n 141 (b) (3), (4), an d (5) o f t h e 1986 C o d e d i d n o t a ppl y . T h e a gg re g a t e f a ce am o u n t o f b o n d s t o w hi c h t hi s p a r a g r a p ha ppl i ess ha ll n o t e x cee d$ 400,000,000. A bond issued as part of either of 2 issues no later than September 8, 1986 , shall be treated as a qualified mortgage bond within the meaning of section 141(d)(1)(B) of the 1986 Code if it satisfies the requirements of section 103A of the 1954 Code and if the issues are issued by the two most populous cities in the Tar Heel State. The aggregate face amount of bonds to which this paragraph applies shall not exceed $4, 000, 000. A b o n d s ha ll b e t re a t e d a s an e x e m pt f a c i l i t y b o n d w i t hin t h e m e anin g o f sec t i o n 142 (a) o f t h e 1986 C o d e i f i t i s i ss u e d t o f u n d res i d e n t ia l, o ff i ce, re t ai l, l i g h t in d u s t r ia l, recre a t i o na l an d p a r kin g d e v e l o p m e n t kn o w na s T o ba cco R o w . S u c hb o n d s ha ll b es u bj ec tt osec t i o n 146 o f t h e 1986 C o d e . T h e a gg re g a t e f a ce am o u n t o f b o n d s t o w hi c h t hi s p a r a g r a p ha ppl i ess ha ll n o t e x cee d$ 100,000,000. A bond issued as part of an issue shall be treated for purposes of part IV of subchapter B of chapter 1 of the 1986 Code as a qualified 501(c)(3) bond if— such bond would not (if issued on August 15, 1986 ) be an industrial development bond (as defined in section 103(b)(2) of the 1954 Code), and such issue was approved by city voters on January 19, 1985 , for construction or renovation of facilities for the cultural and performing arts. The aggregate face amount of bonds to which this paragraph applies shall not exceed $5, 000, 000. I n t h ec a seo f ab o n d i ss u e d b e f ore J an u a ry 1, 1986, b y t h e C i t yo f L os A n g e l es C o mm u ni t y R e d e v e l o p m e n t A g e n cy t o p ro v i d e t h e l ib r a ry an d re l a t e d s t r u c t u res a ssoc ia t e d w i t h t h e C i t yo f L os A n g e l es C e n t r a l L ib r a ry P ro j ec t, t h eo w n ers hi p an d u seo f t h e l an d an df a c i l i t i es a ssoc ia t e d w i t h s u c h p ro j ec t b y p erso n s w hi c ha re n o t g o v er nm e n t a l u ni t s (or p a y m e n t s f ro m s u c h p erso n s) s ha ll n o t a d v erse l y a ff ec tt h ee x c l u s i o n f ro m g ross in co m e u n d ersec t i o n 103 o f t h e 1954 C o d eo f in t eres t o n s u c hb o n d s . Wi t h res p ec tt o 2 n e t bi ll e d n u c l e a r p o w er f a c i l i t i es l oc a t e d in t h e St a t eo f Wa s hin g t o n o n w hi c h co n s t r u c t i o nha s b ee n s u s p e n d e d, t h ere q u i re m e n t so f sec t i o n 147 (b) o f t h e 1986 C o d es ha ll b e t re a t e d a ss a t i s f i e d w i t h res p ec tt ore f u n d in g b o n d s i ss u e d b e f ore 1992 i f — e a c h re f u n d in g b o n d ha s ama t u r i t y d a t e n o tl a t er t han t h e ma t u r i t y d a t eo f t h ere f u n d e d b o n d, an d t h e f a c i l i t i es ha v e n o t b ee n pl a ce d in ser v i ce a so f t h e d a t eo f i ss u an ceo f t h ere f u n d in g b o n d . T h e a gg re g a t e f a ce am o u n t o f b o n d s t o w hi c h t hi s p a r a g r a p ha ppl i ess ha ll n o t e x cee d$ 2,000,000,000. Section 146 of the 1986 Code and the last paragraph of this section shall not apply to bonds to which this paragraph applies. A bond issued to finance a residential rental project within the meaning of 103(b)(4) of the 1954 Code shall be treated as an exempt facility bond within the meaning of section 142(a)(7) of the 1986 Code if the county housing finance authority adopted an inducement resolution with respect to the project on May 8, 1985 , and the project is located in Polk County, Florida. The aggregate face amount of bonds to which this paragraph applies shall not exceed $4, 100, 000. P a r a g r a p h (4) o f sec t i o n 631 (c) o f t h e T a x R e f or m A c t o f 1984 [sec t i o n 631 (c) (4) o f P u b . L .98-369, se t o u t a s an o t e u n d ersec t i o n 103 o f t hi s t i tl e] i s am e n d e d — b ys t r ikin g o u tt h eseco n d se n t e n ce t h ereo f, b y a dd in g a tt h ee n d t h ereo f t h e f o ll o w in g n e w se n t e n ce : ‘ I n t h ec a seo f re f u n d in g o b l i g a t i o n s n o t e x cee d in g$ 100,000,000 issued by the Alabama State Docks Department, the first sentence of this paragraph shall be applied by substituting “ December 31, 1987 ” for “ December 31, 1984 ”.’ The following amounts of pool bonds are exempt from the arbitrage rebate requirement of section 148(f) of the 1986 Code and the temporary period limitation of section 148(c)(2) of the 1986 Code: Pool Maximum Bond Amount Tennessee Utility Districts Pool $80, 000, 000 N e wM e x i coHos p i t a lEq u i p m e n t L o an C o u n c i l$ 35,000,000 Pennsylvania Local Government Investment Trust Pool $375, 000, 000 I n d iana B o n d B ank P oo l$ 240,000,000 Hernando County, Florida Bond Pool $300, 000, 000 U t ah M u ni c i p a lF inan ce C oo p er a t i v e P oo l$ 262,000,000 North Carolina League of Municipalities Pool $200, 000, 000 Ke n t u c k y M u ni c i p a l L e a gu e B o n d P oo l$ 170,000,000 Kentucky Association of Counties Bond Pool $200, 000, 000 Ho m e w oo d M u ni c i p a lB o n d P oo l$ 50,000,000 Colorado Association of School Boards Pool $300, 000, 000 T e nn essee M u ni c i p a l L e a gu e P oo l e d B o n d s$ 75,000,000 Georgia Municipal Association Pool $130, 000, 000 N o tw i t h s t an d in g an yo t h er p ro v i s i o n o f t hi s t i tl e [e na c t in g t hi ssec t i o nan d sec t i o n s 142 t o 150 an d 7703 o f t hi s t i tl e, am e n d in g sec t i o n s 2, 22, 25, 32, 86, 103, 105, 152, 153, 163, 172, 194, 269 A, 414, 879, 1016, 1398, 3402, 4701, 4940, 4942, 4988, 6362, 6652, an d 7871 o f t hi s t i tl e, re p e a l in g sec t i o n s 103 A, 1391 t o 1397, an d 6039 B o f t hi s t i tl e, o mi tt in g f or m ersec t i o n 143 o f t hi s t i tl e, e na c t in g p ro v i s i o n sse t o u t a s n o t es u n d er t hi ssec t i o nan d sec t i o n s 148 an d 501 o f t hi s t i tl e, an d am e n d in g p ro v i s i o n sse t o u t a s an o t e u n d ersec t i o n 103 A o f t hi s t i tl e] — I n t h ec a seo f am e t ro p o l i t an ser v i ce d i s t r i c t cre a t e d p u rs u an tt o St a t ere v i se d s t a t u t es, c ha pt er 268, u pt o$ 100,000,000 unused 1985 bond authority may be carried forward to any year until 1989 (regardless of the date on which such carryforward election is made). If— official action was taken by an industrial development board on September 16, 1985 , with respect to the issuance of not more than $98, 500, 000, o f w a s t e w a t er t re a t m e n t re v e n u e b o n d s, an d an e x ec u t i v eor d ero f t h e g o v er n or g r an t e d a c a rry f or w a r d o f St a t e b o n d a u t h or i t y f ors u c h p ro j ec t o n Dece mb er 30, 1985, s u c h c a rry f or w a r d e l ec t i o n s ha ll b e v a l i df or an yye a r t h ro ug h 1988. T h e a gg re g a t e f a ce am o u n t o f o b l i g a t i o n s t o w hi c h t hi ss u b p a r a g r a p ha ppl i ess ha ll n o t e x cee d$ 98,500,000. If— obligations are issued in an amount not exceeding $5, 000, 000 t o f inan ce t h eco n s t r u c t i o n o f ah y d roe l ec t r i c g e n er a t in g f a c i l i t y l oc a t e d o n t h e N or t h F or k o f C a c h e C ree kin L ak e C o u n t y, C a l i f or nia, w hi c h w a s t h es u bj ec t o f a p re l imina ryreso l u t i o n o f t h e i ss u ero f t h eo b l i g a t i o n so n J u n e 29, 1982, or a re i ss u e d t ore f u n d an yo f s u c h o b l i g a t i o n s, s u b s t an t ia ll y a ll o f t h ee l ec t r i c a lp o w er g e n er a t e d b ys u c h f a c i l i t y i s t o b eso l d t o an o n g o v er nm e n t a lp erso n p u rs u an tt o a l o n g - t er m p o w ers a l es a g ree m e n t ina ccor d an ce w i t h t h e P u b l i c U t i l i t y R e gu l a t ory P o l i c i es A c t o f 1978 [P u b . L .95-617, see S h or tT i tl e n o t ese t o u t u n d er 16 U . S . C .2601], an d t h e ini t ia ll y i ss u e d o b l i g a t i o n s a re i ss u e d o n or b e f oreDece mb er 31, 1986, an d an yo f s u c h re f u n d in g o b l i g a t i o n s a re i ss u e d o n or b e f oreDece mb er 31, 1996, t h e n t h e p erso n re f erre d t o in s u b p a r a g r a p h (B) s ha ll n o t b e t re a t e d a s a p r in c i p a l u sero f s u c h f a c i l i t i es b yre a so n o f s u c h s a l es f or p u r p oseso f s u b p a r a g r a p h s (D) an d (E) o f sec t i o n 103 (b) (6) o f t h e 1954 C o d e . I f — o b l i g a t i o n s a re i ss u e d o n or b e f oreDece mb er 31, 1986, inanam o u n t n o t e x cee d in g$ 4,400,000 to finance a facility for the generation and transmission of steam and electricity having a maximum electrical capacity of approximately 5.3 megawatts and located within the City of San Jose, California, or are issued to refund any of such obligations, substantially all of the electrical power generated by such facility that is not sold to an institution of higher education created by statute of the State of California is to be sold to a nongovernmental person pursuant to a long-term power sales agreement in accordance with the Public Utility Regulatory Policies Act of 1978 [ Pub. L. 95–617 , see Short Title note set out under 16 U.S.C. 2601 ], and the initially issued obligations are issued on or before December 31, 1986 , and any of such refunding obligations are issued on or before December 31, 1996 , then the nongovernmental person referred to in subparagraph (B) shall not be treated as a principal user of such facilities by reason of such sales for purposes of subparagraphs (D) and (E) of section 103(b)(6) of the Internal Revenue Code of 1954. A bond which is not an industrial development bond under section 103(b)(2) of the Internal Revenue Code of 1954 shall not be treated as a private activity bond for purposes of part IV of subchapter B of chapter 1 of the 1986 Code if 95 percent or more of the net proceeds of the issue of which such bond is a part are used to provide facilities described in any of the following subparagraphs: A facility is described in this subparagraph if it is a governmentally-owned and operated State fair and exposition center with respect to which— the 1985 session of the State legislature authorized revenue bonds to be issued in a maximum amount of $10, 000, 000, an d ama r k e t f e a s ibi l i t ys t u d y d a t e dJ u n e 30, 1986, re l a t in g t o amaj orc a p i t a l im p ro v e m e n t a lp ro g r ama tt h e f a c i l i t y w a s p re p a re df or t h e a d v i sory b o a r d o f t h e St a t e f ai r an d e x p os i t i o n ce n t er b y a cer t i f i e d p u b l i c a cco u n t in g f i r m . T h e a gg re g a t e f a ce am o u n t o f o b l i g a t i o n s t o w hi c h t hi ss u b p a r a g r a p ha ppl i ess ha ll n o t e x cee d$ 10,000,000. A facility is described in this subparagraph if it is a convention, trade, or spectator facility which is to be located in the State with respect to which paragraph (6)(U) applies and with respect to which feasibility and preliminary design consultants were hired on May 1, 1985 and October 31, 1985 . The aggregate face amount of obligations to which this subparagraph applies shall not exceed $175, 000, 000. A f a c i l i t y w hi c hi s p a r t o f a p ro j ec t d escr ib e d in p a r a g r a p h (6) (O) . T h e a gg re g a t e f a ce am o u n t o f b o n d s t o w hi c h t hi ss u b p a r a g r a p ha ppl i ess ha ll n o t e x cee d$ 20,000,000. Sections 146 and [former] 149(d)(2) of the 1986 Code shall not apply to the refunding of any bond issued under section 11(b) of the United States Housing Act of 1937 [ 42 U.S.C. 1437i(b) ] before December 31, 1983 , if— the bond has an original term to maturity of at least 40 years, the maturity date of the refunding bonds does not exceed the maturity date of the refunded bonds, the amount of the refunding bonds does not exceed the outstanding amount of the refunded bonds, the interest rate on the refunding bonds is lower than the interest rate of the refunded bonds, and the refunded bond is required to be redeemed not later than the earliest date on which such bond could be redeemed at par. In the case of any bond to which any provision of this section applies, except as otherwise expressly provided, sections 103 and 103A of the 1954 Code shall be applied as if the requirements of sections 147(g), 148, and 149(d) of the 1986 Code were included in each such section. Section 141(b) of the 1986 Code shall be applied by substituting ‘25’ for ‘10’ each place it appears and by not applying sections 141(b)(3) and 141(c)(1)(B) to bonds substantially all of the proceeds are used for— A project is described in this subparagraph if it consists of a capital improvements program for a metropolitan sewer district, with respect to which a proposition was submitted to voters on August 7, 1984 . The aggregate face amount of obligations to which this subparagraph applies shall not exceed $60, 000, 000. F a c i l i t i es d escr ib e d in t hi ss u b p a r a g r a p hi f i t co n s i s t so f a dd i t i o n s, e x t e n s i o n s, an d im p ro v e m e n t s t o t h e w a s t e w a t ersys t e m f or L ak e l an d, Fl or i d a . T h e a gg re g a t e f a ce am o u n t o f o b l i g a t i o n s t o w hi c h t hi ss u b p a r a g r a p ha ppl i ess ha ll n o t e x cee d$ 20,000,000. A project is described in this subparagraph if it is the Central Valley Water Reclamation Project in Utah. The aggregate face amount of obligations to which this subparagraph applies shall not exceed $100, 000, 000. A p ro j ec t i s d escr ib e d in t hi ss u b p a r a g r a p hi f i t i s a p ro j ec tt oco n s t r u c t a pp ro x ima t e l y 26 mi l eso f t o ll e x p ress w a ys, w i t h res p ec tt o w hi c han y a pp e a lt o v a l i d a t i o n w a s f i l e dJ u l y 11, 1986. T h e a gg re g a t e f a ce am o u n t o f o b l i g a t i o n s t o w hi c h t hi ss u b p a r a g r a p ha ppl i ess ha ll n o t e x cee d$ 450,000,000. Except as otherwise provided in this section, this section shall not apply to any bond issued after December 31, 1990 .

“SEC. 1318 DEFINITIONS, ETC., RELATING TO EFFECTIVE DATES AND TRANSITIONAL RULES.

(“(a) Definitions.— For purposes of this subtitle— The term ‘1954 Code’ means the Internal Revenue Code of 1954 as in effect on the day before the date of the enactment of this Act [ Oct. 22, 1986 ]. The term ‘1986 Code’ means the Internal Revenue Code of 1986 as amended by this Act [see Tables for classification]. The term ‘bond’ includes any obligation. A bond shall be treated as issued to advance refund another bond if it is issued more than 90 days before the redemption of the refunded bond. The term ‘net proceeds’ has the meaning given such term by section 150(a) of the 1986 Code. Nothing in this subtitle shall be construed to exempt any bond from any provision of the 1954 Code by reason of a delay in (or exemption from) the application of any amendment made by subtitle A [sections 1301 to 1303 of Pub. L. 99–514 , enacting this section and sections 142 to 150 and 7703 of this title, amending sections 2, 22, 25, 32, 86, 103, 105, 152, 153, 163, 172, 194, 269A, 414, 879, 1016, 1398, 3402, 4701, 4940, 4942, 4988, 6362, 6652, and 7871 of this title, repealing sections 103A, 1391 to 1397, and 6039B of this title, omitting former section 143 of this title , enacting provisions set out as notes under this section and sections 148 and 501 of this title, and amending provisions set out as a note under section 103A of this title ]. Any bond which is treated as an exempt facility bond by section 1316 or 1317 shall not fail to be so treated by reason of subsection (b) of section 142 of the 1986 Code. In the case of any bond to which the amendments made by section 1301 [for classification see section 1311(a) of this note] do not apply by reason of a provision of this Act [see Tables for classification], any amendment of the 1986 Code (and any other provision applicable to such Code) included in any law enacted after October 22, 1986 , shall be treated as included in section 103 and section 103A (as appropriate) of the 1954 Code with respect to such bond unless— such law expressly provides that such amendment (or other provision) shall not apply to such bond, or such amendment (or other provision) applies to a provision of the 1986 Code— for which there is no corresponding provision in section 103 and section 103A (as appropriate) of the 1954 Code, and which is not otherwise treated as included in such sections 103 and 103A with respect to such bond.

(“(b) Minimum Tax Treatment.— Any bond described in paragraph (2) shall not be treated as a private activity bond for purposes of section 57 of the 1986 Code unless such bond would (if issued on August 7, 1986 ) be— an industrial development bond (as defined in section 103(b)(2) of the 1954 Code), or a private loan bond (as defined in section 103( o )(2)(A) of the 1954 Code, without regard to any exception from such definition other than section 103( o )(2)(C) of such Code). For purposes of paragraph (1), a bond is described in this paragraph if— the amendments made by section 1301 [for classification see section 1311(a) of this note] do not apply to such bond by reason of section 1312 or 1316(g), any provision of section 1317 applies to such bond, or the proceeds of such bond are used to refund any bond referred to in subparagraph (A) or (B) (or any bond which is part of a series of refundings of such a bond) if the requirements of paragraphs (1), (2), and (3) of subsection (c) are met with respect to the refunding bond.

(“(c) Current Refundings Not Taken Into Account in Applying Aggregate Limit on Bonds to Which Transitional Rules Apply.— The limitation on the aggregate face amount of bonds to which any provision of section 1316(g) or 1317 applies shall not be reduced by the face amount of any bond the proceeds of which are to be used exclusively to refund any bond to which such provision applies (or any bond which is part of a series of refundings of such bond) if— the average maturity date of the issue of which the refunding bond is a part is not later than the average maturity date of the bonds to be refunded by such issue, the amount of the refunding bond does not exceed the outstanding amount of the refunded bond, and the net proceeds of the refunding bond are used to redeem the refunded bond not later than 90 days after the date of the issuance of the refunding bond. For purposes of paragraph (1), average maturity shall be determined in accordance with section 147(b)(2)(A) of the 1986 Code. No limitation in section 1316(g) or 1317 on the period during which bonds may be issued under such section shall apply to any refunding bond which meets the requirements of this subsection.

(“(d) Special Rule Permitting Carryforward of Volume Cap for Certain Transitioned Projects.— A bond to which section 1312 or 1317 applies shall be treated as having a carryforward purpose described in section 146(f)(5) of the 1986 Code, and the requirement of section 146(f)(2)(A) of the 1986 Code shall be treated as met if such project is identified with reasonable specificity. The preceding sentence shall not apply so as to permit a carryforward with respect to any qualified small issue bond.”

§ 142 Exempt facility bond

(a) General rule For purposes of this part, the term “exempt facility bond” means any bond issued as part of an issue 95 percent or more of the net proceeds of which are to be used to provide— airports and spaceports, docks and wharves, mass commuting facilities, facilities for the furnishing of water, sewage facilities, solid waste disposal facilities, qualified residential rental projects, facilities for the local furnishing of electric energy or gas, local district heating or cooling facilities, qualified hazardous waste facilities, high-speed intercity rail facilities, environmental enhancements of hydroelectric generating facilities, qualified public educational facilities, qualified green building and sustainable design projects, qualified highway or surface freight transfer facilities, qualified broadband projects, or qualified carbon dioxide capture facilities.

(b) Special exempt facility bond rules For purposes of subsection (a)— A facility shall be treated as described in paragraph (1), (2), (3), or (12) of subsection (a) only if all of the property to be financed by the net proceeds of the issue is to be owned by a governmental unit. For purposes of subparagraph (A), property leased by a governmental unit shall be treated as owned by such governmental unit if— the lessee makes an irrevocable election (binding on the lessee and all successors in interest under the lease) not to claim depreciation or an investment credit with respect to such property, the lease term (as defined in section 168(i)(3)) is not more than 80 percent of the reasonably expected economic life of the property (as determined under section 147(b)), and the lessee has no option to purchase the property other than at fair market value (as of the time such option is exercised). Rules similar to the rules of the preceding sentence shall apply to management contracts and similar types of operating agreements. For purposes of subparagraph (A), spaceport property located on land leased by a governmental unit from the United States shall not fail to be treated as owned by a governmental unit if the requirements of this paragraph are met by the lease and any subleases of the property. An office shall not be treated as described in a paragraph of subsection (a) unless— the office is located on the premises of a facility described in such a paragraph, and not more than a de minimis amount of the functions to be performed at such office is not directly related to the day-to-day operations at such facility.

(c) Airports, spaceports, docks and wharves, mass commuting facilities and high-speed intercity rail facilities For purposes of subsection (a)— Storage or training facilities directly related to a facility described in paragraph (1), (2), (3) or (11) of subsection (a) shall be treated as described in the paragraph in which such facility is described. Property shall not be treated as described in paragraph (1), (2), (3) or (11) of subsection (a) if such property is described in any of the following subparagraphs and is to be used for any private business use (as defined in section 141(b)(6)). Any lodging facility. Any retail facility (including food and beverage facilities) in excess of a size necessary to serve passengers and employees at the exempt facility. Any retail facility (other than parking) for passengers or the general public located outside the exempt facility terminal. Any office building for individuals who are not employees of a governmental unit or of the operating authority for the exempt facility. Any industrial park or manufacturing facility.

(d) Qualified residential rental project For purposes of this section— The term “qualified residential rental project” means any project for residential rental property if, at all times during the qualified project period, such project meets the requirements of subparagraph (A) or (B), whichever is elected by the issuer at the time of the issuance of the issue with respect to such project: The project meets the requirements of this subparagraph if 20 percent or more of the residential units in such project are occupied by individuals whose income is 50 percent or less of area median gross income. The project meets the requirements of this subparagraph if 40 percent or more of the residential units in such project are occupied by individuals whose income is 60 percent or less of area median gross income. For purposes of this paragraph, any property shall not be treated as failing to be residential rental property merely because part of the building in which such property is located is used for purposes other than residential rental purposes. For purposes of this subsection— The term “qualified project period” means the period beginning on the 1st day on which 10 percent of the residential units in the project are occupied and ending on the latest of— the date which is 15 years after the date on which 50 percent of the residential units in the project are occupied, the 1st day on which no tax-exempt private activity bond issued with respect to the project is outstanding, or the date on which any assistance provided with respect to the project under section 8 of the United States Housing Act of 1937 terminates. The income of individuals and area median gross income shall be determined by the Secretary in a manner consistent with determinations of lower income families and area median gross income under section 8 of the United States Housing Act of 1937 (or, if such program is terminated, under such program as in effect immediately before such termination). Determinations under the preceding sentence shall include adjustments for family size. Subsections (g) and (h) of section 7872 shall not apply in determining the income of individuals under this subparagraph. For purposes of determining income under this subparagraph, payments under section 403 of title 37 , United States Code, as a basic pay allowance for housing shall be disregarded with respect to any qualified building. For purposes of clause (ii), the term “qualified building” means any building located— in any county in which is located a qualified military installation to which the number of members of the Armed Forces of the United States assigned to units based out of such qualified military installation, as of June 1, 2008 , has increased by not less than 20 percent, as compared to such number on December 31, 2005 , or in any county adjacent to a county described in subclause (I). For purposes of clause (iii), the term “qualified military installation” means any military installation or facility the number of members of the Armed Forces of the United States assigned to which, as of June 1, 2008 , is not less than 1,000. Rules similar to the rules of section 42(i)(3)(D) shall apply for purposes of this subsection. A unit shall not fail to be treated as a residential unit merely because such unit is a single-room occupancy unit (within the meaning of section 42). Any determination of area median gross income under subparagraph (B) with respect to any project for any calendar year after 2008 shall not be less than the area median gross income determined under such subparagraph with respect to such project for the calendar year preceding the calendar year for which such determination is made. In the case of a HUD hold harmless impacted project, the area median gross income with respect to such project for any calendar year after 2008 (hereafter in this clause referred to as the current calendar year) shall be the greater of the amount determined without regard to this clause or the sum of— the area median gross income determined under the HUD hold harmless policy with respect to such project for calendar year 2008, plus any increase in the area median gross income determined under subparagraph (B) (determined without regard to the HUD hold harmless policy and this subparagraph) with respect to such project for the current calendar year over the area median gross income (as so determined) with respect to such project for calendar year 2008. The term “HUD hold harmless policy” means the regulations under which a policy similar to the rules of clause (i) applied to prevent a change in the method of determining area median gross income from resulting in a reduction in the area median gross income determined with respect to certain projects in calendar years 2007 and 2008. The term “HUD hold harmless impacted project” means any project with respect to which area median gross income was determined under subparagraph (B) for calendar year 2007 or 2008 if such determination would have been less but for the HUD hold harmless policy. For purposes of this subsection— The determination of whether the income of a resident of a unit in a project exceeds the applicable income limit shall be made at least annually on the basis of the current income of the resident. The preceding sentence shall not apply with respect to any project for any year if during such year no residential unit in the project is occupied by a new resident whose income exceeds the applicable income limit. If the income of a resident of a unit in a project did not exceed the applicable income limit upon commencement of such resident’s occupancy of such unit (or as of any prior determination under subparagraph (A)), the income of such resident shall be treated as continuing to not exceed the applicable income limit. The preceding sentence shall cease to apply to any resident whose income as of the most recent determination under subparagraph (A) exceeds 140 percent of the applicable income limit if after such determination, but before the next determination, any residential unit of comparable or smaller size in the same project is occupied by a new resident whose income exceeds the applicable income limit. In the case of a project with respect to which credit is allowed under section 42, the second sentence of subparagraph (B) shall be applied by substituting “building (within the meaning of section 42)” for “project”. In the case of any project described in subparagraph (B), the 2d sentence of subparagraph (B) of paragraph (3) shall be applied by substituting— “170 percent” for “140 percent”, and “any low-income unit in the same project is occupied by a new resident whose income exceeds 40 percent of area median gross income” for “any residential unit of comparable or smaller size in the same project is occupied by a new resident whose income exceeds the applicable income limit”. A project is described in this subparagraph if the owner of the project elects to have this paragraph apply and, at all times during the qualified project period, such project meets the requirements of clauses (i), (ii), and (iii): The project meets the requirements of this clause if 15 percent or more of the low-income units in the project are occupied by individuals whose income is 40 percent or less of area median gross income. The project meets the requirements of this clause if the gross rent with respect to each low-income unit in the project does not exceed 30 percent of the applicable income limit which applies to individuals occupying the unit. The project meets the requirements of this clause if the gross rent with respect to each low-income unit in the project does not exceed ½ of the average gross rent with respect to units of comparable size which are not occupied by individuals who meet the applicable income limit. For purposes of subparagraph (B)— The term “low-income unit” means any unit which is required to be occupied by individuals who meet the applicable income limit. The term “gross rent” includes— any payment under section 8 of the United States Housing Act of 1937, and any utility allowance determined by the Secretary after taking into account such determinations under such section 8. For purposes of paragraphs (3) and (4), the term “applicable income limit” means— the limitation under subparagraph (A) or (B) of paragraph (1) which applies to the project, or in the case of a unit to which paragraph (4)(B)(i) applies, the limitation which applies to such unit. In the case of a project located in a city having 5 boroughs and a population in excess of 5,000,000, subparagraph (B) of paragraph (1) shall be applied by substituting “25 percent” for “40 percent”. The operator of any project with respect to which an election was made under this subsection shall submit to the Secretary (at such time and in such manner as the Secretary shall prescribe) an annual certification as to whether such project continues to meet the requirements of this subsection. Any failure to comply with the provisions of the preceding sentence shall not affect the tax-exempt status of any bond but shall subject the operator to penalty, as provided in section 6652(j).

(e) Facilities for the furnishing of water For purposes of subsection (a)(4), the term “facilities for the furnishing of water” means any facility for the furnishing of water if— the water is or will be made available to members of the general public (including electric utility, industrial, agricultural, or commercial users), and either the facility is operated by a governmental unit or the rates for the furnishing or sale of the water have been established or approved by a State or political subdivision thereof, by an agency or instrumentality of the United States, or by a public service or public utility commission or other similar body of any State or political subdivision thereof.

(f) Local furnishing of electric energy or gas For purposes of subsection (a)(8)— The local furnishing of electric energy or gas from a facility shall only include furnishing solely within the area consisting of— a city and 1 contiguous county, or 2 contiguous counties. A facility shall not be treated as failing to meet the local furnishing requirement of subsection (a)(8) by reason of electricity transmitted pursuant to an order of the Federal Energy Regulatory Commission under section 211 or 213 of the Federal Power Act (as in effect on the date of the enactment of this paragraph) if the portion of the cost of the facility financed with tax-exempt bonds is not greater than the portion of the cost of the facility which is allocable to the local furnishing of electric energy (determined without regard to this paragraph). In the case of a facility financed with bonds issued before the date of an order referred to in subparagraph (A) which would (but for this subparagraph) cease to be tax-exempt by reason of subparagraph (A), such bonds shall not cease to be tax-exempt bonds (and section 150(b)(4) shall not apply) if, to the extent necessary to comply with subparagraph (A)— an escrow to pay principal of, premium (if any), and interest on the bonds is established within a reasonable period after the date such order becomes final, and bonds are redeemed not later than the earliest date on which such bonds may be redeemed. For purposes of this section, no bond may be issued as part of an issue described in subsection (a)(8) with respect to a facility for the local furnishing of electric energy or gas on or after the date of the enactment of this paragraph unless— the facility will— be used by a person who is engaged in the local furnishing of that energy source on January 1, 1997 , and be used to provide service within the area served by such person on January 1, 1997 (or within a county or city any portion of which is within such area), or the facility will be used by a successor in interest to such person for the same use and within the same service area as described in subparagraph (A). In the case of a facility financed with bonds issued before the date of the enactment of this paragraph which would cease to be tax-exempt by reason of the failure to meet the local furnishing requirement of subsection (a)(8) as a result of a service area expansion, such bonds shall not cease to be tax-exempt bonds (and section 150(b)(4) shall not apply) if the person engaged in such local furnishing by such facility makes an election described in subparagraph (B). An election is described in this subparagraph if it is an election made in such manner as the Secretary prescribes, and such person (or its predecessor in interest) agrees that— such election is made with respect to all facilities for the local furnishing of electric energy or gas, or both, by such person, no bond exempt from tax under section 103 and described in subsection (a)(8) may be issued on or after the date of the enactment of this paragraph with respect to all such facilities of such person, any expansion of the service area— is not financed with the proceeds of any exempt facility bond described in subsection (a)(8), and is not treated as a nonqualifying use under the rules of paragraph (2), and all outstanding bonds used to finance the facilities for such person are redeemed not later than 6 months after the later of— the earliest date on which such bonds may be redeemed, or the date of the election. For purposes of this paragraph, the term “person” includes a group of related persons (within the meaning of section 144(a)(3)) which includes such person.

(g) Local district heating or cooling facility For purposes of subsection (a)(9), the term “local district heating or cooling facility” means property used as an integral part of a local district heating or cooling system. For purposes of paragraph (1), the term “local district heating or cooling system” means any local system consisting of a pipeline or network (which may be connected to a heating or cooling source) providing hot water, chilled water, or steam to 2 or more users for— residential, commercial, or industrial heating or cooling, or process steam. For purposes of this paragraph, a local system includes facilities furnishing heating and cooling to an area consisting of a city and 1 contiguous county.

(h) Qualified hazardous waste facilities For purposes of subsection (a)(10), the term “qualified hazardous waste facility” means any facility for the disposal of hazardous waste by incineration or entombment but only if— the facility is subject to final permit requirements under subtitle C of title II of the Solid Waste Disposal Act (as in effect on the date of the enactment of the Tax Reform Act of 1986), and the portion of such facility which is to be provided by the issue does not exceed the portion of the facility which is to be used by persons other than— the owner or operator of such facility, and any related person (within the meaning of section 144(a)(3)) to such owner or operator.

(i) High-speed intercity rail facilities For purposes of subsection (a)(11), the term “high-speed intercity rail facilities” means any facility (not including rolling stock) for the fixed guideway rail transportation of passengers and their baggage between metropolitan statistical areas (within the meaning of section 143(k)(2)(B)) using vehicles that are reasonably expected to be capable of attaining a maximum speed in excess of 150 miles per hour between scheduled stops, but only if such facility will be made available to members of the general public as passengers. A facility shall be treated as described in subsection (a)(11) only if any owner of such facility which is not a governmental unit irrevocably elects not to claim— any deduction under section 167 or 168, and any credit under this subtitle, with respect to the property to be financed by the net proceeds of the issue. A bond issued as part of an issue described in subsection (a)(11) shall not be considered an exempt facility bond unless any proceeds not used within a 3-year period of the date of the issuance of such bond are used (not later than 6 months after the close of such period) to redeem bonds which are part of such issue.

(j) Environmental enhancements of hydroelectric generating facilities For purposes of subsection (a)(12), the term “environmental enhancements of hydroelectric generating facilities” means property— the use of which is related to a federally licensed hydroelectric generating facility owned and operated by a governmental unit, and which— protects or promotes fisheries or other wildlife resources, including any fish by-pass facility, fish hatchery, or fisheries enhancement facility, or is a recreational facility or other improvement required by the terms and conditions of any Federal licensing permit for the operation of such generating facility. A bond issued as part of an issue described in subsection (a)(12) shall not be considered an exempt facility bond unless at least 80 percent of the net proceeds of the issue of which it is a part are used to finance property described in paragraph (1)(B)(i).

(k) Qualified public educational facilities For purposes of subsection (a)(13), the term “qualified public educational facility” means any school facility which is— part of a public elementary school or a public secondary school, and owned by a private, for-profit corporation pursuant to a public-private partnership agreement with a State or local educational agency described in paragraph (2). A public-private partnership agreement is described in this paragraph if it is an agreement— under which the corporation agrees— to do 1 or more of the following: construct, rehabilitate, refurbish, or equip a school facility, and at the end of the term of the agreement, to transfer the school facility to such agency for no additional consideration, and the term of which does not exceed the term of the issue to be used to provide the school facility. For purposes of this subsection, the term “school facility” means— any school building, any functionally related and subordinate facility and land with respect to such building, including any stadium or other facility primarily used for school events, and any property, to which section 168 applies (or would apply but for section 179), for use in a facility described in subparagraph (A) or (B). For purposes of this subsection, the terms “elementary school” and “secondary school” have the meanings given such terms by section 14101 of the Elementary and Secondary Education Act of 1965 ( 20 U.S.C. 8801 ), as in effect on the date of the enactment of this subsection. An issue shall not be treated as an issue described in subsection (a)(13) if the aggregate face amount of bonds issued by the State pursuant thereto (when added to the aggregate face amount of bonds previously so issued during the calendar year) exceeds an amount equal to the greater of— $10 m u lt i pl i e d b y t h e St a t e p o p u l a t i o n, or$ 5,000,000. Except as otherwise provided in this subparagraph, the State may allocate the amount described in subparagraph (A) for any calendar year in such manner as the State determines appropriate. A State may elect to carry forward an unused limitation for any calendar year for 3 calendar years following the calendar year in which the unused limitation arose under rules similar to the rules of section 146(f), except that the only purpose for which the carryforward may be elected is the issuance of exempt facility bonds described in subsection (a)(13).

(l) Qualified green building and sustainable design projects For purposes of subsection (a)(14), the term “qualified green building and sustainable design project” means any project which is designated by the Secretary, after consultation with the Administrator of the Environmental Protection Agency, as a qualified green building and sustainable design project and which meets the requirements of clauses (i), (ii), (iii), and (iv) of paragraph (4)(A). Within 60 days after the end of the application period described in paragraph (3)(A), the Secretary, after consultation with the Administrator of the Environmental Protection Agency, shall designate qualified green building and sustainable design projects. At least one of the projects designated shall be located in, or within a 10-mile radius of, an empowerment zone as designated pursuant to section 1391, and at least one of the projects designated shall be located in a rural State. No more than one project shall be designated in a State. A project shall not be designated if such project includes a stadium or arena for professional sports exhibitions or games. The Secretary, after consultation with the Administrator of the Environmental Protection Agency, shall ensure that, in the aggregate, the projects designated shall— reduce electric consumption by more than 150 megawatts annually as compared to conventional generation, reduce daily sulfur dioxide emissions by at least 10 tons compared to coal generation power, expand by 75 percent the domestic solar photovoltaic market in the United States (measured in megawatts) as compared to the expansion of that market from 2001 to 2002, and use at least 25 megawatts of fuel cell energy generation. A project may not be designated under this subsection unless— the project is nominated by a State or local government within 180 days of the enactment of this subsection, and such State or local government provides written assurances that the project will satisfy the eligibility criteria described in paragraph (4). A project may not be designated under this subsection unless the application for such designation includes a project proposal which describes the energy efficiency, renewable energy, and sustainable design features of the project and demonstrates that the project satisfies the following eligibility criteria: At least 75 percent of the square footage of commercial buildings which are part of the project is registered for United States Green Building Council’s LEED certification and is reasonably expected (at the time of the designation) to receive such certification. For purposes of determining LEED certification as required under this clause, points shall be credited by using the following: For wood products, certification under the Sustainable Forestry Initiative Program and the American Tree Farm System. For renewable wood products, as credited for recycled content otherwise provided under LEED certification. For composite wood products, certification under standards established by the American National Standards Institute, or such other voluntary standards as published in the Federal Register by the Administrator of the Environmental Protection Agency. The project includes a brownfield site as defined by section 101(39) of the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 ( 42 U.S.C. 9601 ), including a site described in subparagraph (D)(ii)(II)(aa) thereof. The project receives specific State or local government resources which will support the project in an amount equal to at least 2,000,000,000. Subsection (a)(14) shall not apply with respect to any bond issued after September 30, 2012 . Paragraphs (7)(B) and (8) shall not apply to any bond (or series of bonds) issued to refund a bond issued under subsection (a)(14) before October 1, 2012 , if— the average maturity date of the issue of which the refunding bond is a part is not later than the average maturity date of the bonds to be refunded by such issue, the amount of the refunding bond does not exceed the outstanding amount of the refunded bond, and the net proceeds of the refunding bond are used to redeem the refunded bond not later than 90 days after the date of the issuance of the refunding bond. For purposes of subparagraph (A), average maturity shall be determined in accordance with section 147(b)(2)(A).

(m) Qualified highway or surface freight transfer facilities For purposes of subsection (a)(15), the term “qualified highway or surface freight transfer facilities” means— any surface transportation project which receives Federal assistance under title 23, United States Code (as in effect on the date of the enactment of this subsection), any project for an international bridge or tunnel for which an international entity authorized under Federal or State law is responsible and which receives Federal assistance under title 23, United States Code (as so in effect), or any facility for the transfer of freight from truck to rail or rail to truck (including any temporary storage facilities directly related to such transfers) which receives Federal assistance under either title 23 or title 49, United States Code (as so in effect). The aggregate amount allocated by the Secretary of Transportation under subparagraph (C) shall not exceed $30,000,000,000. An issue shall not be treated as an issue described in subsection (a)(15) if the aggregate face amount of bonds issued pursuant to such issue for any qualified highway or surface freight transfer facility (when added to the aggregate face amount of bonds previously so issued for such facility) exceeds the amount allocated to such facility under subparagraph (C). The Secretary of Transportation shall allocate the amount described in subparagraph (A) among qualified highway or surface freight transfer facilities in such manner as the Secretary determines appropriate. An issue shall not be treated as an issue described in subsection (a)(15) unless at least 95 percent of the net proceeds of the issue is expended for qualified highway or surface freight transfer facilities within the 5-year period beginning on the date of issuance. If at least 95 percent of such net proceeds is not expended within such 5-year period, an issue shall be treated as continuing to meet the requirements of this paragraph if the issuer uses all unspent proceeds of the issue to redeem bonds of the issue within 90 days after the end of such 5-year period. The Secretary, at the request of the issuer, may extend such 5-year period if the issuer establishes that any failure to meet such period is due to circumstances beyond the control of the issuer. Paragraph (2) shall not apply to any bond (or series of bonds) issued to refund a bond issued under subsection (a)(15) if— the average maturity date of the issue of which the refunding bond is a part is not later than the average maturity date of the bonds to be refunded by such issue, the amount of the refunding bond does not exceed the outstanding amount of the refunded bond, and the refunded bond is redeemed not later than 90 days after the date of the issuance of the refunding bond. For purposes of subparagraph (A), average maturity shall be determined in accordance with section 147(b)(2)(A).

(n) Qualified broadband project For purposes of subsection (a)(16), the term “qualified broadband project” means any project which— is designed to provide broadband service solely to 1 or more census block groups in which more than 50 percent of residential households do not have access to fixed, terrestrial broadband service which delivers at least 25 megabits per second downstream and at least 3 megabits service upstream, and results in internet access to residential locations, commercial locations, or a combination of residential and commercial locations at speeds not less than 100 megabits per second for downloads and 20 megabits for second for uploads, but only if at least 90 percent of the locations provided such access under the project are locations where, before the project, a broadband service provider— did not provide service, or did not provide service meeting the minimum speed requirements described in subparagraph (A). A project shall not be treated as a qualified broadband project unless, before the issue date of any issue the proceeds of which are to be used to fund the project, the issuer— notifies each broadband service provider providing broadband service in the area within which broadband services are to be provided under the project of the project and its intended scope, includes in such notice a request for information from each such provider with respect to the provider’s ability to deploy, manage, and maintain a broadband network capable of providing gigabit capable Internet access to residential or commercial locations, and allows each such provider at least 90 days to respond to such notice and request.

(o) Qualified carbon dioxide capture facility For purposes of subsection (a)(17), the term “qualified carbon dioxide capture facility” means— the eligible components of an industrial carbon dioxide facility, and a direct air capture facility (as defined in section 45Q(e)(3)). For purposes of this subsection: The term “eligible component” means any equipment which is installed in an industrial carbon dioxide facility that satisfies the requirements under paragraph (3) and which is— used for the purpose of capture, treatment and purification, compression, transportation, or on-site storage of carbon dioxide produced by the industrial carbon dioxide facility, or integral or functionally related and subordinate to a process which converts a solid or liquid product from coal, petroleum residue, biomass, or other materials which are recovered for their energy or feedstock value into a synthesis gas composed primarily of carbon dioxide and hydrogen for direct use or subsequent chemical or physical conversion. For purposes of this subparagraph— The term “biomass” means any— agricultural or plant waste, byproduct of wood or paper mill operations, including lignin in spent pulping liquors, and other products of forestry maintenance. The term “biomass” does not include paper which is commonly recycled. The term “coal” means anthracite, bituminous coal, subbituminous coal, lignite, and peat. Except as provided in clause (ii), the term “industrial carbon dioxide facility” means a facility that emits carbon dioxide (including from any fugitive emissions source) that is created as a result of any of the following processes: Fuel combustion. Gasification. Bioindustrial. Fermentation. Any manufacturing industry relating to— chemicals, fertilizers, glass, steel, petroleum residues, forest products, agriculture, including feedlots and dairy operations, and transportation grade liquid fuels. For purposes of clause (i), an industrial carbon dioxide facility shall not include— any geological gas facility, or any air separation unit that— does not qualify as gasification equipment, or is not a necessary component of an oxy-fuel combustion process. For purposes of this subparagraph— The term “petroleum residue” means the carbonized product of high-boiling hydrocarbon fractions obtained in petroleum processing. The term “geological gas facility” means a facility that— produces a raw product consisting of gas or mixed gas and liquid from a geological formation, transports or removes impurities from such product, or separates such product into its constituent parts. Subject to subparagraph (B), the eligible components of an industrial carbon dioxide facility satisfies the requirements of this paragraph if such eligible components are designed to have a capture and storage percentage (as determined under subparagraph (C)) that is equal to or greater than 65 percent. In the case of an industrial carbon dioxide facility designed with a capture and storage percentage that is less than 65 percent, the percentage of the cost of the eligible components installed in such facility that may be financed with tax-exempt bonds may not be greater than the designed capture and storage percentage. Subject to clause (ii), the capture and storage percentage shall be an amount, expressed as a percentage, equal to the quotient of— the total metric tons of carbon dioxide designed to be annually captured, transported, and injected into— a facility for geologic storage, or an enhanced oil or gas recovery well followed by geologic storage, divided by the total metric tons of carbon dioxide which would otherwise be released into the atmosphere each year as industrial emission of greenhouse gas if the eligible components were not installed in the industrial carbon dioxide facility. In the case of eligible components that are designed to capture carbon dioxide solely from specific sources of emissions or portions thereof within an industrial carbon dioxide facility, the capture and storage percentage under this subparagraph shall be determined based only on such specific sources of emissions or portions thereof. The Secretary shall issue such regulations or other guidance as are necessary to carry out the provisions of this subsection, including methods for determining costs attributable to an eligible component for purposes of paragraph (3)(A).

(p) Spaceport For purposes of subsection (a)(1), the term “spaceport” means any facility located at or in close proximity to a launch site or reentry site used for— manufacturing, assembling, or repairing spacecraft, space cargo, other facilities described in this paragraph, or any component of the foregoing, flight control operations, providing launch services and reentry services, or transferring crew, spaceflight participants, or space cargo to or from spacecraft. For purposes of paragraph (1)— The term “space cargo” includes satellites, scientific experiments, other property transported into space, and any other type of payload, whether or not such property returns from space. The term “spacecraft” means a launch vehicle or a reentry vehicle. The terms “launch site”, “crew”, “space flight participant”, “launch services”, “launch vehicle”, “payload”, “reentry services”, “reentry site”, a “reentry vehicle” shall have the respective meanings given to such terms by section 50902 of title 51 , United States Code (as in effect on the date of enactment of this subsection). A facility shall not be required to be available for use by the general public to be treated as a spaceport for purposes of this section. With respect to spaceports, subsection (c)(2)(E) shall not apply to spaceport property described in paragraph (1)(A).

§ 143 Mortgage revenue bonds: qualified mortgage bond and qualified veterans’ mortgage bond

(a) Qualified mortgage bond For purposes of this title, the term “qualified mortgage bond” means a bond which is issued as part of a qualified mortgage issue. For purposes of this title, the term “qualified mortgage issue” means an issue by a State or political subdivision thereof of 1 or more bonds, but only if— all proceeds of such issue (exclusive of issuance costs and a reasonably required reserve) are to be used to finance owner-occupied residences, such issue meets the requirements of subsections (c), (d), (e), (f), (g), (h), (i), and (m)(7), such issue does not meet the private business tests of paragraphs (1) and (2) of section 141(b), and except as provided in subparagraph (D)(ii), repayments of principal on financing provided by the issue are used not later than the close of the 1st semiannual period beginning after the date the prepayment (or complete repayment) is received to redeem bonds which are part of such issue. Clause (iv) shall not apply to amounts received within 10 years after the date of issuance of the issue (or, in the case of refunding bond, the date of issuance of the original bond). An issue which fails to meet 1 or more of the requirements of subsections (c), (d), (e), (f), and (i) shall be treated as meeting such requirements if— the issuer in good faith attempted to meet all such requirements before the mortgages were executed, 95 percent or more of the proceeds devoted to owner-financing was devoted to residences with respect to which (at the time the mortgages were executed) all such requirements were met, and any failure to meet the requirements of such subsections is corrected within a reasonable period after such failure is first discovered. An issue which fails to meet 1 or more of the requirements of subsections (g), (h), and (m)(7) shall be treated as meeting such requirements if— the issuer in good faith attempted to meet all such requirements, and any failure to meet such requirements is due to inadvertent error after taking reasonable steps to comply with such requirements. Except as otherwise provided in this subparagraph, an issue shall not meet the requirement of subparagraph (A)(i) unless— all proceeds of the issue required to be used to finance owner-occupied residences are so used within the 42-month period beginning on the date of issuance of the issue (or, in the case of a refunding bond, within the 42-month period beginning on the date of issuance of the original bond) or, to the extent not so used within such period, are used within such period to redeem bonds which are part of such issue, and no portion of the proceeds of the issue are used to make or finance any loan (other than a loan which is a nonpurpose investment within the meaning of section 148(f)(6)(A)) after the close of such period. Clause (i) (and clause (iv) of subparagraph (A)) shall not be construed to require amounts of less than $250,000 to be used to redeem bonds. The Secretary may by regulation treat related issues as 1 issue for purposes of the preceding sentence.

(b) Qualified veterans’ mortgage bond defined For purposes of this part, the term “qualified veterans’ mortgage bond” means any bond— which is issued as part of an issue 95 percent or more of the net proceeds of which are to be used to provide residences for veterans, the payment of the principal and interest on which is secured by the general obligation of a State, which is part of an issue which meets the requirements of subsections (c), (g), (i)(1), and ( l ), and which is part of an issue which does not meet the private business tests of paragraphs (1) and (2) of section 141(b). Rules similar to the rules of subparagraphs (B) and (C) of subsection (a)(2) shall apply to the requirements specified in paragraph (3) of this subsection.

(c) Residence requirements A residence meets the requirements of this subsection only if— it is a single-family residence which can reasonably be expected to become the principal residence of the mortgagor within a reasonable time after the financing is provided, and it is located within the jurisdiction of the authority issuing the bond. An issue meets the requirements of this subsection only if all of the residences for which owner-financing is provided under the issue meet the requirements of paragraph (1).

(d) 3-year requirement An issue meets the requirements of this subsection only if 95 percent or more of the net proceeds of such issue are used to finance the residences of mortgagors who had no present ownership interest in their principal residences at any time during the 3-year period ending on the date their mortgage is executed. For purposes of paragraph (1), the proceeds of an issue which are used to provide— financing with respect to targeted area residences, qualified home improvement loans and qualified rehabilitation loans, financing with respect to land described in subsection (i)(1)(C) and the construction of any residence thereon, and in the case of bonds issued after the date of the enactment of this subparagraph, financing of any residence for a veteran (as defined in section 101 of title 38 , United States Code), if such veteran has not previously qualified for and received such financing by reason of this subparagraph, shall be treated as used as described in paragraph (1). For purposes of paragraph (1), a mortgagor’s interest in the residence with respect to which the financing is being provided shall not be taken into account.

(e) Purchase price requirement An issue meets the requirements of this subsection only if the acquisition cost of each residence the owner-financing of which is provided under the issue does not exceed 90 percent of the average area purchase price applicable to such residence. For purposes of paragraph (1), the term “average area purchase price” means, with respect to any residence, the average purchase price of single family residences (in the statistical area in which the residence is located) which were purchased during the most recent 12-month period for which sufficient statistical information is available. The determination under the preceding sentence shall be made as of the date on which the commitment to provide the financing is made (or, if earlier, the date of the purchase of the residence). For purposes of this subsection, the determination of average area purchase price shall be made separately with respect to— residences which have not been previously occupied, and residences which have been previously occupied. For purposes of this subsection, to the extent provided in regulations, the determination of average area purchase price shall be made separately with respect to 1 family, 2 family, 3 family, and 4 family residences. In the case of a targeted area residence, paragraph (1) shall be applied by substituting “110 percent” for “90 percent”. Paragraph (1) shall not apply with respect to any qualified home improvement loan.

(f) Income requirements An issue meets the requirements of this subsection only if all owner-financing provided under the issue is provided for mortgagors whose family income is 115 percent or less of the applicable median family income. For purposes of this subsection, the family income of mortgagors, and area median gross income, shall be determined by the Secretary after taking into account the regulations prescribed under section 8 of the United States Housing Act of 1937 (or, if such program is terminated, under such program as in effect immediately before such termination). In the case of any financing provided under any issue for targeted area residences— ⅓ of the amount of such financing may be provided without regard to paragraph (1), and paragraph (1) shall be treated as satisfied with respect to the remainder of the owner financing if the family income of the mortgagor is 140 percent or less of the applicable median family income. For purposes of this subsection, the term “applicable median family income” means, with respect to a residence, whichever of the following is the greater: the area median gross income for the area in which such residence is located, or the statewide median gross income for the State in which such residence is located. If the residence (for which financing is provided under the issue) is located in a high housing cost area and the limitation determined under this paragraph is greater than the limitation otherwise applicable under paragraph (1), there shall be substituted for the income limitation in paragraph (1), a limitation equal to the percentage determined under subparagraph (B) of the area median gross income for such area. The percentage determined under this subparagraph for a residence located in a high housing cost area is the percentage (not greater than 140 percent) equal to the product of— 115 percent, and the amount by which the housing cost/income ratio for such area exceeds 0.2. For purposes of this paragraph, the term “high housing cost area” means any statistical area for which the housing cost/income ratio is greater than 1.2. For purposes of this paragraph— The term “housing cost/income ratio” means, with respect to any statistical area, the number determined by dividing— the applicable housing price ratio for such area, by the ratio which the area median gross income for such area bears to the median gross income for the United States. For purposes of clause (i), the applicable housing price ratio for any area is the new housing price ratio or the existing housing price ratio, whichever results in the housing cost/income ratio being closer to 1. The new housing price ratio for any area is the ratio which— the average area purchase price (as defined in subsection (e)(2)) for residences described in subsection (e)(3)(A) which are located in such area bears to the average purchase price (determined in accordance with the principles of subsection (e)(2)) for residences so described which are located in the United States. The existing housing price ratio for any area is the ratio determined in accordance with clause (iii) but with respect to residences described in subsection (e)(3)(B). In the case of a mortgagor having a family of fewer than 3 individuals, the preceding provisions of this subsection shall be applied by substituting— “100 percent” for “115 percent” each place it appears, and “120 percent” for “140 percent” each place it appears.

(g) Requirements related to arbitrage An issue meets the requirements of this subsection only if such issue meets the requirements of paragraph (2) of this subsection and, in the case of an issue described in subsection (b)(1), such issue also meets the requirements of paragraph (3) of this subsection. Such requirements shall be in addition to the requirements of section 148. An issue shall be treated as meeting the requirements of this paragraph only if the excess of— the effective rate of interest on the mortgages provided under the issue, over the yield on the issue, is not greater than 1.125 percentage points. In determining the effective rate of interest on any mortgage for purposes of this paragraph, there shall be taken into account all fees, charges, and other amounts borne by the mortgagor which are attributable to the mortgage or to the bond issue. For purposes of clause (i), the following items (among others) shall be treated as borne by the mortgagor: all points or similar charges paid by the seller of the property, and the excess of the amounts received from any person other than the mortgagor by any person in connection with the acquisition of the mortgagor’s interest in the property over the usual and reasonable acquisition costs of a person acquiring like property where owner-financing is not provided through the use of qualified mortgage bonds or qualified veterans’ mortgage bonds. For purposes of clause (i), the following items shall not be taken into account: any expected rebate of arbitrage profits, and any application fee, survey fee, credit report fee, insurance charge, or similar amount to the extent such amount does not exceed amounts charged in such area in cases where owner-financing is not provided through the use of qualified mortgage bonds or qualified veterans’ mortgage bonds. Subclause (II) shall not apply to origination fees, points, or similar amounts. In determining the effective rate of interest— it shall be assumed that the mortgage prepayment rate will be the rate set forth in the most recent applicable mortgage maturity experience table published by the Federal Housing Administration, and prepayments of principal shall be treated as received on the last day of the month in which the issuer reasonably expects to receive such prepayments. The Secretary may by regulation adjust the mortgage prepayment rate otherwise used in determining the effective rate of interest to the extent the Secretary determines that such an adjustment is appropriate by reason of the impact of subsection (m). For purposes of this subsection, the yield on an issue shall be determined on the basis of— the issue price (within the meaning of sections 1273 and 1274), and an expected maturity for the bonds which is consistent with the assumptions required under subparagraph (B)(iv). An issue shall be treated as meeting the requirements of this paragraph only if an amount equal to the sum of— the excess of— the amount earned on all nonpurpose investments (other than investments attributable to an excess described in this clause), over the amount which would have been earned if such investments were invested at a rate equal to the yield on the issue, plus any income attributable to the excess described in clause (i), is paid or credited to the mortgagors as rapidly as may be practicable. For purposes of subparagraph (A), in determining the amount earned on all nonpurpose investments, any gain or loss on the disposition of such investments shall be taken into account. The amount required to be paid or credited to mortgagors under subparagraph (A) (determined under this paragraph without regard to this subparagraph) shall be reduced by the unused paragraph (2) amount. For purposes of clause (i), the unused paragraph (2) amount is the amount which (if it were treated as an interest payment made by mortgagors) would result in the excess referred to in paragraph (2)(A) being equal to 1.125 percentage points. Such amount shall be fixed and determined as of the yield determination date. Subparagraph (A) shall be satisfied with respect to any issue if the issuer elects before issuing the bonds to pay over to the United States— not less frequently than once each 5 years after the date of issue, an amount equal to 90 percent of the aggregate amount which would be required to be paid or credited to mortgagors under subparagraph (A) (and not theretofore paid to the United States), and not later than 60 days after the redemption of the last bond, 100 percent of such aggregate amount not theretofore paid to the United States. The Secretary shall permit any simplified system of accounting for purposes of this paragraph which the issuer establishes to the satisfaction of the Secretary will assure that the purposes of this paragraph are carried out. For purposes of this paragraph, the term “nonpurpose investment” has the meaning given such term by section 148(f)(6)(A).

(h) Portion of loans required to be placed in targeted areas An issue meets the requirements of this subsection only if at least 20 percent of the proceeds of the issue which are devoted to providing owner-financing is made available (with reasonable diligence) for owner-financing of targeted area residences for at least 1 year after the date on which owner-financing is first made available with respect to targeted area residences. Nothing in paragraph (1) shall be treated as requiring the making available of an amount which exceeds 40 percent of the average annual aggregate principal amount of mortgages executed during the immediately preceding 3 calendar years for single-family, owner-occupied residences located in targeted areas within the jurisdiction of the issuing authority.

(i) Other requirements An issue meets the requirements of this subsection only if no part of the proceeds of such issue is used to acquire or replace existing mortgages. Under regulations prescribed by the Secretary, the replacement of— construction period loans, bridge loans or similar temporary initial financing, and in the case of a qualified rehabilitation, an existing mortgage, shall not be treated as the acquisition or replacement of an existing mortgage for purposes of subparagraph (A). In the case of land possessed under a contract for deed by a mortgagor— whose principal residence (within the meaning of section 121) is located on such land, and whose family income (as defined in subsection (f)(2)) is not more than 50 percent of applicable median family income (as defined in subsection (f)(4)), the contract for deed shall not be treated as an existing mortgage for purposes of subparagraph (A). For purposes of this subparagraph, the term “contract for deed” means a seller-financed contract for the conveyance of land under which— legal title does not pass to the purchaser until the consideration under the contract is fully paid to the seller, and the seller’s remedy for nonpayment is forfeiture rather than judicial or nonjudicial foreclosure. An issue meets the requirements of this subsection only if each mortgage with respect to which owner-financing has been provided under such issue may be assumed only if the requirements of subsections (c), (d), and (e), and the requirements of paragraph (1) or (3)(B) of subsection (f) (whichever applies), are met with respect to such assumption.

(j) Targeted area residences For purposes of this section, the term “targeted area residence” means a residence in an area which is either— a qualified census tract, or an area of chronic economic distress. For purposes of paragraph (1), the term “qualified census tract” means a census tract in which 70 percent or more of the families have income which is 80 percent or less of the statewide median family income. The determination under subparagraph (A) shall be made on the basis of the most recent decennial census for which data are available. For purposes of paragraph (1), the term “area of chronic economic distress” means an area of chronic economic distress— designated by the State as meeting the standards established by the State for purposes of this subsection, and the designation of which has been approved by the Secretary and the Secretary of Housing and Urban Development. The criteria used by the Secretary and the Secretary of Housing and Urban Development in evaluating any proposed designation of an area for purposes of this subsection shall be— the condition of the housing stock, including the age of the housing and the number of abandoned and substandard residential units, the need of area residents for owner-financing under this section, as indicated by low per capita income, a high percentage of families in poverty, a high number of welfare recipients, and high unemployment rates, the potential for use of owner-financing under this section to improve housing conditions in the area, and the existence of a housing assistance plan which provides a displacement program and a public improvements and services program.

(k) Other definitions and special rules For purposes of this section— The term “mortgage” means any owner-financing. The term “statistical area” means— a metropolitan statistical area, and any county (or the portion thereof) which is not within a metropolitan statistical area. The term “metropolitan statistical area” includes the area defined as such by the Secretary of Commerce. For purposes of this paragraph, if there is insufficient recent statistical information with respect to a county (or portion thereof) described in subparagraph (A)(ii), the Secretary may substitute for such county (or portion thereof) another area for which there is sufficient recent statistical information. In the case of any portion of a State which is not within a county, subparagraphs (A)(ii) and (C) shall be applied by substituting for “county” an area designated by the Secretary which is the equivalent of a county. The term “acquisition cost” means the cost of acquiring the residence as a completed residential unit. The term “acquisition cost” does not include— usual and reasonable settlement or financing costs, the value of services performed by the mortgagor or members of his family in completing the residence, and the cost of land (other than land described in subsection (i)(1)(C)(i)) which has been owned by the mortgagor for at least 2 years before the date on which construction of the residence begins. In the case of a qualified rehabilitation loan, for purposes of subsection (e), the term “acquisition cost” includes the cost of the rehabilitation. The term “qualified home improvement loan” means the financing (in an amount which does not exceed 150,000. For purposes of this paragraph, the term “federally declared disaster” has the meaning given such term by section 165(h)(3)(C)(i). 1 An election under this paragraph may not be revoked except with the consent of the Secretary. If a taxpayer elects the application of this paragraph, paragraph (11) shall not apply with respect to the purchase or financing of any residence by such taxpayer.

(l) Additional requirements for qualified veterans’ mortgage bonds An issue meets the requirements of this subsection only if it meets the requirements of paragraphs (1), (2), and (3). An issue meets the requirements of this paragraph only if each mortgagor to whom financing is provided under the issue is a qualified veteran. An issue meets the requirements of this paragraph only if it is a general obligation of a State which issued qualified veterans’ mortgage bonds before June 22, 1984 . An issue meets the requirements of this paragraph only if the aggregate amount of bonds issued pursuant thereto (when added to the aggregate amount of qualified veterans’ mortgage bonds previously issued by the State during the calendar year) does not exceed the State veterans limit for such calendar year. In the case of any State to which clause (ii) does not apply, the State veterans limit for any calendar year is the amount equal to— the aggregate amount of qualified veterans bonds issued by such State during the period beginning on January 1, 1979 , and ending on June 22, 1984 (not including the amount of any qualified veterans bond issued by such State during the calendar year (or portion thereof) in such period for which the amount of such bonds so issued was the lowest), divided by the number (not to exceed 5) of calendar years after 1979 and before 1985 during which the State issued qualified veterans bonds (determined by only taking into account bonds issued on or before June 22, 1984 ). In the case of the following States, the State veterans limit for any calendar year is the amount equal to— $100, 000, 000 f or t h e St a t eo f A l a s ka,$ 100,000,000 for the State of Oregon, and $100,000,000 for the State of Wisconsin. In the case of calendar years beginning before 2010, clause (ii) shall be applied by substituting for each of the dollar amounts therein an amount equal to the applicable percentage of such dollar amount. For purposes of the preceding sentence, the applicable percentage shall be determined in accordance with the following table: For Calendar Year: Applicable percentage is: 2006 20 percent 2007 40 percent 2008 60 percent 2009 80 percent. For purposes of subparagraph (A), the term “qualified veterans’ mortgage bond” shall not include any bond issued to refund another bond but only if the maturity date of the refunding bond is not later than the later of— the maturity date of the bond to be refunded, or the date 32 years after the date on which the refunded bond was issued (or in the case of a series of refundings, the date on which the original bond was issued). The preceding sentence shall apply only to the extent that the amount of the refunding bond does not exceed the outstanding amount of the refunded bond. Clause (i) shall not apply to any bond issued to advance refund another bond. For purposes of this subsection, the term “qualified veteran” means any veteran who— served on active duty, and applied for the financing before the date 25 years after the last date on which such veteran left active service. In the case of any bond— which has a term of 1 year or less, which is authorized to be issued under O.R.S. 407.435 (as in effect on the date of the enactment of this subsection), to provide financing for property taxes, and which is redeemed at the end of such term, the amount taken into account under this subsection with respect to such bond shall be 1 ⁄ 15 of its principal amount.

(m) Recapture of portion of Federal subsidy from use of qualified mortgage bonds and mortgage credit certificates If, during the taxable year, any taxpayer disposes of an interest in a residence with respect to which there is or was any federally-subsidized indebtedness for the payment of which the taxpayer was liable in whole or part, then the taxpayer’s tax imposed by this chapter for such taxable year shall be increased by the lesser of— the recapture amount with respect to such indebtedness, or 50 percent of the gain (if any) on the disposition of such interest. Paragraph (1) shall not apply to— any disposition by reason of death, and any disposition which is more than 9 years after the testing date. For purposes of this subsection— The term “federally-subsidized indebtedness” means any indebtedness if— financing for the indebtedness was provided in whole or part from the proceeds of any tax-exempt qualified mortgage bond, or any credit was allowed under section 25 (relating to interest on certain home mortgages) to the taxpayer for interest paid or incurred on such indebtedness. Such term shall not include any indebtedness to the extent such indebtedness is federally-subsidized indebtedness solely by reason of being a qualified home improvement loan (as defined in subsection (k)(4)). For purposes of this subsection— The recapture amount with respect to any indebtedness is the amount equal to the product of— the federally-subsidized amount with respect to the indebtedness, the holding period percentage, and the income percentage. The federally-subsidized amount with respect to any indebtedness is the amount equal to 6.25 percent of the highest principal amount of the indebtedness for which the taxpayer was liable. The term “holding period percentage” means the percentage determined in accordance with the following table: If the disposition occurs during a year after the testing date which is: The holding period percentage is: The 1st such year 20 The 2d such year 40 The 3d such year 60 The 4th such year 80 The 5th such year 100 The 6th such year 80 The 7th such year 60 The 8th such year 40 The 9th such year 20. If the federally-subsidized indebtedness is completely repaid during any year of the 4-year period beginning on the testing date, the holding period percentage for succeeding years shall be determined by reducing ratably to zero over the succeeding 5 years the holding period percentage which would have been determined under this subparagraph had the taxpayer disposed of his interest in the residence on the date of the repayment. The term “testing date” means the earliest date on which all of the following requirements are met: The indebtedness is federally-subsidized indebtedness. The taxpayer is liable in whole or part for payment of the indebtedness. The term “income percentage” means the percentage (but not greater than 100 percent) which— the excess of— the modified adjusted gross income of the taxpayer for the taxable year in which the disposition occurs, over the adjusted qualifying income for such taxable year, bears to $5,000. The percentage determined under the preceding sentence shall be rounded to the nearest whole percentage point (or, if it includes a half of a percentage point, shall be increased to the nearest whole percentage point). For purposes of paragraph (4), the term “adjusted qualifying income” means the product of— the highest family income which (as of the date the financing was provided) would have met the requirements of subsection (f) with respect to the residents, and 1.05 to the nth power where “n” equals the number of full years during the period beginning on the date the financing was provided and ending on the date of the disposition. For purposes of clause (i), highest family income shall be determined without regard to subsection (f)(3)(A) and on the basis of the number of members of the taxpayer’s family as of the date of the disposition. For purposes of paragraph (4), the term “modified adjusted gross income” means adjusted gross income— increased by the amount of interest received or accrued by the taxpayer during the taxable year which is excluded from gross income under section 103, and decreased by the amount of gain (if any) included in gross income of the taxpayer by reason of the disposition to which this subsection applies. For purposes of paragraph (1), gain shall be taken into account whether or not recognized, and the adjusted basis of the taxpayer’s interest in the residence shall be determined without regard to sections 1033(b) and 1034(e) (as in effect on the day before the date of the enactment of the Taxpayer Relief Act of 1997) for purposes of determining gain. In the case of a disposition other than a sale, exchange, or involuntary conversion, gain shall be determined as if the interest had been sold for its fair market value. In the case of property which (as a result of its destruction in whole or in part by fire, storm, or other casualty) is compulsorily or involuntarily converted, paragraph (1) shall not apply to such conversion if the taxpayer purchases (during the period specified in section 1033(a)(2)(B)) property for use as his principal residence on the site of the converted property. For purposes of subparagraph (A), the adjusted basis of the taxpayer in the residence shall not be adjusted for any gain or loss on a conversion to which this subparagraph applies. The issuer of the issue which provided the federally-subsidized indebtedness to the mortgagor shall— at the time of settlement, provide a written statement informing the mortgagor of the potential recapture under this subsection, and not later than 90 days after the date such indebtedness is provided, provide a written statement to the mortgagor specifying— the federally-subsidized amount with respect to such indebtedness, and the adjusted qualifying income (as defined in paragraph (5)) for each category of family size for each year of the 9-year period beginning on the date the financing was provided. No adjustment shall be made to the basis of any property for the increase in tax under this subsection. Except as provided in subparagraph (C) and in regulations prescribed by the Secretary, if 2 or more persons hold interests in any residence and are jointly liable for the federally-subsidized indebtedness, the recapture amount shall be determined separately with respect to their respective interests in the residence. Paragraph (1) shall not apply to any transfer on which no gain or loss is recognized under section 1041. In any such case, the transferee shall be treated under this subsection in the same manner as the transferor would have been treated had such transfer not occurred. The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out this subsection, including regulations dealing with dispositions of partial interests in a residence.

§ 144 Qualified small issue bond; qualified student loan bond; qualified redevelopment bond

(a) Qualified small issue bond For purposes of this part, the term “qualified small issue bond” means any bond issued as part of an issue the aggregate authorized face amount of which is 10,000,000” for “1,000,000), or described in clause (i) or (ii) of section 41(b)(2)(A) for which a deduction was allowed under section 174A(a), shall not be taken into account. In applying subparagraph (A)(ii) with respect to capital expenditures made after the date of any issue, no bond issued as a part of such issue shall cease to be treated as a qualified small issue bond by reason of any such expenditure for any period before the date on which such expenditure is paid or incurred. In the case of any issue described in paragraph (1)(B), an election may be made under subparagraph (A) of this paragraph only if all of the prior issues being redeemed are issues to which paragraph (1) (or the corresponding provision of prior law) applied. In applying subparagraph (A)(ii) with respect to such a refinancing issue, capital expenditures shall be taken into account only for purposes of determining whether the prior issues being redeemed qualified (and would have continued to qualify) under paragraph (1) (or the corresponding provision of prior law). In the case of any issue 95 percent or more of the net proceeds of which are to be used to provide facilities with respect to which an urban development action grant has been made under section 119 of the Housing and Community Development Act of 1974, capital expenditures of not to exceed $10, 000, 000 s ha ll n o t b e t ak e nin t o a cco u n t f or p u r p oseso f a ppl y in g s u b p a r a g r a p h (A) (ii) . T hi ss u b p a r a g r a p h s ha ll n o t a ppl y t o b o n d s i ss u e d a f t erDece mb er 31, 2006. Wi t h res p ec tt o b o n d s i ss u e d a f t erDece mb er 31, 2006, ina dd i t i o n t o an yc a p i t a l e x p e n d i t u re d escr ib e d in s u b p a r a g r a p h (C), c a p i t a l e x p e n d i t u reso f n o tt oe x cee d$ 10,000,000 shall not be taken into account for purposes of applying subparagraph (A)(ii). This subsection shall not apply to any bond issued as part of an issue 5 percent or more of the net proceeds of which are to be used directly or indirectly to provide residential real property for family units. For purposes of this subsection, separate lots of bonds which (but for this subparagraph) would be treated as part of the same issue shall be treated as separate issues unless the proceeds of such lots are to be used with respect to 2 or more facilities— which are located in more than 1 State, or which have, or will have, as the same principal user the same person or related persons. For purposes of subparagraph (A), a person (other than a governmental unit) shall be considered a principal user of a facility if such person (or a group of related persons which includes such person)— guarantees, arranges, participates in, or assists with the issuance (or pays any portion of the cost of issuance) of any bond the proceeds of which are to be used to finance or refinance such facility, and provides any property, or any franchise, trademark, or trade name (within the meaning of section 1253), which is to be used in connection with such facility. This subsection shall not apply to any bond issued as part of an issue (other than an issue to which paragraph (4) applies) if the interest on any other bond which is part of such issue is excluded from gross income under any provision of law other than this subsection. This subsection shall not apply to an issue if— more than 25 percent of the net proceeds of the issue are to be used to provide a facility the primary purpose of which is one of the following: retail food and beverage services, automobile sales or service, or the provision of recreation or entertainment; or any portion of the proceeds of the issue is to be used to provide the following: any private or commercial golf course, country club, massage parlor, tennis club, skating facility (including roller skating, skateboard, and ice skating), racquet sports facility (including any handball or racquetball court), hot tub facility, suntan facility, or racetrack. For purposes of this subsection, 2 or more issues part or all of the net proceeds of which are to be used with respect to a single building, an enclosed shopping mall, or a strip of offices, stores, or warehouses using substantial common facilities shall be treated as 1 issue (and any person who is a principal user with respect to any of such issues shall be treated as a principal user with respect to the aggregated issue). This subsection shall not apply to any issue if the aggregate authorized face amount of such issue allocated to any test-period beneficiary (when increased by the outstanding tax-exempt facility-related bonds of such beneficiary) exceeds 250,000 of the net proceeds of such issue are to be used to provide depreciable farm property with respect to which the principal user is or will be the same person or 2 or more related persons. For purposes of this paragraph, the term “depreciable farm property” means property of a character subject to the allowance for depreciation which is to be used in a trade or business of farming. In determining the amount of proceeds of an issue to be used as described in subparagraph (A), there shall be taken into account the aggregate amount of each prior issue to which paragraph (1) (or the corresponding provisions of prior law) applied which were or will be so used. This subsection shall not apply to— any bond (other than a bond described in clause (ii)) issued after December 31, 1986 , or any bond (or series of bonds) issued to refund a bond issued on or before such date unless— the average maturity date of the issue of which the refunding bond is a part is not later than the average maturity date of the bonds to be refunded by such issue, the amount of the refunding bond does not exceed the outstanding amount of the refunded bond, and the net proceeds of the refunding bond are used to redeem the refunded bond not later than 90 days after the date of the issuance of the refunding bond. For purposes of clause (ii)(I), average maturity shall be determined in accordance with section 147(b)(2)(A). Subparagraph (A) shall not apply to any bond issued as part of an issue 95 percent or more of the net proceeds of which are to be used to provide— any manufacturing facility, or any land or property in accordance with section 147(c)(2). For purposes of this paragraph— The term “manufacturing facility” means any facility which is used in the manufacturing or production of tangible personal property (including the processing resulting in a change in the condition of such property). A rule similar to the rule of section 142(b)(2) shall apply for purposes of the preceding sentence. Such term includes facilities which are directly related and ancillary to a manufacturing facility (determined without regard to this clause) if— such facilities are located on the same site as the manufacturing facility, and not more than 25 percent of the net proceeds of the issue are used to provide such facilities. In the case of any issue made after the date of enactment of this clause and before January 1, 2011 , clause (ii) shall not apply and the net proceeds from a bond shall be considered to be used to provide a manufacturing facility if such proceeds are used to provide— a facility which is used in the creation or production of intangible property which is described in section 197(d)(1)(C)(iii), or a facility which is functionally related and subordinate to a manufacturing facility (determined without regard to this subclause) if such facility is located on the same site as the manufacturing facility.

(b) Qualified student loan bond For purposes of this part— The term “qualified student loan bond” means any bond issued as part of an issue the applicable percentage or more of the net proceeds of which are to be used directly or indirectly to make or finance student loans under— a program of general application to which the Higher Education Act of 1965 applies if— limitations are imposed under the program on— the maximum amount of loans outstanding to any student, and the maximum rate of interest payable on any loan, the loans are directly or indirectly guaranteed by the Federal Government, the financing of loans under the program is not limited by Federal law to the proceeds of tax-exempt bonds, and special allowance payments under section 438 of the Higher Education Act of 1965— are authorized to be paid with respect to loans made under the program, or would be authorized to be made with respect to loans under the program if such loans were not financed with the proceeds of tax-exempt bonds, or a program of general application approved by the State if no loan under such program exceeds the difference between the total cost of attendance and other forms of student assistance (not including loans pursuant to section 428B(a)(1) of the Higher Education Act of 1965 (relating to parent loans) or subpart I 1 of part C of title VII of the Public Health Service Act (relating to student assistance)) for which the student borrower may be eligible. A program shall not be treated as described in this subparagraph if such program is described in subparagraph (A). A bond shall not be treated as a qualified student loan bond if the issue of which such bond is a part meets the private business tests of paragraphs (1) and (2) of section 141(b) (determined by treating 501(c)(3) organizations as governmental units with respect to their activities which do not constitute unrelated trades or businesses, determined by applying section 513(a)). For purposes of paragraph (1), the term “applicable percentage” means— 90 percent in the case of the program described in paragraph (1)(A), and 95 percent in the case of the program described in paragraph (1)(B). A student loan shall be treated as being made or financed under a program described in paragraph (1) with respect to an issue only if the student is— a resident of the State from which the volume cap under section 146 for such loan was derived, or enrolled at an educational institution located in such State. A program shall not be treated as described in paragraph (1)(A) if such program discriminates on the basis of the location (in the United States) of the educational institution in which the student is enrolled.

(c) Qualified redevelopment bond For purposes of this part— The term “qualified redevelopment bond” means any bond issued as part of an issue 95 percent or more of the net proceeds of which are to be used for 1 or more redevelopment purposes in any designated blighted area. A bond shall not be treated as a qualified redevelopment bond unless— the issue described in paragraph (1) is issued pursuant to— a State law which authorizes the issuance of such bonds for redevelopment purposes in blighted areas, and a redevelopment plan which is adopted before such issuance by the governing body described in paragraph (4)(A) with respect to the designated blighted area, the payment of the principal and interest on such issue is primarily secured by taxes of general applicability imposed by a general purpose governmental unit, or any increase in real property tax revenues (attributable to increases in assessed value) by reason of the carrying out of such purposes in such area is reserved exclusively for debt service on such issue (and similar issues) to the extent such increase does not exceed such debt service, each interest in real property located in such area— which is acquired by a governmental unit with the proceeds of the issue, and which is transferred to a person other than a governmental unit, is transferred for fair market value, the financed area with respect to such issue meets the no additional charge requirements of paragraph (5), and the use of the proceeds of the issue meets the requirements of paragraph (6). For purposes of paragraph (1)— The term “redevelopment purposes” means, with respect to any designated blighted area— the acquisition (by a governmental unit having the power to exercise eminent domain) of real property located in such area, the clearing and preparation for redevelopment of land in such area which was acquired by such governmental unit, the rehabilitation of real property located in such area which was acquired by such governmental unit, and the relocation of occupants of such real property. The term “redevelopment purposes” does not include the construction (other than the rehabilitation) of any property or the enlargement of an existing building. For purposes of this subsection— The term “designated blighted area” means any blighted area designated by the governing body of a local general purpose governmental unit in the jurisdiction of which such area is located. The term “blighted area” means any area which the governing body described in subparagraph (A) determines to be a blighted area on the basis of the substantial presence of factors such as excessive vacant land on which structures were previously located, abandoned or vacant buildings, substandard structures, vacancies, and delinquencies in payment of real property taxes. An area may be designated by a governmental unit as a blighted area only if the designation percentage with respect to such area, when added to the designation percentages of all other designated blighted areas within the jurisdiction of such governmental unit, does not exceed 20 percent. For purposes of this subparagraph, the term “designation percentage” means, with respect to any area, the percentage (determined at the time such area is designated) which the assessed value of real property located in such area is of the total assessed value of all real property located within the jurisdiction of the governmental unit which designated such area. The designation percentage of a previously designated blighted area shall not be taken into account under clause (i) if no qualified redevelopment bond (or similar bond) is or will be outstanding with respect to such area. Except as provided in clause (ii), an area shall not be treated as a designated blighted area for purposes of this subsection unless such area is contiguous and compact and its area equals or exceeds 100 acres. Clause (i) shall be applied by substituting “10 acres” for “100 acres” if not more than 25 percent of the financed area is to be provided (pursuant to the issue and all other such issues) to 1 person. For purposes of the preceding sentence, all related persons (as defined in subsection (a)(3)) shall be treated as 1 person. For purposes of this clause, an area provided to a developer on a short-term interim basis shall not be treated as provided to such developer. The financed area with respect to any issue meets the requirements of this paragraph if, while any bond which is part of such issue is outstanding— no owner or user of property located in the financed area is subject to a charge or fee which similarly situated owners or users of comparable property located outside such area are not subject, and the assessment method or rate of real property taxes with respect to property located in the financed area does not differ from the assessment method or rate of real property taxes with respect to comparable property located outside such area. For purposes of the preceding sentence, the term “comparable property” means property which is of the same type as the property to which it is being compared and which is located within the jurisdiction of the designating governmental unit. The use of the proceeds of an issue meets the requirements of this paragraph if— not more than 25 percent of the net proceeds of such issue are to be used to provide (including the provision of land for) facilities described in subsection (a)(8) or section 147(e), and no portion of the proceeds of such issue is to be used to provide (including the provision of land for) any private or commercial golf course, country club, massage parlor, hot tub facility, suntan facility, racetrack or other facility used for gambling, or any store the principal business of which is the sale of alcoholic beverages for consumption off premises. For purposes of this subsection, the term “financed area” means, with respect to any issue, the portion of the designated blighted area with respect to which the proceeds of such issue are to be used. Section 147(c) (other than paragraphs (1)(B) and (2) thereof) shall not apply to any qualified redevelopment bond.

§ 145 Qualified 501(c)(3) bond

(a) In general For purposes of this part, except as otherwise provided in this section, the term “qualified 501(c)(3) bond” means any private activity bond issued as part of an issue if— all property which is to be provided by the net proceeds of the issue is to be owned by a 501(c)(3) organization or a governmental unit, and such bond would not be a private activity bond if— 501(c)(3) organizations were treated as governmental units with respect to their activities which do not constitute unrelated trades or businesses, determined by applying section 513(a), and paragraphs (1) and (2) of section 141(b) were applied by substituting “5 percent” for “10 percent” each place it appears and by substituting “net proceeds” for “proceeds” each place it appears.

**(b) $150, 000, 000 l imi t a t i o n o nb o n d so t h er t hanh os p i t a l b o n d s * * A b o n d (o t h er t hana q u a l i f i e d h os p i t a l b o n d) s ha ll n o t b e t re a t e d a s a q u a l i f i e d 501 (c) (3) b o n d i f t h e a gg re g a t e a u t h or i ze df a ce am o u n t o f t h e i ss u e (o f w hi c h s u c hb o n d i s a p a r t) a ll oc a t e d t o an y 501 (c) (3) or g ani z a t i o n w hi c hi s a t es t - p er i o d b e n e f i c ia ry (w h e nin cre a se d b y t h eo u t s t an d in g t a x - e x e m pt n o nh os p i t a l b o n d so f s u c h or g ani z a t i o n) e x cee d s$ 150,000,000. For purposes of applying paragraph (1) with respect to any issue, the outstanding tax-exempt nonhospital bonds of any organization which is a test-period beneficiary with respect to such issue is the aggregate amount of tax-exempt bonds referred to in subparagraph (B)— which are allocated to such organization, and which are outstanding at the time of such later issue (not including as outstanding any bond which is to be redeemed (other than in an advance refunding) from the net proceeds of the later issue). For purposes of subparagraph (A), the bonds referred to in this subparagraph are— any qualified 501(c)(3) bond other than a qualified hospital bond, and any bond to which section 141(a) does not apply if— such bond would have been an industrial development bond (as defined in section 103(b)(2), as in effect on the day before the date of the enactment of the Tax Reform Act of 1986) if 501(c)(3) organizations were not exempt persons, and such bond was not described in paragraph (4), (5), or (6) of such section 103(b) (as in effect on the date such bond was issued). A bond shall be taken into account under subparagraph (B) only to the extent that the proceeds of the issue of which such bond is a part are not used with respect to a hospital. If 90 percent or more of the net proceeds of an issue are used with respect to a hospital, no bond which is part of such issue shall be taken into account under subparagraph (B)(ii). For purposes of this subsection, 2 or more organizations under common management or control shall be treated as 1 organization. Rules similar to the rules of subparagraphs (C), (D), and (E) of section 144(a)(10) shall apply for purposes of this subsection. This subsection shall not apply with respect to bonds issued after the date of the enactment of this paragraph as part of an issue 95 percent or more of the net proceeds of which are to be used to finance capital expenditures incurred after such date.

(c) Qualified hospital bond For purposes of this section, the term “qualified hospital bond” means any bond issued as part of an issue 95 percent or more of the net proceeds of which are to be used with respect to a hospital.

(d) Restrictions on bonds used to provide residential rental housing for family units Except as otherwise provided in this subsection, a bond which is part of an issue shall not be a qualified 501(c)(3) bond if any portion of the net proceeds of the issue are to be used directly or indirectly to provide residential rental property for family units. Paragraph (1) shall not apply to any bond issued as part of an issue if the portion of such issue which is to be used as described in paragraph (1) is to be used to provide— a residential rental property for family units if the first use of such property is pursuant to such issue, qualified residential rental projects (as defined in section 142(d)), or property which is to be substantially rehabilitated in a rehabilitation beginning within the 2-year period ending 1 year after the date of the acquisition of such property. Solely for purposes of determining under paragraph (2)(A) whether the 1st use of property is pursuant to tax-exempt financing— If— the 1st use of property is pursuant to taxable financing, there was a reasonable expectation (at the time such taxable financing was provided) that such financing would be replaced by tax-exempt financing, and the taxable financing is in fact so replaced within a reasonable period after the taxable financing was provided, then the 1st use of such property shall be treated as being pursuant to the tax-exempt financing. If, at the time of the 1st use of property, there was no operating State or local program for tax-exempt financing of the property, the 1st use of the property shall be treated as pursuant to the 1st tax-exempt financing of the property. For purposes of this paragraph— The term “tax-exempt financing” means financing provided by tax-exempt bonds. The term “taxable financing” means financing which is not tax-exempt financing. Except as provided in subparagraph (B), rules similar to the rules of section 47(c)(1)(B) shall apply in determining for purposes of paragraph (2)(C) whether property is substantially rehabilitated. For purposes of subparagraph (A), clause (ii) of section 47(c)(1)(B) shall not apply, but the Secretary may extend the 24-month period in section 47(c)(1)(B)(i) where appropriate due to circumstances not within the control of the owner.

(e) Election out This section shall not apply to an issue if— the issuer elects not to have this section apply to such issue, and such issue is an issue of exempt facility bonds, or qualified redevelopment bonds, to which section 146 applies.

§ 146 Volume cap

(a) General rule A private activity bond issued as part of an issue meets the requirements of this section if the aggregate face amount of the private activity bonds issued pursuant to such issue, when added to the aggregate face amount of tax-exempt private activity bonds previously issued by the issuing authority during the calendar year, does not exceed such authority’s volume cap for such calendar year.

(b) Volume cap for State agencies For purposes of this section— The volume cap for any agency of the State authorized to issue tax-exempt private activity bonds for any calendar year shall be 50 percent of the State ceiling for such calendar year. If more than 1 agency of the State is authorized to issue tax-exempt private activity bonds, all such agencies shall be treated as a single agency.

(c) Volume cap for other issuers For purposes of this section— The volume cap for any issuing authority (other than a State agency) for any calendar year shall be an amount which bears the same ratio to 50 percent of the State ceiling for such calendar year as— the population of the jurisdiction of such issuing authority, bears to the population of the entire State. For purposes of paragraph (1)(A), if an area is within the jurisdiction of 2 or more governmental units, such area shall be treated as only within the jurisdiction of the unit having jurisdiction over the smallest geographical area unless such unit agrees to surrender all or part of such jurisdiction for such calendar year to the unit with overlapping jurisdiction which has the next smallest geographical area.

(d) State ceiling For purposes of this section— The State ceiling applicable to any State for any calendar year shall be the greater of— an amount equal to $75 ($ 62.50 in the case of calendar year 2001) multiplied by the State population, or $225, 000, 000 ($ 187,500,000 in the case of calendar year 2001). In the case of a calendar year after 2002, each of the dollar amounts contained in paragraph (1) shall be increased by an amount equal to— such dollar amount, multiplied by the cost-of-living adjustment determined under section 1(f)(3) for such calendar year by substituting “calendar year 2001” for “calendar year 2016” in subparagraph (A)(ii) thereof. If any increase determined under the preceding sentence is not a multiple of $5 ($ 5,000 in the case of the dollar amount in paragraph (1)(B)), such increase shall be rounded to the nearest multiple thereof. For purposes of this section— The volume cap for any constitutional home rule city for any calendar year shall be determined under paragraph (1) of subsection (c) by substituting “100 percent” for “50 percent”. In the case of any State which contains 1 or more constitutional home rule cities, for purposes of applying subsections (b) and (c) with respect to issuing authorities in such State other than constitutional home rule cities, the State ceiling for any calendar year shall be reduced by the aggregate volume caps determined for such year for all constitutional home rule cities in such State. For purposes of this section, the term “constitutional home rule city” means, with respect to any calendar year, any political subdivision of a State which, under a State constitution which was adopted in 1970 and effective on July 1, 1971 , had home rule powers on the 1st day of the calendar year. If the population of any possession of the United States for any calendar year is less than the population of the least populous State (other than a possession) for such calendar year, the limitation under paragraph (1)(A) shall not be less than the amount determined under subparagraph (B) for such calendar year. The limitation determined under this subparagraph, with respect to a possession, for any calendar year is an amount equal to the product of— the fraction— the numerator of which is the amount applicable under paragraph (1)(B) for such calendar year, and the denominator of which is the State population of the least populous State (other than a possession) for such calendar year, and the population of such possession for such calendar year. In the case of calendar year 2008, the State ceiling for each State shall be increased by an amount equal to $11,000,000,000 multiplied by a fraction— the numerator of which is the State ceiling applicable to the State for calendar year 2008, determined without regard to this paragraph, and the denominator of which is the sum of the State ceilings determined under clause (i) for all States. Any amount of the State ceiling for any State which is attributable to an increase under this paragraph shall be allocated solely for one or more qualified housing issues. For purposes of this paragraph, the term “qualified housing issue” means— an issue described in section 142(a)(7) (relating to qualified residential rental projects), or a qualified mortgage issue (determined by substituting “12-month period” for “42-month period” each place it appears in section 143(a)(2)(D)(i)).

(e) State may provide for different allocation For purposes of this section— Except as provided in paragraph (3), a State may, by law provide a different formula for allocating the State ceiling among the governmental units (or other authorities) in such State having authority to issue tax-exempt private activity bonds. Except as otherwise provided in paragraph (3), the Governor of any State may proclaim a different formula for allocating the State ceiling among the governmental units (or other authorities) in such State having authority to issue private activity bonds. The authority provided in subparagraph (A) shall not apply to bonds issued after the earlier of— the last day of the 1st calendar year after 1986 during which the legislature of the State met in regular session, or the effective date of any State legislation with respect to the allocation of the State ceiling. Except as otherwise provided in a State constitutional amendment (or law changing the home rule provision adopted in the manner provided by the State constitution), the authority provided in this subsection shall not apply to that portion of the State ceiling which is allocated to any constitutional home rule city in the State unless such city agrees to such different allocation.

(f) Elective carryforward of unused limitation for specified purpose If— an issuing authority’s volume cap for any calendar year after 1985, exceeds the aggregate amount of tax-exempt private activity bonds issued during such calendar year by such authority, such authority may elect to treat all (or any portion) of such excess as a carryforward for 1 or more carryforward purposes. In any election under paragraph (1), the issuing authority shall— identify the purpose for which the carryforward is elected, and specify the portion of the excess described in paragraph (1) which is to be a carryforward for each such purpose. If any issuing authority elects a carryforward under paragraph (1) with respect to any carryforward purpose, any private activity bonds issued by such authority with respect to such purpose during the 3 calendar years following the calendar year in which the carryforward arose shall not be taken into account under subsection (a) to the extent the amount of such bonds does not exceed the amount of the carryforward elected for such purpose. Carryforwards elected with respect to any purpose shall be used in the order of the calendar years in which they arose. Any election under this paragraph (and any identification or specification contained therein), once made, shall be irrevocable. The term “carryforward purpose” means— the purpose of issuing exempt facility bonds described in 1 of the paragraphs of section 142(a), the purpose of issuing qualified mortgage bonds or mortgage credit certificates, the purpose of issuing qualified student loan bonds, and the purpose of issuing qualified redevelopment bonds. No amount which is attributable to the increase under subsection (d)(5) may be used— for any issue other than a qualified housing issue (as defined in subsection (d)(5)), or to issue any bond after calendar year 2010.

(g) Exception for certain bonds Only for purposes of this section, the term “private activity bond” shall not include— any qualified veterans’ mortgage bond, any qualified 501(c)(3) bond, any exempt facility bond issued as part of an issue described in paragraph (1), (2), (12), (13), (14), or (15) of section 142(a), 75 percent of any exempt facility bond issued as part of an issue described in paragraph (11) of section 142(a) (relating to high-speed intercity rail facilities), 75 percent of any exempt facility bond issued as part of an issue described in paragraph (16) of section 142(a) (relating to qualified broadband projects), and 75 percent of any exempt facility bond issued as part of an issue described in paragraph (17) of section 142(a) (relating to qualified carbon dioxide capture facilities). Paragraphs (4) and (5) shall be applied without regard to “75 percent of” if all of the property to be financed by the net proceeds of the issue is to be owned by a governmental unit (within the meaning of section 142(b)(1)).

(h) Exception for government-owned solid waste disposal facilities Only for purposes of this section, the term “private activity bond” shall not include any exempt facility bond described in section 142(a)(6) which is issued as part of an issue if all of the property to be financed by the net proceeds of such issue is to be owned by a governmental unit. In determining ownership for purposes of paragraph (1), section 142(b)(1)(B) shall apply, except that a lease term shall be treated as satisfying clause (ii) thereof if it is not more than 20 years.

(i) Treatment of refunding issues For purposes of the volume cap imposed by this section— The term “private activity bond” shall not include any bond which is issued to refund another bond to the extent that the amount of such bond does not exceed the outstanding amount of the refunded bond. In the case of any qualified student loan bond, paragraph (1) shall apply only if the maturity date of the refunding bond is not later than the later of— the average maturity date of the qualified student loan bonds to be refunded by the issue of which the refunding bond is a part, or the date 17 years after the date on which the refunded bond was issued (or in the case of a series of refundings, the date on which the original bond was issued). In the case of any qualified mortgage bond, paragraph (1) shall apply only if the maturity date of the refunding bond is not later than the later of— the average maturity date of the qualified mortgage bonds to be refunded by the issue of which the refunding bond is a part, or the date 32 years after the date on which the refunded bond was issued (or in the case of a series of refundings, the date on which the original bond was issued). For purposes of paragraphs (2) and (3), average maturity shall be determined in accordance with section 147(b)(2)(A). This subsection shall not apply to any bond issued to advance refund another bond. If, during the 6-month period beginning on the date of a repayment of a loan financed by an issue 95 percent or more of the net proceeds of which are used to provide projects described in section 142(d), such repayment is used to provide a new loan for any project so described, any bond which is issued to refinance such issue shall be treated as a refunding issue to the extent the principal amount of such refunding issue does not exceed the principal amount of the bonds refunded. Subparagraph (A) shall apply to only one refunding of the original issue and only if— the refunding issue is issued not later than 4 years after the date on which the original issue was issued, the latest maturity date of any bond of the refunding issue is not later than 34 years after the date on which the refunded bond was issued, and the refunding issue is approved in accordance with section 147(f) before the issuance of the refunding issue.

(j) Population For purposes of this section, determinations of the population of any State (or issuing authority) shall be made with respect to any calendar year on the basis of the most recent census estimate of the resident population of such State (or issuing authority) released by the Bureau of Census before the beginning of such calendar year.

(k) Facility must be located within State Except as provided in paragraphs (2) and (3), no portion of the State ceiling applicable to any State for any calendar year may be used with respect to financing for a facility located outside such State. Paragraph (1) shall not apply to any exempt facility bond described in paragraph (4), (5), (6), or (10) of section 142(a) if the issuer establishes that the State’s share of the use of the facility (or its output) will equal or exceed the State’s share of the private activity bonds issued to finance the facility. Paragraph (1) shall not apply to any bond to which volume cap is allocated under section 141(b)(5)— for an output facility, or for a facility of a type described in paragraph (4), (5), (6), or (10) of section 142(a), if the issuer establishes that the State’s share of the private business use (as defined by section 141(b)(6)) of the facility will equal or exceed the State’s share of the volume cap allocated with respect to bonds issued to finance the facility.

(l) Issuer of qualified scholarship funding bonds In the case of a qualified scholarship funding bond, such bond shall be treated for purposes of this section as issued by a State or local issuing authority (whichever is appropriate).

(m) Treatment of amounts allocated to private activity portion of government use bonds The volume cap of an issuer shall be reduced by the amount allocated by the issuer to an issue under section 141(b)(5). Except as otherwise provided by the Secretary, any advance refunding of any part of an issue to which an amount was allocated under section 141(b)(5) (or would have been allocated if such section applied to such issue) shall be taken into account under this section to the extent of the amount of the volume cap which was (or would have been) so allocated.

(n) Reduction for mortgage credit certificates, etc. The volume cap of any issuing authority for any calendar year shall be reduced by the sum of— the amount of qualified mortgage bonds which such authority elects not to issue under section 25(c)(2)(A)(ii) during such year, plus the amount of any reduction in such ceiling under section 25(f) applicable to such authority for such year.

§ 147 Other requirements applicable to certain private activity bonds

(a) Substantial user requirement Except as provided in subsection (h), a private activity bond shall not be a qualified bond for any period during which it is held by a person who is a substantial user of the facilities or by a related person of such a substantial user. For purposes of paragraph (1), the following shall be treated as related persons— 2 or more persons if the relationship between such persons would result in a disallowance of losses under section 267 or 707(b), 2 or more persons which are members of the same controlled group of corporations (as defined in section 1563(a), except that “more than 50 percent” shall be substituted for “at least 80 percent” each place it appears therein), a partnership and each of its partners (and their spouses and minor children), and an S corporation and each of its shareholders (and their spouses and minor children).

(b) Maturity may not exceed 120 percent of economic life Except as provided in subsection (h), a private activity bond shall not be a qualified bond if it is issued as part of an issue and— the average maturity of the bonds issued as part of such issue, exceeds 120 percent of the average reasonably expected economic life of the facilities being financed with the net proceeds of such issue. For purposes of paragraph (1)— the average maturity of any issue shall be determined by taking into account the respective issue prices of the bonds issued as part of such issue, and the average reasonably expected economic life of the facilities being financed with any issue shall be determined by taking into account the respective cost of such facilities. For purposes of this subsection, the reasonably expected economic life of any facility shall be determined as of the later of— the date on which the bonds are issued, or the date on which the facility is placed in service (or expected to be placed in service). Except as provided in clause (ii), land shall not be taken into account under paragraph (1)(B). If 25 percent or more of the net proceeds of any issue is to be used to finance land, such land shall be taken into account under paragraph (1)(B) and shall be treated as having an economic life of 30 years. At the election of the issuer, a qualified 501(c)(3) bond shall be treated as meeting the requirements of paragraph (1) if such bond meets the requirements of subparagraph (B). A qualified 501(c)(3) bond meets the requirements of this subparagraph if— 95 percent or more of the net proceeds of the issue of which such bond is a part are to be used to make or finance loans to 2 or more 501(c)(3) organizations or governmental units for acquisition of property to be used by such organizations, each loan described in clause (i) satisfies the requirements of paragraph (1) (determined by treating each loan as a separate issue), before such bond is issued, a demand survey was conducted which shows a demand for financing greater than an amount equal to 120 percent of the lendable proceeds of such issue, and 95 percent or more of the net proceeds of such issue are to be loaned to 501(c)(3) organizations or governmental units within 1 year of issuance and, to the extent there are any unspent proceeds after such 1-year period, bonds issued as part of such issue are to be redeemed as soon as possible thereafter (and in no event later than 18 months after issuance). A bond shall not meet the requirements of this subparagraph if the maturity date of any bond issued as part of such issue is more than 30 years after the date on which the bond was issued (or, in the case of a refunding or series of refundings, the date on which the original bond was issued). Paragraph (1) shall not apply to any bond issued as part of an issue 95 percent or more of the net proceeds of which are to be used to finance mortgage loans insured under FHA 242 or under a similar Federal Housing Administration program (as in effect on the date of the enactment of the Tax Reform Act of 1986) where the loan term approved by such Administration plus the maximum maturity of debentures which could be issued by such Administration in satisfaction of its obligations exceeds the term permitted under paragraph (1).

(c) Limitation on use for land acquisition Except as provided in subsection (h), a private activity bond shall not be a qualified bond if— it is issued as part of an issue and 25 percent or more of the net proceeds of such issue are to be used (directly or indirectly) for the acquisition of land (or an interest therein), or any portion of the proceeds of such issue is to be used (directly or indirectly) for the acquisition of land (or an interest therein) to be used for farming purposes. If the requirements of subparagraph (B) are met with respect to any land, paragraph (1) shall not apply to such land, and subsection (d) shall not apply to property to be used thereon for farming purposes, but only to the extent of expenditures (financed with the proceeds of the issue) not in excess of 62,500. A rule similar to the rule of subparagraph (C)(ii) shall apply for purposes of the preceding sentence. For purposes of this paragraph and section 144(a), the acquisition by a first-time farmer of land or personal property from a related person (within the meaning of section 144(a)(3)) shall not be treated as an acquisition from a related person, if— the acquisition price is for the fair market value of such land or property, and subsequent to such acquisition, the related person does not have a financial interest in the farming operation with respect to which the bond proceeds are to be used. In the case of any calendar year after 2008, the dollar amount in subparagraph (A) shall be increased by an amount equal to— such dollar amount, multiplied by the cost-of-living adjustment determined under section 1(f)(3) for the calendar year, determined by substituting “calendar year 2007” for “calendar year 2016” in subparagraph (A)(ii) thereof. If any amount as increased under the preceding sentence is not a multiple of $100, s u c ham o u n t s ha ll b ero u n d e d t o t h e n e a res t m u lt i pl eo f$ 100. Any land acquired by a governmental unit (or issuing authority) in connection with an airport, mass commuting facility, high-speed intercity rail facility, dock, or wharf shall not be taken into account under paragraph (1) if— such land is acquired for noise abatement or wetland preservation, or for future use as an airport, mass commuting facility, high-speed intercity rail facility, dock, or wharf, and there is not other significant use of such land.

(d) Acquisition of existing property not permitted Except as provided in subsection (h), a private activity bond shall not be a qualified bond if issued as part of an issue and any portion of the net proceeds of such issue is to be used for the acquisition of any property (or an interest therein) unless the 1st use of such property is pursuant to such acquisition. Paragraph (1) shall not apply with respect to any building (and the equipment therefor) if— the rehabilitation expenditures with respect to such building, equal or exceed 15 percent of the portion of the cost of acquiring such building (and equipment) financed with the net proceeds of the issue. A rule similar to the rule of the preceding sentence shall apply in the case of structures other than a building except that subparagraph (B) shall be applied by substituting “100 percent” for “15 percent”. For purposes of this subsection— Except as provided in this paragraph, the term “rehabilitation expenditures” means any amount properly chargeable to capital account which is incurred by the person acquiring the building for property (or additions or improvements to property) in connection with the rehabilitation of a building. In the case of an integrated operation contained in a building before its acquisition, such term includes rehabilitating existing equipment in such building or replacing it with equipment having substantially the same function. For purposes of this subparagraph, any amount incurred by a successor to the person acquiring the building or by the seller under a sales contract with such person shall be treated as incurred by such person. The term “rehabilitation expenditures” does not include any expenditure described in section 47(c)(2)(B). The term “rehabilitation expenditures” shall not include any amount which is incurred after the date 2 years after the later of— the date on which the building was acquired, or the date on which the bond was issued. In the case of a project involving 2 or more buildings, this subsection shall be applied on a project basis.

(e) No portion of bonds may be issued for skyboxes, airplanes, gambling establishments, etc. A private activity bond shall not be a qualified bond if issued as part of an issue and any portion of the proceeds of such issue is to be used to provide any airplane, skybox or other private luxury box, health club facility, facility primarily used for gambling, or store the principal business of which is the sale of alcoholic beverages for consumption off premises. The preceding sentence shall not apply to any fixed-wing aircraft equipped for, and exclusively dedicated to providing, acute care emergency medical services (within the meaning of section 4261(g)(2)).

(f) Public approval required for private activity bonds A private activity bond shall not be a qualified bond unless such bond satisfies the requirements of paragraph (2). A bond shall satisfy the requirements of this paragraph if such bond is issued as a part of an issue which has been approved by— the governmental unit— which issued such bond, or on behalf of which such bond was issued, and each governmental unit having jurisdiction over the area in which any facility, with respect to which financing is to be provided from the net proceeds of such issue, is located (except that if more than 1 governmental unit within a State has jurisdiction over the entire area within such State in which such facility is located, only 1 such unit need approve such issue). For purposes of subparagraph (A), an issue shall be treated as having been approved by any governmental unit if such issue is approved— by the applicable elected representative of such governmental unit after a public hearing following reasonable public notice, or by voter referendum of such governmental unit. If there has been public approval under subparagraph (A) of the plan for financing a facility, such approval shall constitute approval under subparagraph (A) for any issue— which is issued pursuant to such plan within 3 years after the date of the 1st issue pursuant to the approval, and all or substantially all of the proceeds of which are to be used to finance such facility or to refund previous financing under such plan. No approval under subparagraph (A) shall be necessary with respect to any bond which is issued to refund (other than to advance refund) a bond approved under subparagraph (A) (or treated as approved under subparagraph (C)) unless the average maturity date of the issue of which the refunding bond is a part is later than the average maturity date of the bonds to be refunded by such issue. For purposes of the preceding sentence, average maturity shall be determined in accordance with subsection (b)(2)(A). For purposes of this paragraph— The term “applicable elected representative” means with respect to any governmental unit— an elected legislative body of such unit, or the chief elected executive officer, the chief elected State legal officer of the executive branch, or any other elected official of such unit designated for purposes of this paragraph by such chief elected executive officer or by State law. If the office of any elected official described in subclause (II) is vacated and an individual is appointed by the chief elected executive officer of the governmental unit and confirmed by the elected legislative body of such unit (if any) to serve the remaining term of the elected official, the individual so appointed shall be treated as the elected official for such remaining term. If (but for this clause) a governmental unit has no applicable elected representative, the applicable elected representative for purposes of clause (i) shall be the applicable elected representative of the governmental unit— which is the next higher governmental unit with such a representative, and from which the authority of the governmental unit with no such representative is derived. If— the proceeds of an issue are to be used to finance a facility or facilities located at an airport or high-speed intercity rail facilities, and the governmental unit issuing such bonds is the owner or operator of such airport or high-speed intercity rail facilities, such governmental unit shall be deemed to be the only governmental unit having jurisdiction over such airport or high-speed intercity rail facilities for purposes of this subsection. In the case of a qualified scholarship funding bond, any governmental unit which made a request described in section 150(d)(2)(B) with respect to the issuer of such bond shall be treated for purposes of paragraph (2) of this subsection as the governmental unit on behalf of which such bond was issued. Where more than one governmental unit within a State has made a request described in section 150(d)(2)(B), the State may also be treated for purposes of paragraph (2) of this subsection as the governmental unit on behalf of which such bond was issued. In the case of a bond of a volunteer fire department which meets the requirements of section 150(e), the political subdivision described in section 150(e)(2)(B) with respect to such department shall be treated for purposes of paragraph (2) of this subsection as the governmental unit on behalf of which such bond was issued.

(g) Restriction on issuance costs financed by issue A private activity bond shall not be a qualified bond if the issuance costs financed by the issue (of which such bond is a part) exceed 2 percent of the proceeds of the issue. In the case of an issue of qualified mortgage bonds or qualified veterans’ mortgage bonds, paragraph (1) shall be applied by substituting “3.5 percent” for “2 percent” if the proceeds of the issue do not exceed $20,000,000.

(h) Certain rules not to apply to certain bonds Subsections (a), (b), (c), and (d) shall not apply to any qualified mortgage bond, qualified veterans’ mortgage bond, or qualified student loan bond. Subsections (a), (c), and (d) shall not apply to any qualified 501(c)(3) bond and subsection (e) shall be applied as if it did not contain “health club facility” with respect to such a bond. Subsection (c) shall not apply to any exempt facility bond issued as part of an issue described in section 142(a)(13) (relating to qualified public educational facilities).

§ 148 Arbitrage

(a) Arbitrage bond defined For purposes of section 103, the term “arbitrage bond” means any bond issued as part of an issue any portion of the proceeds of which are reasonably expected (at the time of issuance of the bond) to be used directly or indirectly— to acquire higher yielding investments, or to replace funds which were used directly or indirectly to acquire higher yielding investments. For purposes of this subsection, a bond shall be treated as an arbitrage bond if the issuer intentionally uses any portion of the proceeds of the issue of which such bond is a part in a manner described in paragraph (1) or (2).

(b) Higher yielding investments For purposes of this section— The term “higher yielding investments” means any investment property which produces a yield over the term of the issue which is materially higher than the yield on the issue. The term “investment property” means— any security (within the meaning of section 165(g)(2)(A) or (B)), any obligation, any annuity contract, any investment-type property, or in the case of a bond other than a private activity bond, any residential rental property for family units which is not located within the jurisdiction of the issuer and which is not acquired to implement a court ordered or approved housing desegregation plan. Except as provided in subparagraph (B), the term “investment property” does not include any tax-exempt bond. With respect to an issue other than an issue a part of which is a specified private activity bond (as defined in section 57(a)(5)(C)), the term “investment property” includes a specified private activity bond (as so defined). The term “investment-type property” does not include a prepayment under a qualified natural gas supply contract. For purposes of this paragraph, the term “qualified natural gas supply contract” means any contract to acquire natural gas for resale by a utility owned by a governmental unit if the amount of gas permitted to be acquired under the contract by the utility during any year does not exceed the sum of— the annual average amount during the testing period of natural gas purchased (other than for resale) by customers of such utility who are located within the service area of such utility, and the amount of natural gas to be used to transport the prepaid natural gas to the utility during such year. Natural gas used to generate electricity shall be taken into account in determining the average under subparagraph (B)(i)— only if the electricity is generated by a utility owned by a governmental unit, and only to the extent that the electricity is sold (other than for resale) to customers of such utility who are located within the service area of such utility. If— after the close of the testing period and before the date of issuance of the issue, the utility owned by a governmental unit enters into a contract to supply natural gas (other than for resale) for a business use at a property within the service area of such utility, and the utility did not supply natural gas to such property during the testing period or the ratable amount of natural gas to be supplied under the contract is significantly greater than the ratable amount of gas supplied to such property during the testing period, then a contract shall not fail to be treated as a qualified natural gas supply contract by reason of supplying the additional natural gas under the contract referred to in subclause (I). The average under subparagraph (B)(i) shall not exceed the annual amount of natural gas reasonably expected to be purchased (other than for resale) by persons who are located within the service area of such utility and who, as of the date of issuance of the issue, are customers of such utility. The Secretary may increase the average under subparagraph (B)(i) for any period if the utility owned by the governmental unit establishes to the satisfaction of the Secretary that, based on objective evidence of growth in natural gas consumption or population, such average would otherwise be insufficient for such period. The amount otherwise permitted to be acquired under the contract for any period shall be reduced by— the applicable share of natural gas held by the utility on the date of issuance of the issue, and the natural gas (not taken into account under subclause (I)) which the utility has a right to acquire during such period (determined as of the date of issuance of the issue). For purposes of the clause (i), the term “applicable share” means, with respect to any period, the natural gas allocable to such period if the gas were allocated ratably over the period to which the prepayment relates. Subparagraph (A) shall cease to apply to any issue if the utility owned by the governmental unit engages in any intentional act to render the volume of natural gas acquired by such prepayment to be in excess of the sum of— the amount of natural gas needed (other than for resale) by customers of such utility who are located within the service area of such utility, and the amount of natural gas used to transport such natural gas to the utility. For purposes of this paragraph, the term “testing period” means, with respect to an issue, the most recent 5 calendar years ending before the date of issuance of the issue. For purposes of this paragraph, the service area of a utility owned by a governmental unit shall be comprised of— any area throughout which such utility provided at all times during the testing period— in the case of a natural gas utility, natural gas transmission or distribution services, and in the case of an electric utility, electricity distribution services, any area within a county contiguous to the area described in clause (i) in which retail customers of such utility are located if such area is not also served by another utility providing natural gas or electricity services, as the case may be, and any area recognized as the service area of such utility under State or Federal law.

(c) Temporary period exception For purposes of subsection (a), a bond shall not be treated as an arbitrage bond solely by reason of the fact that the proceeds of the issue of which such bond is a part may be invested in higher yielding investments for a reasonable temporary period until such proceeds are needed for the purpose for which such issue was issued. The temporary period referred to in paragraph (1) shall not exceed 6 months with respect to the proceeds of an issue which are to be used to make or finance loans (other than nonpurpose investments) to 2 or more persons. Subparagraph (A) shall be applied by substituting “3 months” for “6 months” with respect to the proceeds from the sale or repayment of any loan which are to be used to make or finance any loan. For purposes of the preceding sentence, a nonpurpose investment shall not be treated as a loan. In the case of an issue described in subparagraph (A) any portion of which is used to make or finance loans for construction expenditures (within the meaning of subsection (f)(4)(C)(iv))— rules similar to the rules of subsection (f)(4)(C)(v) shall apply, and subparagraph (A) shall be applied with respect to such portion by substituting “2 years” for “6 months”. This paragraph shall not apply to any qualified mortgage bond or qualified veterans’ mortgage bond.

(d) Special rules for reasonably required reserve or replacement fund For purposes of subsection (a), a bond shall not be treated as an arbitrage bond solely by reason of the fact that an amount of the proceeds of the issue of which such bond is a part may be invested in higher yielding investments which are part of a reasonably required reserve or replacement fund. The amount referred to in the preceding sentence shall not exceed 10 percent of the proceeds of such issue unless the issuer establishes to the satisfaction of the Secretary that a higher amount is necessary. A bond issued as part of an issue shall be treated as an arbitrage bond if the amount of the proceeds from the sale of such issue which is part of any reserve or replacement fund exceeds 10 percent of the proceeds of the issue (or such higher amount which the issuer establishes is necessary to the satisfaction of the Secretary).

(e) Minor portion may be invested in higher yielding investments Notwithstanding subsections (a), (c), and (d), a bond issued as part of an issue shall not be treated as an arbitrage bond solely by reason of the fact that an amount of the proceeds of such issue (in addition to the amounts under subsections (c) and (d)) is invested in higher yielding investments if such amount does not exceed the lesser of— 5 percent of the proceeds of the issue, or $100,000.

(f) Required rebate to the United States A bond which is part of an issue shall be treated as an arbitrage bond if the requirements of paragraphs (2) and (3) are not met with respect to such issue. The preceding sentence shall not apply to any qualified veterans’ mortgage bond. An issue shall be treated as meeting the requirements of this paragraph only if an amount equal to the sum of— the excess of— the amount earned on all nonpurpose investments (other than investments attributable to an excess described in this subparagraph), over the amount which would have been earned if such nonpurpose investments were invested at a rate equal to the yield on the issue, plus any income attributable to the excess described in subparagraph (A), is paid to the United States by the issuer in accordance with the requirements of paragraph (3). Except to the extent provided by the Secretary, the amount which is required to be paid to the United States by the issuer shall be paid in installments which are made at least once every 5 years. Each installment shall be in an amount which ensures that 90 percent of the amount described in paragraph (2) with respect to the issue at the time payment of such installment is required will have been paid to the United States. The last installment shall be made no later than 60 days after the day on which the last bond of the issue is redeemed and shall be in an amount sufficient to pay the remaining balance of the amount described in paragraph (2) with respect to such issue. A series of issues which are redeemed during a 6-month period (or such longer period as the Secretary may prescribe) shall be treated (at the election of the issuer) as 1 issue for purposes of the preceding sentence if no bond which is part of any issue in such series has a maturity of more than 270 days or is a private activity bond. In the case of a tax and revenue anticipation bond, the last installment shall not be required to be made before the date 8 months after the date of issuance of the issue of which the bond is a part. In determining the aggregate amount earned on nonpurpose investments for purposes of paragraph (2)— any gain or loss on the disposition of a nonpurpose investment shall be taken into account, and any amount earned on a bona fide debt service fund shall not be taken into account if the gross earnings on such fund for the bond year is less than 5,000,000. For purposes of subclause (IV) of clause (i)— an issuer and all entities which issue bonds on behalf of such issuer shall be treated as 1 issuer, all bonds issued by a subordinate entity shall, for purposes of applying such subclause to each other entity to which such entity is subordinate, be treated as issued by such other entity, and an entity formed (or, to the extent provided by the Secretary, availed of) to avoid the purposes of such subclause (IV) and all other entities benefiting thereby shall be treated as 1 issuer. There shall not be taken into account under subclause (IV) of clause (i) any bond issued to refund (other than to advance refund) any bond to the extent the amount of the refunding bond does not exceed the outstanding amount of the refunded bond. An issue issued by a subordinate entity of a governmental unit with general taxing powers shall be treated as described in clause (i)(I) if the aggregate face amount of such issue does not exceed the lesser of— $5, 000, 000, or t h e am o u n tw hi c h, w h e na dd e d t o t h e a gg re g a t e f a ce am o u n t o f o t h er i ss u es i ss u e d b ys u c h e n t i t y, d oes n o t e x cee d t h e p or t i o n o f t h e$ 5,000,000 limitation under clause (i)(IV) which such governmental unit allocates to such entity. For purposes of the preceding sentence, an entity which issues bonds on behalf of a governmental unit with general taxing powers shall be treated as a subordinate entity of such unit. An allocation shall be taken into account under subclause (II) only if it is irrevocable and made before the issuance date of such issue and only to the extent that the limitation so allocated bears a reasonable relationship to the benefits received by such governmental unit from issues issued by such entity. If any portion of an issue is issued to refund other bonds, such portion shall be treated as a separate issue which does not meet the requirements of paragraphs (2) and (3) by reason of this subparagraph unless— the aggregate face amount of such issue does not exceed 5,000,000. References in subclause (II) to section 103 shall be to such section as in effect on the day before the date of the enactment of the Tax Reform Act of 1986. Rules similar to the rules of clauses (ii) and (iii) shall apply for purposes of subclause (III). For purposes of subclause (II) of clause (i), bonds described in subclause (II) of this clause to which section 141(a) does not apply shall not be treated as private activity bonds. Each of the $5, 000, 000 am o u n t s in t h e p rece d in g p ro v i s i o n so f t hi ss u b p a r a g r a p h s ha ll b e in cre a se d b y t h e l essero f$ 10,000,000 or so much of the aggregate face amount of the bonds as are attributable to financing the construction (within the meaning of subparagraph (C)(iv)) of public school facilities. Gross income shall not include the sum described in paragraph (2). Notwithstanding any other provision of this title, no deduction shall be allowed for any amount paid to the United States under paragraph (2). For purposes of this subsection and subsections (c) and (d)— The term “nonpurpose investment” means any investment property which— is acquired with the gross proceeds of an issue, and is not acquired in order to carry out the governmental purpose of the issue. Except as otherwise provided by the Secretary, the gross proceeds of an issue include— amounts received (including repayments of principal) as a result of investing the original proceeds of the issue, and amounts to be used to pay debt service on the issue. In the case of an issue which would (but for this paragraph) fail to meet the requirements of paragraph (2) or (3), the Secretary may treat such issue as not failing to meet such requirements if— no bond which is part of such issue is a private activity bond (other than a qualified 501(c)(3) bond), the failure to meet such requirements is not due to willful neglect, and the issuer pays to the United States a penalty in an amount equal to the sum of— 50 percent of the amount which was not paid in accordance with paragraphs (2) and (3), plus interest (at the underpayment rate established under section 6621) on the portion of the amount which was not paid on the date required under paragraph (3) for the period beginning on such date. The Secretary may waive all or any portion of the penalty under this paragraph.

(g) Student loan incentive payments Except to the extent otherwise provided in regulations, payments made by the Secretary of Education pursuant to section 438 of the Higher Education Act of 1965 are not to be taken into account, for purposes of subsection (a)(1), in determining yields on student loan notes.

(h) Determinations of yield For purposes of this section, the yield on an issue shall be determined on the basis of the issue price (within the meaning of sections 1273 and 1274).

(i) Regulations The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section.

§ 149 Bonds must be registered to be tax exempt; other requirements

(a) Bonds must be registered to be tax exempt Nothing in section 103(a) or in any other provision of law shall be construed to provide an exemption from Federal income tax for interest on any registration-required bond unless such bond is in registered form. For purposes of paragraph (1), the term “registration-required bond” means any bond other than a bond which— is not of a type offered to the public, or has a maturity (at issue) of not more than 1 year. For purposes of paragraph (1), a book entry bond shall be treated as in registered form if the right to the principal of, and stated interest on, such bond may be transferred only through a book entry consistent with regulations prescribed by the Secretary. The Secretary shall prescribe such regulations as may be necessary to carry out the purpose of paragraph (1) where there is a nominee or chain of nominees.

(b) Federally guaranteed bond is not tax exempt Section 103(a) shall not apply to any State or local bond if such bond is federally guaranteed. For purposes of paragraph (1), a bond is federally guaranteed if— the payment of principal or interest with respect to such bond is guaranteed (in whole or in part) by the United States (or any agency or instrumentality thereof), such bond is issued as part of an issue and 5 percent or more of the proceeds of such issue is to be— used in making loans the payment of principal or interest with respect to which are to be guaranteed (in whole or in part) by the United States (or any agency or instrumentality thereof), or invested (directly or indirectly) in federally insured deposits or accounts, or the payment of principal or interest on such bond is otherwise indirectly guaranteed (in whole or in part) by the United States (or an agency or instrumentality thereof). A bond shall not be treated as federally guaranteed by reason of— any guarantee by the Federal Housing Administration, the Department of Veterans Affairs, the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation, or the Government National Mortgage Association, any guarantee of student loans and any guarantee by the Student Loan Marketing Association to finance student loans, any guarantee by the Bonneville Power Authority pursuant to the Northwest Power Act ( 16 U.S.C. 839d ) as in effect on the date of the enactment of the Tax Reform Act of 1984, or subject to subparagraph (E), any guarantee by a Federal home loan bank made in connection with the original issuance of a bond during the period beginning on the date of the enactment of this clause and ending on December 31, 2010 (or a renewal or extension of a guarantee so made). Paragraph (1) shall not apply to— proceeds of the issue invested for an initial temporary period until such proceeds are needed for the purpose for which such issue was issued, investments of a bona fide debt service fund, investments of a reserve which meet the requirements of section 148(d), investments in bonds issued by the United States Treasury, or other investments permitted under regulations. Except as provided in clause (ii), paragraph (1) shall not apply to— a private activity bond for a qualified residential rental project or a housing program obligation under section 11(b) of the United States Housing Act of 1937, a qualified mortgage bond, or a qualified veterans’ mortgage bond. Clause (i) shall not apply to any bond which is federally guaranteed within the meaning of paragraph (2)(B)(ii). Except as provided in paragraph (2)(B)(ii), a bond which is issued as part of an issue shall not be treated as federally guaranteed merely by reason of the fact that the proceeds of such issue are used in making loans to a financial institution or there is a guarantee by a financial institution unless such guarantee constitutes a federally insured deposit or account. Clause (iv) of subparagraph (A) shall not apply to any guarantee by a Federal home loan bank unless such bank meets safety and soundness collateral requirements for such guarantees which are at least as stringent as such requirements which apply under regulations applicable to such guarantees by Federal home loan banks as in effect on April 9, 2008 . A bond shall not be treated as federally guaranteed merely because of the payment of rent, user fees, or other charges by the United States (or any agency or instrumentality thereof) in exchange for the use of the spaceport by the United States (or any agency or instrumentality thereof). For purposes of this subsection— To the extent provided in regulations prescribed by the Secretary, any entity with statutory authority to borrow from the United States shall be treated as an instrumentality of the United States. Except in the case of an exempt facility bond, a qualified small issue bond, and a qualified student loan bond, nothing in the preceding sentence shall be construed as treating the District of Columbia or any possession of the United States as an instrumentality of the United States. The term “federally insured deposit or account” means any deposit or account in a financial institution to the extent such deposit or account is insured under Federal law by the Federal Deposit Insurance Corporation, the Federal Savings and Loan Insurance Corporation, the National Credit Union Administration, or any similar federally chartered corporation.

(c) Tax exemption must be derived from this title Except as provided in paragraph (2), no interest on any bond shall be exempt from taxation under this title unless such interest is exempt from tax under this title without regard to any provision of law which is not contained in this title and which is not contained in a revenue Act. For purposes of this title, notwithstanding any provision of this part, any bond the interest on which is exempt from taxation under this title by reason of any provision of law (other than a provision of this title) which is in effect on January 6, 1983 , shall be treated as a bond described in section 103(a). Subparagraph (A) shall not apply to a bond (not described in subparagraph (C)) issued after 1983 if the appropriate requirements of this part (or the corresponding provisions of prior law) are not met with respect to such bond. A bond is described in this subparagraph (and treated as described in subparagraph (A)) if— such bond is issued pursuant to the Northwest Power Act ( 16 U.S.C. 839d ), as in effect on July 18, 1984 ; such bond is issued pursuant to section 608(a)(6)(A) of Public Law 97–468 , as in effect on the date of the enactment of the Tax Reform Act of 1986; or such bond is issued before June 19, 1984 under section 11(b) of the United States Housing Act of 1937.

(d) Advance refundings Nothing in section 103(a) or in any other provision of law shall be construed to provide an exemption from Federal income tax for interest on any bond issued to advance refund another bond. For purposes of this part, a bond shall be treated as issued to advance refund another bond if it is issued more than 90 days before the redemption of the refunded bond. The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this subsection.

(e) Information reporting Nothing in section 103(a) or any other provision of law shall be construed to provide an exemption from Federal income tax for interest on any bond unless such bond satisfies the requirements of paragraph (2). A bond satisfies the requirements of this paragraph if the issuer submits to the Secretary, not later than the 15th day of the 2d calendar month after the close of the calendar quarter in which the bond is issued (or such later time as the Secretary may prescribe with respect to any portion of the statement), a statement concerning the issue of which the bond is a part which contains— the name and address of the issuer, the date of issue, the amount of net proceeds of the issue, the stated interest rate, term, and face amount of each bond which is part of the issue, the amount of issuance costs of the issue, and the amount of reserves of the issue, where required, the name of the applicable elected representative who approved the issue, or a description of the voter referendum by which the issue was approved, the name, address, and employer identification number of— each initial principal user of any facility provided with the proceeds of the issue, the common parent of any affiliated group of corporations (within the meaning of section 1504(a)) of which such initial principal user is a member, and if the issue is treated as a separate issue under section 144(a)(6)(A), any person treated as a principal user under section 144(a)(6)(B), a description of any property to be financed from the proceeds of the issue, a certification by a State official designated by State law (or, where there is no such official, the Governor) that the bond meets the requirements of section 146 (relating to cap on private activity bonds), if applicable, and such other information as the Secretary may require. Subparagraphs (C) and (D) shall not apply to any bond which is not a private activity bond. The Secretary may provide that certain information specified in the 1st sentence need not be included in the statement with respect to an issue where the inclusion of such information is not necessary to carry out the purposes of this subsection. The Secretary may grant an extension of time for the filing of any statement required under paragraph (2) if the failure to file in a timely fashion is not due to willful neglect.

(f) Treatment of certain pooled financing bonds Section 103(a) shall not apply to any pooled financing bond unless, with respect to the issue of which such bond is a part, the requirements of paragraphs (2), (3), (4), and (5) are met. The requirements of this paragraph are met with respect to an issue if the issuer reasonably expects that— as of the close of the 1-year period beginning on the date of issuance of the issue, at least 30 percent of the net proceeds of the issue (as of the close of such period) will have been used directly or indirectly to make or finance loans to ultimate borrowers, and as of the close of the 3-year period beginning on such date of issuance, at least 95 percent of the net proceeds of the issue (as of the close of such period) will have been so used. Expectations as to changes in interest rates or in the provisions of this title (or in the regulations or rulings thereunder) may not be taken into account in determining whether expectations are reasonable for purposes of this paragraph. For purposes of subparagraph (A), the term “net proceeds” has the meaning given such term by section 150 but shall not include proceeds used to finance issuance costs and shall not include proceeds necessary to pay interest (during such period) on the bonds which are part of the issue. For purposes of subparagraph (A), in the case of a refunding bond, the date of issuance taken into account is the date of issuance of the original bond. The requirements of this paragraph are met with respect to an issue if— the payment of legal and underwriting costs associated with the issuance of the issue is not contingent, and at least 95 percent of the reasonably expected legal and underwriting costs associated with the issuance of the issue are paid not later than the 180th day after the date of the issuance of the issue. The requirement of this paragraph is met with respect to an issue if the issuer receives prior to issuance written loan commitments identifying the ultimate potential borrowers of at least 30 percent of the net proceeds of such issue. Subparagraph (A) shall not apply with respect to any issuer which— is a State (or an integral part of a State) issuing pooled financing bonds to make or finance loans to subordinate governmental units of such State, or is a State-created entity providing financing for water-infrastructure projects through the federally-sponsored State revolving fund program. The requirement of this paragraph is met if to the extent that less than the percentage of the proceeds of an issue required to be used under clause (i) or (ii) of paragraph (2)(A) is used by the close of the period identified in such clause, the issuer uses an amount of proceeds equal to the excess of— the amount required to be used under such clause, over the amount actually used by the close of such period, to redeem outstanding bonds within 90 days after the end of such period. For purposes of this subsection— The term “pooled financing bond” means any bond issued as part of an issue more than $5,000,000 of the proceeds of which are reasonably expected (at the time of the issuance of the bonds) to be used (or are intentionally used) directly or indirectly to make or finance loans to 2 or more ultimate borrowers. Such term shall not include any bond if— section 146 applies to the issue of which such bond is a part (other than by reason of section 141(b)(5)) or would apply but for section 146(i), or section 143( l )(3) applies to such issue. For purposes of this subsection, the term “loan” does not include— any loan which is a nonpurpose investment (within the meaning of section 148(f)(6)(A), determined without regard to section 148(b)(3)), and any use of proceeds by an agency of the issuer unless such agency is a political subdivision or instrumentality of the issuer. If only a portion of the proceeds of an issue is reasonably expected (at the time of issuance of the bond) to be used (or is intentionally used) as described in paragraph (6)(A), such portion and the other portion of such issue shall be treated as separate issues for purposes of determining whether such portion meets the requirements of this subsection.

(g) Treatment of hedge bonds Section 103(a) shall not apply to any hedge bond unless, with respect to the issue of which such bond is a part— the requirement of paragraph (2) is met, and the requirement of subsection (f)(3) is met. An issue meets the requirement of this paragraph if the issuer reasonably expects that— 10 percent of the spendable proceeds of the issue will be spent for the governmental purposes of the issue within the 1-year period beginning on the date the bonds are issued, 30 percent of the spendable proceeds of the issue will be spent for such purposes within the 2-year period beginning on such date, 60 percent of the spendable proceeds of the issue will be spent for such purposes within the 3-year period beginning on such date, and 85 percent of the spendable proceeds of the issue will be spent for such purposes within the 5-year period beginning on such date. For purposes of this subsection, the term “hedge bond” means any bond issued as part of an issue unless— the issuer reasonably expects that 85 percent of the spendable proceeds of the issue will be used to carry out the governmental purposes of the issue within the 3-year period beginning on the date the bonds are issued, and not more than 50 percent of the proceeds of the issue are invested in nonpurpose investments (as defined in section 148(f)(6)(A)) having a substantially guaranteed yield for 4 years or more. Such term shall not include any bond issued as part of an issue 95 percent of the net proceeds of which are invested in bonds— the interest on which is not includible in gross income under section 103, and which are not specified private activity bonds (as defined in section 57(a)(5)(C)). Amounts in a bona fide debt service fund shall be treated as invested in bonds described in clause (i). Amounts held for not more than 30 days pending reinvestment or bond redemption shall be treated as invested in bonds described in clause (i). A refunding bond shall be treated as meeting the requirements of this subsection only if the original bond met such requirements. A refunding bond shall be treated as meeting the requirements of this subsection if— this subsection does not apply to the original bond, the average maturity date of the issue of which the refunding bond is a part is not later than the average maturity date of the bonds to be refunded by such issue, and the amount of the refunding bond does not exceed the outstanding amount of the refunded bond. A refunding bond shall be treated as meeting the requirements of this subsection if— this subsection does not apply to the original bond, the issuer reasonably expected that 85 percent of the spendable proceeds of the issue of which the original bond is a part would be used to carry out the governmental purposes of the issue within the 5-year period beginning on the date the original bonds were issued but did not reasonably expect that 85 percent of such proceeds would be so spent within the 3-year period beginning on such date, and at least 85 percent of the spendable proceeds of the original issue (and all other prior original issues issued to finance the governmental purposes of such issue) were spent before the date the refunding bonds are issued. For purposes of this subsection— The Secretary may, at the request of any issuer, provide that the requirement of paragraph (2) shall be treated as met with respect to the portion of the spendable proceeds of an issue which is to be used for any construction project having a construction period in excess of 5 years if it is reasonably expected that such proceeds will be spent over a reasonable construction schedule specified in such request. The rules of subsection (f)(2)(B) shall apply. The Secretary may prescribe regulations to prevent the avoidance of the rules of this subsection, including through the aggregation of projects within a single issue.

§ 150 Definitions and special rules

(a) General rule For purposes of this part— The term “bond” includes any obligation. The term “governmental unit” does not include the United States or any agency or instrumentality thereof. The term “net proceeds” means, with respect to any issue, the proceeds of such issue reduced by amounts in a reasonably required reserve or replacement fund. The term “501(c)(3) organization” means any organization described in section 501(c)(3) and exempt from tax under section 501(a). Property shall be treated as owned by a governmental unit if it is owned on behalf of such unit. The term “tax-exempt” means, with respect to any bond (or issue), that the interest on such bond (or on the bonds issued as part of such issue) is excluded from gross income.

(b) Change in use of facilities financed with tax-exempt private activity bonds In the case of any residence with respect to which financing is provided from the proceeds of a tax-exempt qualified mortgage bond or qualified veterans’ mortgage bond, if there is a continuous period of at least 1 year during which such residence is not the principal residence of at least 1 of the mortgagors who received such financing, then no deduction shall be allowed under this chapter for interest on such financing which accrues on or after the date such period began and before the date such residence is again the principal residence of at least 1 of the mortgagors who received such financing. Subparagraph (A) shall not apply to the extent the Secretary determines that its application would result in undue hardship and that the failure to meet the requirements of subparagraph (A) resulted from circumstances beyond the mortgagor’s control. In the case of any project for residential rental property— with respect to which financing is provided from the proceeds of any private activity bond which, when issued, purported to be a tax-exempt bond described in paragraph (7) of section 142(a), and which does not meet the requirements of section 142(d), no deduction shall be allowed under this chapter for interest on such financing which accrues during the period beginning on the 1st day of the taxable year in which such project fails to meet such requirements and ending on the date such project meets such requirements. If the provisions of prior law corresponding to section 142(d) apply to a refunded bond, such provisions shall apply (in lieu of section 142(d)) to the refunding bond. In the case of any facility with respect to which financing is provided from the proceeds of any private activity bond which, when issued, purported to be a tax-exempt qualified 501(c)(3) bond, if any portion of such facility— is used in a trade or business of any person other than a 501(c)(3) organization or a governmental unit, but continues to be owned by a 501(c)(3) organization, then the owner of such portion shall be treated for purposes of this title as engaged in an unrelated trade or business (as defined in section 513) with respect to such portion. The amount of gross income attributable to such portion for any period shall not be less than the fair rental value of such portion for such period. No deduction shall be allowed under this chapter for interest on financing described in subparagraph (A) which accrues during the period beginning on the date such facility is used as described in subparagraph (A)(i) and ending on the date such facility is not so used. In the case of any facility with respect to which financing is provided from the proceeds of any private activity bond to which this paragraph applies, if such facility is not used for a purpose for which a tax-exempt bond could be issued on the date of such issue, no deduction shall be allowed under this chapter for interest on such financing which accrues during the period beginning on the date such facility is not so used and ending on the date such facility is so used. This paragraph applies to any private activity bond which, when issued, purported to be a tax-exempt exempt facility bond described in a paragraph (other than paragraph (7)) of section 142(a) or a qualified small issue bond. If— financing is provided with respect to any facility from the proceeds of any private activity bond which, when issued, purported to be a tax-exempt bond, such facility is required to be owned by a governmental unit or a 501(c)(3) organization as a condition of such tax exemption, and such facility is not so owned, then no deduction shall be allowed under this chapter for interest on such financing which accrues during the period beginning on the date such facility is not so owned and ending on the date such facility is so owned. In the case of any financing provided from the proceeds of any bond which, when issued, purported to be a qualified small issue bond, no deduction shall be allowed under this chapter for interest on such financing which accrues during the period such bond is not a qualified small issue bond.

(c) Exception and special rules for purposes of subsection (b) For purposes of subsection (b)— Any use with respect to facilities financed with proceeds of an issue which are not required to be used for the exempt purpose of such issue shall not be taken into account. If the amounts payable for the use of a facility are not interest, subsection (b) shall apply to such amounts as if they were interest but only to the extent such amounts for any period do not exceed the amount of interest accrued on the bond financing for such period. In the case of any person which uses only a portion of the facility, only the interest accruing on the financing allocable to such portion shall be taken into account by such person. In the case of any facility where part but not all of the facility is not used for an exempt purpose, only the interest accruing on the financing allocable to such part shall be taken into account. The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this subsection and subsection (b).

(d) Qualified scholarship funding bond For purposes of this part and section 103— A qualified scholarship funding bond shall be treated as a State or local bond. The term “qualified scholarship funding bond” means a bond issued by a corporation which— is a corporation not for profit established and operated exclusively for the purpose of acquiring student loan notes incurred under the Higher Education Act of 1965, and is organized at the request of the State or 1 or more political subdivisions thereof or is requested to exercise such power by 1 or more political subdivisions and required by its corporate charter and bylaws, or required by State law, to devote any income (after payment of expenses, debt service, and the creation of reserves for the same) to the purchase of additional student loan notes or to pay over any income to the United States. Any qualified scholarship funding bond, and qualified student loan bond, outstanding on the date of the issuer’s election under this paragraph (and any bond (or series of bonds) issued to refund such a bond) shall not fail to be a tax-exempt bond solely because the issuer ceases to be described in subparagraphs (A) and (B) of paragraph (2) if the issuer meets the requirements of subparagraphs (B) and (C) of this paragraph. The requirements of this subparagraph are met by an issuer if— all of the student loan notes of the issuer and other assets pledged to secure the repayment of qualified scholarship funding bond indebtedness of the issuer are transferred to another corporation within a reasonable period after the election is made under this paragraph; such transferee corporation assumes or otherwise provides for the payment of all of the qualified scholarship funding bond indebtedness of the issuer within a reasonable period after the election is made under this paragraph; to the extent permitted by law, such transferee corporation assumes all of the responsibilities, and succeeds to all of the rights, of the issuer under the issuer’s agreements with the Secretary of Education in respect of student loans; immediately after such transfer, the issuer, together with any other issuer which has made an election under this paragraph in respect of such transferee, hold all of the senior stock in such transferee corporation; and such transferee corporation is not exempt from tax under this chapter. The requirements of this subparagraph are met by an issuer if, within a reasonable period after the transfer referred to in subparagraph (B)— the issuer is described in section 501(c)(3) and exempt from tax under section 501(a); the issuer no longer is described in subparagraphs (A) and (B) of paragraph (2); and at least 80 percent of the members of the board of directors of the issuer are independent members. For purposes of this paragraph, the term “senior stock” means stock— which participates pro rata and fully in the equity value of the corporation with all other common stock of the corporation but which has the right to payment of liquidation proceeds prior to payment of liquidation proceeds in respect of other common stock of the corporation; which has a fixed right upon liquidation and upon redemption to an amount equal to the greater of— the fair market value of such stock on the date of liquidation or redemption (whichever is applicable); or the fair market value of all assets transferred in exchange for such stock and reduced by the amount of all liabilities of the corporation which has made an election under this paragraph assumed by the transferee corporation in such transfer; the holder of which has the right to require the transferee corporation to redeem on a date that is not later than 10 years after the date on which an election under this paragraph was made and pursuant to such election such stock was issued; and in respect of which, during the time such stock is outstanding, there is not outstanding any equity interest in the corporation having any liquidation, redemption or dividend rights in the corporation which are superior to those of such stock. The term “independent member” means a member of the board of directors of the issuer who (except for services as a member of such board) receives no compensation directly or indirectly— for services performed in connection with such transferee corporation, or for services as a member of the board of directors or as an officer of such transferee corporation. For purposes of clause (ii), the term “officer” includes any individual having powers or responsibilities similar to those of officers. For purposes of sections 4942 (relating to the excise tax on a failure to distribute income) and 4943 (relating to the excise tax on excess business holdings), the transferee corporation referred to in subparagraph (B) shall be treated as a functionally related business (within the meaning of section 4942(j)(4)) with respect to the issuer during the period commencing with the date on which an election is made under this paragraph and ending on the date that is the earlier of— the last day of the last taxable year for which more than 50 percent of the gross income of such transferee corporation is derived from, or more than 50 percent of the assets (by value) of such transferee corporation consists of, student loan notes incurred under the Higher Education Act of 1965; or the last day of the taxable year of the issuer during which occurs the date which is 10 years after the date on which the election under this paragraph is made. An election under this paragraph may be revoked only with the consent of the Secretary.

(e) Bonds of certain volunteer fire departments For purposes of this part and section 103— A bond of a volunteer fire department shall be treated as a bond of a political subdivision of a State if— such department is a qualified volunteer fire department with respect to an area within the jurisdiction of such political subdivision, and such bond is issued as part of an issue 95 percent or more of the net proceeds of which are to be used for the acquisition, construction, reconstruction, or improvement of a firehouse (including land which is functionally related and subordinate thereto) or firetruck used or to be used by such department. For purposes of this subsection, the term “qualified volunteer fire department” means, with respect to a political subdivision of a State, any organization— which is organized and operated to provide firefighting or emergency medical services for persons in an area (within the jurisdiction of such political subdivision) which is not provided with any other firefighting services, and which is required (by written agreement) by the political subdivision to furnish firefighting services in such area. For purposes of subparagraph (A), other firefighting services provided in an area shall be disregarded in determining whether an organization is a qualified volunteer fire department if such other firefighting services are provided by a qualified volunteer fire department (determined with the application of this sentence) and such organization and the provider of such other services have been continuously providing firefighting services to such area since January 1, 1981 . Bonds which are part of an issue which meets the requirements of paragraph (1) shall not be treated as private activity bonds except for purposes of sections 147(f) and 149(d).

§ 151 Allowance of deductions for personal exemptions

(a) Allowance of deductions In the case of an individual, the exemptions provided by this section shall be allowed as deductions in computing taxable income.

(b) Taxpayer and spouse An exemption of the exemption amount for the taxpayer; and an additional exemption of the exemption amount for the spouse of the taxpayer if a joint return is not made by the taxpayer and his spouse, and if the spouse, for the calendar year in which the taxable year of the taxpayer begins, has no gross income and is not the dependent of another taxpayer.

(c) Additional exemption for dependents An exemption of the exemption amount for each individual who is a dependent (as defined in section 152) of the taxpayer for the taxable year.

(d) Exemption amount For purposes of this section— Except as otherwise provided in this subsection, the term “exemption amount” means $2, 000. I n t h ec a seo f anin d i v i d u a lw i t h res p ec tt o w h o ma d e d u c t i o n u n d er t hi ssec t i o ni s a ll o w ab l e t o an o t h er t a x p a yer f or a t a x ab l eye a r b e g innin g in t h ec a l e n d a rye a r in w hi c h t h e in d i v i d u a l ’ s t a x ab l eye a r b e g in s, t h ee x e m pt i o nam o u n t a ppl i c ab l e t os u c hin d i v i d u a l f ors u c hin d i v i d u a l ’ s t a x ab l eye a rs ha ll b ezero . I n t h ec a seo f an y t a x p a yer w h ose a d j u s t e d g ross in co m e f or t h e t a x ab l eye a re x cee d s t h e a ppl i c ab l e am o u n t in e ff ec t u n d ersec t i o n 68 (b), 1 t h ee x e m pt i o nam o u n t s ha ll b ere d u ce d b y t h e a ppl i c ab l e p erce n t a g e . F or p u r p oseso f s u b p a r a g r a p h (A), t h e t er m “ a ppl i c ab l e p erce n t a g e ” m e an s 2 p erce n t a g e p o in t s f ore a c h$ 2,500 (or fraction thereof) by which the taxpayer’s adjusted gross income for the taxable year exceeds the applicable amount in effect under section 68(b). 1 In the case of a married individual filing a separate return, the preceding sentence shall be applied by substituting “ $1, 250” f or “$ 2,500”. In no event shall the applicable percentage exceed 100 percent. The provisions of this paragraph shall not apply for purposes of determining whether a deduction under this section with respect to any individual is allowable to another taxpayer for any taxable year. Except as provided in paragraph (5), in the case of any taxable year beginning in a calendar year after 1989, the dollar amount contained in paragraph (1) shall be increased by an amount equal to— such dollar amount, multiplied by the cost-of-living adjustment determined under section 1(f)(3) for the calendar year in which the taxable year begins, by substituting “calendar year 1988” for “calendar year 2016” in subparagraph (A)(ii) thereof. In the case of a taxable year beginning after December 31, 2017 — The term “exemption amount” means zero. For purposes of any other provision of this title, the reduction of the exemption amount to zero under subparagraph (A) shall not be taken into account in determining whether a deduction is allowed or allowable, or whether a taxpayer is entitled to a deduction, under this section. In the case of a taxable year beginning before January 1, 2029 , there shall be allowed a deduction in an amount equal to $6, 000 f ore a c h q u a l i f i e d in d i v i d u a lw i t h res p ec tt o t h e t a x p a yer . F or p u r p oseso f c l a u se (i), t h e t er m “ q u a l i f i e d in d i v i d u a l ” m e an s — t h e t a x p a yer, i f t h e t a x p a yer ha s a tt ain e d a g e 65 b e f ore t h ec l oseo f t h e t a x ab l eye a r, an d in t h ec a seo f aj o in t re t u r n, t h e t a x p a yer ’ ss p o u se, i f s u c h s p o u se ha s a tt ain e d a g e 65 b e f ore t h ec l oseo f t h e t a x ab l eye a r . I n t h ec a seo f an y t a x p a yer f or an y t a x ab l eye a r, t h e$ 6,000 amount in clause (i) shall be reduced (but not below zero) by 6 percent of so much of the taxpayer’s modified adjusted gross income as exceeds $75, 000 ($ 150,000 in the case of a joint return). For purposes of this clause, the term “modified adjusted gross income” means the adjusted gross income of the taxpayer for the taxable year increased by any amount excluded from gross income under section 911, 931, or 933. Clause (i) shall not apply with respect to a qualified individual unless the taxpayer includes such qualified individual’s social security number on the return of tax for the taxable year. For purposes of subclause (I), the term “social security number” has the meaning given such term in section 24(h)(7). If the taxpayer is a married individual (within the meaning of section 7703), this subparagraph shall apply only if the taxpayer and the taxpayer’s spouse file a joint return for the taxable year.

(e) Identifying information required No exemption shall be allowed under this section with respect to any individual unless the TIN of such individual is included on the return claiming the exemption.

§ 152 Dependent defined

(a) In general For purposes of this subtitle, the term “dependent” means— a qualifying child, or a qualifying relative.

(b) Exceptions For purposes of this section— If an individual is a dependent of a taxpayer for any taxable year of such taxpayer beginning in a calendar year, such individual shall be treated as having no dependents for any taxable year of such individual beginning in such calendar year. An individual shall not be treated as a dependent of a taxpayer under subsection (a) if such individual has made a joint return with the individual’s spouse under section 6013 for the taxable year beginning in the calendar year in which the taxable year of the taxpayer begins. The term “dependent” does not include an individual who is not a citizen or national of the United States unless such individual is a resident of the United States or a country contiguous to the United States. Subparagraph (A) shall not exclude any child of a taxpayer (within the meaning of subsection (f)(1)(B)) from the definition of “dependent” if— for the taxable year of the taxpayer, the child has the same principal place of abode as the taxpayer and is a member of the taxpayer’s household, and the taxpayer is a citizen or national of the United States.

(c) Qualifying child For purposes of this section— The term “qualifying child” means, with respect to any taxpayer for any taxable year, an individual— who bears a relationship to the taxpayer described in paragraph (2), who has the same principal place of abode as the taxpayer for more than one-half of such taxable year, who meets the age requirements of paragraph (3), who has not provided over one-half of such individual’s own support for the calendar year in which the taxable year of the taxpayer begins, and who has not filed a joint return (other than only for a claim of refund) with the individual’s spouse under section 6013 for the taxable year beginning in the calendar year in which the taxable year of the taxpayer begins. For purposes of paragraph (1)(A), an individual bears a relationship to the taxpayer described in this paragraph if such individual is— a child of the taxpayer or a descendant of such a child, or a brother, sister, stepbrother, or stepsister of the taxpayer or a descendant of any such relative. For purposes of paragraph (1)(C), an individual meets the requirements of this paragraph if such individual is younger than the taxpayer claiming such individual as a qualifying child and— has not attained the age of 19 as of the close of the calendar year in which the taxable year of the taxpayer begins, or is a student who has not attained the age of 24 as of the close of such calendar year. In the case of an individual who is permanently and totally disabled (as defined in section 22(e)(3)) at any time during such calendar year, the requirements of subparagraph (A) shall be treated as met with respect to such individual. Except as provided in subparagraphs (B) and (C), if (but for this paragraph) an individual may be claimed as a qualifying child by 2 or more taxpayers for a taxable year beginning in the same calendar year, such individual shall be treated as the qualifying child of the taxpayer who is— a parent of the individual, or if clause (i) does not apply, the taxpayer with the highest adjusted gross income for such taxable year. If the parents claiming any qualifying child do not file a joint return together, such child shall be treated as the qualifying child of— the parent with whom the child resided for the longest period of time during the taxable year, or if the child resides with both parents for the same amount of time during such taxable year, the parent with the highest adjusted gross income. If the parents of an individual may claim such individual as a qualifying child but no parent so claims the individual, such individual may be claimed as the qualifying child of another taxpayer but only if the adjusted gross income of such taxpayer is higher than the highest adjusted gross income of any parent of the individual.

(d) Qualifying relative For purposes of this section— The term “qualifying relative” means, with respect to any taxpayer for any taxable year, an individual— who bears a relationship to the taxpayer described in paragraph (2), whose gross income for the calendar year in which such taxable year begins is less than the exemption amount (as defined in section 151(d)), with respect to whom the taxpayer provides over one-half of the individual’s support for the calendar year in which such taxable year begins, and who is not a qualifying child of such taxpayer or of any other taxpayer for any taxable year beginning in the calendar year in which such taxable year begins. For purposes of paragraph (1)(A), an individual bears a relationship to the taxpayer described in this paragraph if the individual is any of the following with respect to the taxpayer: A child or a descendant of a child. A brother, sister, stepbrother, or stepsister. The father or mother, or an ancestor of either. A stepfather or stepmother. A son or daughter of a brother or sister of the taxpayer. A brother or sister of the father or mother of the taxpayer. A son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law. An individual (other than an individual who at any time during the taxable year was the spouse, determined without regard to section 7703, of the taxpayer) who, for the taxable year of the taxpayer, has the same principal place of abode as the taxpayer and is a member of the taxpayer’s household. For purposes of paragraph (1)(C), over one-half of the support of an individual for a calendar year shall be treated as received from the taxpayer if— no one person contributed over one-half of such support, over one-half of such support was received from 2 or more persons each of whom, but for the fact that any such person alone did not contribute over one-half of such support, would have been entitled to claim such individual as a dependent for a taxable year beginning in such calendar year, the taxpayer contributed over 10 percent of such support, and each person described in subparagraph (B) (other than the taxpayer) who contributed over 10 percent of such support files a written declaration (in such manner and form as the Secretary may by regulations prescribe) that such person will not claim such individual as a dependent for any taxable year beginning in such calendar year. For purposes of paragraph (1)(B), the gross income of an individual who is permanently and totally disabled (as defined in section 22(e)(3)) at any time during the taxable year shall not include income attributable to services performed by the individual at a sheltered workshop if— the availability of medical care at such workshop is the principal reason for the individual’s presence there, and the income arises solely from activities at such workshop which are incident to such medical care. For purposes of subparagraph (A), the term “sheltered workshop” means a school— which provides special instruction or training designed to alleviate the disability of the individual, and which is operated by an organization described in section 501(c)(3) and exempt from tax under section 501(a), or by a State, a possession of the United States, any political subdivision of any of the foregoing, the United States, or the District of Columbia. For purposes of this subsection— payments to a spouse of alimony or separate maintenance payments shall not be treated as a payment by the payor spouse for the support of any dependent, and in the case of the remarriage of a parent, support of a child received from the parent’s spouse shall be treated as received from the parent. For purposes of subparagraph (A), the term “alimony or separate maintenance payment” means any payment in cash if— such payment is received by (or on behalf of) a spouse under a divorce or separation instrument (as defined in section 121(d)(3)(C)), in the case of an individual legally separated from the individual’s spouse under a decree of divorce or of separate maintenance, the payee spouse and the payor spouse are not members of the same household at the time such payment is made, and there is no liability to make any such payment for any period after the death of the payee spouse and there is no liability to make any payment (in cash or property) as a substitute for such payments after the death of the payee spouse.

(e) Special rule for divorced parents, etc. Notwithstanding subsection (c)(1)(B), (c)(4), or (d)(1)(C), if— a child receives over one-half of the child’s support during the calendar year from the child’s parents— who are divorced or legally separated under a decree of divorce or separate maintenance, who are separated under a written separation agreement, or who live apart at all times during the last 6 months of the calendar year, and— such child is in the custody of 1 or both of the child’s parents for more than one-half of the calendar year, such child shall be treated as being the qualifying child or qualifying relative of the noncustodial parent for a calendar year if the requirements described in paragraph (2) or (3) are met. For purposes of paragraph (1), the requirements described in this paragraph are met with respect to any calendar year if— the custodial parent signs a written declaration (in such manner and form as the Secretary may by regulations prescribe) that such custodial parent will not claim such child as a dependent for any taxable year beginning in such calendar year, and the noncustodial parent attaches such written declaration to the noncustodial parent’s return for the taxable year beginning during such calendar year. For purposes of paragraph (1), the requirements described in this paragraph are met with respect to any calendar year if— a qualified pre-1985 instrument between the parents applicable to the taxable year beginning in such calendar year provides that the noncustodial parent shall be entitled to any deduction allowable under section 151 for such child, and the noncustodial parent provides at least $600 for the support of such child during such calendar year. For purposes of this subparagraph, amounts expended for the support of a child or children shall be treated as received from the noncustodial parent to the extent that such parent provided amounts for such support. For purposes of this paragraph, the term “qualified pre-1985 instrument” means any decree of divorce or separate maintenance or written agreement— which is executed before January 1, 1985 , which on such date contains the provision described in subparagraph (A)(i), and which is not modified on or after such date in a modification which expressly provides that this paragraph shall not apply to such decree or agreement. For purposes of this subsection— The term “custodial parent” means the parent having custody for the greater portion of the calendar year. The term “noncustodial parent” means the parent who is not the custodial parent. This subsection shall not apply in any case where over one-half of the support of the child is treated as having been received from a taxpayer under the provision of subsection (d)(3). For purposes of this subsection, in the case of the remarriage of a parent, support of a child received from the parent’s spouse shall be treated as received from the parent.

(f) Other definitions and rules For purposes of this section— The term “child” means an individual who is— a son, daughter, stepson, or stepdaughter of the taxpayer, or an eligible foster child of the taxpayer. In determining whether any of the relationships specified in subparagraph (A)(i) or paragraph (4) exists, a legally adopted individual of the taxpayer, or an individual who is lawfully placed with the taxpayer for legal adoption by the taxpayer, shall be treated as a child of such individual by blood. For purposes of subparagraph (A)(ii), the term “eligible foster child” means an individual who is placed with the taxpayer by an authorized placement agency or by judgment, decree, or other order of any court of competent jurisdiction. The term “student” means an individual who during each of 5 calendar months during the calendar year in which the taxable year of the taxpayer begins— is a full-time student at an educational organization described in section 170(b)(1)(A)(ii), or is pursuing a full-time course of institutional on-farm training under the supervision of an accredited agent of an educational organization described in section 170(b)(1)(A)(ii) or of a State or political subdivision of a State. An individual shall not be treated as a member of the taxpayer’s household if at any time during the taxable year of the taxpayer the relationship between such individual and the taxpayer is in violation of local law. The terms “brother” and “sister” include a brother or sister by the half blood. For purposes of subsections (c)(1)(D) and (d)(1)(C), in the case of an individual who is— a child of the taxpayer, and a student, amounts received as scholarships for study at an educational organization described in section 170(b)(1)(A)(ii) shall not be taken into account. Solely for the purposes referred to in subparagraph (B), a child of the taxpayer— who is presumed by law enforcement authorities to have been kidnapped by someone who is not a member of the family of such child or the taxpayer, and who had, for the taxable year in which the kidnapping occurred, the same principal place of abode as the taxpayer for more than one-half of the portion of such year before the date of the kidnapping, shall be treated as meeting the requirement of subsection (c)(1)(B) with respect to a taxpayer for all taxable years ending during the period that the child is kidnapped. Subparagraph (A) shall apply solely for purposes of determining— the deduction under section 151(c), the credit under section 24 (relating to child tax credit), whether an individual is a surviving spouse or a head of a household (as such terms are defined in section 2), and the earned income credit under section 32. For purposes of this section, a child of the taxpayer— who is presumed by law enforcement authorities to have been kidnapped by someone who is not a member of the family of such child or the taxpayer, and who was (without regard to this paragraph) a qualifying relative of the taxpayer for the portion of the taxable year before the date of the kidnapping, shall be treated as a qualifying relative of the taxpayer for all taxable years ending during the period that the child is kidnapped. Subparagraphs (A) and (C) shall cease to apply as of the first taxable year of the taxpayer beginning after the calendar year in which there is a determination that the child is dead (or, if earlier, in which the child would have attained age 18). For provision treating child as dependent of both parents for purposes of certain provisions, see sections 105(b), 132(h)(2)(B), and 213(d)(5).

§ 153 Cross references

For deductions of estates and trusts, in lieu of the exemptions under section 151, see section 642(b). For exemptions of nonresident aliens, see section 873(b)(3). For determination of marital status, see section 7703. ( Aug. 16, 1954, ch. 736 , 68A Stat. 45 , § 154; Pub. L. 89–809, title I, § 103(c)(2) , Nov. 13, 1966 , 80 Stat. 1551 ; renumbered § 153 and amended Pub. L. 94–455, title XIX, § 1901(b)(7)(A)(i) , (C), Oct. 4, 1976 , 90 Stat. 1794 ; Pub. L. 99–514, title XII, § 1272(d)(7) , title XIII, § 1301(j)(8), Oct. 22, 1986 , 100 Stat. 2594 , 2658; Pub. L. 108–311, title II, § 207(14) , Oct. 4, 2004 , 118 Stat. 1177 .)

§ 161 Allowance of deductions

In computing taxable income under section 63, there shall be allowed as deductions the items specified in this part, subject to the exceptions provided in part IX (sec. 261 and following, relating to items not deductible). ( Aug. 16, 1954, ch. 736 , 68A Stat. 45 ; Pub. L. 95–30, title I, § 102(b)(1) , May 23, 1977 , 91 Stat. 137 .)

§ 162 Trade or business expenses

(a) In general There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including— a reasonable allowance for salaries or other compensation for personal services actually rendered; traveling expenses (including amounts expended for meals and lodging other than amounts which are lavish or extravagant under the circumstances) while away from home in the pursuit of a trade or business; and rentals or other payments required to be made as a condition to the continued use or possession, for purposes of the trade or business, of property to which the taxpayer has not taken or is not taking title or in which he has no equity. For purposes of the preceding sentence, the place of residence of a Member of Congress (including any Delegate and Resident Commissioner) within the State, congressional district, or possession which he represents in Congress shall be considered his home, but amounts expended by such Members within each taxable year for living expenses shall not be deductible for income tax purposes. For purposes of paragraph (2), the taxpayer shall not be treated as being temporarily away from home during any period of employment if such period exceeds 1 year. The preceding sentence shall not apply to any Federal employee during any period for which such employee is certified by the Attorney General (or the designee thereof) as traveling on behalf of the United States in temporary duty status to investigate or prosecute, or provide support services for the investigation or prosecution of, a Federal crime.

(b) Charitable contributions and gifts excepted No deduction shall be allowed under subsection (a) for any contribution or gift which would be allowable as a deduction under section 170 were it not for the percentage limitations, the dollar limitations, or the requirements as to the time of payment, set forth in such section.

(c) Illegal bribes, kickbacks, and other payments No deduction shall be allowed under subsection (a) for any payment made, directly or indirectly, to an official or employee of any government, or of any agency or instrumentality of any government, if the payment constitutes an illegal bribe or kickback or, if the payment is to an official or employee of a foreign government, the payment is unlawful under the Foreign Corrupt Practices Act of 1977. The burden of proof in respect of the issue, for the purposes of this paragraph, as to whether a payment constitutes an illegal bribe or kickback (or is unlawful under the Foreign Corrupt Practices Act of 1977) shall be upon the Secretary to the same extent as he bears the burden of proof under section 7454 (concerning the burden of proof when the issue relates to fraud). No deduction shall be allowed under subsection (a) for any payment (other than a payment described in paragraph (1)) made, directly or indirectly, to any person, if the payment constitutes an illegal bribe, illegal kickback, or other illegal payment under any law of the United States, or under any law of a State (but only if such State law is generally enforced), which subjects the payor to a criminal penalty or the loss of license or privilege to engage in a trade or business. For purposes of this paragraph, a kickback includes a payment in consideration of the referral of a client, patient, or customer. The burden of proof in respect of the issue, for purposes of this paragraph, as to whether a payment constitutes an illegal bribe, illegal kickback, or other illegal payment shall be upon the Secretary to the same extent as he bears the burden of proof under section 7454 (concerning the burden of proof when the issue relates to fraud). No deduction shall be allowed under subsection (a) for any kickback, rebate, or bribe made by any provider of services, supplier, physician, or other person who furnishes items or services for which payment is or may be made under the Social Security Act, or in whole or in part out of Federal funds under a State plan approved under such Act, if such kickback, rebate, or bribe is made in connection with the furnishing of such items or services or the making or receipt of such payments. For purposes of this paragraph, a kickback includes a payment in consideration of the referral of a client, patient, or customer.

(d) Capital contributions to Federal National Mortgage Association For purposes of this subtitle, whenever the amount of capital contributions evidenced by a share of stock issued pursuant to section 303(c) of the Federal National Mortgage Association Charter Act (12 U.S.C., sec. 1718) exceeds the fair market value of the stock as of the issue date of such stock, the initial holder of the stock shall treat the excess as ordinary and necessary expenses paid or incurred during the taxable year in carrying on a trade or business.

(e) Denial of deduction for certain lobbying and political expenditures No deduction shall be allowed under subsection (a) for any amount paid or incurred in connection with— influencing legislation, participation in, or intervention in, any political campaign on behalf of (or in opposition to) any candidate for public office, any attempt to influence the general public, or segments thereof, with respect to elections, legislative matters, or referendums, or any direct communication with a covered executive branch official in an attempt to influence the official actions or positions of such official. No deduction shall be allowed under subsection (a) for the portion of dues or other similar amounts paid by the taxpayer to an organization which is exempt from tax under this subtitle which the organization notifies the taxpayer under section 6033(e)(1)(A)(ii) is allocable to expenditures to which paragraph (1) applies. For purposes of this subsection— The term “influencing legislation” means any attempt to influence any legislation through communication with any member or employee of a legislative body, or with any government official or employee who may participate in the formulation of legislation. The term “legislation” has the meaning given such term by section 4911(e)(2). In the case of any taxpayer engaged in the trade or business of conducting activities described in paragraph (1), paragraph (1) shall not apply to expenditures of the taxpayer in conducting such activities directly on behalf of another person (but shall apply to payments by such other person to the taxpayer for conducting such activities). Paragraph (1) shall not apply to any in-house expenditures for any taxable year if such expenditures do not exceed $2, 000. I n d e t er minin g w h e t h er a t a x p a yere x cee d s t h e$ 2,000 limit under this clause, there shall not be taken into account overhead costs otherwise allocable to activities described in paragraphs (1)(A) and (D). For purposes of clause (i), the term “in-house expenditures” means expenditures described in paragraphs (1)(A) and (D) other than— payments by the taxpayer to a person engaged in the trade or business of conducting activities described in paragraph (1) for the conduct of such activities on behalf of the taxpayer, or dues or other similar amounts paid or incurred by the taxpayer which are allocable to activities described in paragraph (1). Any amount paid or incurred for research for, or preparation, planning, or coordination of, any activity described in paragraph (1) shall be treated as paid or incurred in connection with such activity. For purposes of this subsection, the term “covered executive branch official” means— the President, the Vice President, any officer or employee of the White House Office of the Executive Office of the President, and the 2 most senior level officers of each of the other agencies in such Executive Office, and any individual serving in a position in level I of the Executive Schedule under section 5312 of title 5 , United States Code, (ii) any other individual designated by the President as having Cabinet level status, and (iii) any immediate deputy of an individual described in clause (i) or (ii). For reporting requirements and alternative taxes related to this subsection, see section 6033(e).

(f) Fines, penalties, and other amounts Except as provided in the following paragraphs of this subsection, no deduction otherwise allowable shall be allowed under this chapter for any amount paid or incurred (whether by suit, agreement, or otherwise) to, or at the direction of, a government or governmental entity in relation to the violation of any law or the investigation or inquiry by such government or entity into the potential violation of any law. Paragraph (1) shall not apply to any amount that— the taxpayer establishes— constitutes restitution (including remediation of property) for damage or harm which was or may be caused by the violation of any law or the potential violation of any law, or is paid to come into compliance with any law which was violated or otherwise involved in the investigation or inquiry described in paragraph (1), is identified as restitution or as an amount paid to come into compliance with such law, as the case may be, in the court order or settlement agreement, and in the case of any amount of restitution for failure to pay any tax imposed under this title in the same manner as if such amount were such tax, would have been allowed as a deduction under this chapter if it had been timely paid. The identification under clause (ii) alone shall not be sufficient to make the establishment required under clause (i). Subparagraph (A) shall not apply to any amount paid or incurred as reimbursement to the government or entity for the costs of any investigation or litigation. Paragraph (1) shall not apply to any amount paid or incurred by reason of any order of a court in a suit in which no government or governmental entity is a party. Paragraph (1) shall not apply to any amount paid or incurred as taxes due. For purposes of this subsection, the following nongovernmental entities shall be treated as governmental entities: Any nongovernmental entity which exercises self-regulatory powers (including imposing sanctions) in connection with a qualified board or exchange (as defined in section 1256(g)(7)). To the extent provided in regulations, any nongovernmental entity which exercises self-regulatory powers (including imposing sanctions) as part of performing an essential governmental function.

(g) Treble damage payments under the antitrust laws If in a criminal proceeding a taxpayer is convicted of a violation of the antitrust laws, or his plea of guilty or nolo contendere to an indictment or information charging such a violation is entered or accepted in such a proceeding, no deduction shall be allowed under subsection (a) for two-thirds of any amount paid or incurred— on any judgment for damages entered against the taxpayer under section 4 of the Act entitled “An Act to supplement existing laws against unlawful restraints and monopolies, and for other purposes”, approved October 15, 1914 (commonly known as the Clayton Act), on account of such violation or any related violation of the antitrust laws which occurred prior to the date of the final judgment of such conviction, or in settlement of any action brought under such section 4 on account of such violation or related violation.

(h) State legislators’ travel expenses away from home For purposes of subsection (a), in the case of any individual who is a State legislator at any time during the taxable year and who makes an election under this subsection for the taxable year— the place of residence of such individual within the legislative district which he represented shall be considered his home, he shall be deemed to have expended for living expenses (in connection with his trade or business as a legislator) an amount equal to the sum of the amounts determined by multiplying each legislative day of such individual during the taxable year by the greater of— the amount generally allowable with respect to such day to employees of the State of which he is a legislator for per diem while away from home, to the extent such amount does not exceed 110 percent of the amount described in clause (ii) with respect to such day, or the amount generally allowable with respect to such day to employees of the executive branch of the Federal Government for per diem while away from home but serving in the United States, and he shall be deemed to be away from home in the pursuit of a trade or business on each legislative day. For purposes of paragraph (1), a legislative day during any taxable year for any individual shall be any day during such year on which— the legislature was in session (including any day in which the legislature was not in session for a period of 4 consecutive days or less), or the legislature was not in session but the physical presence of the individual was formally recorded at a meeting of a committee of such legislature. An election under this subsection for any taxable year shall be made at such time and in such manner as the Secretary shall by regulations prescribe. This subsection shall not apply to any legislator whose place of residence within the legislative district which he represents is 50 or fewer miles from the capitol building of the State.

([(i) Repealed. Pub. L. 101–239, title VI, § 6202(b)(3)(A), Dec. 19, 1989, 103 Stat. 2233]

(j) Certain foreign advertising expenses No deduction shall be allowed under subsection (a) for any expenses of an advertisement carried by a foreign broadcast undertaking and directed primarily to a market in the United States. This paragraph shall apply only to foreign broadcast undertakings located in a country which denies a similar deduction for the cost of advertising directed primarily to a market in the foreign country when placed with a United States broadcast undertaking. For purposes of paragraph (1), the term “broadcast undertaking” includes (but is not limited to) radio and television stations.

(k) Stock reacquisition expenses Except as provided in paragraph (2), no deduction otherwise allowable shall be allowed under this chapter for any amount paid or incurred by a corporation in connection with the reacquisition of its stock or of the stock of any related person (as defined in section 465(b)(3)(C)). Paragraph (1) shall not apply to— Any— deduction allowable under section 163 (relating to interest), deduction for amounts which are properly allocable to indebtedness and amortized over the term of such indebtedness, or deduction for dividends paid (within the meaning of section 561). Any amount paid or incurred in connection with the redemption of any stock in a regulated investment company which issues only stock which is redeemable upon the demand of the shareholder.

(l) Special rules for health insurance costs of self-employed individuals In the case of a taxpayer who is an employee within the meaning of section 401(c)(1), there shall be allowed as a deduction under this section an amount equal to the amount paid during the taxable year for insurance which constitutes medical care for— the taxpayer, the taxpayer’s spouse, the taxpayer’s dependents, and any child (as defined in section 152(f)(1)) of the taxpayer who as of the end of the taxable year has not attained age 27. No deduction shall be allowed under paragraph (1) to the extent that the amount of such deduction exceeds the taxpayer’s earned income (within the meaning of section 401(c)) derived by the taxpayer from the trade or business with respect to which the plan providing the medical care coverage is established. Paragraph (1) shall not apply to any taxpayer for any calendar month for which the taxpayer is eligible to participate in any subsidized health plan maintained by any employer of the taxpayer or of the spouse of, or any dependent, or individual described in subparagraph (D) of paragraph (1) with respect to, the taxpayer. The preceding sentence shall be applied separately with respect to— plans which include coverage for qualified long-term care services (as defined in section 7702B(c)) or are qualified long-term care insurance contracts (as defined in section 7702B(b)), and plans which do not include such coverage and are not such contracts. In the case of a qualified long-term care insurance contract (as defined in section 7702B(b)), only eligible long-term care premiums (as defined in section 213(d)(10)) shall be taken into account under paragraph (1). Any amount paid by a taxpayer for insurance to which paragraph (1) applies shall not be taken into account in computing the amount allowable to the taxpayer as a deduction under section 213(a). The deduction allowable by reason of this subsection shall not be taken into account in determining an individual’s net earnings from self-employment (within the meaning of section 1402(a)) for purposes of chapter 2 for taxable years beginning before January 1, 2010 , or after December 31, 2010 . This subsection shall apply in the case of any individual treated as a partner under section 1372(a), except that— for purposes of this subsection, such individual’s wages (as defined in section 3121) from the S corporation shall be treated as such individual’s earned income (within the meaning of section 401(c)(1)), and there shall be such adjustments in the application of this subsection as the Secretary may by regulations prescribe.

(m) Certain excessive employee remuneration In the case of any publicly held corporation, no deduction shall be allowed under this chapter for applicable employee remuneration with respect to any covered employee to the extent that the amount of such remuneration for the taxable year with respect to such employee exceeds 500,000, or in the case of deferred deduction executive remuneration for any taxable year for services performed during any applicable taxable year by a covered executive, to the extent that the amount of such remuneration exceeds $500, 000 re d u ce d (b u t n o t b e l o w zero) b y t h es u m o f — t h ee x ec u t i v ere m u n er a t i o n f ors u c ha ppl i c ab l e t a x ab l eye a r, pl u s t h e p or t i o n o f t h e d e f erre dd e d u c t i o n e x ec u t i v ere m u n er a t i o n f ors u c h ser v i ces w hi c h w a s t ak e nin t o a cco u n t u n d er t hi sc l a u se ina p rece d in g t a x ab l eye a r . F or p u r p oseso f t hi s p a r a g r a p h — E x ce pt a s p ro v i d e d in c l a u se (ii), t h e t er m “ a ppl i c ab l ee m pl oyer ” m e an s an ye m pl oyer f ro m w h o m 1 or m ore t ro u b l e d a sse t s a re a c q u i re d u n d er a p ro g r am es t ab l i s h e d b y t h e S ecre t a ry u n d ersec t i o n 101 (a) o f t h e E m er g e n cy E co n o mi c St abi l i z a t i o n A c t o f 2008 i f t h e a gg re g a t e am o u n t o f t h e a sse t sso a c q u i re df or a llt a x ab l eye a rse x cee d s$ 300,000,000. If the only sales of troubled assets by an employer under the program described in clause (i) are through 1 or more direct purchases (within the meaning of section 113(c) of the Emergency Economic Stabilization Act of 2008), such assets shall not be taken into account under clause (i) in determining whether the employer is an applicable employer for purposes of this paragraph. Two or more persons who are treated as a single employer under subsection (b) or (c) of section 414 shall be treated as a single employer, except that in applying section 1563(a) for purposes of either such subsection, paragraphs (2) and (3) thereof shall be disregarded. For purposes of this paragraph, the term “applicable taxable year” means, with respect to any employer— the first taxable year of the employer— which includes any portion of the period during which the authorities under section 101(a) of the Emergency Economic Stabilization Act of 2008 are in effect (determined under section 120 thereof), and in which the aggregate amount of troubled assets acquired from the employer during the taxable year pursuant to such authorities (other than assets to which subparagraph (B)(ii) applies), when added to the aggregate amount so acquired for all preceding taxable years, exceeds 500,000, or in the case of deferred deduction remuneration for any taxable year beginning after December 31, 2012 , which is attributable to services performed by an applicable individual during any disqualified taxable year beginning after December 31, 2009 , to the extent that the amount of such remuneration exceeds 1,000,000— paragraph (1) shall apply to such person with respect to such remuneration, and paragraph (1) shall apply to such publicly held corporation and to each such related person by substituting “the allocable limitation amount” for “ $1, 000, 000”. F or p u r p oseso f t hi s p a r a g r a p h, t h e t er m “ a ll oc ab l e l imi t a t i o nam o u n t ” m e an s, w i t h res p ec tt o an y m e mb ero f t h eco n t ro ll e d g ro u p re f erre d t o in s u b p a r a g r a p h (A) w i t h res p ec tt o an ys p ec i f i e d co v ere d e m pl oyeeo f s u c h co n t ro ll e d g ro u p, t h e am o u n tw hi c hb e a rs t h es am er a t i o t o$ 1,000,000 as— the amount of applicable employee remuneration provided by such member with respect to such specified covered employee, bears to the aggregate amount of applicable employee remuneration provided by all such members with respect to such specified covered employee. For purposes of this paragraph, the term “specified covered employee” means, with respect to any controlled group— any employee described in subparagraph (A), (B), or (D) of paragraph (3), with respect to the publicly held corporation which is a member of such controlled group, and any employee who would be described in subparagraph (C) of paragraph (3) if such subparagraph were applied by taking into account the employees of all members of the controlled group. For purposes of this paragraph, the term “controlled group” means any group treated as a single employer under subsection (b), (c), (m), or ( o ) of section 414.

(n) Special rule for certain group health plans No deduction shall be allowed under this chapter to an employer for any amount paid or incurred in connection with a group health plan if the plan does not reimburse for inpatient hospital care services provided in the State of New York— except as provided in subparagraphs (B) and (C), at the same rate as licensed commercial insurers are required to reimburse hospitals for such services when such reimbursement is not through such a plan, in the case of any reimbursement through a health maintenance organization, at the same rate as health maintenance organizations are required to reimburse hospitals for such services for individuals not covered by such a plan (determined without regard to any government-supported individuals exempt from such rate), or in the case of any reimbursement through any corporation organized under Article 43 of the New York State Insurance Law, at the same rate as any such corporation is required to reimburse hospitals for such services for individuals not covered by such a plan. Paragraph (1) shall not apply to any group health plan which is not required under the laws of the State of New York (determined without regard to this subsection or other provisions of Federal law) to reimburse at the rates provided in paragraph (1). For purposes of this subsection, the term “group health plan” means a plan of, or contributed to by, an employer or employee organization (including a self-insured plan) to provide health care (directly or otherwise) to any employee, any former employee, the employer, or any other individual associated or formerly associated with the employer in a business relationship, or any member of their family.

(o) Treatment of certain expenses of rural mail carriers In the case of any employee of the United States Postal Service who performs services involving the collection and delivery of mail on a rural route and who receives qualified reimbursements for the expenses incurred by such employee for the use of a vehicle in performing such services— the amount allowable as a deduction under this chapter for the use of a vehicle in performing such services shall be equal to the amount of such qualified reimbursements; and such qualified reimbursements shall be treated as paid under a reimbursement or other expense allowance arrangement for purposes of section 62(a)(2)(A) (and section 62(c) shall not apply to such qualified reimbursements). Notwithstanding paragraph (1)(A), if the expenses incurred by an employee for the use of a vehicle in performing services described in paragraph (1) exceed the qualified reimbursements for such expenses, such excess shall be taken into account in computing the miscellaneous itemized deductions of the employee under section 67. For purposes of this subsection, the term “qualified reimbursements” means the amounts paid by the United States Postal Service to employees as an equipment maintenance allowance under the 1991 collective bargaining agreement between the United States Postal Service and the National Rural Letter Carriers’ Association. Amounts paid as an equipment maintenance allowance by such Postal Service under later collective bargaining agreements that supersede the 1991 agreement shall be considered qualified reimbursements if such amounts do not exceed the amounts that would have been paid under the 1991 agreement, adjusted by increasing any such amount under the 1991 agreement by an amount equal to— such amount, multiplied by the cost-of-living adjustment determined under section 1(f)(3) for the calendar year in which the taxable year begins, by substituting “calendar year 1990” for “calendar year 2016” in subparagraph (A)(ii) thereof.

(p) Treatment of expenses of members of reserve component of Armed Forces of the United States For purposes of subsection (a)(2), in the case of an individual who performs services as a member of a reserve component of the Armed Forces of the United States at any time during the taxable year, such individual shall be deemed to be away from home in the pursuit of a trade or business for any period during which such individual is away from home in connection with such service.

(q) Payments related to sexual harassment and sexual abuse No deduction shall be allowed under this chapter for— any settlement or payment related to sexual harassment or sexual abuse if such settlement or payment is subject to a nondisclosure agreement, or attorney’s fees related to such a settlement or payment.

(r) Disallowance of FDIC premiums paid by certain large financial institutions No deduction shall be allowed for the applicable percentage of any FDIC premium paid or incurred by the taxpayer. Paragraph (1) shall not apply to any taxpayer for any taxable year if the total consolidated assets of such taxpayer (determined as of the close of such taxable year) do not exceed $10, 000, 000, 000. F or p u r p oseso f t hi ss u b sec t i o n, t h e t er m “ a ppl i c ab l e p erce n t a g e ” m e an s, w i t h res p ec tt o an y t a x p a yer f or an y t a x ab l eye a r, t h er a t i o (e x p resse d a s a p erce n t a g e b u t n o t g re a t er t han 100 p erce n t) w hi c h — t h ee x cesso f — t h e t o t a l co n so l i d a t e d a sse t so f s u c h t a x p a yer (d e t er min e d a so f t h ec l oseo f s u c h t a x ab l eye a r), o v er$ 10,000,000,000, bears to $40,000,000,000. For purposes of this subsection, the term “FDIC premium” means any assessment imposed under section 7(b) of the Federal Deposit Insurance Act ( 12 U.S.C. 1817(b) ). For purposes of this subsection, the term “total consolidated assets” has the meaning given such term under section 165 of the Dodd-Frank Wall Street Reform and Consumer Protection Act ( 12 U.S.C. 5365 ). Members of an expanded affiliated group shall be treated as a single taxpayer for purposes of applying this subsection. For purposes of this paragraph, the term “expanded affiliated group” means an affiliated group as defined in section 1504(a), determined— by substituting “more than 50 percent” for “at least 80 percent” each place it appears, and without regard to paragraphs (2) and (3) of section 1504(b). A partnership or any other entity (other than a corporation) shall be treated as a member of an expanded affiliated group if such entity is controlled (within the meaning of section 954(d)(3)) by members of such group (including any entity treated as a member of such group by reason of this clause).

(s) Cross reference For special rule relating to expenses in connection with subdividing real property for sale, see section 1237. For special rule relating to the treatment of payments by a transferee of a franchise, trademark, or trade name, see section 1253. For special rules relating to— funded welfare benefit plans, see section 419, and deferred compensation and other deferred benefits, see section 404.

§ 163 Interest

(a) General rule There shall be allowed as a deduction all interest paid or accrued within the taxable year on indebtedness.

(b) Installment purchases where interest charge is not separately stated If personal property or educational services are purchased under a contract— which provides that payment of part or all of the purchase price is to be made in installments, and in which carrying charges are separately stated but the interest charge cannot be ascertained, then the payments made during the taxable year under the contract shall be treated for purposes of this section as if they included interest equal to 6 percent of the average unpaid balance under the contract during the taxable year. For purposes of the preceding sentence, the average unpaid balance is the sum of the unpaid balance outstanding on the first day of each month beginning during the taxable year, divided by 12. For purposes of this paragraph, the term “educational services” means any service (including lodging) which is purchased from an educational organization described in section 170(b)(1)(A)(ii) and which is provided for a student of such organization. In the case of any contract to which paragraph (1) applies, the amount treated as interest for any taxable year shall not exceed the aggregate carrying charges which are properly attributable to such taxable year.

(c) Redeemable ground rents For purposes of this subtitle, any annual or periodic rental under a redeemable ground rent (excluding amounts in redemption thereof) shall be treated as interest on an indebtedness secured by a mortgage.

(d) Limitation on investment interest In the case of a taxpayer other than a corporation, the amount allowed as a deduction under this chapter for investment interest for any taxable year shall not exceed the net investment income of the taxpayer for the taxable year. The amount not allowed as a deduction for any taxable year by reason of paragraph (1) shall be treated as investment interest paid or accrued by the taxpayer in the succeeding taxable year. For purposes of this subsection— The term “investment interest” means any interest allowable as a deduction under this chapter (determined without regard to paragraph (1)) which is paid or accrued on indebtedness properly allocable to property held for investment. The term “investment interest” shall not include— any qualified residence interest (as defined in subsection (h)(3)), or any interest which is taken into account under section 469 in computing income or loss from a passive activity of the taxpayer. For purposes of this paragraph, the term “interest” includes any amount allowable as a deduction in connection with personal property used in a short sale. For purposes of this subsection— The term “net investment income” means the excess of— investment income, over investment expenses. The term “investment income” means the sum of— gross income from property held for investment (other than any gain taken into account under clause (ii)(I)), the excess (if any) of— the net gain attributable to the disposition of property held for investment, over the net capital gain determined by only taking into account gains and losses from dispositions of property held for investment, plus so much of the net capital gain referred to in clause (ii)(II) (or, if lesser, the net gain referred to in clause (ii)(I)) as the taxpayer elects to take into account under this clause. Such term shall include qualified dividend income (as defined in section 1(h)(11)(B)) only to the extent the taxpayer elects to treat such income as investment income for purposes of this subsection. The term “investment expenses” means the deductions allowed under this chapter (other than for interest) which are directly connected with the production of investment income. Investment income and investment expenses shall not include any income or expenses taken into account under section 469 in computing income or loss from a passive activity. For purposes of this subsection— The term “property held for investment” shall include— any property which produces income of a type described in section 469(e)(1), and any interest held by a taxpayer in an activity involving the conduct of a trade or business— which is not a passive activity, and with respect to which the taxpayer does not materially participate. In the case of property described in subparagraph (A)(i), expenses shall be allocated to such property in the same manner as under section 469. For purposes of this paragraph, the terms “activity”, “passive activity”, and “materially participate” have the meanings given such terms by section 469.

(e) Original issue discount The portion of the original issue discount with respect to any debt instrument which is allowable as a deduction to the issuer for any taxable year shall be equal to the aggregate daily portions of the original issue discount for days during such taxable year. For purposes of this subsection— The term “debt instrument” has the meaning given such term by section 1275(a)(1). The daily portion of the original issue discount for any day shall be determined under section 1272(a) (without regard to paragraph (7) thereof and without regard to section 1273(a)(3)). In the case of an obligor of a short-term obligation (as defined in section 1283(a)(1)(A)) who uses the cash receipts and disbursements method of accounting, the original issue discount (and any other interest payable) on such obligation shall be deductible only when paid. If any debt instrument having original issue discount is held by a related foreign person, any portion of such original issue discount shall not be allowable as a deduction to the issuer until paid. The preceding sentence shall not apply to the extent that the original issue discount is effectively connected with the conduct by such foreign related person of a trade or business within the United States unless such original issue discount is exempt from taxation (or is subject to a reduced rate of tax) pursuant to a treaty obligation of the United States. In the case of any debt instrument having original issue discount which is held by a related foreign person which is a controlled foreign corporation (as defined in section 957) or a passive foreign investment company (as defined in section 1297), a deduction shall be allowable to the issuer with respect to such original issue discount for any taxable year before the taxable year in which paid only to the extent such original issue discount is includible (determined without regard to properly allocable deductions and qualified deficits under section 952(c)(1)(B)) during such prior taxable year in the gross income of a United States person who owns (within the meaning of section 958(a)) stock in such corporation. The Secretary may by regulation exempt transactions from the application of clause (i), including any transaction which is entered into by a payor in the ordinary course of a trade or business in which the payor is predominantly engaged. For purposes of subparagraph (A), the term “related foreign person” means any person— who is not a United States person, and who is related (within the meaning of section 267(b)) to the issuer. This subsection shall not apply to any debt instrument described in section 1272(a)(2)(D) (relating to loans between natural persons). In the case of an applicable high yield discount obligation issued by a corporation— no deduction shall be allowed under this chapter for the disqualified portion of the original issue discount on such obligation, and the remainder of such original issue discount shall not be allowable as a deduction until paid. For purposes of this paragraph, rules similar to the rules of subsection (i)(3)(B) shall apply in determining the amount of the original issue discount and when the original issue discount is paid. Solely for purposes of sections 243, 245, 246, and 246A, the dividend equivalent portion of any amount includible in gross income of a corporation under section 1272(a) in respect of an applicable high yield discount obligation shall be treated as a dividend received by such corporation from the corporation issuing such obligation. For purposes of clause (i), the dividend equivalent portion of any amount includible in gross income under section 1272(a) in respect of an applicable high yield discount obligation is the portion of the amount so includible— which is attributable to the disqualified portion of the original issue discount on such obligation, and which would have been treated as a dividend if it had been a distribution made by the issuing corporation with respect to stock in such corporation. For purposes of this paragraph, the disqualified portion of the original issue discount on any applicable high yield discount obligation is the lesser of— the amount of such original issue discount, or the portion of the total return on such obligation which bears the same ratio to such total return as the disqualified yield on such obligation bears to the yield to maturity on such obligation. For purposes of clause (i), the term “disqualified yield” means the excess of the yield to maturity on the obligation over the sum referred to in subsection (i)(1)(B) plus 1 percentage point, and the term “total return” is the amount which would have been the original issue discount on the obligation if interest described in the parenthetical in section 1273(a)(2) were included in the stated redemption price at maturity. This paragraph shall not apply to any obligation issued by any corporation for any period for which such corporation is an S corporation. This paragraph shall not apply for purposes of determining earnings and profits; except that, for purposes of determining the dividend equivalent portion of any amount includible in gross income under section 1272(a) in respect of an applicable high yield discount obligation, no reduction shall be made for any amount attributable to the disqualified portion of any original issue discount on such obligation. This paragraph shall not apply to any applicable high yield discount obligation issued during the period beginning on September 1, 2008 , and ending on December 31, 2009 , in exchange (including an exchange resulting from a modification of the debt instrument) for an obligation which is not an applicable high yield discount obligation and the issuer (or obligor) of which is the same as the issuer (or obligor) of such applicable high yield discount obligation. The preceding sentence shall not apply to any obligation the interest on which is interest described in section 871(h)(4) (without regard to subparagraph (D) thereof) or to any obligation issued to a related person (within the meaning of section 108(e)(4)). Any obligation to which clause (i) applies shall not be treated as an applicable high yield discount obligation for purposes of applying this subparagraph to any other obligation issued in exchange for such obligation. The Secretary may apply this paragraph with respect to debt instruments issued in periods following the period described in clause (i) if the Secretary determines that such application is appropriate in light of distressed conditions in the debt capital markets. For definition of applicable high yield discount obligation, see subsection (i). For provision relating to deduction of original issue discount on tax-exempt obligation, see section 1288. For special rules in the case of the borrower under certain loans for personal use, see section 1275(b).

(f) Denial of deduction for interest on certain obligations not in registered form Nothing in subsection (a) or in any other provision of law shall be construed to provide a deduction for interest on any registration-required obligation unless such obligation is in registered form. For purposes of this section— The term “registration-required obligation” means any obligation (including any obligation issued by a governmental entity) other than an obligation which— is issued by a natural person, is not of a type offered to the public, or has a maturity (at issue) of not more than 1 year. Clauses (ii) and (iii) of subparagraph (A) shall not apply to any obligation if— such obligation is of a type which the Secretary has determined by regulations to be used frequently in avoiding Federal taxes, and such obligation is issued after the date on which the regulations referred to in clause (i) take effect. For purposes of this subsection, rules similar to the rules of section 149(a)(3) shall apply, except that a dematerialized book entry system or other book entry system specified by the Secretary shall be treated as a book entry system described in such section.

(g) Reduction of deduction where section 25 credit taken The amount of the deduction under this section for interest paid or accrued during any taxable year on indebtedness with respect to which a mortgage credit certificate has been issued under section 25 shall be reduced by the amount of the credit allowable with respect to such interest under section 25 (determined without regard to section 26).

(h) Disallowance of deduction for personal interest In the case of a taxpayer other than a corporation, no deduction shall be allowed under this chapter for personal interest paid or accrued during the taxable year. For purposes of this subsection, the term “personal interest” means any interest allowable as a deduction under this chapter other than— interest paid or accrued on indebtedness properly allocable to a trade or business (other than the trade or business of performing services as an employee), any investment interest (within the meaning of subsection (d)), any interest which is taken into account under section 469 in computing income or loss from a passive activity of the taxpayer, any qualified residence interest (within the meaning of paragraph (3)), any interest payable under section 6601 on any unpaid portion of the tax imposed by section 2001 for the period during which an extension of time for payment of such tax is in effect under section 6163, and any interest allowable as a deduction under section 221 (relating to interest on educational loans). For purposes of this subsection— The term “qualified residence interest” means any interest which is paid or accrued during the taxable year on— acquisition indebtedness with respect to any qualified residence of the taxpayer, or home equity indebtedness with respect to any qualified residence of the taxpayer. For purposes of the preceding sentence, the determination of whether any property is a qualified residence of the taxpayer shall be made as of the time the interest is accrued. The term “acquisition indebtedness” means any indebtedness which— is incurred in acquiring, constructing, or substantially improving any qualified residence of the taxpayer, and is secured by such residence. Such term also includes any indebtedness secured by such residence resulting from the refinancing of indebtedness meeting the requirements of the preceding sentence (or this sentence); but only to the extent the amount of the indebtedness resulting from such refinancing does not exceed the amount of the refinanced indebtedness. The aggregate amount treated as acquisition indebtedness for any period shall not exceed $1, 000, 000 ($ 500,000 in the case of a married individual filing a separate return). The term “home equity indebtedness” means any indebtedness (other than acquisition indebtedness) secured by a qualified residence to the extent the aggregate amount of such indebtedness does not exceed— the fair market value of such qualified residence, reduced by the amount of acquisition indebtedness with respect to such residence. The aggregate amount treated as home equity indebtedness for any period shall not exceed $100, 000 ($ 50,000 in the case of a separate return by a married individual). In the case of any pre- October 13, 1987 , indebtedness— such indebtedness shall be treated as acquisition indebtedness, and the limitation of subparagraph (B)(ii) shall not apply. The limitation of subparagraph (B)(ii) shall be reduced (but not below zero) by the aggregate amount of outstanding pre- October 13, 1987 , indebtedness. The term “pre- October 13, 1987 , indebtedness” means— any indebtedness which was incurred on or before October 13, 1987 , and which was secured by a qualified residence on October 13, 1987 , and at all times thereafter before the interest is paid or accrued, or any indebtedness which is secured by the qualified residence and was incurred after October 13, 1987 , to refinance indebtedness described in subclause (I) (or refinanced indebtedness meeting the requirements of this subclause) to the extent (immediately after the refinancing) the principal amount of the indebtedness resulting from the refinancing does not exceed the principal amount of the refinanced indebtedness (immediately before the refinancing). Subclause (II) of clause (iii) shall not apply to any indebtedness after— the expiration of the term of the indebtedness described in clause (iii)(I), or if the principal of the indebtedness described in clause (iii)(I) is not amortized over its term, the expiration of the term of the 1st refinancing of such indebtedness (or if earlier, the date which is 30 years after the date of such 1st refinancing). Premiums paid or accrued for qualified mortgage insurance by a taxpayer during the taxable year in connection with acquisition indebtedness with respect to a qualified residence of the taxpayer shall be treated for purposes of this section as interest which is qualified residence interest. The amount otherwise treated as interest under clause (i) shall be reduced (but not below zero) by 10 percent of such amount for each $1, 000 ($ 500 in the case of a married individual filing a separate return) (or fraction thereof) that the taxpayer’s adjusted gross income for the taxable year exceeds $100, 000 ($ 50,000 in the case of a married individual filing a separate return). Clause (i) shall not apply with respect to any mortgage insurance contracts issued before January 1, 2007 . Clause (i) shall not apply to amounts— paid or accrued after December 31, 2021 , or properly allocable to any period after such date. In the case of taxable years beginning after December 31, 2017 — Subparagraph (A)(ii) shall not apply. Subparagraph (B)(ii) shall be applied by substituting “ $750, 000 ($ 375,000” for “ $1, 000, 000 ($ 500,000”. Clause (iv) of subparagraph (E) shall not apply. Subclause (II) shall not apply to any indebtedness incurred on or before December 15, 2017 , and, in applying such subclause to any indebtedness incurred after such date, the limitation under such subclause shall be reduced (but not below zero) by the amount of any indebtedness incurred on or before December 15, 2017 , which is treated as acquisition indebtedness for purposes of this subsection for the taxable year. In the case of a taxpayer who enters into a written binding contract before December 15, 2017 , to close on the purchase of a principal residence before January 1, 2018 , and who purchases such residence before April 1, 2018 , subclause (IV) shall be applied by substituting “ April 1, 2018 ” for “ December 15, 2017 ”. In the case of any indebtedness which is incurred to refinance indebtedness, such refinanced indebtedness shall be treated for purposes of clause (i)(III) as incurred on the date that the original indebtedness was incurred to the extent the amount of the indebtedness resulting from such refinancing does not exceed the amount of the refinanced indebtedness. Subclause (I) shall not apply to any indebtedness after the expiration of the term of the original indebtedness or, if the principal of such original indebtedness is not amortized over its term, the expiration of the term of the 1st refinancing of such indebtedness (or if earlier, the date which is 30 years after the date of such 1st refinancing). Section 108(h)(2) shall be applied without regard to this subparagraph. In the case of taxable years beginning after December 31, 2024 , and before January 1, 2029 , for purposes of this subsection the term “personal interest” shall not include qualified passenger vehicle loan interest. For purposes of this paragraph, the term “qualified passenger vehicle loan interest” means any interest which is paid or accrued during the taxable year on indebtedness incurred by the taxpayer after December 31, 2024 , for the purchase of, and that is secured by a first lien on, an applicable passenger vehicle for personal use. Such term shall not include any amount paid or incurred on any of the following: A loan to finance fleet sales. A loan incurred for the purchase of a commercial vehicle that is not used for personal purposes. Any lease financing. A loan to finance the purchase of a vehicle with a salvage title. A loan to finance the purchase of a vehicle intended to be used for scrap or parts. Interest shall not be treated as qualified passenger vehicle loan interest under this paragraph unless the taxpayer includes the vehicle identification number of the applicable passenger vehicle described in clause (i) on the return of tax for the taxable year. The amount of interest taken into account by a taxpayer under subparagraph (B) for any taxable year shall not exceed $10, 000. T h e am o u n tw hi c hi so t h er w i se a ll o w ab l e a s a d e d u c t i o n u n d ers u b sec t i o n (a) a s q u a l i f i e d p a sse n g er v e hi c l e l o anin t eres t (d e t er min e d w i t h o u t re g a r d t o t hi sc l a u se an d a f t er t h e a ppl i c a t i o n o f c l a u se (i)) s ha ll b ere d u ce d (b u t n o t b e l o w zero) b y$ 200 for each $1, 000 (or p or t i o n t h ereo f) b y w hi c h t h e m o d i f i e d a d j u s t e d g ross in co m eo f t h e t a x p a yer f or t h e t a x ab l eye a re x cee d s$ 100,000 ($200,000 in the case of a joint return). For purposes of this clause, the term “modified adjusted gross income” means the adjusted gross income of the taxpayer for the taxable year increased by any amount excluded from gross income under section 911, 931, or 933. The term “applicable passenger vehicle” means any vehicle— the original use of which commences with the taxpayer, which is manufactured primarily for use on public streets, roads, and highways (not including a vehicle operated exclusively on a rail or rails), which has at least 2 wheels, which is a car, minivan, van, sport utility vehicle, pickup truck, or motorcycle, which is treated as a motor vehicle for purposes of title II of the Clean Air Act, and which has a gross vehicle weight rating of less than 14,000 pounds. Such term shall not include any vehicle the final assembly of which did not occur within the United States. For purposes of this paragraph— For purposes of subparagraph (D), the term “final assembly” means the process by which a manufacturer produces a vehicle at, or through the use of, a plant, factory, or other place from which the vehicle is delivered to a dealer with all component parts necessary for the mechanical operation of the vehicle included with the vehicle, whether or not the component parts are permanently installed in or on the vehicle. Indebtedness described in subparagraph (B) shall include indebtedness that results from refinancing any indebtedness described in such subparagraph, and that is secured by a first lien on the applicable passenger vehicle with respect to which the refinanced indebtedness was incurred, but only to the extent the amount of such resulting indebtedness does not exceed the amount of such refinanced indebtedness. Indebtedness described in subparagraph (B) shall not include any indebtedness owed to a person who is related (within the meaning of section 267(b) or 707(b)(1)) to the taxpayer. For purposes of this subsection— The term “qualified residence” means— the principal residence (within the meaning of section 121) of the taxpayer, and 1 other residence of the taxpayer which is selected by the taxpayer for purposes of this subsection for the taxable year and which is used by the taxpayer as a residence (within the meaning of section 280A(d)(1)). If a married couple does not file a joint return for the taxable year— such couple shall be treated as 1 taxpayer for purposes of clause (i), and each individual shall be entitled to take into account 1 residence unless both individuals consent in writing to 1 individual taking into account the principal residence and 1 other residence. For purposes of clause (i)(II), notwithstanding section 280A(d)(1), if the taxpayer does not rent a dwelling unit at any time during a taxable year, such unit may be treated as a residence for such taxable year. Any indebtedness secured by stock held by the taxpayer as a tenant-stockholder (as defined in section 216) in a cooperative housing corporation (as so defined) shall be treated as secured by the house or apartment which the taxpayer is entitled to occupy as such a tenant-stockholder. If stock described in the preceding sentence may not be used to secure indebtedness, indebtedness shall be treated as so secured if the taxpayer establishes to the satisfaction of the Secretary that such indebtedness was incurred to acquire such stock. Indebtedness shall not fail to be treated as secured by any property solely because, under any applicable State or local homestead or other debtor protection law in effect on August 16, 1986 , the security interest is ineffective or the enforceability of the security interest is restricted. For purposes of determining whether any interest paid or accrued by an estate or trust is qualified residence interest, any residence held by such estate or trust shall be treated as a qualified residence of such estate or trust if such estate or trust establishes that such residence is a qualified residence of a beneficiary who has a present interest in such estate or trust or an interest in the residuary of such estate or trust. The term “qualified mortgage insurance” means— mortgage insurance provided by the Department of Veterans Affairs, the Federal Housing Administration, or the Rural Housing Service, and private mortgage insurance (as defined by section 2 of the Homeowners Protection Act of 1998 ( 12 U.S.C. 4901 ), as in effect on the date of the enactment of this subparagraph). Any amount paid by the taxpayer for qualified mortgage insurance that is properly allocable to any mortgage the payment of which extends to periods that are after the close of the taxable year in which such amount is paid shall be chargeable to capital account and shall be treated as paid in such periods to which so allocated. No deduction shall be allowed for the unamortized balance of such account if such mortgage is satisfied before the end of its term. The preceding sentences shall not apply to amounts paid for qualified mortgage insurance provided by the Department of Veterans Affairs or the Rural Housing Service.

(i) Applicable high yield discount obligation For purposes of this section, the term “applicable high yield discount obligation” means any debt instrument if— the maturity date of such instrument is more than 5 years from the date of issue, the yield to maturity on such instrument equals or exceeds the sum of— the applicable Federal rate in effect under section 1274(d) for the calendar month in which the obligation is issued, plus 5 percentage points, and such instrument has significant original issue discount. For purposes of subparagraph (B)(i), the Secretary may by regulation (i) permit a rate to be used with respect to any debt instrument which is higher than the applicable Federal rate if the taxpayer establishes to the satisfaction of the Secretary that such higher rate is based on the same principles as the applicable Federal rate and is appropriate for the term of the instrument, or (ii) permit, on a temporary basis, a rate to be used with respect to any debt instrument which is higher than the applicable Federal rate if the Secretary determines that such rate is appropriate in light of distressed conditions in the debt capital markets. For purposes of paragraph (1)(C), a debt instrument shall be treated as having significant original issue discount if— the aggregate amount which would be includible in gross income with respect to such instrument for periods before the close of any accrual period (as defined in section 1272(a)(5)) ending after the date 5 years after the date of issue, exceeds— the sum of— the aggregate amount of interest to be paid under the instrument before the close of such accrual period, and the product of the issue price of such instrument (as defined in sections 1273(b) and 1274(a)) and its yield to maturity. For purposes of determining whether a debt instrument is an applicable high yield discount obligation— any payment under the instrument shall be assumed to be made on the last day permitted under the instrument, and any payment to be made in the form of another obligation of the issuer (or a related person within the meaning of section 453(f)(1)) shall be assumed to be made when such obligation is required to be paid in cash or in property other than such obligation. Except for purposes of paragraph (1)(B), any reference to an obligation in subparagraph (B) of this paragraph shall be treated as including a reference to stock. For purposes of this subsection, the term “debt instrument” means any instrument which is a debt instrument as defined in section 1275(a). The Secretary shall prescribe such regulations as may be appropriate to carry out the purposes of this subsection and subsection (e)(5), including— regulations providing for modifications to the provisions of this subsection and subsection (e)(5) in the case of varying rates of interest, put or call options, indefinite maturities, contingent payments, assumptions of debt instruments, conversion rights, or other circumstances where such modifications are appropriate to carry out the purposes of this subsection and subsection (e)(5), and regulations to prevent avoidance of the purposes of this subsection and subsection (e)(5) through the use of issuers other than C corporations, agreements to borrow amounts due under the debt instrument, or other arrangements.

(j) Limitation on business interest The amount allowed as a deduction under this chapter for any taxable year for business interest shall not exceed the sum of— the business interest income of such taxpayer for such taxable year, 30 percent of the adjusted taxable income of such taxpayer for such taxable year, plus the floor plan financing interest of such taxpayer for such taxable year. The amount determined under subparagraph (B) shall not be less than zero. The amount of any business interest not allowed as a deduction for any taxable year by reason of paragraph (1) shall be treated as business interest paid or accrued in the succeeding taxable year. In the case of any taxpayer (other than a tax shelter prohibited from using the cash receipts and disbursements method of accounting under section 448(a)(3)) which meets the gross receipts test of section 448(c) for any taxable year, paragraph (1) shall not apply to such taxpayer for such taxable year. In the case of any taxpayer which is not a corporation or a partnership, the gross receipts test of section 448(c) shall be applied in the same manner as if such taxpayer were a corporation or partnership. In the case of any partnership— this subsection shall be applied at the partnership level and any deduction for business interest shall be taken into account in determining the non-separately stated taxable income or loss of the partnership, and the adjusted taxable income of each partner of such partnership— shall be determined without regard to such partner’s distributive share of any items of income, gain, deduction, or loss of such partnership, and shall be increased by such partner’s distributive share of such partnership’s excess taxable income. For purposes of clause (ii)(II), a partner’s distributive share of partnership excess taxable income shall be determined in the same manner as the partner’s distributive share of nonseparately stated taxable income or loss of the partnership. The amount of any business interest not allowed as a deduction to a partnership for any taxable year by reason of paragraph (1) for any taxable year— shall not be treated under paragraph (2) as business interest paid or accrued by the partnership in the succeeding taxable year, and shall, subject to clause (ii), be treated as excess business interest which is allocated to each partner in the same manner as the non-separately stated taxable income or loss of the partnership. If a partner is allocated any excess business interest from a partnership under clause (i) for any taxable year— such excess business interest shall be treated as business interest paid or accrued by the partner in the next succeeding taxable year in which the partner is allocated excess taxable income from such partnership, but only to the extent of such excess taxable income, and any portion of such excess business interest remaining after the application of subclause (I) shall, subject to the limitations of subclause (I), be treated as business interest paid or accrued in succeeding taxable years. For purposes of applying this paragraph, excess taxable income allocated to a partner from a partnership for any taxable year shall not be taken into account under paragraph (1)(A) with respect to any business interest other than excess business interest from the partnership until all such excess business interest for such taxable year and all preceding taxable years has been treated as paid or accrued under clause (ii). The adjusted basis of a partner in a partnership interest shall be reduced (but not below zero) by the amount of excess business interest allocated to the partner under clause (i)(II). If a partner disposes of a partnership interest, the adjusted basis of the partner in the partnership interest shall be increased immediately before the disposition by the amount of the excess (if any) of the amount of the basis reduction under subclause (I) over the portion of any excess business interest allocated to the partner under clause (i)(II) which has previously been treated under clause (ii) as business interest paid or accrued by the partner. The preceding sentence shall also apply to transfers of the partnership interest (including by reason of death) in a transaction in which gain is not recognized in whole or in part. No deduction shall be allowed to the transferor or transferee under this chapter for any excess business interest resulting in a basis increase under this subclause. The term “excess taxable income” means, with respect to any partnership, the amount which bears the same ratio to the partnership’s adjusted taxable income as— the excess (if any) of— the amount determined for the partnership under paragraph (1)(B), over the amount (if any) by which the business interest of the partnership, reduced by the floor plan financing interest, exceeds the business interest income of the partnership, bears to the amount determined for the partnership under paragraph (1)(B). Rules similar to the rules of subparagraphs (A) and (C) shall apply with respect to any S corporation and its shareholders. For purposes of this subsection, the term “business interest” means any interest paid or accrued on indebtedness properly allocable to a trade or business. Such term shall not include investment interest (within the meaning of subsection (d)). Such term shall not include any interest which is capitalized under section 263(g) or 263A(f). For purposes of this subsection, the term “business interest income” means the amount of interest includible in the gross income of the taxpayer for the taxable year which is properly allocable to a trade or business. Such term shall not include investment income (within the meaning of subsection (d)). For purposes of this subsection— The term “trade or business” shall not include— the trade or business of performing services as an employee, any electing real property trade or business, any electing farming business, or the trade or business of the furnishing or sale of— electrical energy, water, or sewage disposal services, gas or steam through a local distribution system, or transportation of gas or steam by pipeline, if the rates for such furnishing or sale, as the case may be, have been established or approved by a State or political subdivision thereof, by any agency or instrumentality of the United States, by a public service or public utility commission or other similar body of any State or political subdivision thereof, or by the governing or ratemaking body of an electric cooperative. For purposes of this paragraph, the term “electing real property trade or business” means any trade or business which is described in section 469(c)(7)(C) and which makes an election under this subparagraph. Any such election shall be made at such time and in such manner as the Secretary shall prescribe, and, once made, shall be irrevocable. For purposes of this paragraph, the term “electing farming business” means— a farming business (as defined in section 263A(e)(4)) which makes an election under this subparagraph, or any trade or business of a specified agricultural or horticultural cooperative (as defined in section 199A(g)(2)) 1 with respect to which the cooperative makes an election under this subparagraph. Any such election shall be made at such time and in such manner as the Secretary shall prescribe, and, once made, shall be irrevocable. For purposes of this subsection, the term “adjusted taxable income” means the taxable income of the taxpayer— computed without regard to— any item of income, gain, deduction, or loss which is not properly allocable to a trade or business, any business interest or business interest income, the amount of any net operating loss deduction under section 172, the amount of any deduction allowed under section 199A, any deduction allowable for depreciation, amortization, or depletion, and the amounts included in gross income under sections 951(a), 951A(a), and 78 (and the portion of the deductions allowed under sections 245A(a) (by reason of section 964(e)(4)) and 250(a)(1)(B) by reason of such inclusions), and computed with such other adjustments as provided by the Secretary. For purposes of this subsection— The term “floor plan financing interest” means interest paid or accrued on floor plan financing indebtedness. The term “floor plan financing indebtedness” means indebtedness— used to finance the acquisition of motor vehicles held for sale or lease, and secured by the inventory so acquired. The term “motor vehicle” means a motor vehicle that is any of the following: Any self-propelled vehicle designed for transporting persons or property on a public street, highway, or road. A boat. Farm machinery or equipment. Such term shall also include any trailer or camper which is designed to provide temporary living quarters for recreational, camping, or seasonal use and is designed to be towed by, or affixed to, a motor vehicle. In applying this subsection— the limitation under paragraph (1) shall apply to business interest without regard to whether the taxpayer would otherwise deduct such business interest or capitalize such business interest under an interest capitalization provision, and any reference in this subsection to a deduction for business interest shall be treated as including a reference to the capitalization of business interest. The amount allowed after taking into account the limitation described in paragraph (1)— shall be applied first to the aggregate amount of business interest which would otherwise be capitalized, and the remainder (if any) shall be applied to the aggregate amount of business interest which would be deducted. No portion of any business interest carried forward under paragraph (2) from any taxable year to any succeeding taxable year shall, for purposes of this title (including any interest capitalization provision which previously applied to such portion) be treated as interest to which an interest capitalization provision applies. For purposes of this section, the term “interest capitalization provision” means any provision of this subtitle under which interest— is required to be charged to capital account, or may be deducted or charged to capital account. The Secretary shall issue such regulations or guidance as may be necessary or appropriate to carry out the purposes of this subsection, including regulations or guidance to determine which business interest is taken into account under this subsection and section 59A(c)(3). Except as provided in clause (ii) or (iii), in the case of any taxable year beginning in 2019 or 2020, paragraph (1)(B) shall be applied by substituting “50 percent” for “30 percent”. In the case of a partnership— clause (i) shall not apply to any taxable year beginning in 2019, but unless a partner elects not to have this subclause apply, in the case of any excess business interest of the partnership for any taxable year beginning in 2019 which is allocated to the partner under paragraph (4)(B)(i)(II)— 50 percent of such excess business interest shall be treated as business interest which, notwithstanding paragraph (4)(B)(ii), is paid or accrued by the partner in the partner’s first taxable year beginning in 2020 and which is not subject to the limits of paragraph (1), and 50 percent of such excess business interest shall be subject to the limitations of paragraph (4)(B)(ii) in the same manner as any other excess business interest so allocated. A taxpayer may elect, at such time and in such manner as the Secretary may prescribe, not to have clause (i) apply to any taxable year. Such an election, once made, may be revoked only with the consent of the Secretary. In the case of a partnership, any such election shall be made by the partnership and may be made only for taxable years beginning in 2020. Subject to clause (ii), in the case of any taxable year beginning in 2020, the taxpayer may elect to apply this subsection by substituting the adjusted taxable income of the taxpayer for the last taxable year beginning in 2019 for the adjusted taxable income for such taxable year. In the case of a partnership, any such election shall be made by the partnership. If an election is made under clause (i) for a taxable year which is a short taxable year, the adjusted taxable income for the taxpayer’s last taxable year beginning in 2019 which is substituted under clause (i) shall be equal to the amount which bears the same ratio to such adjusted taxable income determined without regard to this clause as the number of months in the short taxable year bears to 12 2 For requirement that an electing real property trade or business use the alternative depreciation system, see section 168(g)(1)(F). For requirement that an electing farming business use the alternative depreciation system, see section 168(g)(1)(G).

(k) Section 6166 interest No deduction shall be allowed under this section for any interest payable under section 6601 on any unpaid portion of the tax imposed by section 2001 for the period during which an extension of time for payment of such tax is in effect under section 6166.

(l) Disallowance of deduction on certain debt instruments of corporations No deduction shall be allowed under this chapter for any interest paid or accrued on a disqualified debt instrument. For purposes of this subsection, the term “disqualified debt instrument” means any indebtedness of a corporation which is payable in equity of the issuer or a related party or equity held by the issuer (or any related party) in any other person. For purposes of paragraph (2), indebtedness shall be treated as payable in equity of the issuer or any other person only if— a substantial amount of the principal or interest is required to be paid or converted, or at the option of the issuer or a related party is payable in, or convertible into, such equity, a substantial amount of the principal or interest is required to be determined, or at the option of the issuer or a related party is determined, by reference to the value of such equity, or the indebtedness is part of an arrangement which is reasonably expected to result in a transaction described in subparagraph (A) or (B). For purposes of this paragraph, principal or interest shall be treated as required to be so paid, converted, or determined if it may be required at the option of the holder or a related party and there is a substantial certainty the option will be exercised. If the disqualified debt instrument of a corporation is payable in equity held by the issuer (or any related party) in any other person (other than a related party), the basis of such equity shall be increased by the amount not allowed as a deduction by reason of paragraph (1) with respect to the instrument. For purposes of this subsection, the term “disqualified debt instrument” does not include indebtedness issued by a dealer in securities (or a related party) which is payable in, or by reference to, equity (other than equity of the issuer or a related party) held by such dealer in its capacity as a dealer in securities. For purposes of this paragraph, the term “dealer in securities” has the meaning given such term by section 475. For purposes of this subsection, a person is a related party with respect to another person if such person bears a relationship to such other person described in section 267(b) or 707(b). The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this subsection, including regulations preventing avoidance of this subsection through the use of an issuer other than a corporation.

(m) Interest on unpaid taxes attributable to nondisclosed reportable transactions No deduction shall be allowed under this chapter for any interest paid or accrued under section 6601 on any underpayment of tax which is attributable to the portion of any reportable transaction understatement (as defined in section 6662A(b)) with respect to which the requirement of section 6664(d)(2)(A) 1 is not met.

(n) Cross references For disallowance of certain amounts paid in connection with insurance, endowment, or annuity contracts, see section 264. For disallowance of deduction for interest relating to tax-exempt income, see section 265(a)(2). For disallowance of deduction for carrying charges chargeable to capital account, see section 266. For disallowance of interest with respect to transactions between related taxpayers, see section 267. For treatment of redeemable ground rents and real property held subject to liabilities under redeemable ground rents, see section 1055.

§ 164 Taxes

(a) General rule Except as otherwise provided in this section, the following taxes shall be allowed as a deduction for the taxable year within which paid or accrued: State and local, and foreign, real property taxes. State and local personal property taxes. State and local, and foreign, income, war profits, and excess profits taxes. The GST tax imposed on income distributions. In addition, there shall be allowed as a deduction State and local, and foreign, taxes not described in the preceding sentence which are paid or accrued within the taxable year in carrying on a trade or business or an activity described in section 212 (relating to expenses for production of income). Notwithstanding the preceding sentence, any tax (not described in the first sentence of this subsection) which is paid or accrued by the taxpayer in connection with an acquisition or disposition of property shall be treated as part of the cost of the acquired property or, in the case of a disposition, as a reduction in the amount realized on the disposition.

(b) Definitions and special rules For purposes of this section— The term “personal property tax” means an ad valorem tax which is imposed on an annual basis in respect of personal property. A State or local tax includes only a tax imposed by a State, a possession of the United States, or a political subdivision of any of the foregoing, or by the District of Columbia. A foreign tax includes only a tax imposed by the authority of a foreign country. The GST tax imposed on income distributions is— the tax imposed by section 2601, and any State tax described in section 2604 (as in effect before its repeal), but only to the extent such tax is imposed on a transfer which is included in the gross income of the distributee and to which section 666 does not apply. Any tax referred to in subparagraph (A) imposed with respect to a transfer occurring during the taxable year of the distributee (or, in the case of a taxable termination, the trust) which is paid not later than the time prescribed by law (including extensions) for filing the return with respect to such transfer shall be treated as having been paid on the last day of the taxable year in which the transfer was made. For purposes of subsection (a)— At the election of the taxpayer for the taxable year, subsection (a) shall be applied— without regard to the reference to State and local income taxes, and as if State and local general sales taxes were referred to in a paragraph thereof. The term “general sales tax” means a tax imposed at one rate with respect to the sale at retail of a broad range of classes of items. In the case of items of food, clothing, medical supplies, and motor vehicles— the fact that the tax does not apply with respect to some or all of such items shall not be taken into account in determining whether the tax applies with respect to a broad range of classes of items, and the fact that the rate of tax applicable with respect to some or all of such items is lower than the general rate of tax shall not be taken into account in determining whether the tax is imposed at one rate. Except in the case of a lower rate of tax applicable with respect to an item described in subparagraph (C), no deduction shall be allowed under this paragraph for any general sales tax imposed with respect to an item at a rate other than the general rate of tax. A compensating use tax with respect to an item shall be treated as a general sales tax. For purposes of the preceding sentence, the term “compensating use tax” means, with respect to any item, a tax which— is imposed on the use, storage, or consumption of such item, and is complementary to a general sales tax, but only if a deduction is allowable under this paragraph with respect to items sold at retail in the taxing jurisdiction which are similar to such item. In the case of motor vehicles, if the rate of tax exceeds the general rate, such excess shall be disregarded and the general rate shall be treated as the rate of tax. If the amount of any general sales tax is separately stated, then, to the extent that the amount so stated is paid by the consumer (other than in connection with the consumer’s trade or business) to the seller, such amount shall be treated as a tax imposed on, and paid by, such consumer. At the election of the taxpayer for the taxable year, the amount of the deduction allowed under this paragraph for such year shall be— the amount determined under this paragraph (without regard to this subparagraph) with respect to motor vehicles, boats, and other items specified by the Secretary, and the amount determined under tables prescribed by the Secretary with respect to items to which subclause (I) does not apply. The tables prescribed under clause (i)— shall reflect the provisions of this paragraph, shall be based on the average consumption by taxpayers on a State-by-State basis (as determined by the Secretary) of items to which clause (i)(I) does not apply, taking into account filing status, number of dependents, adjusted gross income, and rates of State and local general sales taxation, and need only be determined with respect to adjusted gross incomes up to the applicable amount (as determined under section 68(b) 1 ). In the case of an individual and a taxable year beginning after December 31, 2017 , 2 — foreign real property taxes shall not be taken into account under subsection (a)(1), and the aggregate amount of taxes taken into account under paragraphs (1), (2), and (3) of subsection (a) and paragraph (5) of this subsection for any taxable year shall not exceed the applicable limitation amount (half the applicable limitation amount in the case of a married individual filing a separate return). The preceding sentence shall not apply to any foreign taxes described in subsection (a)(3) or to any taxes described in paragraph (1) and (2) of subsection (a) which are paid or accrued in carrying on a trade or business or an activity described in section 212. For purposes of subparagraph (B), an amount paid in a taxable year beginning before January 1, 2018 , with respect to a State or local income tax imposed for a taxable year beginning after December 31, 2017 , shall be treated as paid on the last day of the taxable year for which such tax is so imposed. For purposes of paragraph (6), the term “applicable limitation amount” means— in the case of any taxable year beginning in calendar year 2025, $40, 000, in t h ec a seo f an y t a x ab l eye a r b e g innin g in c a l e n d a rye a r 2026,$ 40,400, in the case of any taxable year beginning after calendar year 2026 and before 2030, 101 percent of the dollar amount in effect under this subparagraph for taxable years beginning in the preceding calendar year, and in the case of any taxable year beginning after calendar year 2029, $10, 000. E x ce pt a s p ro v i d e d in c l a u se (iii), in t h ec a seo f an y t a x ab l eye a r b e g innin g b e f ore J an u a ry 1, 2030, t h e a ppl i c ab l e l imi t a t i o nam o u n t s ha ll b ere d u ce d b y 30 p erce n t o f t h ee x cess (i f an y) o f t h e t a x p a yer ’ s m o d i f i e d a d j u s t e d g ross in co m eo v er t h e t h res h o l d am o u n t (ha l f t h e t h res h o l d am o u n t in t h ec a seo f ama rr i e d in d i v i d u a l f i l in g a se p a r a t ere t u r n) . F or p u r p oseso f t hi ss u b p a r a g r a p h, t h e t er m “ t h res h o l d am o u n t ” m e an s — in t h ec a seo f an y t a x ab l eye a r b e g innin g in c a l e n d a rye a r 2025,$ 500,000, in the case of any taxable year beginning in calendar year 2026, $505, 000, an d in t h ec a seo f an y t a x ab l eye a r b e g innin g a f t erc a l e n d a rye a r 2026, 101 p erce n t o f t h e d o ll a r am o u n t in e ff ec t u n d er t hi ss u b p a r a g r a p h f or t a x ab l eye a rs b e g innin g in t h e p rece d in g c a l e n d a rye a r . T h ere d u c t i o n u n d erc l a u se (i) s ha ll n o t res u lt in t h e a ppl i c ab l e l imi t a t i o nam o u n t b e in g l ess t han$ 10,000. For purposes of this paragraph, the term “modified adjusted gross income” means adjusted gross income increased by any amount excluded from gross income under section 911, 931, or 933.

(c) Deduction denied in case of certain taxes No deduction shall be allowed for the following taxes: Taxes assessed against local benefits of a kind tending to increase the value of the property assessed; but this paragraph shall not prevent the deduction of so much of such taxes as is properly allocable to maintenance or interest charges. Taxes on real property, to the extent that subsection (d) requires such taxes to be treated as imposed on another taxpayer.

(d) Apportionment of taxes on real property between seller and purchaser For purposes of subsection (a), if real property is sold during any real property tax year, then— so much of the real property tax as is properly allocable to that part of such year which ends on the day before the date of the sale shall be treated as a tax imposed on the seller, and so much of such tax as is properly allocable to that part of such year which begins on the date of the sale shall be treated as a tax imposed on the purchaser. In the case of any sale of real property, if— a taxpayer may not, by reason of his method of accounting, deduct any amount for taxes unless paid, and the other party to the sale is (under the law imposing the real property tax) liable for the real property tax for the real property tax year, then for purposes of subsection (a) the taxpayer shall be treated as having paid, on the date of the sale, so much of such tax as, under paragraph (1) of this subsection, is treated as imposed on the taxpayer. For purposes of the preceding sentence, if neither party is liable for the tax, then the party holding the property at the time the tax becomes a lien on the property shall be considered liable for the real property tax for the real property tax year. In the case of any sale of real property, if the taxpayer’s taxable income for the taxable year during which the sale occurs is computed under an accrual method of accounting, and if no election under section 461(c) (relating to the accrual of real property taxes) applies, then, for purposes of subsection (a), that portion of such tax which— is treated, under paragraph (1) of this subsection, as imposed on the taxpayer, and may not, by reason of the taxpayer’s method of accounting, be deducted by the taxpayer for any taxable year, shall be treated as having accrued on the date of the sale.

(e) Taxes of shareholder paid by corporation Where a corporation pays a tax imposed on a shareholder on his interest as a shareholder, and where the shareholder does not reimburse the corporation, then— the deduction allowed by subsection (a) shall be allowed to the corporation; and no deduction shall be allowed the shareholder for such tax.

(f) Deduction for one-half of self-employment taxes In the case of an individual, in addition to the taxes described in subsection (a), there shall be allowed as a deduction for the taxable year an amount equal to one-half of the taxes imposed by section 1401 (other than the taxes imposed by section 1401(b)(2)) for such taxable year. For purposes of this chapter, the deduction allowed by paragraph (1) shall be treated as attributable to a trade or business carried on by the taxpayer which does not consist of the performance of services by the taxpayer as an employee.

(g) Cross references For provisions disallowing any deduction for certain taxes, see section 275. For treatment of taxes imposed by Indian tribal governments (or their subdivisions), see section 7871.

§ 165 Losses

(a) General rule There shall be allowed as a deduction any loss sustained during the taxable year and not compensated for by insurance or otherwise.

(b) Amount of deduction For purposes of subsection (a), the basis for determining the amount of the deduction for any loss shall be the adjusted basis provided in section 1011 for determining the loss from the sale or other disposition of property.

(c) Limitation on losses of individuals In the case of an individual, the deduction under subsection (a) shall be limited to— losses incurred in a trade or business; losses incurred in any transaction entered into for profit, though not connected with a trade or business; and except as provided in subsection (h), losses of property not connected with a trade or business or a transaction entered into for profit, if such losses arise from fire, storm, shipwreck, or other casualty, or from theft.

(d) Wagering losses For purposes of losses from wagering transactions, the amount allowed as a deduction for any taxable year— shall be equal to 90 percent of the amount of such losses during such taxable year, and shall be allowed only to the extent of the gains from such transactions during such taxable year. For purposes of paragraph (1), the term “losses from wagering transactions” includes any deduction otherwise allowable under this chapter incurred in carrying on any wagering transaction.

(e) Theft losses For purposes of subsection (a), any loss arising from theft shall be treated as sustained during the taxable year in which the taxpayer discovers such loss.

(f) Capital losses Losses from sales or exchanges of capital assets shall be allowed only to the extent allowed in sections 1211 and 1212.

(g) Worthless securities If any security which is a capital asset becomes worthless during the taxable year, the loss resulting therefrom shall, for purposes of this subtitle, be treated as a loss from the sale or exchange, on the last day of the taxable year, of a capital asset. For purposes of this subsection, the term “security” means— a share of stock in a corporation; a right to subscribe for, or to receive, a share of stock in a corporation; or a bond, debenture, note, or certificate, or other evidence of indebtedness, issued by a corporation or by a government or political subdivision thereof, with interest coupons or in registered form. For purposes of paragraph (1), any security in a corporation affiliated with a taxpayer which is a domestic corporation shall not be treated as a capital asset. For purposes of the preceding sentence, a corporation shall be treated as affiliated with the taxpayer only if— the taxpayer owns directly stock in such corporation meeting the requirements of section 1504(a)(2), and more than 90 percent of the aggregate of its gross receipts for all taxable years has been from sources other than royalties, rents (except rents derived from rental of properties to employees of the corporation in the ordinary course of its operating business), dividends, interest (except interest received on deferred purchase price of operating assets sold), annuities, and gains from sales or exchanges of stocks and securities. In computing gross receipts for purposes of the preceding sentence, gross receipts from sales or exchanges of stocks and securities shall be taken into account only to the extent of gains therefrom.

(h) Treatment of casualty gains and losses Any loss of an individual described in subsection (c)(3) shall be allowed only to the extent that the amount of the loss to such individual arising from each casualty, or from each theft, exceeds $500 ($ 100 for taxable years beginning after December 31, 2009 ). If the personal casualty losses for any taxable year exceed the personal casualty gains for such taxable year, such losses shall be allowed for the taxable year only to the extent of the sum of— the amount of the personal casualty gains for the taxable year, plus so much of such excess as exceeds 10 percent of the adjusted gross income of the individual. If the personal casualty gains for any taxable year exceed the personal casualty losses for such taxable year— all such gains shall be treated as gains from sales or exchanges of capital assets, and all such losses shall be treated as losses from sales or exchanges of capital assets. For purposes of this subsection— The term “personal casualty gain” means the recognized gain from any involuntary conversion of property which is described in subsection (c)(3) arising from fire, storm, shipwreck, or other casualty, or from theft. The term “personal casualty loss” means any loss described in subsection (c)(3). For purposes of paragraph (2), the amount of any personal casualty loss shall be determined after the application of paragraph (1). In any case to which paragraph (2)(A) applies, the deduction for personal casualty losses for any taxable year shall be treated as a deduction allowable in computing adjusted gross income to the extent such losses do not exceed the personal casualty gains for the taxable year. For purposes of this subsection, a husband and wife making a joint return for the taxable year shall be treated as 1 individual. For purposes of paragraph (2), the adjusted gross income of an estate or trust shall be computed in the same manner as in the case of an individual, except that the deductions for costs paid or incurred in connection with the administration of the estate or trust shall be treated as allowable in arriving at adjusted gross income. No loss described in subsection (c)(3) shall be allowed if, at the time of filing the return, such loss has been claimed for estate tax purposes in the estate tax return. Any loss of an individual described in subsection (c)(3) to the extent covered by insurance shall be taken into account under this section only if the individual files a timely insurance claim with respect to such loss. In the case of an individual, except as provided in subparagraph (B), any personal casualty loss which (but for this paragraph) would be deductible in a taxable year beginning after December 31, 2017 , shall be allowed as a deduction under subsection (a) only to the extent it is attributable to a Federally declared disaster (as defined in subsection (i)(5)) or a State declared disaster. If a taxpayer has personal casualty gains for any taxable year to which subparagraph (A) applies— subparagraph (A) shall not apply to the portion of the personal casualty loss not attributable to a Federally declared disaster (as so defined) or a State declared disaster to the extent such loss does not exceed such gains, and in applying paragraph (2) for purposes of subparagraph (A) to the portion of personal casualty loss which is so attributable to such a disaster, the amount of personal casualty gains taken into account under paragraph (2)(A) shall be reduced by the portion of such gains taken into account under clause (i). For purposes of this paragraph— The term “State declared disaster” means, with respect to any State, any natural catastrophe (including any hurricane, tornado, storm, high water, wind-driven water, tidal wave, tsunami, earthquake, volcanic eruption, landslide, mudslide, snowstorm, or drought), or, regardless of cause, any fire, flood, or explosion, in any part of the State, which in the determination of the Governor of such State (or the Mayor, in the case of the District of Columbia) and the Secretary causes damage of sufficient severity and magnitude to warrant the application of the rules of this section. The term “State” includes the District of Columbia, the Commonwealth of Puerto Rico, the Virgin Islands, Guam, American Samoa, and the Commonwealth of the Northern Mariana Islands.

(i) Disaster losses Notwithstanding the provisions of subsection (a), any loss occurring in a disaster area and attributable to a federally declared disaster may, at the election of the taxpayer, be taken into account for the taxable year immediately preceding the taxable year in which the disaster occurred. If an election is made under this subsection, the casualty resulting in the loss shall be treated for purposes of this title as having occurred in the taxable year for which the deduction is claimed. The amount of the loss taken into account in the preceding taxable year by reason of paragraph (1) shall not exceed the uncompensated amount determined on the basis of the facts existing at the date the taxpayer claims the loss. Nothing in this title shall be construed to prohibit the Secretary from prescribing regulations or other guidance under which an appraisal for the purpose of obtaining a loan of Federal funds or a loan guarantee from the Federal Government as a result of a federally declared disaster may be used to establish the amount of any loss described in paragraph (1) or (2). For purposes of this subsection— The term “Federally 1 declared disaster” means any disaster subsequently determined by the President of the United States to warrant assistance by the Federal Government under the Robert T. Stafford Disaster Relief and Emergency Assistance Act. The term “disaster area” means the area so determined to warrant such assistance.

(j) Denial of deduction for losses on certain obligations not in registered form Nothing in subsection (a) or in any other provision of law shall be construed to provide a deduction for any loss sustained on any registration-required obligation unless such obligation is in registered form (or the issuance of such obligation was subject to tax under section 4701). For purposes of this subsection— The term “registration-required obligation” has the meaning given to such term by section 163(f)(2). The term “registered form” has the same meaning as when used in section 163(f). The Secretary may, by regulations, provide that this subsection and section 1287 shall not apply with respect to obligations held by any person if— such person holds such obligations in connection with a trade or business outside the United States, such person holds such obligations as a broker dealer (registered under Federal or State law) for sale to customers in the ordinary course of his trade or business, such person complies with reporting requirements with respect to ownership, transfers, and payments as the Secretary may require, or such person promptly surrenders the obligation to the issuer for the issuance of a new obligation in registered form, but only if such obligations are held under arrangements provided in regulations or otherwise which are designed to assure that such obligations are not delivered to any United States person other than a person described in subparagraph (A), (B), or (C).

(k) Treatment as disaster loss where taxpayer ordered to demolish or relocate residence in disaster area because of disaster In the case of a taxpayer whose residence is located in an area which has been determined by the President of the United States to warrant assistance by the Federal Government under the Robert T. Stafford Disaster Relief and Emergency Assistance Act, if— not later than the 120th day after the date of such determination, the taxpayer is ordered, by the government of the State or any political subdivision thereof in which such residence is located, to demolish or relocate such residence, and the residence has been rendered unsafe for use as a residence by reason of the disaster, any loss attributable to such disaster shall be treated as a loss which arises from a casualty and which is described in subsection (i).

(l) Treatment of certain losses in insolvent financial institutions If— as of the close of the taxable year, it can reasonably be estimated that there is a loss on a qualified individual’s deposit in a qualified financial institution, and such loss is on account of the bankruptcy or insolvency of such institution, then the taxpayer may elect to treat the amount so estimated as a loss described in subsection (c)(3) incurred during the taxable year. For purposes of this subsection, the term “qualified individual” means any individual, except an individual— who owns at least 1 percent in value of the outstanding stock of the qualified financial institution, who is an officer of the qualified financial institution, who is a sibling (whether by the whole or half blood), spouse, aunt, uncle, nephew, niece, ancestor, or lineal descendant of an individual described in subparagraph (A) or (B), or who otherwise is a related person (as defined in section 267(b)) with respect to an individual described in subparagraph (A) or (B). For purposes of this subsection, the term “qualified financial institution” means— any bank (as defined in section 581), any institution described in section 591, any credit union the deposits or accounts in which are insured under Federal or State law or are protected or guaranteed under State law, or any similar institution chartered and supervised under Federal or State law. For purposes of this subsection, the term “deposit” means any deposit, withdrawable account, or withdrawable or repurchasable share. In lieu of any election under paragraph (1), the taxpayer may elect to treat the amount referred to in paragraph (1) for the taxable year as an ordinary loss described in subsection (c)(2) incurred during the taxable year. No election may be made under subparagraph (A) with respect to any loss on a deposit in a qualified financial institution if part or all of such deposit is insured under Federal law. With respect to each financial institution, the aggregate amount of losses attributable to deposits in such financial institution to which an election under subparagraph (A) may be made by the taxpayer for any taxable year shall not exceed $20, 000 ($ 10,000 in the case of a separate return by a married individual). The limitation of the preceding sentence shall be reduced by the amount of any insurance proceeds under any State law which can reasonably be expected to be received with respect to losses on deposits in such institution. Any election by the taxpayer under this subsection for any taxable year— shall apply to all losses for such taxable year of the taxpayer on deposits in the institution with respect to which such election was made, and may be revoked only with the consent of the Secretary. Section 166 shall not apply to any loss to which an election under this subsection applies.

(m) Cross references For special rule for banks with respect to worthless securities, see section 582. For disallowance of deduction for worthlessness of securities to which subsection (g)(2)(C) applies, if issued by a political party or similar organization, see section 271. For special rule for losses on stock in a small business investment company, see section 1242. For special rule for losses of a small business investment company, see section 1243. For special rule for losses on small business stock, see section 1244.

§ 166 Bad debts

(a) General rule There shall be allowed as a deduction any debt which becomes worthless within the taxable year. When satisfied that a debt is recoverable only in part, the Secretary may allow such debt, in an amount not in excess of the part charged off within the taxable year, as a deduction.

(b) Amount of deduction For purposes of subsection (a), the basis for determining the amount of the deduction for any bad debt shall be the adjusted basis provided in section 1011 for determining the loss from the sale or other disposition of property.

([(c) Repealed. Pub. L. 99–514, title VIII, § 805(a), Oct. 22, 1986, 100 Stat. 2361]

(d) Nonbusiness debts In the case of a taxpayer other than a corporation— subsection (a) shall not apply to any nonbusiness debt; and where any nonbusiness debt becomes worthless within the taxable year, the loss resulting therefrom shall be considered a loss from the sale or exchange, during the taxable year, of a capital asset held for not more than 1 year. For purposes of paragraph (1), the term “nonbusiness debt” means a debt other than— a debt created or acquired (as the case may be) in connection with a trade or business of the taxpayer; or a debt the loss from the worthlessness of which is incurred in the taxpayer’s trade or business.

(e) Worthless securities This section shall not apply to a debt which is evidenced by a security as defined in section 165(g)(2)(C).

(f) Cross references For disallowance of deduction for worthlessness of debts owed by political parties and similar organizations, see section 271. For special rule for banks with respect to worthless securities, see section 582.

§ 167 Depreciation

(a) General rule There shall be allowed as a depreciation deduction a reasonable allowance for the exhaustion, wear and tear (including a reasonable allowance for obsolescence)— of property used in the trade or business, or of property held for the production of income.

(b) Cross reference For determination of depreciation deduction in case of property to which section 168 applies, see section 168.

(c) Basis for depreciation The basis on which exhaustion, wear and tear, and obsolescence are to be allowed in respect of any property shall be the adjusted basis provided in section 1011, for the purpose of determining the gain on the sale or other disposition of such property. If any property is acquired subject to a lease— no portion of the adjusted basis shall be allocated to the leasehold interest, and the entire adjusted basis shall be taken into account in determining the depreciation deduction (if any) with respect to the property subject to the lease.

(d) Life tenants and beneficiaries of trusts and estates In the case of property held by one person for life with remainder to another person, the deduction shall be computed as if the life tenant were the absolute owner of the property and shall be allowed to the life tenant. In the case of property held in trust, the allowable deduction shall be apportioned between the income beneficiaries and the trustee in accordance with the pertinent provisions of the instrument creating the trust, or, in the absence of such provisions, on the basis of the trust income allocable to each. In the case of an estate, the allowable deduction shall be apportioned between the estate and the heirs, legatees, and devisees on the basis of the income of the estate allocable to each.

(e) Certain term interests not depreciable No depreciation deduction shall be allowed under this section (and no depreciation or amortization deduction shall be allowed under any other provision of this subtitle) to the taxpayer for any term interest in property for any period during which the remainder interest in such property is held (directly or indirectly) by a related person. This subsection shall not apply to any term interest to which section 273 applies. This subsection shall not apply to the holder of the dividend rights which were separated from any stripped preferred stock to which section 305(e)(1) applies. If, but for this subsection, a depreciation or amortization deduction would be allowable to the taxpayer with respect to any term interest in property— the taxpayer’s basis in such property shall be reduced by any depreciation or amortization deductions disallowed under this subsection, and the basis of the remainder interest in such property shall be increased by the amount of such disallowed deductions (properly adjusted for any depreciation deductions allowable under subsection (d) to the taxpayer). No increase in the basis of the remainder interest shall be made under paragraph (3)(B) for any disallowed deductions attributable to periods during which the term interest was held— by an organization exempt from tax under this subtitle, or by a nonresident alien individual or foreign corporation but only if income from the term interest is not effectively connected with the conduct of a trade or business in the United States. If, but for this subsection, a depreciation or amortization deduction would be allowable to any person with respect to any term interest in property, the principles of subsection (d) shall apply to such person with respect to such term interest. For purposes of this subsection— The term “term interest in property” has the meaning given such term by section 1001(e)(2). The term “related person” means any person bearing a relationship to the taxpayer described in subsection (b) or (e) of section 267. The Secretary shall prescribe such regulations as may be necessary to carry out the purposes of this subsection, including regulations preventing avoidance of this subsection through cross-ownership arrangements or otherwise.

(f) Treatment of certain property excluded from section 197 If a depreciation deduction is allowable under subsection (a) with respect to any computer software, such deduction shall be computed by using the straight line method and a useful life of 36 months. For purposes of this section, the term “computer software” has the meaning given to such term by section 197(e)(3)(B); except that such term shall not include any such software which is an amortizable section 197 intangible. In the case of computer software which would be tax-exempt use property as defined in subsection (h) of section 168 if such section applied to computer software, the useful life under subparagraph (A) shall not be less than 125 percent of the lease term (within the meaning of section 168(i)(3)). If a depreciation deduction is allowable under subsection (a) with respect to any property described in subparagraph (B), (C), or (D) of section 197(e)(4), such deduction shall be computed in accordance with regulations prescribed by the Secretary. If such property would be tax-exempt use property as defined in subsection (h) of section 168 if such section applied to such property, the useful life under such regulations shall not be less than 125 percent of the lease term (within the meaning of section 168(i)(3)). If a depreciation deduction is allowable under subsection (a) with respect to any right described in section 197(e)(6), such deduction shall be computed by using the straight line method and a useful life of 108 months.

(g) Depreciation under income forecast method If the depreciation deduction allowable under this section to any taxpayer with respect to any property is determined under the income forecast method or any similar method— the income from the property to be taken into account in determining the depreciation deduction under such method shall be equal to the amount of income earned in connection with the property before the close of the 10th taxable year following the taxable year in which the property was placed in service, the adjusted basis of the property shall only include amounts with respect to which the requirements of section 461(h) are satisfied, the depreciation deduction under such method for the 10th taxable year beginning after the taxable year in which the property was placed in service shall be equal to the adjusted basis of such property as of the beginning of such 10th taxable year, and such taxpayer shall pay (or be entitled to receive) interest computed under the look-back method of paragraph (2) for any recomputation year. The interest computed under the look-back method of this paragraph for any recomputation year shall be determined by— first determining the depreciation deductions under this section with respect to such property which would have been allowable for prior taxable years if the determination of the amounts so allowable had been made on the basis of the sum of the following (instead of the estimated income from such property)— the actual income earned in connection with such property for periods before the close of the recomputation year, and an estimate of the future income to be earned in connection with such property for periods after the recomputation year and before the close of the 10th taxable year following the taxable year in which the property was placed in service, second, determining (solely for purposes of computing such interest) the overpayment or underpayment of tax for each such prior taxable year which would result solely from the application of subparagraph (A), and then using the adjusted overpayment rate (as defined in section 460(b)(7)), compounded daily, on the overpayment or underpayment determined under subparagraph (B). For purposes of the preceding sentence, any cost incurred after the property is placed in service (which is not treated as a separate property under paragraph (5)) shall be taken into account by discounting (using the Federal mid-term rate determined under section 1274(d) as of the time such cost is incurred) such cost to its value as of the date the property is placed in service. The taxpayer may elect with respect to any property to have the preceding sentence not apply to such property. Paragraph (1)(D) shall not apply with respect to any property which had a cost basis of $100,000 or less. For purposes of this subsection, except as provided in regulations, the term “recomputation year” means, with respect to any property, the 3d and the 10th taxable years beginning after the taxable year in which the property was placed in service, unless the actual income earned in connection with the property for the period before the close of such 3d or 10th taxable year is within 10 percent of the income earned in connection with the property for such period which was taken into account under paragraph (1)(A). For purposes of this subsection, the following costs shall be treated as separate properties: Any costs incurred with respect to any property after the 10th taxable year beginning after the taxable year in which the property was placed in service. Any costs incurred after the property is placed in service and before the close of such 10th taxable year if such costs are significant and give rise to a significant increase in the income from the property which was not included in the estimated income from the property. In the case of property which is 1 or more episodes in a television series, income from syndicating such series shall not be required to be taken into account under this subsection before the earlier of— the 4th taxable year beginning after the date the first episode in such series is placed in service, or the earliest taxable year in which the taxpayer has an arrangement relating to the future syndication of such series. For purposes of this subsection, in the case of television and motion picture films, the income from the property shall include income from the exploitation of characters, designs, scripts, scores, and other incidental income associated with such films, but only to the extent that such income is earned in connection with the ultimate use of such items by, or the ultimate sale of merchandise to, persons who are not related persons (within the meaning of section 267(b)) to the taxpayer. For purposes of subtitle F (other than sections 6654 and 6655), any interest required to be paid by the taxpayer under paragraph (1) for any recomputation year shall be treated as an increase in the tax imposed by this chapter for such year. For purposes of this subsection, the income with respect to any property shall be the taxpayer’s gross income from such property. For purposes of paragraph (2), determinations of the amount of income earned in connection with any property shall be made in the same manner as for purposes of applying the income forecast method; except that any income from the disposition of such property shall be taken into account. Rules similar to the rules of section 460(b)(4) shall apply for purposes of this subsection. The depreciation deduction allowable under this section may be determined under the income forecast method or any similar method only with respect to— property described in paragraph (3) or (4) of section 168(f), copyrights, books, patents, and other property specified in regulations. Such methods may not be used with respect to any amortizable section 197 intangible (as defined in section 197(c)). For purposes of determining the depreciation deduction allowable with respect to a property under this subsection, the taxpayer may include participations and residuals with respect to such property in the adjusted basis of such property for the taxable year in which the property is placed in service, but only to the extent that such participations and residuals relate to income estimated (for purposes of this subsection) to be earned in connection with the property before the close of the 10th taxable year referred to in paragraph (1)(A). For purposes of this paragraph, the term “participations and residuals” means, with respect to any property, costs the amount of which by contract varies with the amount of income earned in connection with such property. If the adjusted basis of any property is determined under this paragraph, paragraph (4) shall be applied by substituting “for each taxable year in such period” for “for such period”. Notwithstanding subparagraph (A), the taxpayer may exclude participations and residuals from the adjusted basis of such property and deduct such participations and residuals in the taxable year that such participations and residuals are paid. Deductions computed in accordance with this paragraph shall be allowable notwithstanding paragraph (1)(B), section 263, 263A, 404, 419, or 461(h). The Secretary shall prescribe appropriate adjustments to the basis of property and to the look-back method for the additional amounts allowable as a deduction solely by reason of this paragraph. If an election is in effect under this paragraph for any taxable year, then, notwithstanding paragraph (1), any expense which— is paid or incurred by the taxpayer in creating or acquiring any applicable musical property placed in service during the taxable year, and is otherwise properly chargeable to capital account, shall be amortized ratably over the 5-year period beginning with the month in which the property was placed in service. The preceding sentence shall not apply to any expense which, without regard to this paragraph, would not be allowable as a deduction. Except as provided in this paragraph, no depreciation or amortization deduction shall be allowed with respect to any expense to which subparagraph (A) applies. For purposes of this paragraph— The term “applicable musical property” means any musical composition (including any accompanying words), or any copyright with respect to a musical composition, which is property to which this subsection applies without regard to this paragraph. Such term shall not include any property— with respect to which expenses are treated as qualified creative expenses to which section 263A(h) applies, to which a simplified procedure established under section 263A(i)(2) 1 applies, or which is an amortizable section 197 intangible (as defined in section 197(c)). An election under this paragraph shall be made at such time and in such form as the Secretary may prescribe and shall apply to all applicable musical property placed in service during the taxable year for which the election applies. An election may not be made under this paragraph for any taxable year beginning after December 31, 2010 .

(h) Amortization of geological and geophysical expenditures Any geological and geophysical expenses paid or incurred in connection with the exploration for, or development of, oil or gas within the United States (as defined in section 638) shall be allowed as a deduction ratably over the 24-month period beginning on the date that such expense was paid or incurred. For purposes of paragraph (1), any payment paid or incurred during the taxable year shall be treated as paid or incurred on the mid-point of such taxable year. Except as provided in this subsection, no depreciation or amortization deduction shall be allowed with respect to such payments. If any property with respect to which geological and geophysical expenses are paid or incurred is retired or abandoned during the 24-month period described in paragraph (1), no deduction shall be allowed on account of such retirement or abandonment and the amortization deduction under this subsection shall continue with respect to such payment. In the case of a major integrated oil company, paragraphs (1) and (4) shall be applied by substituting “7-year” for “24 month”. For purposes of this paragraph, the term “major integrated oil company” means, with respect to any taxable year, a producer of crude oil— which has an average daily worldwide production of crude oil of at least 500,000 barrels for the taxable year, which had gross receipts in excess of $1,000,000,000 for its last taxable year ending during calendar year 2005, and to which subsection (c) of section 613A does not apply by reason of paragraph (4) of section 613A(d), determined— by substituting “15 percent” for “5 percent” each place it occurs in paragraph (3) of section 613A(d), and without regard to whether subsection (c) of section 613A does not apply by reason of paragraph (2) of section 613A(d). For purposes of clauses (i) and (ii), all persons treated as a single employer under subsections (a) and (b) of section 52 shall be treated as 1 person and, in case of a short taxable year, the rule under section 448(c)(3)(B) shall apply.

(i) Cross references For additional rule applicable to depreciation of improvements in the case of mines, oil and gas wells, other natural deposits, and timber, see section 611. For amortization of goodwill and certain other intangibles, see section 197.

§ 168 Accelerated cost recovery system

(a) General rule Except as otherwise provided in this section, the depreciation deduction provided by section 167(a) for any tangible property shall be determined by using— the applicable depreciation method, the applicable recovery period, and the applicable convention.

(b) Applicable depreciation method For purposes of this section— Except as provided in paragraphs (2) and (3), the applicable depreciation method is— the 200 percent declining balance method, switching to the straight line method for the 1st taxable year for which using the straight line method with respect to the adjusted basis as of the beginning of such year will yield a larger allowance. Paragraph (1) shall be applied by substituting “150 percent” for “200 percent” in the case of— any 15-year or 20-year property not referred to in paragraph (3), any property (other than property described in paragraph (3)) which is a qualified smart electric meter or qualified smart electric grid system, or any property (other than property described in paragraph (3)) with respect to which the taxpayer elects under paragraph (5) to have the provisions of this paragraph apply. The applicable depreciation method shall be the straight line method in the case of the following property: Nonresidential real property. Residential rental property. Any railroad grading or tunnel bore. Property with respect to which the taxpayer elects under paragraph (5) to have the provisions of this paragraph apply. Property described in subsection (e)(3)(D)(ii). Water utility property described in subsection (e)(5). Qualified improvement property described in subsection (e)(6). Salvage value shall be treated as zero. An election under paragraph (2)(D) 1 or (3)(D) may be made with respect to 1 or more classes of property for any taxable year and once made with respect to any class shall apply to all property in such class placed in service during such taxable year. Such an election, once made, shall be irrevocable.

(c) Applicable recovery period For purposes of this section, the applicable recovery period shall be determined in accordance with the following table: In the case of: The applicable recovery period is: 3-year property 3 years 5-year property 5 years 7-year property 7 years 10-year property 10 years 15-year property 15 years 20-year property 20 years Water utility property 25 years Residential rental property 27.5 years Nonresidential real property 39 years. Any railroad grading or tunnel bore 50 years.

(d) Applicable convention For purposes of this section— Except as otherwise provided in this subsection, the applicable convention is the half-year convention. In the case of— nonresidential real property, residential rental property, and any railroad grading or tunnel bore, the applicable convention is the mid-month convention. Except as provided in regulations, if during any taxable year— the aggregate bases of property to which this section applies placed in service during the last 3 months of the taxable year, exceed 40 percent of the aggregate bases of property to which this section applies placed in service during such taxable year, the applicable convention for all property to which this section applies placed in service during such taxable year shall be the mid-quarter convention. For purposes of subparagraph (A), there shall not be taken into account— any nonresidential real property, residential rental property, and railroad grading or tunnel bore, and any other property placed in service and disposed of during the same taxable year. The half-year convention is a convention which treats all property placed in service during any taxable year (or disposed of during any taxable year) as placed in service (or disposed of) on the mid-point of such taxable year. The mid-month convention is a convention which treats all property placed in service during any month (or disposed of during any month) as placed in service (or disposed of) on the mid-point of such month. The mid-quarter convention is a convention which treats all property placed in service during any quarter of a taxable year (or disposed of during any quarter of a taxable year) as placed in service (or disposed of) on the mid-point of such quarter.

(e) Classification of property For purposes of this section— Except as otherwise provided in this subsection, property shall be classified under the following table: Property shall be treated as: If such property has a class life (in years) of: 3-year property 4 or less 5-year property More than 4 but less than 10 7-year property 10 or more but less than 16 10-year property 16 or more but less than 20 15-year property 20 or more but less than 25 20-year property 25 or more. The term “residential rental property” means any building or structure if 80 percent or more of the gross rental income from such building or structure for the taxable year is rental income from dwelling units. For purposes of clause (i)— the term “dwelling unit” means a house or apartment used to provide living accommodations in a building or structure, but does not include a unit in a hotel, motel, or other establishment more than one-half of the units in which are used on a transient basis, and if any portion of the building or structure is occupied by the taxpayer, the gross rental income from such building or structure shall include the rental value of the portion so occupied. The term “nonresidential real property” means section 1250 property which is not— residential rental property, or property with a class life of less than 27.5 years. The term “3-year property” includes— any race horse— which is placed in service before January 1, 2022 , and which is placed in service after December 31, 2021 , and which is more than 2 years old at the time such horse is placed in service by such purchaser, any horse other than a race horse which is more than 12 years old at the time it is placed in service, and any qualified rent-to-own property. The term “5-year property” includes— any automobile or light general purpose truck, any semi-conductor manufacturing equipment, any computer-based telephone central office switching equipment, any qualified technological equipment, any section 1245 property used in connection with research and experimentation, any property which— is described in paragraph (15) of section 48( l ) (as in effect on the day before the date of the enactment of the Revenue Reconciliation Act of 1990) and has a power production capacity of not greater than 80 megawatts, or is described in section 48( l )(3)(A)(ix) (as in effect on the day before the date of the enactment of the Revenue Reconciliation Act of 1990), any machinery or equipment (other than any grain bin, cotton ginning asset, fence, or other land improvement) which is used in a farming business (as defined in section 263A(e)(4)), the original use of which commences with the taxpayer after December 31, 2017 , and any qualified facility (as defined in section 45Y(b)(1)(A)), any qualified property (as defined in subsection (b)(2) of section 48E) which is a qualified investment (as defined in subsection (b)(1) of such section), or any energy storage technology (as defined in subsection (c)(2) of such section). Nothing in any provision of law shall be construed to treat property as not being described in subclause (I) or (II) of clause (vi) 1 by reason of being public utility property. The term “7-year property” includes— any railroad track, any motorsports entertainment complex, any Alaska natural gas pipeline, any natural gas gathering line the original use of which commences with the taxpayer after April 11, 2005 , and any property which— does not have a class life, and is not otherwise classified under paragraph (2) or this paragraph. The term “10-year property” includes— any single purpose agricultural or horticultural structure (within the meaning of subsection (i)(13)), any tree or vine bearing fruit or nuts, any qualified smart electric meter, and any qualified smart electric grid system. The term “15-year property” includes— any municipal wastewater treatment plant, any telephone distribution plant and comparable equipment used for 2-way exchange of voice and data communications, any section 1250 property which is a retail motor fuels outlet (whether or not food or other convenience items are sold at the outlet), initial clearing and grading land improvements with respect to gas utility property, any section 1245 property (as defined in section 1245(a)(3)) used in the transmission at 69 or more kilovolts of electricity for sale and the original use of which commences with the taxpayer after April 11, 2005 , any natural gas distribution line the original use of which commences with the taxpayer after April 11, 2005 , and which is placed in service before January 1, 2011 , and any qualified improvement property. The term “20-year property” means initial clearing and grading land improvements with respect to any electric utility transmission and distribution plant. The term “railroad grading or tunnel bore” means all improvements resulting from excavations (including tunneling), construction of embankments, clearings, diversions of roads and streams, sodding of slopes, and from similar work necessary to provide, construct, reconstruct, alter, protect, improve, replace, or restore a roadbed or right-of-way for railroad track. The term “water utility property” means property— which is an integral part of the gathering, treatment, or commercial distribution of water, and which, without regard to this paragraph, would be 20-year property, and any municipal sewer. The term “qualified improvement property” means any improvement made by the taxpayer to an interior portion of a building which is nonresidential real property if such improvement is placed in service after the date such building was first placed in service. Such term shall not include any improvement for which the expenditure is attributable to— the enlargement of the building, any elevator or escalator, or the internal structural framework of the building.

(f) Property to which section does not apply This section shall not apply to— Any property if— the taxpayer elects to exclude such property from the application of this section, and for the 1st taxable year for which a depreciation deduction would be allowable with respect to such property in the hands of the taxpayer, the property is properly depreciated under the unit-of-production method or any method of depreciation not expressed in a term of years (other than the retirement-replacement-betterment method or similar method). Any public utility property (within the meaning of subsection (i)(10)) if the taxpayer does not use a normalization method of accounting. Any motion picture film or video tape. Any works which result from the fixation of a series of musical, spoken, or other sounds, regardless of the nature of the material (such as discs, tapes, or other phonorecordings) in which such sounds are embodied. Property— described in paragraph (4) of section 168(e) (as in effect before the amendments made by the Tax Reform Act of 1986), or which would be described in such paragraph if such paragraph were applied by substituting “1987” for “1981” and “1986” for “1980” each place such terms appear. Clause (ii) of subparagraph (A) shall not apply to— any residential rental property or nonresidential real property, any property if, for the 1st taxable year in which such property is placed in service— the amount allowable as a deduction under this section (as in effect before the date of the enactment of this paragraph) with respect to such property is greater than, the amount allowable as a deduction under this section (as in effect on or after such date and using the half-year convention) for such taxable year, or any property to which this section (as amended by the Tax Reform Act of 1986) applied in the hands of the transferor. In the case of any property to which this section would apply but for this paragraph, the depreciation deduction under section 167 shall be determined under the provisions of this section as in effect before the amendments made by section 201 of the Tax Reform Act of 1986.

(g) Alternative depreciation system for certain property In the case of— any tangible property which during the taxable year is used predominantly outside the United States, any tax-exempt use property, any tax-exempt bond financed property, any imported property covered by an Executive order under paragraph (6), any property to which an election under paragraph (7) applies, any property described in paragraph (8), and any property with a recovery period of 10 years or more which is held by an electing farming business (as defined in section 163(j)(7)(C)), the depreciation deduction provided by section 167(a) shall be determined under the alternative depreciation system. For purposes of paragraph (1), the alternative depreciation system is depreciation determined by using— the straight line method (without regard to salvage value), the applicable convention determined under subsection (d), and a recovery period determined under the following table: In the case of: The recovery period shall be: (i) Property not described in clause (ii) or (iii) The class life. (ii) Personal property with no class life 12 years. (iii) Residential rental property 30 years (iv) Nonresidential real property 40 years (v) Any railroad grading or tunnel bore or water utility property 50 years In the case of any tax-exempt use property subject to a lease, the recovery period used for purposes of paragraph (2) shall (notwithstanding any other subparagraph of this paragraph) in no event be less than 125 percent of the lease term. For purposes of paragraph (2), in the case of property described in any of the following subparagraphs of subsection (e)(3), the class life shall be determined as follows: If property is described in subparagraph: The class life is: (A)(iii) 4 (B)(ii) 5 (B)(iii) 9.5 (B)(vii) 10 (C)(i) 10 (C)(iii) 22 (C)(iv) 14 (D)(i) 15 (D)(ii) 20 (E)(i) 24 (E)(ii) 24 (E)(iii) 20 (E)(iv) 20 (E)(v) 30 (E)(vi) 35 (E)(vii) 20 (F) 25 In the case of any qualified technological equipment, the recovery period used for purposes of paragraph (2) shall be 5 years. In the case of any automobile or light general purpose truck, the recovery period used for purposes of paragraph (2) shall be 5 years. In the case of any section 1245 property which is real property with no class life, the recovery period used for purposes of paragraph (2) shall be 40 years. Subparagraph (A) of paragraph (1) shall not apply to— any aircraft which is registered by the Administrator of the Federal Aviation Agency and which is operated to and from the United States or is operated under contract with the United States; rolling stock which is used within and without the United States and which is— of a rail carrier subject to part A of subtitle IV of title 49, or of a United States person (other than a corporation described in clause (i)) but only if the rolling stock is not leased to one or more foreign persons for periods aggregating more than 12 months in any 24-month period; any vessel documented under the laws of the United States which is operated in the foreign or domestic commerce of the United States; any motor vehicle of a United States person (as defined in section 7701(a)(30)) which is operated to and from the United States; any container of a United States person which is used in the transportation of property to and from the United States; any property (other than a vessel or an aircraft) of a United States person which is used for the purpose of exploring for, developing, removing, or transporting resources from the outer Continental Shelf (within the meaning of section 2 of the Outer Continental Shelf Lands Act, as amended and supplemented; ( 43 U.S.C. 1331 )); any property which is owned by a domestic corporation or by a United States citizen (other than a citizen entitled to the benefits of section 931 or 933) and which is used predominantly in a possession of the United States by such a corporation or such a citizen, or by a corporation created or organized in, or under the law of, a possession of the United States; any communications satellite (as defined in section 103(3) of the Communications Satellite Act of 1962, 47 U.S.C. 702(3) ), or any interest therein, of a United States person; any cable, or any interest therein, of a domestic corporation engaged in furnishing telephone service to which section 168(i)(10)(C) applies (or of a wholly owned domestic subsidiary of such a corporation), if such cable is part of a submarine cable system which constitutes part of a communication link exclusively between the United States and one or more foreign countries; any property (other than a vessel or an aircraft) of a United States person which is used in international or territorial waters within the northern portion of the Western Hemisphere for the purpose of exploring for, developing, removing, or transporting resources from ocean waters or deposits under such waters; any property described in section 48( l )(3)(A)(ix) (as in effect on the day before the date of the enactment of the Revenue Reconciliation Act of 1990) which is owned by a United States person and which is used in international or territorial waters to generate energy for use in the United States; and any satellite (not described in subparagraph (H)) or other spacecraft (or any interest therein) held by a United States person if such satellite or other spacecraft was launched from within the United States. For purposes of subparagraph (J), the term “northern portion of the Western Hemisphere” means the area lying west of the 30th meridian west of Greenwich, east of the international dateline, and north of the Equator, but not including any foreign country which is a country of South America. For purposes of this subsection— Except as otherwise provided in this paragraph, the term “tax-exempt bond financed property” means any property to the extent such property is financed (directly or indirectly) by an obligation the interest on which is exempt from tax under section 103(a). For purposes of subparagraph (A), the proceeds of any obligation shall be treated as used to finance property acquired in connection with the issuance of such obligation in the order in which such property is placed in service. The term “tax-exempt bond financed property” shall not include any qualified residential rental project (within the meaning of section 142(a)(7)). If the President determines that a foreign country— maintains nontariff trade restrictions, including variable import fees, which substantially burden United States commerce in a manner inconsistent with provisions of trade agreements, or engages in discriminatory or other acts (including tolerance of international cartels) or policies unjustifiably restricting United States commerce, the President may by Executive order provide for the application of paragraph (1)(D) to any article or class of articles manufactured or produced in such foreign country for such period as may be provided by such Executive order. Any period specified in the preceding sentence shall not apply to any property ordered before (or the construction, reconstruction, or erection of which began before) the date of the Executive order unless the President determines an earlier date to be in the public interest and specifies such date in the Executive order. For purposes of this subsection, the term “imported property” means any property if— such property was completed outside the United States, or less than 50 percent of the basis of such property is attributable to value added within the United States. For purposes of this subparagraph, the term “United States” includes the Commonwealth of Puerto Rico and the possessions of the United States. If the taxpayer makes an election under this paragraph with respect to any class of property for any taxable year, the alternative depreciation system under this subsection shall apply to all property in such class placed in service during such taxable year. Notwithstanding the preceding sentence, in the case of nonresidential real property or residential rental property, such election may be made separately with respect to each property. An election under subparagraph (A), once made, shall be irrevocable. The property described in this paragraph shall consist of any nonresidential real property, residential rental property, and qualified improvement property held by an electing real property trade or business (as defined in 163(j)(7)(B)).

(h) Tax-exempt use property For purposes of this section— Except as otherwise provided in this subsection, the term “tax-exempt use property” means that portion of any tangible property (other than nonresidential real property) leased to a tax-exempt entity. In the case of nonresidential real property, the term “tax-exempt use property” means that portion of the property leased to a tax-exempt entity in a disqualified lease. For purposes of this subparagraph, the term “disqualified lease” means any lease of the property to a tax-exempt entity, but only if— part or all of the property was financed (directly or indirectly) by an obligation the interest on which is exempt from tax under section 103(a) and such entity (or a related entity) participated in such financing, under such lease there is a fixed or determinable price purchase or sale option which involves such entity (or a related entity) or there is the equivalent of such an option, such lease has a lease term in excess of 20 years, or such lease occurs after a sale (or other transfer) of the property by, or lease of the property from, such entity (or a related entity) and such property has been used by such entity (or a related entity) before such sale (or other transfer) or lease. Clause (i) shall apply to any property only if the portion of such property leased to tax-exempt entities in disqualified leases is more than 35 percent of the property. For purposes of this subparagraph, improvements to a property (other than land) shall not be treated as a separate property. Subclause (IV) of clause (ii) shall not apply to any property which is leased within 3 months after the date such property is first used by the tax-exempt entity (or a related entity). Property shall not be treated as tax-exempt use property merely by reason of a short-term lease. For purposes of clause (i), the term “short-term lease” means any lease the term of which is— less than 3 years, and less than the greater of 1 year or 30 percent of the property’s present class life. In the case of nonresidential real property and property with no present class life, subclause (II) shall not apply. The term “tax-exempt use property” shall not include any portion of a property if such portion is predominantly used by the tax-exempt entity (directly or through a partnership of which such entity is a partner) in an unrelated trade or business the income of which is subject to tax under section 511. For purposes of subparagraph (B)(iii), any portion of a property so used shall not be treated as leased to a tax-exempt entity in a disqualified lease. For purposes of this paragraph, the term “nonresidential real property” includes residential rental property. For purposes of this subsection, the term “tax-exempt entity” means— the United States, any State or political subdivision thereof, any possession of the United States, or any agency or instrumentality of any of the foregoing, an organization (other than a cooperative described in section 521) which is exempt from tax imposed by this chapter, any foreign person or entity, and any Indian tribal government described in section 7701(a)(40). For purposes of applying this subsection, any Indian tribal government referred to in clause (iv) shall be treated in the same manner as a State. Clause (iii) of subparagraph (A) shall not apply with respect to any property if more than 50 percent of the gross income for the taxable year derived by the foreign person or entity from the use of such property is— subject to tax under this chapter, or included under section 951 in the gross income of a United States shareholder for the taxable year with or within which ends the taxable year of the controlled foreign corporation in which such income was derived. For purposes of the preceding sentence, any exclusion or exemption shall not apply for purposes of determining the amount of the gross income so derived, but shall apply for purposes of determining the portion of such gross income subject to tax under this chapter. For purposes of this paragraph, the term “foreign person or entity” means— any foreign government, any international organization, or any agency or instrumentality of any of the foregoing, and any person who is not a United States person. Such term does not include any foreign partnership or other foreign pass-thru entity. For purposes of this subsection, a corporation shall not be treated as an instrumentality of the United States or of any State or political subdivision thereof if— all of the activities of such corporation are subject to tax under this chapter, and a majority of the board of directors of such corporation is not selected by the United States or any State or political subdivision thereof. For purposes of this subsection, an organization shall be treated as an organization described in subparagraph (A)(ii) with respect to any property (other than property held by such organization) if such organization was an organization (other than a cooperative described in section 521) exempt from tax imposed by this chapter at any time during the 5-year period ending on the date such property was first used by such organization. The preceding sentence and subparagraph (D)(ii) shall not apply to the Federal Home Loan Mortgage Corporation. In the case of an organization formerly exempt from tax under section 501(a) as an organization described in section 501(c)(12), clause (i) shall not apply to such organization with respect to any property if such organization elects not to be exempt from tax under section 501(a) during the tax-exempt use period with respect to such property. For purposes of subclause (I), the term “tax-exempt use period” means the period beginning with the taxable year in which the property described in subclause (I) is first used by the organization and ending with the close of the 15th taxable year following the last taxable year of the applicable recovery period of such property. Any election under subclause (I), once made, shall be irrevocable. Any organization which is engaged in activities substantially similar to those engaged in by a predecessor organization shall succeed to the treatment under this subparagraph of such predecessor organization. For purposes of this subparagraph, property shall be treated as first used by the organization— when the property is first placed in service under a lease to such organization, or in the case of property leased to (or held by) a partnership (or other pass-thru entity) in which the organization is a member, the later of when such property is first used by such partnership or pass-thru entity or when such organization is first a member of such partnership or pass-thru entity. For purposes of this section, the term “tax-exempt use property” shall not include any qualified technological equipment if the lease to the tax-exempt entity has a lease term of 5 years or less. Notwithstanding subsection (i)(3)(A)(i), in determining a lease term for purposes of the preceding sentence, there shall not be taken into account any option of the lessee to renew at the fair market value rent determined at the time of renewal; except that the aggregate period not taken into account by reason of this sentence shall not exceed 24 months. For purposes of subparagraph (A), the term “qualified technological equipment” shall not include any property leased to a tax-exempt entity if— part or all of the property was financed (directly or indirectly) by an obligation the interest on which is exempt from tax under section 103(a), such lease occurs after a sale (or other transfer) of the property by, or lease of such property from, such entity (or related entity) and such property has been used by such entity (or a related entity) before such sale (or other transfer) or lease, or such tax-exempt entity is the United States or any agency or instrumentality of the United States. Subclause (II) of clause (i) shall not apply to any property which is leased within 3 months after the date such property is first used by the tax-exempt entity (or a related entity). For purposes of this subsection— Each governmental unit and each agency or instrumentality of a governmental unit is related to each other such unit, agency, or instrumentality which directly or indirectly derives its powers, rights, and duties in whole or in part from the same sovereign authority. For purposes of clause (i), the United States, each State, and each possession of the United States shall be treated as a separate sovereign authority. Any entity not described in subparagraph (A)(i) is related to any other entity if the 2 entities have— significant common purposes and substantial common membership, or directly or indirectly substantial common direction or control. An entity is related to another entity if either entity owns (directly or through 1 or more entities) a 50 percent or greater interest in the capital or profits of the other entity. For purposes of clause (i), entities treated as related under subparagraph (A) or (B) shall be treated as 1 entity. An entity is related to another entity with respect to a transaction if such transaction is part of an attempt by such entities to avoid the application of this subsection. For purposes of this subsection— In the case of any property which is leased to a partnership, the determination of whether any portion of such property is tax-exempt use property shall be made by treating each tax-exempt entity partner’s proportionate share (determined under paragraph (6)(C)) of such property as being leased to such partner. Rules similar to the rules of subparagraph (A) shall also apply in the case of any pass-thru entity other than a partnership and in the case of tiered partnerships and other entities. Unless it is otherwise established to the satisfaction of the Secretary, it shall be presumed that the partners of a foreign partnership (and the beneficiaries of any other foreign pass-thru entity) are persons who are not United States persons. For purposes of this subsection, if— any property which (but for this subparagraph) is not tax-exempt use property is owned by a partnership which has both a tax-exempt entity and a person who is not a tax-exempt entity as partners, and any allocation to the tax-exempt entity of partnership items is not a qualified allocation, an amount equal to such tax-exempt entity’s proportionate share of such property shall (except as provided in paragraph (1)(D)) be treated as tax-exempt use property. For purposes of subparagraph (A), the term “qualified allocation” means any allocation to a tax-exempt entity which— is consistent with such entity’s being allocated the same distributive share of each item of income, gain, loss, deduction, credit, and basis and such share remains the same during the entire period the entity is a partner in the partnership, and has substantial economic effect within the meaning of section 704(b)(2). For purposes of this subparagraph, items allocated under section 704(c) shall not be taken into account. For purposes of subparagraph (A), a tax-exempt entity’s proportionate share of any property owned by a partnership shall be determined on the basis of such entity’s share of partnership items of income or gain (excluding gain allocated under section 704(c)), whichever results in the largest proportionate share. For purposes of clause (i), if a tax-exempt entity’s share of partnership items of income or gain (excluding gain allocated under section 704(c)) may vary during the period such entity is a partner in the partnership, such share shall be the highest share such entity may receive. For purposes of this subsection, in the case of any property which is owned by a partnership which has both a tax-exempt entity and a person who is not a tax-exempt entity as partners, the determination of whether such property is used in an unrelated trade or business of such an entity shall be made without regard to section 514. Rules similar to the rules of subparagraphs (A), (B), (C), and (D) shall also apply in the case of any pass-thru entity other than a partnership and in the case of tiered partnerships and other entities. For purposes of this paragraph and paragraph (5), except as otherwise provided in this subparagraph, any tax-exempt controlled entity shall be treated as a tax-exempt entity. If a tax-exempt controlled entity makes an election under this clause— such entity shall not be treated as a tax-exempt entity for purposes of this paragraph and paragraph (5), and any gain recognized by a tax-exempt entity on any disposition of an interest in such entity (and any dividend or interest received or accrued by a tax-exempt entity from such tax-exempt controlled entity) shall be treated as unrelated business taxable income for purposes of section 511. Any such election shall be irrevocable and shall bind all tax-exempt entities holding interests in such tax-exempt controlled entity. For purposes of subclause (II), there shall only be taken into account dividends which are properly allocable to income of the tax-exempt controlled entity which was not subject to tax under this chapter. The term “tax-exempt controlled entity” means any corporation (which is not a tax-exempt entity determined without regard to this subparagraph and paragraph (2)(E)) if 50 percent or more (in value) of the stock in such corporation is held by 1 or more tax-exempt entities (other than a foreign person or entity). For purposes of subclause (I), in the case of a corporation the stock of which is publicly traded on an established securities market, stock held by a tax-exempt entity shall not be taken into account unless such entity holds at least 5 percent (in value) of the stock in such corporation. For purposes of this subclause, related entities (within the meaning of paragraph (4)) shall be treated as 1 entity. For purposes of this clause, a tax-exempt entity shall be treated as holding stock which it holds through application of section 318 (determined without regard to the 50-percent limitation contained in subsection (a)(2)(C) thereof). For purposes of determining whether there is a qualified allocation under subparagraph (B), the regulations prescribed under paragraph (8) for purposes of this paragraph— shall set forth the proper treatment for partnership guaranteed payments, and may provide for the exclusion or segregation of items. For purposes of this subsection, the term “lease” includes any grant of a right to use property. The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this subsection.

(i) Definitions and special rules For purposes of this section— Except as provided in this section, the term “class life” means the class life (if any) which would be applicable with respect to any property as of January 1, 1986 , under subsection (m) of section 167 (determined without regard to paragraph (4) and as if the taxpayer had made an election under such subsection). The Secretary, through an office established in the Treasury, shall monitor and analyze actual experience with respect to all depreciable assets. The reference in this paragraph to subsection (m) of section 167 shall be treated as a reference to such subsection as in effect on the day before the date of the enactment of the Revenue Reconciliation Act of 1990. The term “qualified technological equipment” means— any computer or peripheral equipment, any high technology telephone station equipment installed on the customer’s premises, and any high technology medical equipment. For purposes of this paragraph— The term “computer or peripheral equipment” means— any computer, and any related peripheral equipment. The term “computer” means a programmable electronically activated device which— is capable of accepting information, applying prescribed processes to the information, and supplying the results of these processes with or without human intervention, and consists of a central processing unit containing extensive storage, logic, arithmetic, and control capabilities. The term “related peripheral equipment” means any auxiliary machine (whether on-line or off-line) which is designed to be placed under the control of the central processing unit of a computer. The term “computer or peripheral equipment” shall not include— any equipment which is an integral part of other property which is not a computer, typewriters, calculators, adding and accounting machines, copiers, duplicating equipment, and similar equipment, and equipment of a kind used primarily for amusement or entertainment of the user. For purposes of this paragraph, the term “high technology medical equipment” means any electronic, electromechanical, or computer-based high technology equipment used in the screening, monitoring, observation, diagnosis, or treatment of patients in a laboratory, medical, or hospital environment. In determining a lease term— there shall be taken into account options to renew, the term of a lease shall include the term of any service contract or similar arrangement (whether or not treated as a lease under section 7701(e))— which is part of the same transaction (or series of related transactions) which includes the lease, and which is with respect to the property subject to the lease or substantially similar property, and 2 or more successive leases which are part of the same transaction (or a series of related transactions) with respect to the same or substantially similar property shall be treated as 1 lease. For purposes of clause (i) of subparagraph (A), in the case of nonresidential real property or residential rental property, there shall not be taken into account any option to renew at fair market value, determined at the time of renewal. Under regulations, a taxpayer may maintain 1 or more general asset accounts for any property to which this section applies. Except as provided in regulations, all proceeds realized on any disposition of property in a general asset account shall be included in income as ordinary income. The Secretary shall, by regulations, provide for the method of determining the deduction allowable under section 167(a) with respect to any tangible property for any taxable year (and the succeeding taxable years) during which such property changes status under this section but continues to be held by the same person. In the case of any addition to (or improvement of) any property— any deduction under subsection (a) for such addition or improvement shall be computed in the same manner as the deduction for such property would be computed if such property had been placed in service at the same time as such addition or improvement, and the applicable recovery period for such addition or improvement shall begin on the later of— the date on which such addition (or improvement) is placed in service, or the date on which the property with respect to which such addition (or improvement) was made is placed in service. In the case of any property transferred in a transaction described in subparagraph (B), the transferee shall be treated as the transferor for purposes of computing the depreciation deduction determined under this section with respect to so much of the basis in the hands of the transferee as does not exceed the adjusted basis in the hands of the transferor. In any case where this section as in effect before the amendments made by section 201 of the Tax Reform Act of 1986 applied to the property in the hands of the transferor, the reference in the preceding sentence to this section shall be treated as a reference to this section as so in effect. The transactions described in this subparagraph are— any transaction described in section 332, 351, 361, 721, or 731, and any transaction between members of the same affiliated group during any taxable year for which a consolidated return is made by such group. Under regulations, property which is disposed of and then reacquired by the taxpayer shall be treated for purposes of computing the deduction allowable under subsection (a) as if such property had not been disposed of. In the case of any building erected (or improvements made) on leased property, if such building or improvement is property to which this section applies, the depreciation deduction shall be determined under the provisions of this section. An improvement— which is made by the lessor of leased property for the lessee of such property, and which is irrevocably disposed of or abandoned by the lessor at the termination of the lease by such lessee, shall be treated for purposes of determining gain or loss under this title as disposed of by the lessor when so disposed of or abandoned. For treatment of qualified long-term real property constructed or improved in connection with cash or rent reduction from lessor to lessee, see section 110(b). In order to use a normalization method of accounting with respect to any public utility property for purposes of subsection (f)(2)— the taxpayer must, in computing its tax expense for purposes of establishing its cost of service for ratemaking purposes and reflecting operating results in its regulated books of account, use a method of depreciation with respect to such property that is the same as, and a depreciation period for such property that is no shorter than, the method and period used to compute its depreciation expense for such purposes; and if the amount allowable as a deduction under this section with respect to such property (respecting all elections made by the taxpayer under this section) differs from the amount that would be allowable as a deduction under section 167 using the method (including the period, first and last year convention, and salvage value) used to compute regulated tax expense under clause (i), the taxpayer must make adjustments to a reserve to reflect the deferral of taxes resulting from such difference. One way in which the requirements of subparagraph (A) are not met is if the taxpayer, for ratemaking purposes, uses a procedure or adjustment which is inconsistent with the requirements of subparagraph (A). The procedures and adjustments which are to be treated as inconsistent for purposes of clause (i) shall include any procedure or adjustment for ratemaking purposes which uses an estimate or projection of the taxpayer’s tax expense, depreciation expense, or reserve for deferred taxes under subparagraph (A)(ii) unless such estimate or projection is also used, for ratemaking purposes, with respect to the other 2 such items and with respect to the rate base. The Secretary may by regulations prescribe procedures and adjustments (in addition to those specified in clause (ii)) which are to be treated as inconsistent for purposes of clause (i). In the case of any public utility property to which this section does not apply by reason of subsection (f)(2), the allowance for depreciation under section 167(a) shall be an amount computed using the method and period referred to in subparagraph (A)(i). The term “public utility property” means property used predominantly in the trade or business of the furnishing or sale of— electrical energy, water, or sewage disposal services, gas or steam through a local distribution system, telephone services, or other communication services if furnished or sold by the Communications Satellite Corporation for purposes authorized by the Communications Satellite Act of 1962 ( 47 U.S.C. 701 ), or transportation of gas or steam by pipeline, if the rates for such furnishing or sale, as the case may be, have been established or approved by a State or political subdivision thereof, by any agency or instrumentality of the United States, or by a public service or public utility commission or other similar body of any State or political subdivision thereof. The term “research and experimentation” has the same meaning as the term research and experimental has under section 174. The terms “section 1245 property” and “section 1250 property” have the meanings given such terms by sections 1245(a)(3) and 1250(c), respectively. The term “single purpose agricultural or horticultural structure” means— a single purpose livestock structure, and a single purpose horticultural structure. For purposes of this paragraph— The term “single purpose livestock structure” means any enclosure or structure specifically designed, constructed, and used— for housing, raising, and feeding a particular type of livestock and their produce, and for housing the equipment (including any replacements) necessary for the housing, raising, and feeding referred to in subclause (I). The term “single purpose horticultural structure” means— a greenhouse specifically designed, constructed, and used for the commercial production of plants, and a structure specifically designed, constructed, and used for the commercial production of mushrooms. An enclosure or structure which provides work space shall be treated as a single purpose agricultural or horticultural structure only if such work space is solely for— the stocking, caring for, or collecting of livestock or plants (as the case may be) or their produce, the maintenance of the enclosure or structure, and the maintenance or replacement of the equipment or stock enclosed or housed therein. The term “livestock” includes poultry. The term “qualified rent-to-own property” means property held by a rent-to-own dealer for purposes of being subject to a rent-to-own contract. The term “rent-to-own dealer” means a person that, in the ordinary course of business, regularly enters into rent-to-own contracts with customers for the use of consumer property, if a substantial portion of those contracts terminate and the property is returned to such person before the receipt of all payments required to transfer ownership of the property from such person to the customer. The term “consumer property” means tangible personal property of a type generally used within the home for personal use. The term “rent-to-own contract” means any lease for the use of consumer property between a rent-to-own dealer and a customer who is an individual which— is titled “Rent-to-Own Agreement” or “Lease Agreement with Ownership Option,” or uses other similar language, provides for level (or decreasing where no payment is less than 40 percent of the largest payment), regular periodic payments (for a payment period which is a week or month), provides that legal title to such property remains with the rent-to-own dealer until the customer makes all the payments described in clause (ii) or early purchase payments required under the contract to acquire legal title to the item of property, provides a beginning date and a maximum period of time for which the contract may be in effect that does not exceed 156 weeks or 36 months from such beginning date (including renewals or options to extend), provides for payments within the 156-week or 36-month period that, in the aggregate, generally exceed the normal retail price of the consumer property plus interest, provides for payments under the contract that, in the aggregate, do not exceed $10,000 per item of consumer property, provides that the customer does not have any legal obligation to make all the payments referred to in clause (ii) set forth under the contract, and that at the end of each payment period the customer may either continue to use the consumer property by making the payment for the next payment period or return such property to the rent-to-own dealer in good working order, in which case the customer does not incur any further obligations under the contract and is not entitled to a return of any payments previously made under the contract, and provides that the customer has no right to sell, sublease, mortgage, pawn, pledge, encumber, or otherwise dispose of the consumer property until all the payments stated in the contract have been made. The term “motorsports entertainment complex” means a racing track facility which— is permanently situated on land, and during the 36-month period following the first day of the month in which the asset is placed in service, hosts 1 or more racing events for automobiles (of any type), trucks, or motorcycles which are open to the public for the price of admission. Such term shall include, if owned by the taxpayer who owns the complex and provided for the benefit of patrons of the complex— ancillary facilities and land improvements in support of the complex’s activities (including parking lots, sidewalks, waterways, bridges, fences, and landscaping), support facilities (including food and beverage retailing, souvenir vending, and other nonlodging accommodations), and appurtenances associated with such facilities and related attractions and amusements (including ticket booths, race track surfaces, suites and hospitality facilities, grandstands and viewing structures, props, walls, facilities that support the delivery of entertainment services, other special purpose structures, facades, shop interiors, and buildings). Such term shall not include any transportation equipment, administrative services assets, warehouses, administrative buildings, hotels, or motels. Such term shall not include any property placed in service after December 31, 2025 . The term “Alaska natural gas pipeline” means the natural gas pipeline system located in the State of Alaska which— has a capacity of more than 500,000,000,000 Btu of natural gas per day, and is— placed in service after December 31, 2013 , or treated as placed in service on January 1, 2014 , if the taxpayer who places such system in service before January 1, 2014 , elects such treatment. Such term includes the pipe, trunk lines, related equipment, and appurtenances used to carry natural gas, but does not include any gas processing plant. The term “natural gas gathering line” means— the pipe, equipment, and appurtenances determined to be a gathering line by the Federal Energy Regulatory Commission, and the pipe, equipment, and appurtenances used to deliver natural gas from the wellhead or a commonpoint to the point at which such gas first reaches— a gas processing plant, an interconnection with a transmission pipeline for which a certificate as an interstate transmission pipeline has been issued by the Federal Energy Regulatory Commission, an interconnection with an intrastate transmission pipeline, or a direct interconnection with a local distribution company, a gas storage facility, or an industrial consumer. The term “qualified smart electric meter” means any smart electric meter which— is placed in service by a taxpayer who is a supplier of electric energy or a provider of electric energy services, and does not have a class life (determined without regard to subsection (e)) of less than 16 years. For purposes of subparagraph (A), the term “smart electric meter” means any time-based meter and related communication equipment which is capable of being used by the taxpayer as part of a system that— measures and records electricity usage data on a time-differentiated basis in at least 24 separate time segments per day, provides for the exchange of information between supplier or provider and the customer’s electric meter in support of time-based rates or other forms of demand response, provides data to such supplier or provider so that the supplier or provider can provide energy usage information to customers electronically, and provides net metering. The term “qualified smart electric grid system” means any smart grid property which— is used as part of a system for electric distribution grid communications, monitoring, and management placed in service by a taxpayer who is a supplier of electric energy or a provider of electric energy services, and does not have a class life (determined without regard to subsection (e)) of less than 16 years. For the purposes of subparagraph (A), the term “smart grid property” means electronics and related equipment that is capable of— sensing, collecting, and monitoring data of or from all portions of a utility’s electric distribution grid, providing real-time, two-way communications to monitor or manage such grid, and providing real time analysis of and event prediction based upon collected data that can be used to improve electric distribution system reliability, quality, and performance.

(j) Property on Indian reservations For purposes of subsection (a), the applicable recovery period for qualified Indian reservation property shall be determined in accordance with the table contained in paragraph (2) in lieu of the table contained in subsection (c). For purposes of paragraph (1)— In the case of: The applicable recovery period is: 3-year property 2 years 5-year property 3 years 7-year property 4 years 10-year property 6 years 15-year property 9 years 20-year property 12 years Nonresidential real property 22 years. For purposes of determining alternative minimum taxable income under section 55, the deduction under subsection (a) for qualified Indian reservation property shall be determined under this section without regard to any adjustment under section 56. For purposes of this subsection— The term “qualified Indian reservation property” means property which is property described in the table in paragraph (2) and which is— used by the taxpayer predominantly in the active conduct of a trade or business within an Indian reservation, not used or located outside the Indian reservation on a regular basis, not acquired (directly or indirectly) by the taxpayer from a person who is related to the taxpayer (within the meaning of section 465(b)(3)(C)), and not property (or any portion thereof) placed in service for purposes of conducting or housing class I, II, or III gaming (as defined in section 4 of the Indian Regulatory Act ( 25 U.S.C. 2703 )). The term “qualified Indian reservation property” does not include any property to which the alternative depreciation system under subsection (g) applies, determined— without regard to subsection (g)(7) (relating to election to use alternative depreciation system), and after the application of section 280F(b) (relating to listed property with limited business use). Subparagraph (A)(ii) shall not apply to qualified infrastructure property located outside of the Indian reservation if the purpose of such property is to connect with qualified infrastructure property located within the Indian reservation. For purposes of this subparagraph, the term “qualified infrastructure property” means qualified Indian reservation property (determined without regard to subparagraph (A)(ii)) which— benefits the tribal infrastructure, is available to the general public, and is placed in service in connection with the taxpayer’s active conduct of a trade or business within an Indian reservation. Such term includes, but is not limited to, roads, power lines, water systems, railroad spurs, and communications facilities. For purposes of this subsection, the rental to others of real property located within an Indian reservation shall be treated as the active conduct of a trade or business within an Indian reservation. For purposes of this subsection, the term “Indian reservation” means a reservation, as defined in— section 3(d) of the Indian Financing Act of 1974 ( 25 U.S.C. 1452(d) ), or section 4(10) of the Indian Child Welfare Act of 1978 ( 25 U.S.C. 1903(10) ). For purposes of the preceding sentence, such section 3(d) shall be applied by treating the term “former Indian reservations in Oklahoma” as including only lands which are within the jurisdictional area of an Oklahoma Indian tribe (as determined by the Secretary of the Interior) and are recognized by such Secretary as eligible for trust land status under 25 CFR Part 151 (as in effect on the date of the enactment of this sentence). Any reference in this subsection to a provision not contained in this title shall be treated for purposes of this subsection as a reference to such provision as in effect on the date of the enactment of this paragraph. If a taxpayer makes an election under this paragraph with respect to any class of property for any taxable year, paragraph (1) shall not apply to all property in such class placed in service during such taxable year. Such election, once made, shall be irrevocable. This subsection shall not apply to property placed in service after December 31, 2021 .

(k) Special allowance for certain property In the case of any qualified property— the depreciation deduction provided by section 167(a) for the taxable year in which such property is placed in service shall include an allowance equal to 100 percent of the adjusted basis of the qualified property, and the adjusted basis of the qualified property shall be reduced by the amount of such deduction before computing the amount otherwise allowable as a depreciation deduction under this chapter for such taxable year and any subsequent taxable year. For purposes of this subsection— The term “qualified property” means property— to which this section applies which has a recovery period of 20 years or less, which is computer software (as defined in section 167(f)(1)(B)) for which a deduction is allowable under section 167(a) without regard to this subsection, which is water utility property, or 2 which is a qualified film or television production (as defined in subsection (d) of section 181) for which a deduction would have been allowable under section 181 without regard to subsections (a)(2) and (h) of such section or this subsection, which is a qualified live theatrical production (as defined in subsection (e) of section 181) for which a deduction would have been allowable under section 181 without regard to subsections (a)(2) and (h) of such section or this subsection, and or 3 which is a qualified sound recording production (as defined in subsection (f) of section 181) for which a deduction would have been allowable under section 181 without regard to subsections (a)(2) and (h) of such section or this subsection, and the original use of which begins with the taxpayer or the acquisition of which by the taxpayer meets the requirements of clause (i) of subparagraph (E). The term “qualified property” includes any property if such property— meets the requirements of clauses (i) and (ii) of subparagraph (A), has a recovery period of at least 10 years or is transportation property, is subject to section 263A, and meets the requirements of clause (iii) of section 263A(f)(1)(B) (determined as if such clause also applies to property which has a long useful life (within the meaning of section 263A(f))). For purposes of this subparagraph, the term “transportation property” means tangible personal property used in the trade or business of transporting persons or property. This subparagraph shall not apply to any property which is described in subparagraph (C). The term “qualified property” includes property— which meets the requirements of subparagraph (A)(ii), which is an aircraft which is not a transportation property (as defined in subparagraph (B)(ii)) other than for agricultural or firefighting purposes, which is purchased and on which such purchaser, at the time of the contract for purchase, has made a nonrefundable deposit of the lesser of— 10 percent of the cost, or $100, 000, an d w hi c hha s — an es t ima t e d p ro d u c t i o n p er i o d e x cee d in g 4 m o n t h s, an d a cos t e x cee d in g$ 200,000. The term “qualified property” shall not include any property to which the alternative depreciation system under subsection (g) applies, determined— without regard to paragraph (7) of subsection (g) (relating to election to have system apply), and after application of section 280F(b) (relating to listed property with limited business use). An acquisition of property meets the requirements of this clause if— such property was not used by the taxpayer at any time prior to such acquisition, and the acquisition of such property meets the requirements of paragraphs (2)(A), (2)(B), (2)(C), and (3) of section 179(d). For purposes of subparagraph (A)(ii), if— property is used by a lessor of such property and such use is the lessor’s first use of such property, such property is sold by such lessor or any subsequent purchaser within 3 months after the date such property was originally placed in service (or, in the case of multiple units of property subject to the same lease, within 3 months after the date the final unit is placed in service, so long as the period between the time the first unit is placed in service and the time the last unit is placed in service does not exceed 12 months), and the user of such property after the last sale during such 3-month period remains the same as when such property was originally placed in service, such property shall be treated as originally placed in service not earlier than the date of such last sale. For purposes of section 280F— In the case of a passenger automobile (as defined in section 280F(d)(5)) which is qualified property, the Secretary shall increase the limitation under section 280F(a)(1)(A)(i) by $8, 000. T h e d e d u c t i o na ll o w ab l e u n d er p a r a g r a p h (1) s ha ll b e t ak e nin t o a cco u n t in co m p u t in g an yrec a pt u re am o u n t u n d ersec t i o n 280 F (b) (2) . I n t h ec a seo f a p a sse n g er a u t o m o bi l e a c q u i re d b y t h e t a x p a yer b e f ore S e pt e mb er 28, 2017, an d pl a ce d in ser v i ce b y t h e t a x p a yer a f t er S e pt e mb er 27, 2017, c l a u se (i) s ha ll b e a ppl i e d b ys u b s t i t u t in g f or “$ 8,000”— in the case of an automobile placed in service during 2018, $6, 400, an d in t h ec a seo f ana u t o m o bi l e pl a ce d in ser v i ce d u r in g 2019,$ 4,800. For purposes of determining alternative minimum taxable income under section 55, the deduction under section 167 for qualified property shall be determined without regard to any adjustment under section 56. For purposes of subparagraph (A)— a qualified film or television production shall be considered to be placed in service at the time of initial release or broadcast, a qualified live theatrical production shall be considered to be placed in service at the time of the initial live staged performance, and a qualified sound recording production shall be considered to be placed in service at the time of initial release or broadcast. In the case of any specified plant which is planted or grafted by the taxpayer in the ordinary course of the taxpayer’s farming business (as defined in section 263A(e)(4)) during a taxable year for which the taxpayer has elected the application of this paragraph— a depreciation deduction equal to 100 percent of the adjusted basis of such specified plant shall be allowed under section 167(a) for the taxable year in which such specified plant is so planted or grafted, and the adjusted basis of such specified plant shall be reduced by the amount of such deduction. For purposes of this paragraph, the term “specified plant” means— any tree or vine which bears fruits or nuts, and any other plant which will have more than one crop or yield of fruits or nuts and which generally has a pre-productive period of more than 2 years from the time of planting or grafting to the time at which such plant begins bearing a marketable crop or yield of fruits or nuts. Such term shall not include any property which is planted or grafted outside of the United States. An election under this paragraph may be revoked only with the consent of the Secretary. If this paragraph applies to any specified plant, such specified plant shall not be treated as qualified property in the taxable year in which placed in service. Rules similar to the rules of paragraph (2)(G) shall apply for purposes of this paragraph. If a taxpayer makes an election under this paragraph with respect to any class of property for any taxable year, paragraphs (1) and (2)(F) shall not apply to any qualified property in such class placed in service during such taxable year. An election under this paragraph may be revoked only with the consent of the Secretary. The term “qualified property” shall not include— any property which is primarily used in a trade or business described in clause (iv) of section 163(j)(7)(A), or any property used in a trade or business that has had floor plan financing indebtedness (as defined in paragraph (9) of section 163(j)), if the floor plan financing interest related to such indebtedness was taken into account under paragraph (1)(C) of such section. In the case of qualified property placed in service by the taxpayer during the first taxable year ending after January 19, 2025 , if the taxpayer elects to have this paragraph apply for such taxable year, paragraph (1)(A) shall be applied— in the case of property which is not described in clause (ii), by substituting “40 percent” for “100 percent”, or in the case of property which is described in subparagraph (B) or (C) of paragraph (2), by substituting “60 percent” for “100 percent”. In the case of any specified plant planted or grafted by the taxpayer during the first taxable year ending after January 19, 2025 , if the taxpayer elects to have this paragraph apply for such taxable year, paragraph (5)(A)(i) shall be applied by substituting “40 percent” for “100 percent”. Any election under this paragraph shall be made at such time and in such form and manner as the Secretary may prescribe.

(l) Special allowance for second generation biofuel plant property In the case of any qualified second generation biofuel plant property— the depreciation deduction provided by section 167(a) for the taxable year in which such property is placed in service shall include an allowance equal to 50 percent of the adjusted basis of such property, and the adjusted basis of such property shall be reduced by the amount of such deduction before computing the amount otherwise allowable as a depreciation deduction under this chapter for such taxable year and any subsequent taxable year. The term “qualified second generation biofuel plant property” means property of a character subject to the allowance for depreciation— which is used in the United States solely to produce second generation biofuel (as defined in section 40(b)(6)(E)), the original use of which commences with the taxpayer after the date of the enactment of this subsection, which is acquired by the taxpayer by purchase (as defined in section 179(d)) after the date of the enactment of this subsection, but only if no written binding contract for the acquisition was in effect on or before the date of the enactment of this subsection, and which is placed in service by the taxpayer before January 1, 2021 . Such term shall not include any property to which subsection (k) applies. Such term shall not include any property described in subsection (k)(2)(D). Such term shall not include any property any portion of which is financed with the proceeds of any obligation the interest on which is exempt from tax under section 103. If a taxpayer makes an election under this subparagraph with respect to any class of property for any taxable year, this subsection shall not apply to all property in such class placed in service during such taxable year. For purposes of this subsection, rules similar to the rules of subsection (k)(2)(E) shall apply. For purposes of this subsection, rules similar to the rules of subsection (k)(2)(G) shall apply. For purposes of this subsection, rules similar to the rules under section 179(d)(10) shall apply with respect to any qualified second generation biofuel plant property which ceases to be qualified second generation biofuel plant property. Paragraph (1) shall not apply to any qualified second generation biofuel plant property with respect to which an election has been made under section 179C (relating to election to expense certain refineries).

(m) Special allowance for certain reuse and recycling property In the case of any qualified reuse and recycling property— the depreciation deduction provided by section 167(a) for the taxable year in which such property is placed in service shall include an allowance equal to 50 percent of the adjusted basis of the qualified reuse and recycling property, and the adjusted basis of the qualified reuse and recycling property shall be reduced by the amount of such deduction before computing the amount otherwise allowable as a depreciation deduction under this chapter for such taxable year and any subsequent taxable year. For purposes of this subsection— The term “qualified reuse and recycling property” means any reuse and recycling property— to which this section applies, which has a useful life of at least 5 years, the original use of which commences with the taxpayer after August 31, 2008 , and which is— acquired by purchase (as defined in section 179(d)(2)) by the taxpayer after August 31, 2008 , but only if no written binding contract for the acquisition was in effect before September 1, 2008 , or acquired by the taxpayer pursuant to a written binding contract which was entered into after August 31, 2008 . The term “qualified reuse and recycling property” shall not include any property to which subsection (k) (determined without regard to paragraph (4) thereof) applies. The term “qualified reuse and recycling property” shall not include any property to which the alternative depreciation system under subsection (g) applies, determined without regard to paragraph (7) of subsection (g) (relating to election to have system apply). If a taxpayer makes an election under this clause with respect to any class of property for any taxable year, this subsection shall not apply to all property in such class placed in service during such taxable year. In the case of a taxpayer manufacturing, constructing, or producing property for the taxpayer’s own use, the requirements of clause (iv) of subparagraph (A) shall be treated as met if the taxpayer begins manufacturing, constructing, or producing the property after August 31, 2008 . For purposes of determining alternative minimum taxable income under section 55, the deduction under subsection (a) for qualified reuse and recycling property shall be determined under this section without regard to any adjustment under section 56. For purposes of this subsection— The term “reuse and recycling property” means any machinery and equipment (not including buildings or real estate), along with all appurtenances thereto, including software necessary to operate such equipment, which is used exclusively to collect, distribute, or recycle qualified reuse and recyclable materials. Such term does not include rolling stock or other equipment used to transport reuse and recyclable materials. The term “qualified reuse and recyclable materials” means scrap plastic, scrap glass, scrap textiles, scrap rubber, scrap packaging, recovered fiber, scrap ferrous and nonferrous metals, or electronic scrap generated by an individual or business. For purposes of clause (i), the term “electronic scrap” means— any cathode ray tube, flat panel screen, or similar video display device with a screen size greater than 4 inches measured diagonally, or any central processing unit. The term “recycling” or “recycle” means that process (including sorting) by which worn or superfluous materials are manufactured or processed into specification grade commodities that are suitable for use as a replacement or substitute for virgin materials in manufacturing tangible consumer and commercial products, including packaging.

(n) Special allowance for qualified production property In the case of any qualified production property of a taxpayer making an election under this subsection— the depreciation deduction provided by section 167(a) for the taxable year in which such property is placed in service shall include an allowance equal to 100 percent of the adjusted basis of the qualified production property, and the adjusted basis of the qualified production property shall be reduced by the amount of such deduction before computing the amount otherwise allowable as a depreciation deduction under this chapter for such taxable year and any subsequent taxable year. For purposes of this subsection— The term “qualified production property” means that portion of any nonresidential real property— to which this section applies, which is used by the taxpayer as an integral part of a qualified production activity, which is placed in service in the United States or any possession of the United States, the original use of which commences with the taxpayer, the construction of which begins after January 19, 2025 , and before January 1, 2029 , which is designated by the taxpayer in the election made under this subsection, and which is placed in service before January 1, 2031 . For purposes of clause (ii), in the case of property with respect to which the taxpayer is a lessor, property used by a lessee shall not be considered to be used by the taxpayer as part of a qualified production activity. In the case of property acquired by the taxpayer during the period described in subparagraph (A)(v), the requirements of clauses (iv) and (v) of subparagraph (A) shall be treated as satisfied if— such property was not used in a qualified production activity (determined without regard to the second sentence of subparagraph (D)) by any person at any time during the period beginning on January 1, 2021 , and ending on May 12, 2025 , such property was not used by the taxpayer at any time prior to such acquisition, and the acquisition of such property meets the requirements of paragraphs (2)(A), (2)(B), (2)(C), and (3) of section 179(d). For purposes of determining under clause (i)— whether such property is acquired before the period described in subparagraph (A)(v), such property shall be treated as acquired not later than the date on which the taxpayer enters into a written binding contract for such acquisition, and whether such property is acquired after such period, such property shall be treated as acquired not earlier than such date. The term “qualified production property” shall not include that portion of any nonresidential real property which is used for offices, administrative services, lodging, parking, sales activities, research activities, software development or engineering activities, or other functions unrelated to the manufacturing, production, or refining of tangible personal property. The term “qualified production activity” means the manufacturing, production, or refining of a qualified product. The activities of any taxpayer do not constitute manufacturing, production, or refining of a qualified product unless the activities of such taxpayer result in a substantial transformation of the property comprising the product. The term “production” shall not include activities other than agricultural production and chemical production. The term “qualified product” means any tangible personal property if such property is not a food or beverage prepared in the same building as a retail establishment in which such property is sold. For purposes of subparagraph (A)(iv), rules similar to the rules of subsection (k)(2)(E)(iii) shall apply. The Secretary may extend the date under subparagraph (A)(vii) with respect to any property that meets the requirements of clauses (i) through (vi) of subparagraph (A) if the Secretary determines that an act of God (as defined in section 101(1) of the Comprehensive Environmental Response, Compensation, and Liability Act of 1980) prevents the taxpayer from placing such property in service before such date. For purposes of determining alternative minimum taxable income under section 55, the deduction under section 167 for qualified production property shall be determined under this section without regard to any adjustment under section 56. For purposes of subsections (k)(7), ( l )(3)(D), and (m)(2)(B)(iii)— qualified production property shall be treated as a separate class of property, and the taxpayer shall be treated as having made an election under such subsections with respect to such class. The term “qualified production property” shall not include any property to which the alternative depreciation system under subsection (g) applies. For purposes of subsection (g)(7)(A), qualified production property to which this subsection applies shall be treated as separate nonresidential real property. If, at any time during the 10-year period beginning on the date that any qualified production property is placed in service by the taxpayer, such property ceases to be used as described in paragraph (2)(A)(ii) and is used by the taxpayer in a productive use not described in paragraph (2)(A)(ii)— section 1245 shall be applied— by treating such property as having been disposed of by the taxpayer as of the first time such property is so used in a productive use not described in paragraph (2)(A)(ii), and by treating the amount described in subparagraph (B) of section 1245(a)(1) with respect to such disposition as being not less than the amount described in subparagraph (A) of such section, and the basis of the taxpayer in such property, and the taxpayer’s allowance for depreciation with respect to such property, shall be appropriately adjusted to take into account amounts recognized by reason of subparagraph (A). An election under this subsection for any taxable year shall— specify the nonresidential real property subject to the election and the portion of such property designated under paragraph (2)(A)(vi), and except as otherwise provided by the Secretary, be made on the taxpayer’s return of the tax imposed by this chapter for the taxable year. Such election shall be made in such manner as the Secretary may prescribe by regulations or other guidance. Any election made under this subsection, and any specification contained in any such election, may not be revoked except with the consent of the Secretary (and the Secretary shall provide such consent only in extraordinary circumstances). The Secretary shall issue such regulations or other guidance as may be necessary or appropriate to carry out the purposes of this subsection, including regulations or other guidance— providing rules for regarding what constitutes substantial transformation of property which are consistent with guidance provided under section 954(d), and providing for the application of paragraph (5) with respect to a change in use described in such paragraph by a transferee following a fully or partially tax free transfer of qualified production property.

“SEC. 203 EFFECTIVE DATES; GENERAL TRANSITIONAL RULES.

(“(a) General Effective Dates.— Except as provided in this section, section 204, and section 251(d) [set out as a note under section 46 of this title ], the amendments made by section 201 [amending sections 46, 167, 168, 178, 179, 280F, 291, 312, 465, 467, 514, 751, 1245, 4162, 6111, and 7701 of this title] shall apply to property placed in service after December 31, 1986 , in taxable years ending after such date. A taxpayer may elect (at such time and in such manner as the Secretary of the Treasury or his delegate may prescribe) to have the amendments made by section 201 apply to any property placed in service after July 31, 1986 , and before January 1, 1987 . No election may be made under this subparagraph with respect to property to which section 168 of the Internal Revenue Code of 1986 would not apply by reason of section 168(f)(5) of such Code if such property were placed in service after December 31, 1986 . The amendments made by section 202 [amending section 179 of this title ] shall apply to property placed in service after December 31, 1986 , in taxable years ending after such date. In the case of any taxable year (other than a calendar year) which includes January 1, 1987 , for purposes of applying the amendments made by section 202 to property placed in service during such taxable year and after December 31, 1986 — the limitation of section 179(b)(1) of the Internal Revenue Code of 1986 (as amended by section 202) shall be reduced by the aggregate deduction under section 179 (as in effect on the day before the date of the enactment of the Tax Reform Act of 1986 [ Oct. 22, 1986 ]) for section 179 property placed in service during such taxable year and before January 1, 1987 , the limitation of section 179(b)(2) of such Code (as so amended) shall be applied by taking into account the cost of all section 179 property placed in service during such taxable year, and the limitation of section 179(b)(3) of such Code shall be applied by taking into account the taxable income for the entire taxable year reduced by the amount of any deduction under section 179 of such Code for property placed in service during such taxable year and before January 1, 1987 .

(“(b) General Transitional Rule.— The amendments made by section 201 [amending this section and sections 46, 167, 178, 179, 280F, 291, 312, 465, 467, 514, 751, 1245, 4162, 6111, and 7701 of this title] shall not apply to— any property which is constructed, reconstructed, or acquired by the taxpayer pursuant to a written contract which was binding on March 1, 1986 , property which is constructed or reconstructed by the taxpayer if— the lesser of (I) $1,000,000, or (II) 5 percent of the cost of such property has been incurred or committed by March 1, 1986 , and the construction or reconstruction of such property began by such date, or an equipped building or plant facility if construction has commenced as of March 1, 1986 , pursuant to a written specific plan and more than one-half of the cost of such equipped building or facility has been incurred or committed by such date. For purposes of this paragraph, all members of the same affiliated group of corporations (within the meaning of section 1504 of the Internal Revenue Code of 1986) filing a consolidated return shall be treated as one taxpayer. Paragraph (1) and section 204(a) (other than paragraph (8) or (12) thereof) shall not apply to any property unless such property has a class life of at least 7 years and is placed in service before the applicable date determined under the following table: “In the case of property The applicable with a class life of: date is: At least 7 but less than 20 years January 1, 1989 20 years or more January 1, 1991 . In the case of residential rental property and nonresidential real property, the applicable date is January 1, 1991 . For purposes of subparagraph (A)— the class life of property to which section 168(g)(3)(B) of the Internal Revenue Code of 1986 (as added by section 201) applies shall be the class life in effect on January 1, 1986 , except that computer-based telephone central office switching equipment described in section 168(e)(3)(B)(iii) of such Code shall be treated as having a class life of 6 years, property described in section 204(a) shall be treated as having a class life of 20 years, and property with no class life shall be treated as having a class life of 12 years. If any provision of this Act [see Tables for classification] substitutes a date for an applicable date, this paragraph shall be applied by using such date. Property shall be treated as meeting the requirements of paragraphs (1) and (2) or section 204(a) with respect to any taxpayer if such property is acquired by the taxpayer from a person— in whose hands such property met the requirements of paragraphs (1) and (2) or section 204(a) (or would have met such requirements if placed in service by such person), or who placed the property in service before January 1, 1987 , and such property is leased back by the taxpayer to such person, or is leased to such person, not later than the earlier of the applicable date under paragraph (2) or the day which is 3 months after such property was placed in service. For purposes of paragraph (1), the term ‘plant facility’ means a facility which does not include any building (or with respect to which buildings constitute an insignificant portion) and which is— a self-contained single operating unit or processing operation, located on a single site, and identified as a single unitary project as of March 1, 1986 .

(“(c) Property Financed With Tax-Exempt Bonds.— Except as otherwise provided in this subsection or section 204, subparagraph (C) of section 168(g)(1) of the Internal Revenue Code of 1986 (as added by this Act) shall apply to property placed in service after December 31, 1986 , in taxable years ending after such date, to the extent such property is financed by the proceeds of an obligation (including a refunding obligation) issued after March 1, 1986 . Subparagraph (C) of section 168(g)(1) of such Code (as so added) shall not apply to obligations with respect to a facility— the original use of which commences with the taxpayer, and the construction, reconstruction, or rehabilitation of which began before March 2, 1986 , and was completed on or after such date, with respect to which a binding contract to incur significant expenditures for construction, reconstruction, or rehabilitation was entered into before March 2, 1986 , and some of such expenditures are incurred on or after such date, or acquired on or after March 2, 1986 , pursuant to a binding contract entered into before such date, and described in an inducement resolution or other comparable preliminary approval adopted by the issuing authority (or by a voter referendum) before March 2, 1986 . Except as provided in clause (ii), in the case of property placed in service after December 31, 1986 , which is financed by the proceeds of an obligation which is issued solely to refund another obligation which was issued before March 2, 1986 , subparagraph (C) of section 168(g)(1) of such Code (as so added) shall apply only with respect to an amount equal to the basis in such property which has not been recovered before the date such refunded obligation is issued. In the case of facilities the original use of which commences with the taxpayer and with respect to which significant expenditures are made before January 1, 1987 , subparagraph (C) of section 168(g)(1) of such Code (as so added) shall not apply with respect to such facilities to the extent such facilities are financed by the proceeds of an obligation issued solely to refund another obligation which was issued before March 2, 1986 . In the case of an inducement resolution or other comparable preliminary approval adopted by an issuing authority before March 2, 1986 , for purposes of subparagraphs (A) and (B)(ii) with respect to obligations described in such resolution, the term ‘facilities’ means the facilities described in such resolution. For purposes of this paragraph, the term ‘significant expenditures’ means expenditures greater than 10 percent of the reasonably anticipated cost of the construction, reconstruction, or rehabilitation of the facility involved.

(“(d) Mid-Quarter Convention.— In the case of any taxable year beginning before October 1, 1987 in which property to which the amendments made by section 201 [amending this section and sections 46, 167, 178, 179, 280F, 291, 312, 465, 467, 514, 751, 1245, 4162, 6111, and 7701 of this title] do not apply is placed in service, such property shall be taken into account in determining whether section 168(d)(3) of the Internal Revenue Code of 1986 (as added by section 201) applies for such taxable year to property to which such amendments apply. The preceding sentence shall only apply to property which would be taken into account if such amendments did apply.

(“(e) Normalization Requirements.— A normalization method of accounting shall not be treated as being used with respect to any public utility property for purposes of section 167 or 168 of the Internal Revenue Code of 1986 if the taxpayer, in computing its cost of service for ratemaking purposes and reflecting operating results in its regulated books of account, reduces the excess tax reserve more rapidly or to a greater extent than such reserve would be reduced under the average rate assumption method. For purposes of this subsection— The term ‘excess tax reserve’ means the excess of— the reserve for deferred taxes (as described in section 167( l )(3)(G)(ii) or 168(e)(3)(B)(ii) of the Internal Revenue Code of 1954 as in effect on the day before the date of the enactment of this Act [ Oct. 22, 1986 ]), over the amount which would be the balance in such reserve if the amount of such reserve were determined by assuming that the corporate rate reductions provided in this Act [see Tables for classification] were in effect for all prior periods. The average rate assumption method is the method under which the excess in the reserve for deferred taxes is reduced over the remaining lives of the property as used in its regulated books of account which gave rise to the reserve for deferred taxes. Under such method, if timing differences for the property reverse, the amount of the adjustment to the reserve for the deferred taxes is calculated by multiplying— the ratio of the aggregate deferred taxes for the property to the aggregate timing differences for the property as of the beginning of the period in question, by the amount of the timing differences which reverse during such period.

“SEC. 204 ADDITIONAL TRANSITIONAL RULES.

(“(a) Other Transitional Rules.— The amendments made by section 201 [amending this section and sections 46, 167, 178, 179, 280F, 291, 312, 465, 467, 514, 751, 1245, 4162, 6111, and 7701 of this title] shall not apply to any property which is an integral part of any qualified urban renovation project. For purposes of subparagraph (A), the term ‘qualified urban renovation project’ means any project— described in subparagraph (C), (D), (E), or (G) which before March 1, 1986 , was publicly announced by a political subdivision of a State for a renovation of an urban area within its jurisdiction, described in subparagraph (C), (D) or (G) which before March 1, 1986 , was identified as a single unitary project in the internal financing plans of the primary developer of the project, described in subparagraph (C) or (D), which is not substantially modified on or after March 1, 1986 , and described in subparagraph (F) or (H). A project is described in this subparagraph if— a political subdivision granted on July 11, 1985 , development rights to the primary developer-purchaser of such project, and such project was the subject of a development agreement between a political subdivision and a bridge authority on December 19, 1984 . For purposes of this subparagraph, section 203(b)(2) shall be applied by substituting ‘ January 1, 1994 ’ for ‘ January 1, 1991 ’ each place it appears. A project is described in this subparagraph if it is described in any of the following clauses of this subparagraph and the primary developer of all such projects is the same person: A project is described in this clause if the development agreement with respect thereto was entered into during April 1984 and the estimated cost of the project is approximately $194, 000, 000. A p ro j ec t i s d escr ib e d in t hi sc l a u se i f t h e d e v e l o p m e n t a g ree m e n tw i t h res p ec tt h ere t o w a se n t ere d in t o d u r in g M a y 1984 an d t h ees t ima t e d cos t o f t h e p ro j ec t i s a pp ro x ima t e l y$ 190,000,000. A project is described in this clause if the project has an estimated cost of approximately $92, 000, 000 an d a tl e a s t$ 7,000,000 was spent before September 26, 1985 , with respect to such project. A project is described in this clause if the estimated project cost is approximately $39, 000, 000 an d a tl e a s t$ 2,000,000 of construction cost for such project were incurred before September 26, 1985 . A project is described in this clause if the development agreement with respect thereto was entered into before September 26, 1985 , and the estimated cost of the project is approximately $150, 000, 000. A p ro j ec t i s d escr ib e d in t hi sc l a u se i f t h e b o a r d o fd i rec t orso f t h e p r ima ry d e v e l o p er a pp ro v e d s u c h p ro j ec t in Dece mb er 1982, an d t h ees t ima t e d cos t o f s u c h p ro j ec t i s a pp ro x ima t e l y$ 107,000,000. A project is described in this clause if the board of directors of the primary developer approved such project in December 1982, and the estimated cost of such project is approximately $59, 000, 000. A p ro j ec t i s d escr ib e d in t hi sc l a u se i f t h e B o a r d o f D i rec t orso f t h e p r ima ry d e v e l o p er a pp ro v e d s u c h p ro j ec t in Dece mb er 1983, f o ll o w in g se l ec t i o n o f t h e d e v e l o p er b y a c i t yco u n c i l o n S e pt e mb er 26, 1983, an d t h ees t ima t e d cos t o f s u c h p ro j ec t i s a pp ro x ima t e l y$ 107,000,000. A project is described in this subparagraph if— a State or an agency, instrumentality, or political subdivision thereof approved the filing of a general project plan on June 18, 1981 , and on October 4, 1984 , a State or an agency, instrumentality, or political subdivision thereof confirmed such plan, the project plan as confirmed on October 4, 1984 , included construction or renovation of office buildings, a hotel, a trade mart, theaters, and a subway complex, and significant segments of such project were the subject of one or more conditional designations granted by a State or an agency, instrumentality, or political subdivision thereof to one or more developers before January 1, 1985 . The preceding sentence shall apply with respect to a property only to the extent that a building on such property site was identified as part of the project plan before September 26, 1985 , and only to the extent that the size of the building on such property site was not substantially increased by reason of a modification to the project plan with respect to such property on or after such date. For purposes of this subparagraph, section 203(b)(2) shall be applied by substituting ‘ January 1, 1998 ’ for ‘ January 1, 1991 ’ each place it appears. A project is described in this subparagraph if it is a sports and entertainment facility which— is to be used by both a National Hockey League team and a National Basketball Association team; is to be constructed on a platform utilizing air rights over land acquired by a State authority and identified as site B in a report dated May 30, 1984 , prepared for a State urban development corporation; and is eligible for real property tax, and power and energy benefits pursuant to the provisions of State legislation approved and effective July 7, 1982 . A project is also described in this subparagraph if it is a mixed-use development which is— to be constructed above a public railroad station utilized by the national railroad passenger corporation and commuter railroads serving two States; and will include the reconstruction of such station so as to make it a more efficient transportation center and to better integrate the station with the development above, such reconstruction plans to be prepared in cooperation with a State transportation authority. For purposes of this subparagraph, section 203(b)(2) shall be applied by substituting ‘ January 1, 1998 ’ for the applicable date that would otherwise apply. A project is described in this subparagraph if— an inducement resolution was passed on March 9, 1984 , for the issuance of obligations with respect to such project, such resolution was extended by resolutions passed on August 14, 1984 , April 2, 1985 , August 13, 1985 , and July 8, 1986 , an application was submitted on January 31, 1984 , for an Urban Development Action Grant with respect to such project, and an Urban Development Action Grant was preliminarily approved for all or part of such project on July 3, 1986 . A project is described in this subparagraph if it is a redevelopment project, with respect to which $10, 000, 000 inin d u s t r ia l re v e n u e b o n d s w ere a pp ro v e d b y a St a t eDe v e l o p m e n tF inan ce A u t h or i t yo n J an u a ry 15, 1986, a v i ll a g e t r an s f erre d a pp ro x ima t e l y$ 4,000,000 of bond volume authority to the State in June 1986, and a binding Redevelopment Agreement was executed between a city and the development team on June 30, 1986 . The amendments made by section 201 [amending this section and sections 46, 167, 178, 179, 280F, 291, 312, 465, 467, 514, 751, 1245, 4162, 6111, and 7701 of this title] shall not apply to any property which is part of a project— which is certified by the Federal Energy Regulatory Commission before March 2, 1986 , as a qualifying facility for purposes of the Public Utility Regulatory Policies Act of 1978 [see Short Title note set out under 16 U.S.C. 2601 ], which was granted before March 2, 1986 , a hydroelectric license for such project by the Federal Energy Regulatory Commission, or which is a hydroelectric project of less than 80 megawatts that filed an application for a permit, exemption, or license with the Federal Energy Regulatory Commission before March 2, 1986 . The amendments made by section 201 shall not apply to any property which is readily identifiable with and necessary to carry out a written supply or service contract, or agreement to lease, which was binding on March 1, 1986 . The amendments made by section 201 shall not apply— to property described in section 12(c)(2) (as amended by the Technical and Miscellaneous Revenue Act of 1988), 31(g)(5), or 31(g)(17)(J) of the Tax Reform Act of 1984 [sections 12(c)(2) and 31(g)(5), (17)(J) of Pub. L. 98–369 , set out below], to property described in section 209(d)(1)(B) of the Tax Equity and Fiscal Responsibility Act of 1982, as amended by the Tax Reform Act of 1984 [ section 209(d)(1)(B) of Pub. L. 97–248 , as amended, set out below], and to property described in section 216(b)(3) of the Tax Equity and Fiscal Responsibility Act of 1982 [ section 216(b)(3) of Pub. L. 97–248 , set out below]. The amendments made by section 201 shall not apply to any property placed in service pursuant to a master plan which is clearly identifiable as of March 1, 1986 , for any project described in any of the following subparagraphs of this paragraph: A project is described in this subparagraph if— the project involves production platforms for offshore drilling, oil and gas pipeline to shore, process and storage facilities, and a marine terminal, and at least $900, 000, 000 o f t h ecos t so f s u c h p ro j ec tw ere in c u rre d b e f ore S e pt e mb er 26, 1985. A p ro j ec t i s d escr ib e d in t hi ss u b p a r a g r a p hi f — s u c h p ro j ec t in v o l v es a f ib ero pt i c n e tw or k o f a tl e a s t 20, 000 mi l es, an d b e f ore S e pt e mb er 26, 1985, co n s t r u c t i o n co mm e n ce d p u rs u an tt o t h e ma s t er pl anan d a tl e a s t$ 85,000,000 was spent on construction. A project is described in this subparagraph if— such project passes through at least 10 States and involves intercity communication links (including one or more repeater sites, terminals and junction stations for microwave transmissions, regenerators or fiber optics and other related equipment), the lesser of $150, 000, 000 or 5 p erce n t o f t h e t o t a lp ro j ec t cos t ha s b ee n e x p e n d e d, in c u rre d, orco mmi tt e d b e f ore M a rc h 2, 1986, b yo n eor m ore t a x p a yerse a c h o f w hi c hi s am e mb ero f t h es am e a ff i l ia t e d g ro u p (a s d e f in e d in sec t i o n 1504 (a) [o f t h e I n t er na lR e v e n u e C o d eo f 1986]), an d s u c h p ro j ec t co n s i s t so f a co m p re h e n s i v e pl an f or m ee t in g n e tw or k c a p a c i t yre q u i re m e n t s a se n co m p a sse d w i t hin e i t h er : a N o v e mb er 5, 1985, p rese n t a t i o nma d e t o an d a cce pt e d b y t h e C hai r man o f t h e B o a r d an d t h e p res i d e n t o f t h e t a x p a yer, or t h e a pp ro v a l s b y t h e B o a r d o f D i rec t orso f t h e p a re n t co m p an yo f t h e t a x p a yero n M a y 3, 1985, an d S e pt e mb er 22, 1985, an d o f t h ee x ec u t i v eco mmi tt eeo f s ai d b o a r d o n Dece mb er 23, 1985. A p ro j ec t i s d escr ib e d in t hi ss u b p a r a g r a p hi f — s u c h p ro j ec t i s p a r t o f a f l a t ro ll e d p ro d u c t m o d er ni z a t i o n pl an w hi c h w a s ini t ia ll y p rese n t e d t o t h e B o a r d o f D i rec t orso f t h e t a x p a yero n J u l y 8, 1983, s u c h p ro g r am w i ll b ec a rr i e d o u t a t 3 l oc a t i o n s, an d s u c h p ro j ec tw i ll in v o l v e a t o t a l es t ima t e d minim u m c a p i t a l cos t o f a tl e a s t$ 250,000,000. A project is described in this subparagraph if the project is being carried out by a corporation engaged in the production of paint, chemicals, fiberglass, and glass, and if— the project includes a production line which applies a thin coating to glass in the manufacture of energy efficient residential products, if approved by the management committee of the corporation on January 29, 1986 , the project is a turbogenerator which was approved by the president of such corporation and at least $1, 000, 000 o f t h ecos t o f w hi c h w a s in c u rre d orco mmi tt e d b e f ores u c h d a t e, t h e p ro j ec t i s a w a s t e - t o - e n er g y d i s p os a l sys t e m w hi c h w a s ini t ia ll y a pp ro v e d b y t h e mana g e m e n t co mmi tt eeo f t h ecor p or a t i o n o n M a rc h 29, 1982, an d a tl e a s t$ 5,000,000 of the cost of which was incurred before September 26, 1985 , the project, which involves the expansion of an existing service facility and the addition of new lab facilities needed to accommodate topcoat and undercoat production needs of a nearby automotive assembly plant, was approved by the corporation’s management committee on March 5, 1986 , or the project is part of a facility to consolidate and modernize the silica production of such corporation and the project was approved by the president of such corporation on August 19, 1985 . A project is described in this subparagraph if— such project involves a port terminal and oil pipeline extending generally from the area of Los Angeles, California, to the area of Midland, Texas, and before September 26, 1985 , there is a binding contract for dredging and channeling with respect thereto and a management contract with a construction manager for such project. A project is described in this subparagraph if— the project is a newspaper printing and distribution plant project with respect to which a contract for the purchase of 8 printing press units and related equipment to be installed in a single press line was entered into on January 8, 1985 , and the contract price for such units and equipment represents at least 50 percent of the total cost of such project. A project is described in this subparagraph if it is the second phase of a project involving direct current transmission lines spanning approximately 190 miles from the United States-Canadian border to Ayer, Massachusetts, alternating current transmission lines in Massachusetts from Ayers to Millbury to West Medway, DC–AC converted terminals to Monroe, New Hampshire, and Ayer, Massachusetts, and other related equipment and facilities. A project is described in this subparagraph if it involves not more than two natural gas-fired combined cycle electric generating units each having a net electrical capability of approximately 233 megawatts, and a sales contract for approximately one-half of the output of the 1st unit was entered into in December 1985. A project is described in this subparagraph if— the project involves an automobile manufacturing facility (including equipment and incidental appurtenances) to be located in the United States, and either— the project was the subject of a memorandum of understanding between 2 automobile manufacturers that was signed before September 25, 1985 , the automobile manufacturing facility (including equipment and incidental appurtenances) will involve a total estimated cost of approximately $750, 000, 000, an d w i ll ha v e anann u a lp ro d u c t i o n c a p a c i t yo f a pp ro x ima t e l y 240, 000 v e hi c l esor t h e B o a r d o f D i rec t orso f ana u t o m o bi l e man u f a c t u rer a pp ro v e d a w r i tt e n pl an f or t h eco n v ers i o n o f e x i s t in g f a c i l i t i es t o p ro d u ce n e w m o d e l so f a v e hi c l e n o t c u rre n tl y p ro d u ce d in t h e U ni t e d St a t es, s u c h f a c i l i t i es w i ll b e pl a ce d in ser v i ce b y J u l y 1, 1987, an d s u c h B o a r d a c t i o n occ u rre d in J u l y 1985 w i t h res p ec tt o a$ 602,000,000 expenditure, a $438, 000, 000 e x p e n d i t u re, an d a$ 321,000,000 expenditure. A project is described in this subparagraph if— the project involves a joint venture between a utility company and a paper company for a supercalendered paper mill, and at least $50, 000, 000 w a s in c u rre d orco mmi tt e d w i t h res p ec tt os u c h p ro j ec t b e f ore M a rc h 1, 1986, or t h e p ro j ec t in v o l v es a p a p er mi ll f or t h e man u f a c t u reo f n e w s p r in t (in c l u d in g a co g e n er a t i o n f a c i l i t y) i s g e n er a ll y ba se d o na w r i tt e n d es i g nan df e a s ibi l i t ys t u d y t ha tw a sco m pl e t e d o n Dece mb er 15, 1981, an d w i ll b e pl a ce d in ser v i ce b e f ore J an u a ry 1, 1991, or t h e p ro j ec t i s u n d er t ak e nb y a M ain ecor p or a t i o nan d in v o l v es t h e m o d er ni z a t i o n o f p u lp an d p a p er mi ll s in M i ll in oc k e t an d / or E a s tM i ll in oc k e t, M ain e, or t h e p ro j ec t in v o l v es t h e in s t a ll a t i o n o f a p a p er ma c hin e f or p ro d u c t i o n o f co a t e d p u b l i c a t i o n p a p ers, t h e m o d er ni z a t i o n o f a p u lp mi ll, an d t h e in s t a ll a t i o n o f ma c hin ery an d e q u i p m e n tw i t h res p ec tt ore l a t e d p rocesses, a so f Dece mb er 31, 1985, in e x cesso f$ 50,000,000 was incurred for the project, as of July 1986, in excess of $150, 000, 000 w a s in c u rre df or t h e p ro j ec t, an d t h e p ro j ec t i s l oc a t e d in P in e Bl u ff, A r kan s a s, or t h e p ro j ec t in v o l v es p ro p er t yo f a t y p e d escr ib e d in A D R c l a sses 26.1, 26.2, 25, 00.3 an d 00.4 in c l u d e d ina p a p er pl an tw hi c h w i ll man u f a c t u re an dd i s t r ib u t e t i ss u e, t o w e l or na p kin p ro d u c t s; i s l oc a t e d in E ff in g ham C o u n t y, G eor g ia; an d i s g e n er a ll y ba se d u p o na w r i tt e n G e n er a l Descr i pt i o n w hi c h w a ss u bmi tt e d t o t h e G eor g ia De p a r t m e n t o f R e v e n u eo n or ab o u t J u n e 13, 1985. A p ro j ec t i s d escr ib e d in t hi ss u b p a r a g r a p hi f — a l e tt ero f in t e n tw i t h res p ec tt os u c h p ro j ec tw a se x ec u t e d o n J u n e 4, 1985, an d a 5 - p erce n t d o w n p a y m e n tw a s ma d e in co nn ec t i o n w i t h s u c h p ro j ec t f or 210 - u ni tp ress l in es an d re l a t e d e q u i p m e n t . A p ro j ec t i s d escr ib e d in t hi ss u b p a r a g r a p hi f — t h e p ro j ec t in v o l v es t h ere t ro f i t o f amm o nia pl an t s, a so f M a rc h 1, 1986, m ore t han$ 390,000 had been expended for engineering and equipment, and more than $170, 000 w a se x p e n se d in 1985 a s a p or t i o n o f p re l imina rye n g in eer in g e x p e n se . A p ro j ec t i s d escr ib e d in t hi ss u b p a r a g r a p hi f t h e p ro j ec t in v o l v es b u l kh e a d in t er m o d a l f l a t c a rs w hi c ha re pl a ce d in ser v i ce b e f ore J an u a ry 1, 1987, an d e i t h er — m ore t han$ 2,290,000 of expenditures were made before March 1, 1986 , with respect to a project involving up to 300 platforms, or more than $95, 000 o f e x p e n d i t u res w ere ma d e b e f ore M a rc h 1, 1986, w i t h res p ec tt o a p ro j ec t in v o l v in gu pt o 850 pl a t f or m s . A p ro j ec t i s d escr ib e d in t hi ss u b p a r a g r a p hi f — t h e p ro j ec t in v o l v es t h e p ro d u c t i o nan d t r an s p or t a t i o n o f o i l an d g a s f ro ma w e lll oc a t e d n or t h o f t h e A rc t i c C i rc l e, an d m ore t han$ 200,000,000 of cost had been incurred or committed before September 26, 1985 . A project is described in this subparagraph if— a commitment letter was entered into with a financial institution on January 23, 1986 , for the financing of the project, the project involves intercity communication links (including microwave and fiber optics communications systems and related property), the project consists of communications links between— Omaha, Nebraska, and Council Bluffs, Iowa, Waterloo, Iowa and Sioux City, Iowa, Davenport, Iowa and Springfield, Illinois, and the estimated cost of such project is approximately $13, 000, 000. A p ro j ec t i s d escr ib e d in t hi ss u b p a r a g r a p hi f — s u c h p ro j ec t i s aminin g m o d er ni z a t i o n p ro j ec t in v o l v in g minin g, t r an s p or t, an d mi ll in g o p er a t i o n s, b e f ore S e pt e mb er 26, 1985, a tl e a s t$ 20,000,000 was expended for engineering studies which were approved by the Board of Directors of the taxpayer on January 27, 1983 , and such project will involve a total estimated minimum cost of $350, 000, 000. A p ro j ec t i s d escr ib e d in t hi ss u b p a r a g r a p hi f — s u c h p ro j ec t i s a d r a g l in e a c q u i re d in co nn ec t i o n w i t ha 3 - s t a g e p ro g r am w hi c hb e g anin 1980 t o in cre a se p ro d u c t i o n f ro ma co a l min e, a tl e a s t$ 35,000,000 was spent before September 26, 1985 , on the 1st 2 stages of the program, and at least $4, 000, 000 w a ss p e n tt o p re p a re t h e min es i t e f or t h e d r a g l in e . A p ro j ec t i s d escr ib e d in t hi ss u b p a r a g r a p hi f — i t i s a p ro j ec t co n s i s t in g o f amin er a lp rocess in g f a c i l i t y u s in g ah e a pl e a c hin g sys t e m (in c l u d in g w a s t e d u m p s, l o w - g r a d e d u m p s, a l e a c hin g a re a, an d min ero a d s) an d i f — co n v er t ib l es u b or d ina t e dd e b e n t u res w ere i ss u e d in A ugu s t 1985, t o f inan ce t h e p ro j ec t, co n s t r u c t i o n o f t h e p ro j ec tw a s a u t h or i ze d b y t h e B o a r d o f D i rec t orso f t h e t a x p a yero n or b e f oreDece mb er 31, 1985, a tl e a s t$ 750,000 was paid or incurred with respect to the project on or before December 31, 1985 , and the project is placed in service on or before December 31, 1986 . A project is described in this subparagraph if it is a plant facility on Alaska’s North Slope which is placed in service before January 1, 1988 , and— the approximate cost of which is $675, 000, 000, o f w hi c ha pp ro x ima t e l y$ 400,000,000 was spent on off-site construction, the approximate cost of which is $445, 000, 000, o f w hi c ha pp ro x ima t e l y$ 400,000,000 was spent on off-site construction and more than 50 percent of the project cost was spent prior to December 31, 1985 , or the approximate cost of which is $375, 000, 000, o f w hi c ha pp ro x ima t e l y$ 260,000,000 was spent on off-site construction. A project is described in this subparagraph if it involves the connecting of existing retail stores in the downtown area of a city to a new covered area, the total project will be 250,000 square feet, a formal Memorandum of Understanding relating to development of the project was executed with the city on July 2, 1986 , and the estimated cost of the project is $18, 186, 424. A p ro j ec t i s d escr ib e d in t hi ss u b p a r a g r a p hi f i t in c l u d es a 200, 000 s q u a re f oo t o ff i ce t o w er, a 200 - roo mh o t e l, a 300, 000 s q u a re f oo t re t ai l ce n t er, an 800 - s p a ce p a r kin g f a c i l i t y, t h e t o t a l cos t i s p ro j ec t e d t o b e$ 60,000,000, and $1, 250, 000 w a se x p e n d e d w i t h res p ec tt o t h es i t e b e f ore A ugu s t 25, 1986. A p ro j ec t i s d escr ib e d in t hi ss u b p a r a g r a p hi f i t i s aj o in t u se an dd e v e l o p m e n tp ro j ec t in c l u d in g anin t e g r a t e d h o t e l, co n v e n t i o n ce n t er, o ff i ce, re l a t e d re t ai l f a c i l i t i es an d p u b l i c ma ss t r an s p or t a t i o n t er mina l, an d v e hi c l e p a r kin g f a c i l i t i es w hi c h s a t i s f i es t h e f o ll o w in g co n d i t i o n s : i s d e v e l o p e d w i t hin cer t ainai rs p a cer i g h t s an d u p o n re a lp ro p er t ye x c han g e df ors u c hj o in t u se an dd e v e l o p m e n tp ro j ec tw hi c hi so w n e d or a c q u i re d b y a s t a t e d e p a r t m e n t o f t r an s p or t a t i o n, a re g i o na l ma ss t r an s i t d i s t r i c t ina co u n t y w i t ha p o p u l a t i o n o f a tl e a s t 5, 000, 000 an d a co mm u ni t yre d e v e l o p m e n t a g e n cy; s u c h p ro j ec t a ff ec t s an e x i s t in g, a pp ro x ima t e l y 40 a cre p u b l i c ma ss t r an s p or t a t i o nb u s - w a y t er mina l f a c i l i t y l oc a t e d a d ja ce n tt o anin t ers t a t e hi g h w a y; am e m or an d u m o f u n d ers t an d in g w i t h res p ec tt os u c hj o in t u se an dd e v e l o p m e n tp ro j ec t i se x ec u t e d b y a s t a t e d e p a r t m e n t o f t r an s p or t a t i o n, s u c ha co u n t yre g i o na l ma ss t r an s i t d i s t r i c t an d a co mm u ni t yre d e v e l o p m e n t a g e n cyo n or b e f oreDece mb er 31, 1986, an d amaj or p or t i o n o f s u c hj o in t u se an dd e v e l o p m e n tp ro j ec t i s pl a ce d in ser v i ce b yDece mb er 31, 1990. A p ro j ec t i s d escr ib e d in t hi ss u b p a r a g r a p hi f — i t i s an$ 8,000,000 project to provide advanced control technology for adipic acid at a plant, which was authorized by the company’s Board of Directors in October 1985, at December 31, 1985 , $1, 400, 000 w a sco mmi tt e d an d$ 400,000 expended with respect to such project, or it is an $8, 300, 000 p ro j ec tt o a c hi e v eco m pl ian ce w i t h St a t e an d F e d er a l re gu l a t i o n s f or p a r t i c u l a t ese mi ss i o n s, w hi c h w a s a u t h or i ze d b y t h eco m p an y ’ s B o a r d o f D i rec t ors in Dece mb er 1985, b y M a rc h 31, 1986,$ 250,000 was committed and $250, 000 w a se x p e n d e d w i t h res p ec tt os u c h p ro j ec t, or i t i s a$ 22,000,000 project for the retrofit of a plant that makes a raw material for aspartame, which was approved in the company’s December 1985 capital budget, if approximately $3, 000, 000 o f t h e$ 22,000,000 was spent before August 1, 1986 . A project is described in this subparagraph if such project passes through at least 9 States and involves an intercity communication link (including multiple repeater sites and junction stations for microwave transmissions and amplifiers for fiber optics); the link from Buffalo to New York/Elizabeth was completed in 1984; the link from Buffalo to Chicago was completed in 1985; and the link from New York to Washington is completed in 1986. A project is described in this subparagraph if— such project involves a fiber optic network of at least 475 miles, passing through Minnesota and Wisconsin; and before January 1, 1986 , at least 200,000 for the financing or construction of such facility, such facility is the Tri-Cities Solid Waste Recovery Project involving Fremont, Newark, and Union City, California, and has received an authority to construct from the Environmental Protection Agency or from a State or local agency authorized by the Environmental Protection Agency to issue air quality permits under the Clean Air Act [ 42 U.S.C. 7401 et seq.], a bond volume carryforward election was made for the facility and the facility is for Chattanooga, Knoxville, or Kingsport, Tennessee, or such facility is to serve Haverhill, Massachusetts. In the case of a binding contract entered into on October 30, 1984 , for the purchase of 6 semi-submersible drilling units at a cost of 300,000,000; or the International Telecommunications Satellite Organization or the International Maritime Satellite Organization entered into written binding contracts before May 1, 1985 . The amendments made by section 201 shall not apply to property that is part of a nonwire line system in the Domestic Public Cellular Radio Telecommunications Service for which the Federal Communications Commission has issued a construction permit before September 26, 1985 , but only if such property is placed in service before January 1, 1987 . The amendments made by section 201 shall not apply to projects consisting of 1 or more facilities for the cogeneration and distribution of electricity and steam or other forms of thermal energy if— at least $100, 000 w a s p ai d or in c u rre d w i t h res p ec tt o t h e p ro j ec t b e f ore M a rc h 1, 1986, am e m or an d u m o f u n d ers t an d in g w a se x ec u t e d o n S e pt e mb er 13, 1985, an d t h e p ro j ec t i s pl a ce d in ser v i ce b e f ore J an u a ry 1, 1989, a tl e a s t$ 500,000 was paid or incurred with respect to the projects before May 6, 1986 , the projects involve a 22-megawatt combined cycle gas turbine plant and a 45-megawatt coal waste plant, and applications for qualifying facility status were filed with the Federal Energy Regulatory Commission on March 5, 1986 , the project cost approximates $125, 000, 000 t o$ 140,000,000 and an application was made to the Federal Energy Regulatory Commission in July 1985, an inducement resolution for such facility was adopted on September 10, 1985 , a development authority was given an inducement date of September 10, 1985 , for a loan not to exceed $80, 000, 000 w i t h res p ec tt os u c h f a c i l i t y, an d s u c h f a c i l i t y i se x p ec t e d t o ha v e a c a p a c i t yo f a pp ro x ima t e l y 30 m e g a w a tt so f e l ec t r i c p o w er an d 70, 000 p o u n d so f s t e am p er h o u r, a tl e a s t$ 1,000,000 was incurred with respect to the project before May 6, 1986 , the project involves a 52-megawatt combined cycle gas turbine plant and a petition was filed with the Connecticut Department of Public Utility Control to approve a power sales agreement with respect to the project on March 27, 1986 , the project has a planned scheduled capacity of approximately 38,000 kilowatts, the project property is placed in service before January 1, 1991 , and the project is operated, established, or constructed pursuant to certain agreements, the negotiation of which began before 1986, with public or municipal utilities conducting business in Massachusetts, or the Board of Regents of Oklahoma State University took official action on July 25, 1986 , with respect to the project. In the case of the project described in subparagraph (F), section 203(b)(2)(A) shall be applied by substituting ‘ January 1, 1991 ’ for ‘ January 1, 1989 ’. The amendments made by section 201 shall not apply to a project located in New Mexico consisting of a coal-fired electric generating station (including multiple generating units, coal mine equipment, and transmission facilities) if— a tax-exempt entity will own an equity interest in all property included in the project (except the coal mine equipment), and at least $72, 000, 000 w a se x p e n d e d in t h e a c q u i s i t i o n o f co a ll e a ses, l an d an d w a t err i g h t s, e n g in eer in g s t u d i es, an d o t h er d e v e l o p m e n t cos t s b e f ore M a y 6, 1986. F or p u r p oseso f t hi s p a r a g r a p h, sec t i o n 203 (b) (2) s ha ll b e a ppl i e d b ys u b s t i t u t in g ‘ J an u a ry 1, 1996’ f or ‘ J an u a ry 1, 1991’ e a c h pl a ce i t a pp e a rs . T h e am e n d m e n t s ma d e b ysec t i o n 201 s ha ll n o t a ppl y t o u pt o$ 20,000,000 of improvements made by a lessee of any indoor sports facility pursuant to a lease from a State commission granting the right to make limited and specified improvements (including planned seat explanations), if architectural renderings of the project were commissioned and received before December 22, 1985 . The amendments made by section 201 shall not apply to any property which is part of an arena constructed for professional sports activities in a metropolitan area, provided that such arena is capable of seating no less than 18,000 spectators and a binding contract to incur significant expenditures for its construction was entered into before June 1, 1986 . The amendments made by section 201 shall not apply to 2 agricultural waste-to-energy powerplants (and required transmission facilities), in connection with which a contract to sell 100 megawatts of electricity to a city was executed in October 1984. The amendments made by section 201 shall not apply to one of three 540 megawatt coal-fired plants that are placed in service after a sale leaseback occurring after January 1, 1986 , if— the Board of Directors of an electric power cooperation authorized the investigation of a sale leaseback of a nuclear generation facility by resolution dated January 22, 1985 , and a loan was extended by the Rural Electrification Administration on February 20, 1986 , which contained a covenant with respect to used property leasing from unit II. The amendments made by section 201 shall not apply to a light rail transit system, the approximate cost of which is $235, 000, 000, i f, w i t h res p ec tt o w hi c h, t h e b o a r d o fd i rec t orso f a cor p or a t i o n (f or m e d in S e pt e mb er 1984 f or t h e p u r p oseo fd e v e l o p in g, f inan c in g, an d o p er a t in g t h esys t e m) a u t h or i ze d a$ 300,000 expenditure for a feasibility study in April 1985. The amendments made by section 201 shall not apply to any project for rehabilitation of regional railroad rights of way and properties including grade crossings which was authorized by the Board of Directors of such company prior to October 1985; and/or was modified, altered or enlarged as a result of termination of company contracts, but approved by said Board of Directors no later than January 30, 1986 , and which is in the public interest, and which is subject to binding contracts or substantive commitments by December 31, 1987 . The amendments made by section 201 shall not apply to a laundry detergent manufacturing facility, the approximate cost of which is $13, 200, 000, w i t h res p ec tt o w hi c ha p ro j ec t a g ree m e n tw a s f u ll ye x ec u t e d o n M a rc h 17, 1986. T h e am e n d m e n t s ma d e b ysec t i o n 201 s ha ll n o t a ppl y t o an yo f 3 reso u rcereco v ery pl an t s, t h e a gg re g a t ecos t o f w hi c ha pp ro x ima t es$ 300,000,000, if an industrial development authority adopted a bond resolution with respect to such facilities on December 17, 1984 , and the projects were approved by the department of commerce of a Commonwealth on December 27, 1984 . The amendments made by section 201 shall not apply to a computer and office support center building in Minneapolis, with respect to which the first contract, with an architecture firm, was signed on April 30, 1985 , and a construction contract was signed on March 12, 1986 . The amendments made by section 201 shall not apply to pipes, mains, and related equipment included in district heating and cooling facilities, with respect to which the development authority of a State approved the project through an inducement resolution adopted on October 8, 1985 , and in connection with which approximately $11, 000, 000 o f t a x - e x e m pt b o n d s a re t o b e i ss u e d . T h e am e n d m e n t s ma d e b ysec t i o n 201 s ha ll n o t a ppl y t o an yo ff s h ore v esse lt h eco n s t r u c t i o n co n t r a c t f or w hi c h w a ss i g n e d o n F e b r u a ry 28, 1986, an d t h e a pp ro x ima t ecos t o f w hi c hi s$ 9,000,000. The amendments made by section 201 shall not apply to a project involving the reconstruction of an inland river vessel docked on the Mississippi River at St. Louis, Missouri, on July 14, 1986 , and with respect to which: the estimated cost of reconstruction is approximately $39, 000, 000; reco n s t r u c t i o n w a sco mm e n ce d p r i or t oDece mb er 1, 1985; a tl e a s t$ 17,000,000 was expended before December 31, 1985 ; and The amendments made by section 201 shall not apply to two new automobile carrier vessels which will cost approximately $47, 000, 000 an d w i ll b eco n s t r u c t e d b y a U ni t e d St a t es - f l a g c a rr i er t oo p er a t e, u n d er t h e U ni t e d St a t es - f l a g an d w i t han A m er i c an cre w, t o t r an s p or t f ore i g na u t o m o bi l es t o t h e U ni t e d St a t es, ina c a se w h ere n e g o t ia t i o n s f ors u c h t r an s p or t a t i o na rr an g e m e n t sco mm e n ce d in A p r i l 1985, f or ma l co n t r a c t bi d s w eres u bmi tt e d p r i or t o t h ee n d o f 1985, an dd e f ini t i v e t r an s p or t a t i o n co n t r a c t s w ere a w a r d e d in M a y 1986. T h e am e n d m e n t s ma d e b ysec t i o n 201 s ha ll n o t a ppl y t o a 562 - f oo tp a sse n g ercr u i ses hi p, w hi c h w a s p u rc ha se d in 1980 f or t h e p u r p oseo f re t u r nin g t h e v esse lt o U ni t e d St a t esser v i ce, t h e a pp ro x ima t ecos t o f re f u r bi s hm e n t o f w hi c hi s a pp ro x ima t e l y$ 47,000,000. The amendments made by section 201 shall not apply to the Muskegon, Michigan, Cross-Lake Ferry project having a projected cost of approximately $7, 200, 000. T h e am e n d m e n t s ma d e b ysec t i o n 201 s ha ll n o t a ppl y t o an e w a u t o m o bi l ec a rr i er v esse l, t h eco n t r a c tp r i ce f or w hi c hi s n o g re a t er t han$ 28,000,000, and which will be constructed for and placed in service by OSG Car Carriers, Inc., to transport, under the United States flag and with an American crew, foreign automobiles to North America in a case where negotiations for such transportation arrangements commenced in 1985, and definitive transportation contracts were awarded before June 1986. The amendments made by section 201 shall not apply to two wood energy projects for which applications with the Federal Energy Regulatory Commission were filed before January 1, 1986 , which are described as follows: a 26.5 megawatt plant in Fresno, California, and a 26.5 megawatt plant in Rocklin, California. The amendments made by section 201 shall not apply to property which is a geothermal project of less than 20 megawatts that was certified by the Federal Energy Regulatory Commission on July 14, 1986 , as a qualifying small power production facility for purposes of the Public Utility Regulatory Policies Act of 1978 [see Short Title note set out under 16 U.S.C. 2601 ] pursuant to an application filed with the Federal Energy Regulatory Commission on April 17, 1986 . The amendments made by section 201 shall not apply to any of the following projects: A mixed use development on the East River the total cost of which is approximately $400, 000, 000, w i t h res p ec tt o w hi c ha l e tt ero f in t e n tw a se x ec u t e d o n J an u a ry 24, 1984, an d w i t h res p ec tt o w hi c ha pp ro x ima t e l y$ 2.5 million had been spent by March 1, 1986 . A 356-room hotel, banquet, and conference facility (including 540,000 square feet of office space) the approximate cost of which is $158, 000, 000, w i t h res p ec tt o w hi c ha l e tt ero f in t e n tw a se x ec u t e d o n J u n e 1, 1984, an d w i t h res p ec tt o w hi c hanin d u ce m e n t reso l u t i o nan d b o n d reso l u t i o n w a s a d o pt e d o n A ugu s t 20, 1985. P ha se 1 o f a 4 - p ha se p ro j ec t in v o l v in g t h eco n s t r u c t i o n o f l ab or a t orys p a ce an d g ro u n d - f l oorre t ai l s p a ce t h ees t ima t e d cos t o f w hi c hi s$ 22,000,000 and with respect to which a memoradum [sic] of understanding was made on August 29, 1983 . A project involving the development of a 490,000 square foot mixed-use building at 152 W. 57th Street, New York, New York, the estimated cost of which is $100, 000, 000, an d w i t h res p ec tt o w hi c hab u i l d in g p er mi t a ppl i c a t i o n w a s f i l e d in M a y 1986. A mi x e d - u se p ro j ec t co n t ainin g a 300 u ni t, 12 - s t ory h o t e l, g a r a g e, tw o m u lt i - r i seo ff i ce b u i l d in g s, an d a l so in c l u d e d a p a r k, re n o v a t e d r i v er b o a t, an d ba r g e w i t h f es t i v a l ma r k e tpl a ce, t h ec a p i t a l o u tl a ys f or w hi c ha pp ro x ima t e$ 68,000,000. The construction of a three-story office building that will serve as the home office for an insurance group and its affiliated companies, with respect to which a city agreed to transfer its ownership of the land for the project in a Redevelopment Agreement executed on September 18, 1985 , once certain conditions are met. A commercial bank formed under the laws of the State of New York which entered into an agreement on September 5, 1985 , to construct its headquarters at 60 Wall Street, New York, New York, with respect to such headquarters. Any property which is part of a commercial and residential project, the first phase of which is currently under construction, to be developed on land which is the subject of an ordinance passed on July 20, 1981 , by the city council of the city in which such land is located, designating such land and the improvements to be placed thereon as a residential-business planned development, which development is being financed in part by the proceeds of industrial development bonds in the amount of $62, 600, 000 i ss u e d o n Dece mb er 4, 1985. A 600, 000 s q u a re f oo t mi x e d u se b u i l d in g kn o w na s Fl u s hin g C e n t er w i t h res p ec tt o w hi c ha l e tt ero f in t e n tw a se x ec u t e d o n M a rc h 26, 1986. I n t h ec a seo f t h e b u i l d in g d escr ib e d in s u b p a r a g r a p h (I), sec t i o n 203 (b) (2) (A) s ha ll b e a ppl i e d b ys u b s t i t u t in g ‘ J an u a ry 1, 1993’ f or t h e a ppl i c ab l e d a t e w hi c h w o u l d o t h er w i se a ppl y . T h e am e n d m e n t s ma d e b ysec t i o n 201 s ha ll n o t a ppl y t o an$ 80,000,000 capital project steel seamless tubular casings minimill and melting facility located in Youngstown, Ohio, which was purchased by the taxpayer in April 1985, and— the purchase and renovation of which was approved by a committee of the Board of Directors on February 22, 1985 , and as of December 31, 1985 , more than $20, 000, 000 w a s in c u rre d orco mmi tt e d w i t h res p ec tt o t h ere n o v a t i o n . T h e am e n d m e n t s ma d e b ysec t i o n 201 s ha ll n o t a ppl y t o an y p ro j ec t f orres i d e n t ia l re n t a lp ro p er t y i f — anin d u ce m e n t reso l u t i o n w i t h res p ec tt os u c h p ro j ec tw a s a d o pt e d b y t h e St a t e h o u s in g d e v e l o p m e n t a u t h or i t yo n J an u a ry 25, 1985, an d s u c h p ro j ec tw a s t h es u bj ec t o f a l a w s u i t f i l e d o n O c t o b er 25, 1985. T h e am e n d m e n t s ma d e b ysec t i o n 201 s ha ll n o t a ppl y t o a 30 m e g a w a tt e l ec t r i c g e n er a t in g f a c i l i t y f u e l e d b y g eo t h er ma l an d w oo d w a s t e, t h e a pp ro x ima t ecos t o f w hi c hi s$ 55,000,000, and with respect to which a 30-year power sales contract was executed on March 22, 1985 . The amendments made by section 201 shall not apply to railroad maintenance-of-way equipment, with respect to which a Boston bank entered into a firm binding contract with a major northeastern railroad before March 2, 1986 , to finance $10, 500, 000 o f s u c h e q u i p m e n t, i f a ll o f t h ee q u i p m e n tw a s pl a ce d in ser v i ce b e f ore A ugu s t 1, 1986. T h e am e n d m e n t ma d e b ysec t i o n 201 s ha ll n o t a ppl y t o — a f a c i l i t yco n s t r u c t e d o na pp ro x ima t e l yse v e na creso f l an d l oc a t e d o n O g l e ’ s P oso C ree k O i l f i e l d, t h e p r ima ry f u e l o f w hi c h w i ll b e bi t u min o u sco a l f ro m U t ah or W yo min g, w i t h res p ec tt o w hi c hana ppl i c a t i o n f or ana u t h or i t y t oco n s t r u c tw a s f i l e d o n Dece mb er 26, 1985, ana u t h or i t y t oco n s t r u c tw a s i ss u e d o n J u l y 2, 1986, an d a p re v e n t i o n o f s i g ni f i c an t d e t er i or a t i o n p er mi t a ppl i c a t i o n w a ss u bmi tt e d in M a y 1985, a f a c i l i t yco n s t r u c t e d o na pp ro x ima t e l yse v e na creso f l an d l oc a t e d o n T eorco ’ s J a s min o i l f i e l d, t h e p r ima ry f u e l o f w hi c h w i ll b e bi t u min o u sco a l f ro m U t ah or W yo min g, w i t h res p ec tt o w hi c hana u t h or i t y t oco n s t r u c tw a s f i l e d o n Dece mb er 26, 1985, ana u t h or i t y t oco n s t r u c tw a s i ss u e d o n J u l y 2, 1986, an d a p re v e n t i o n o f s i g ni f i c an t d e t er i or a t i o n p er mi t a ppl i c a t i o n w a ss u bmi tt e d in J u l y 1985, t h e M o u n t ainVi e w A p a r t m e n t s, in H a d l ey, M a ss a c h u se tt s, a f a c i l i t ye x p ec t e d t o ha v e a c a p a c i t yo f n o tl ess t han 65 m e g a w a tt so f e l ec t r i c i t y, t h es t e am f ro m w hi c hi s t o b eso l d t o a p u lp an d p a p er mi ll, w i t h res p ec tt o w hi c ha ppl i c a t i o n w a s ma d e t o t h e F e d er a lR e gu l a t ory C o mmi ss i o n f orcer t i f i c a t i o na s a q u a l i f i e df a c i l i t yo n N o v e mb er 1, 1985, an d rece i v e d s u c h cer t i f i c a t i o n o n J an u a ry 24, 1986,$ 5,000,000 of equipment ordered in 1986, in connection with a 60,000 square foot plant in Masontown, Pennsylvania, that was completed in 1983, a magnetic resonance imaging machine, with respect to which a binding contract to purchase was entered into in April 1986, in connection with the construction of a magnetic resonance imaging clinic with respect to which a Determination of Need certification was obtained from a State Department of Public Health on October 22, 1985 , if such property is placed in service before December 31, 1986 , a company located in Salina, Kansas, which has been engaged in the construction of highways and city streets since 1946, but only to the extent of $1, 410, 000 o f in v es t m e n t inn e w sec t i o n 38 p ro p er t y, a$ 300,000 project undertaken by a small metal finishing company located in Minneapolis, Minnesota, the first parts of which were received and paid for in January 1986, with respect to which the company received Board approval to purchase the largest piece of machinery it has ever ordered in 1985, A $1, 200, 000 f ini s hin g ma c hin e t ha tw a s p u rc ha se d o n A p r i l 2, 1986 an d pl a ce d in t oser v i ce in S e pt e mb er 1986 b y a co m p an y l oc a t e d in D a v e n p or t, I o w a, A 25 m e g a w a tt s ma llp o w er p ro d u c t i o n f a c i l i t y, w i t h res p ec tt o w hi c h Q u a l i f y in g F a c i l i t ys t a t u s n u mb ere d QF 86-593-000 w a s g r an t e d o n M a rc h 5, 1986, A 250 m e g a w a tt co a l - f i re d e l ec t r i c pl an t inn or t h e a s t er n N e v a d a es t ima t e d t ocos t$ 600,000,000 and known as the Thousand Springs project, on which the Sierra Pacific Power Company, a subsidiary of Sierra Pacific Resources, began in 1980 work to design, finance, construct, and operate (and section 203(b)(2) shall be applied with respect to such plant by substituting ‘ January 1, 1995 ’ for ‘ January 1, 1991 ’), 128 units of rental housing in connection with the Point Gloria Limited Partnership, property which is part of the Kenosha Downtown Redevelopment Project and which is financed with the proceeds of bonds issued pursuant to section 1317(6)(W) [set out as a note under section 141 of this title ], Lakeland Park Phase II, in Baton Rouge, Louisiana, the Santa Rosa Hotel, in Pensacola, Florida, the Sheraton Baton Rouge, in Baton Rouge, Louisiana, $300, 000 o f e q u i p m e n tpl a ce d in ser v i ce in 1986, in co nn ec t i o n w i t h t h ere n o v a t i o n o f t h e B es t W es t er n T o w nh o u se C o n v e n t i o n C e n t er in C e d a r R a p i d s, I o w a, t h ese g m e n t o f ana t i o n w i d e f ib ero pt i cs t e l eco mm u ni c a t i o n s n e tw or k pl a ce d in ser v i ce b y S o u t h er n N e t, t h e t o t a l es t ima t e d cos t o f w hi c hi s$ 37,000,000, two cogeneration facilities, to be placed in service by the Reading Anthracite Coal Company (or any subsidiary thereof), costing approximately $110, 000, 000 e a c h, w i t h res p ec tt o w hi c h f i l in g s w ere ma d e w i t h t h e F e d er a lE n er g y R e gu l a t ory C o mmi ss i o nb yDece mb er 31, 1985, an d w hi c ha re l oc a t e d in P e nn sy l v ania, a p or t i o n o f a f ib ero pt i cs n e tw or k pl a ce d in ser v i ce b y L D XNET a f t erDece mb er 31, 1988, b u t o n l y t o t h ee x t e n tt h ecos t o f s u c h p or t i o n d oes n o t e x cee d$ 25,000,000, 3 newly constructed fishing vessels, and one vessel that is overhauled, constructed by Mid Coast Marine, but only to the extent of $6, 700, 000 o f in v es t m e n t,$ 350,000 of equipment acquired in connection with the reopening of a plant in Bristol, Rhode Island, which plant was purchased by Buttonwoods, Ltd., Associates on February 7, 1986 , $4, 046, 000 o f e q u i p m e n tpl a ce d in ser v i ce b y B re n d l e ’ s I n cor p or a t e d, a c q u i re d in co nn ec t i o n w i t ha D i s t r ib u t i o n C e n t er, am u lt i - f ami l y mi x e d - u se h o u s in g p ro j ec tl oc a t e d inah o m er u l ec i t y, t h ezo nin g f or w hi c h w a sc han g e d t ores i d e n t ia l b u s in ess pl ann e dd e v e l o p m e n t o n N o v e mb er 26, 1985, an d w i t h res p ec tt o w hi c hb o t h t h e h o m er u l ec i t yo n Dece mb er 4, 1985, an d t h e St a t e h o u s in g f inan ce a g e n cyo n Dece mb er 20, 1985, a d o pt e d in d u ce m e n t reso l u t i o n s, t h e M yr tl e B e a c h C o n v e n t i o n C e n t er, in S o u t h C a ro l ina, t o t h ee x t e n t o f$ 25,000,000 of investment, and railroad cars placed in service by the Pullman Leasing Company, pursuant to an April 3, 1986 purchase order, costing approximately $10, 000, 000. T h e am e n d m e n t s ma d e b ysec t i o n 201 [am e n d in g t hi ssec t i o nan d sec t i o n s 46, 167, 178, 179, 280 F, 291, 312, 465, 467, 514, 751, 1245, 4162, 6111, an d 7701 o f t hi s t i tl e] s ha ll n o t a ppl y t o —$ 400,000 of equipment placed in service by Super Key Market, if such equipment is placed in service before January 1, 1987 , the Trolley Square project, the total project cost of which is $24, 500, 000, an d t h e am o u n t o fd e p rec iab l ere a lp ro p er t yo f w hi c hi s$ 14,700,000. a waste-to-energy project in Derry, New Hampshire, costing approximately $60, 000, 000, an d a w a s t e - t o - e n er g y p ro j ec t in M an c h es t er, N e w H am p s hi re, cos t in g a pp ro x ima t e l y$ 60,000,000, the City of Los Angeles Co-composting project, the estimated cost of which is $62, 000, 000, w i t h res p ec tt o w hi c h, o n J u l y 17, 1985, t h e C a l i f or nia P o ll u t i o n C o n t ro lF inan c in g A u t h or i t y i ss u e d anini t ia l reso l u t i o nin t h e ma x im u mam o u n t o f$ 75,000,000 to finance this project, the St. Charles, Missouri Mixed-Use Center, Oxford Place in Tulsa, Oklahoma, an amount of investment generating $20, 000, 000 o f in v es t m e n tt a x cre d i t s a tt r ib u t ab l e t o p ro p er t y u se d o n t h e I ll in o i sD i v ers a t ec h C am p u s,$ 25,000,000 of equipment used in the Melrose Park Engine Plant that is sold and leased back by Navistar, 80,000 vending machines, for a cost approximating $3, 400, 000 pl a ce d in t oser v i ce b y F o l z V e n d in g C o ., A 25.85 m e g a w a tt a lt er na t i v ee n er g y f a c i l i t y l oc a t e d in De b l o i s, M ain e, w i t h res p ec tt o w hi c h cer t i f i c a t i o nb y t h e F e d er a lE n er g y R e gu l a t ory C o mmi ss i o n w a s ma d eo n A p r i l 3, 1986, B u r bank M an ors, in I ll in o i s, an d a co g e n er a t i o n f a c i l i t y t o b e b u i lt a t a p a p erco m p an y in T u r n ers F a ll s, M a ss a c h u se tt s, w i t h res p ec tt o w hi c ha l e tt ero f in t e n tw a se x ec u t e d o nb e ha l f o f t h e p a p erco m p an yo n S e pt e mb er 26, 1985. C er t ain t r u c k s, e t c .— T h e am e n d m e n t s ma d e b ysec t i o n 201 s ha ll n o t a ppl y t o t r u c k s, t r a c t or u ni t s, an d t r ai l ers w hi c ha p r i v a t e l y h e l d t r u c k l e a s in g co m p an y h e a d q u a r t ere d in Des M o in es, I o w a, co n t r a c t e d t o p u rc ha se in S e pt e mb er 1985 b u t o n l y t o t h ee x t e n tt h e a gg re g a t ere d u c t i o nin F e d er a lt a x l iabi l i t y b yre a so n o f t h e a ppl i c a t i o n o f t hi s p a r a g r a p h d oes n o t e x cee d$ 8,500,000. The amendments made by section 201 shall not apply to an approximately 240,000 square foot beverage container manufacturing plant located in Batesville, Mississippi, or plant equipment used exclusively on the plant premises if— a 2-year supply contract was signed by the taxpayer and a customer on November 1, 1985 , such contract further obligated the customer to purchase beverage containers for an additional 5-year period if physical signs of construction of the plant are present before September 1986, ground clearing for such plant began before August 1986, and construction is completed, the equipment is installed, and operations are commenced before July 1, 1987 . The amendments made by section 201 shall not apply to any property which is part of the multifamily housing at the Columbia Point Project in Boston, Massachusetts. A project shall be treated as not described in the preceding sentence and as not described in section 252(f)(1)(D) [set out as a note under section 42 of this title ] unless such project includes at substantially all times throughout the compliance period (within the meaning of section 42(i)(1) of the Internal Revenue Code of 1986), a facility which provides health services to the residents of such project for fees commensurate with the ability of such individuals to pay for such services. The amendments made by section 201 shall not apply to any ethanol facility located in Blair, Nebraska, if— in July of 1984 an initial binding construction contract was entered into for such facility, in June of 1986, certain Department of Energy recommended contract changes required a change of contractor, and in September of 1986, a new contract to construct such facility, consistent with such recommended changes, was entered into. The amendments made by section 201 shall not apply to any property which is part of a sewage treatment facility if, prior to January 1, 1986 , the City of Conyers, Georgia, selected a privatizer to construct such facility, received a guaranteed maximum price bid for the construction of such facility, signed a letter of intent and began substantial negotiations of a service agreement with respect to such facility. The amendments made by section 201 shall not apply to— a $28, 000, 000 w oo d reso u rceco m pl e x f or w hi c h co n s t r u c t i o n w a s a u t h or i ze d b y t h e B o a r d o f D i rec t orso n A ugu s t 9, 1985, an e l ec t r i c a l co g e n er a t i o n pl an t in B e t h e l, M ain e w hi c hi s t o g e n er a t e 2 m e g a w a tt so f e l ec t r i c i t y f ro m t h e b u r nin g o f w oo d res i d u es, w i t h res p ec tt o w hi c ha co n t r a c tw a se n t ere d in t oo n J u l y 10, 1984, an d w i t h res p ec tt o w hi c h$ 200,000 of the expected $2, 000, 000 cos t ha d b ee n co mmi tt e d b e f ore J u n e 15, 1986, ami x e d in co m e h o u s in g p ro j ec t in P or tl an d, M ain e w hi c hi s kn o w na s t h e B a c k B a y T o w er an d w hi c hi se x p ec t e d t ocos t$ 17,300,000, the Eastman Place project and office building in Rochester, New York, which is projected to cost $20, 000, 000, w i t h res p ec tt o w hi c hanin d u ce m e n t reso l u t i o n w a s a d o pt e d in Dece mb er 1986, an df or w hi c habin d in g co n t r a c t o f$ 500,000 was entered into on April 30, 1986 , the Marquis Two project in Atlanta, Georgia which has a total budget of $72, 000, 000 an d t h eco n s t r u c t i o n p ha seo f w hi c hb e g an u n d er a co n t r a c t e n t ere d in t oo n M a rc h 26, 1986, a 166 - u ni t co n t in u in g c a rere t i re m e n t ce n t er in N e wO r l e an s, L o u i s iana, t h eco n s t r u c t i o n co n t r a c t f or w hi c h w a ss i g n e d o n F e b r u a ry 12, 1986, an d i s f or ama x im u mam o u n t n o tt oe x cee d$ 8,500,000, the expansion of the capacity of an oil refining facility in Rosemont, Minnesota from 137,000 to 207,000 barrels per day which is expected to be completed by December 31, 1990 , and a project in Ransom, Pennsylvania which will burn coal waste (known as ‘culm’) with an approximate cost of $64,000,000 and for which a certification from the Federal Energy Regulatory Commission was received on March 11, 1986 . The amendments made by section 201 shall not apply to any facility for the manufacture of an improved particle board if a binding contract to purchase such equipment was executed March 3, 1986 , such equipment will be placed in service by January 1, 1988 , and such facility is located in or near Moncure, North Carolina.

(“(b) Special Rule for Certain Property.— The provisions of section 168(f)(8) of the Internal Revenue Code of 1954 (as amended by section 209 of the Tax Equity and Fiscal Responsibility Act of 1982) shall continue to apply to any transaction permitted by reason of section 12(c)(2) of the Tax Reform Act of 1984 or section 209(d)(1)(B) of the Tax Equity and Fiscal Responsibility Act of 1982 (as amended by the Tax Reform Act of 1984) [ section 12(c)(2) of Pub. L. 98–369 and section 209(d)(1)(B) of Pub. L. 97–248 , respectively, set out below].

(“(c) Applicable Date in Certain Cases.— Section 203(b)(2) shall be applied by substituting ‘ January 1, 1992 ’ for ‘ January 1, 1991 ’ in the following cases. in the case of a 2-unit nuclear powered electric generating plant (and equipment and incidental appurtenances), located in Pennsylvania and constructed pursuant to contracts entered into by the owner operator of the facility before December 31, 1975 , including contracts with the engineer/constructor and the nuclear steam system supplier, such contracts shall be treated as contracts described in section 203(b)(1)(A), a cogeneration facility with respect to which an application with the Federal Energy Regulatory Commission was filed on August 2, 1985 , and approved October 15, 1985 . in the case of a 1,300 megawatt coal-fired steam powered electric generating plant (and related equipment and incidental appurtenances), which the three owners determined in 1984 to convert from nuclear power to coal power and for which more than $600, 000, 000 ha d b ee nin c u rre d orco mmi tt e df orco n s t r u c t i o nb e f ore S e pt e mb er 25, 1985, e x ce ptt ha t n o in v es t m e n tt a x cre d i tw i ll b e a ll o w ab l e u n d ersec t i o n 49 (d) (3) a dd e d b ysec t i o n 211 (a) o f t hi s A c t [sec t i o n 49 (d) o f t hi s t i tl e d oes n o t co n t aina p a r . (3)] f or an y q u a l i f i e d p ro g resse x p e n d i t u res ma d e a f t erDece mb er 31, 1990. S ec t i o n 203 (b) (2) s ha ll b e a ppl i e d b ys u b s t i t u t in g ‘ A p r i l 1, 1992’ f or t h e a ppl i c ab l e d a t e t ha tw o u l d o t h er w i se a ppl y, in t h ec a seo f t h eseco n d u ni t o f a tw in s t e am e l ec t r i c g e n er a t in g f a c i l i t y an d re l a t e d e q u i p m e n tw hi c h w a s g r an t e d a cer t i f i c a t eo f p u b l i cco n v e ni e n ce an d n ecess i t y b y a p u b l i cser v i ceco mmi ss i o n p r i or t o J an u a ry 1, 1982, i f t h e f i rs t u ni t o f t h e f a c i l i t y w a s pl a ce d in ser v i ce p r i or t o J an u a ry 1, 1985, an d b e f ore S e pt e mb er 26, 1985, m ore t han$ 100,000,000 had been expended toward the construction of the second unit. Section 203(b)(2) shall be applied by substituting ‘ January 1, 1990 ,’ (or, in the case of a project described in subparagraph (B), by substituting ‘ April 1, 1992 ’) for the applicable date that would otherwise apply in the case of— new commercial passenger aircraft used by a domestic airline, if a binding contract with respect to such aircraft was entered into on or before April 1, 1986 , and such aircraft has a present class life of 12 years, a pumped storage hydroelectric project with respect to which an application was made to the Federal Energy Regulatory Commission for a license on February 4, 1974 , and license was issued August 1, 1977 , the project number of which is 2740, and a newsprint mill in Pend Oreille county, Washington, costing about $290, 000, 000. I n t h ec a seo f anai rcr a f t d escr ib e d in s u b p a r a g r a p h (A), sec t i o n 203 (b) (1) (A) s ha ll b e a ppl i e d b ys u b s t i t u t in g ‘ A p r i l 1, 1986’ f or ‘ M a rc h 1, 1986’ an d sec t i o n 49 (e) (1) (B) o f t h e I n t er na lR e v e n u e C o d eo f 1986 s ha ll n o t a ppl y . T h e am e n d m e n t s ma d e b ysec t i o n 201 [am e n d in g t hi ssec t i o nan d sec t i o n s 46, 167, 178, 179, 280 F, 291, 312, 465, 467, 514, 751, 1245, 4162, 6111, an d 7701 o f t hi s t i tl e] s ha ll n o t a ppl y t o a l imi t e d am o u n t o f t h e f o ll o w in g p ro p er t yor a l imi t e d am o u n t o f p ro p er t yse t f or t hina s u bmi ss i o nb e f ore S e pt e mb er 16, 1986, b y t h e f o ll o w in g t a x p a yers : A re na p ro j ec t, M i c hi g an, b u t o n l y w i t h res p ec tt o$ 78,000,000 of investments. Campbell Soup Company, Pennsylvania, California, North Carolina, Ohio, Maryland, Florida, Nebraska, Michigan, South Carolina, Texas, New Jersey, and Delaware, but only with respect to $9, 329, 000 o f re gu l a r in v es t m e n tt a x cre d i t s . T h e S o u t h e a s tO v er t o w n / P a r kW es t d e v e l o p m e n t, Fl or i d a, b u t o n l y w i t h res p ec tt o$ 200,000,000 of investments. Equipment placed in service and operated by Leggett and Platt before July 1, 1987 , but only with respect to $2, 000, 000 o f re gu l a r in v es t m e n tt a x cre d i t s, an d s u b sec t i o n s (c) an d (d) o f sec t i o n 49 o f t h e I n t er na lR e v e n u e C o d eo f 1986 s ha ll n o t a ppl y t os u c h e q u i p m e n t . E a s tB ank Ho u s in g P ro j ec t .$ 1,561,215 of investments by Standard Telephone Company. Five aircraft placed in service before January 1, 1987 , by Presidential Air. A rehabilitation project by Ann Arbor Railroad, but only with respect to $2, 900, 000 o f in v es t m e n t s . P ro p er t y t ha t i s p a r t o f a co g e n er a t i o n p ro j ec tl oc a t e d in A d a, M i c hi g an, b u t o n l y w i t h res p ec tt o$ 30,000,000 of investments. Anchor Store Project, Michigan, but only with respect to $21, 000, 000 o f in v es t m e n t s . A w a s t e - f i re d e l ec t r i c a l g e n er a t in g f a c i l i t yo f B i o g e n P o w er, b u t o n l y w i t h res p ec tt o$ 34,000,000 of investments. $14, 000, 000 o f t e l e v i s i o n t r an s mi tt in g t o w ers pl a ce d in ser v i ce b y M e d ia G e n er a l, I n c ., w hi c h w eres u bj ec tt o bin d in g co n t r a c t s a so fJ an u a ry 21, 1986, an d w i ll b e pl a ce d in ser v i ce b e f ore J an u a ry 1, 1988, I n t eres t so f S am u e l A . H a r d a g e (w h e t h ero w n e d in d i v i d u a ll yor in p a r t n ers hi p f or m) . Tw o ai rcr a f t o f M es a A i r l in es w i t hana gg re g a t ecos t o f$ 5,723,484. Yarn-spinning equipment used at Spray Cotton Mills, but only with respect to $3, 000, 000 o f in v es t m e n t s .328 u ni t so f l o w - in co m e h o u s in g a t A n g e l u s Pl a z a, b u t o n l y w i t h res p ec tt o$ 20,500,000 of investments. One aircraft of Continental Aviation Services with a cost of approximately $15,000,000 that was purchased pursuant to a contract entered into during March of 1983 and that is placed in service by December 31, 1988 .

(“(d) Railroad Grading and Tunnel Bores.— In the case of expenditures for railroad grading and tunnel bores which were incurred by a common carrier by railroad to replace property destroyed in a disaster occurring on or about April 17, 1983 , near Thistle, Utah, such expenditures, to the extent not in excess of $15,000,000, shall be treated as recovery property which is 5-year property under section 168 of the Internal Revenue Code of 1954 (as in effect before the amendments made by this Act) and which is placed in service at the time such expenditures were incurred. Business interruption proceeds received for loss of use, revenues, or profits in connection with the disaster described in paragraph (1) and devoted by the taxpayer described in paragraph (1) to the construction of replacement track and related grading and tunnel bore expenditures shall be treated as constituting an amount received from the involuntary conversion of property under section 1033(a)(2) of such Code. This subsection shall apply to taxable years ending after April 17, 1983 .

(“(e) Treatment of Certain Disaster Losses.— In the case of a disaster described in paragraph (2), at the election of the taxpayer, the amendments made by section 201 of this Act [amending this section and sections 46, 167, 178, 179, 280F, 291, 312, 465, 467, 514, 751, 1245, 4162, 6111, and 7701 of this title]— shall not apply to any property placed in service during 1987 or 1988, or shall apply to any property placed in service during 1985 or 1986, which is property to replace property lost, damaged, or destroyed in such disaster. This section shall apply to a flood which occurred on November 3 through 7, 1985, and which was declared a natural disaster area by the President of the United States.”

§ 169 Amortization of pollution control facilities

(a) Allowance of deduction Every person, at his election, shall be entitled to a deduction with respect to the amortization of the amortizable basis of any certified pollution control facility (as defined in subsection (d)), based on a period of 60 months. Such amortization deduction shall be an amount, with respect to each month of such period within the taxable year, equal to the amortizable basis of the pollution control facility at the end of such month divided by the number of months (including the month for which the deduction is computed) remaining in the period. Such amortizable basis at the end of the month shall be computed without regard to the amortization deduction for such month. The amortization deduction provided by this section with respect to any month shall be in lieu of the depreciation deduction with respect to such pollution control facility for such month provided by section 167. The 60-month period shall begin, as to any pollution control facility, at the election of the taxpayer, with the month following the month in which such facility was completed or acquired, or with the succeeding taxable year.

(b) Election of amortization The election of the taxpayer to take the amortization deduction and to begin the 60-month period with the month following the month in which the facility is completed or acquired, or with the taxable year succeeding the taxable year in which such facility is completed or acquired, shall be made by filing with the Secretary, in such manner, in such form, and within such time, as the Secretary may by regulations prescribe, a statement of such election.

(c) Termination of amortization deduction A taxpayer which has elected under subsection (b) to take the amortization deduction provided in subsection (a) may, at any time after making such election, discontinue the amortization deduction with respect to the remainder of the amortization period, such discontinuance to begin as of the beginning of any month specified by the taxpayer in a notice in writing filed with the Secretary before the beginning of such month. The depreciation deduction provided under section 167 shall be allowed, beginning with the first month as to which the amortization deduction does not apply, and the taxpayer shall not be entitled to any further amortization deduction under this section with respect to such pollution control facility.

(d) Definitions and special rules For purposes of this section— The term “certified pollution control facility” means a new identifiable treatment facility which is used, in connection with a plant or other property in operation before January 1, 1976 , to abate or control water or atmospheric pollution or contamination by removing, altering, disposing, storing, or preventing the creation or emission of pollutants, contaminants, wastes, or heat and which— the State certifying authority having jurisdiction with respect to such facility has certified to the Federal certifying authority as having been constructed, reconstructed, erected, or acquired in conformity with the State program or requirements for abatement or control of water or atmospheric pollution or contamination; the Federal certifying authority has certified to the Secretary (i) as being in compliance with the applicable regulations of Federal agencies and (ii) as being in furtherance of the general policy of the United States for cooperation with the States in the prevention and abatement of water pollution under the Federal Water Pollution Control Act, as amended ( 33 U.S.C. 466 et seq.), or in the prevention and abatement of atmospheric pollution and contamination under the Clean Air Act, as amended ( 42 U.S.C. 1857 et seq.); and does not significantly— increase the output or capacity, extend the useful life, or reduce the total operating costs of such plant or other property (or any unit thereof), or alter the nature of the manufacturing or production process or facility. The term “State certifying authority” means, in the case of water pollution, the State water pollution control agency as defined in section 13(a) of the Federal Water Pollution Control Act and, in the case of air pollution, the air pollution control agency as defined in section 302(b) of the Clean Air Act. The term “State certifying authority” includes any interstate agency authorized to act in place of a certifying authority of the State. The term “Federal certifying authority” means, in the case of water pollution, the Secretary of the Interior and, in the case of air pollution, the Secretary of Health and Human Services. For purposes of paragraph (1), the term “new identifiable treatment facility” includes only tangible property (not including a building and its structural components, other than a building which is exclusively a treatment facility) which is of a character subject to the allowance for depreciation provided in section 167, which is identifiable as a treatment facility, and which is property— the construction, reconstruction, or erection of which is completed by the taxpayer after December 31, 1968 , or acquired after December 31, 1968 , if the original use of the property commences with the taxpayer and commences after such date. In applying this section in the case of property described in clause (i) there shall be taken into account only that portion of the basis which is properly attributable to construction, reconstruction, or erection after December 31, 1968 . In the case of any facility described in paragraph (1) solely by reason of paragraph (5), subparagraph (A) shall be applied by substituting “ April 11, 2005 ” for “ December 31, 1968 ” each place it appears therein. In the case of any atmospheric pollution control facility which is placed in service after April 11, 2005 , and used in connection with an electric generation plant or other property which is primarily coal fired— paragraph (1) shall be applied without regard to the phrase “in operation before January 1, 1976 ”, and in the case of a facility placed in service in connection with a plant or other property placed in operation after December 31, 1975 , this section shall be applied by substituting “84” for “60” each place it appears in subsections (a) and (b).

(e) Profitmaking abatement works, etc. The Federal certifying authority shall not certify any property under subsection (d)(1)(B) to the extent it appears that by reason of profits derived through the recovery of wastes or otherwise in the operation of such property, its costs will be recovered over its actual useful life.

(f) Amortizable basis For purposes of this section, the term “amortizable basis” means that portion of the adjusted basis (for determining gain) of a certified pollution control facility which may be amortized under this section. If a certified pollution control facility has a useful life (determined as of the first day of the first month for which a deduction is allowable under this section) in excess of 15 years, the amortizable basis of such facility shall be equal to an amount which bears the same ratio to the portion of the adjusted basis of such facility, which would be eligible for amortization but for the application of this subparagraph, as 15 bears to the number of years of useful life of such facility. The amortizable basis of a certified pollution control facility with respect to which an election under this section is in effect shall not be increased, for purposes of this section, for additions or improvements after the amortization period has begun.

(g) Depreciation deduction The depreciation deduction provided by section 167 shall, despite the provisions of subsection (a), be allowed with respect to the portion of the adjusted basis which is not the amortizable basis.

([(h) Repealed. Pub. L. 92–178, title I, § 104(f)(2), Dec. 10, 1971, 85 Stat. 502]

(i) Life tenant and remainderman In the case of property held by one person for life with remainder to another person, the deduction under this section shall be computed as if the life tenant were the absolute owner of the property and shall be allowable to the life tenant.

(j) Cross reference For special rule with respect to certain gain derived from the disposition of property the adjusted basis of which is determined with regard to this section, see section 1245.

§ 170 Charitable, etc., contributions and gifts

(a) Allowance of deduction There shall be allowed as a deduction any charitable contribution (as defined in subsection (c)) payment of which is made within the taxable year. A charitable contribution shall be allowable as a deduction only if verified under regulations prescribed by the Secretary. In the case of a corporation reporting its taxable income on the accrual basis, if— the board of directors authorizes a charitable contribution during any taxable year, and payment of such contribution is made after the close of such taxable year and on or before the 15th day of the fourth month following the close of such taxable year, then the taxpayer may elect to treat such contribution as paid during such taxable year. The election may be made only at the time of the filing of the return for such taxable year, and shall be signified in such manner as the Secretary shall by regulations prescribe. For purposes of this section, payment of a charitable contribution which consists of a future interest in tangible personal property shall be treated as made only when all intervening interests in, and rights to the actual possession or enjoyment of, the property have expired or are held by persons other than the taxpayer or those standing in a relationship to the taxpayer described in section 267(b) or 707(b). For purposes of the preceding sentence, a fixture which is intended to be severed from the real property shall be treated as tangible personal property.

(b) Percentage limitations In the case of an individual, the deduction provided in subsection (a) shall be limited as provided in the succeeding subparagraphs. Any charitable contribution to— a church or a convention or association of churches, an educational organization which normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of pupils or students in attendance at the place where its educational activities are regularly carried on, an organization the principal purpose or functions of which are the providing of medical or hospital care or medical education or medical research, if the organization is a hospital, or if the organization is a medical research organization directly engaged in the continuous active conduct of medical research in conjunction with a hospital, and during the calendar year in which the contribution is made such organization is committed to spend such contributions for such research before January 1 of the fifth calendar year which begins after the date such contribution is made, an organization which normally receives a substantial part of its support (exclusive of income received in the exercise or performance by such organization of its charitable, educational, or other purpose or function constituting the basis for its exemption under section 501(a)) from the United States or any State or political subdivision thereof or from direct or indirect contributions from the general public, and which is organized and operated exclusively to receive, hold, invest, and administer property and to make expenditures to or for the benefit of a college or university which is an organization referred to in clause (ii) of this subparagraph and which is an agency or instrumentality of a State or political subdivision thereof, or which is owned or operated by a State or political subdivision thereof or by an agency or instrumentality of one or more States or political subdivisions, a governmental unit referred to in subsection (c)(1), an organization referred to in subsection (c)(2) which normally receives a substantial part of its support (exclusive of income received in the exercise or performance by such organization of its charitable, educational, or other purpose or function constituting the basis for its exemption under section 501(a)) from a governmental unit referred to in subsection (c)(1) or from direct or indirect contributions from the general public, a private foundation described in subparagraph (F), an organization described in section 509(a)(2) or (3), an agricultural research organization directly engaged in the continuous active conduct of agricultural research (as defined in section 1404 of the National Agricultural Research, Extension, and Teaching Policy Act of 1977) in conjunction with a land-grant college or university (as defined in such section) or a non-land grant college of agriculture (as defined in such section), and during the calendar year in which the contribution is made such organization is committed to spend such contribution for such research before January 1 of the fifth calendar year which begins after the date such contribution is made, or an organization described in section 501(c)(19) that is a federally chartered corporation, shall be allowed to the extent that the aggregate of such contributions does not exceed 50 percent of the taxpayer’s contribution base for the taxable year. Any charitable contribution other than a charitable contribution to which subparagraph (A) or (G) applies shall be allowed to the extent that the aggregate of such contributions does not exceed the lesser of— 30 percent of the taxpayer’s contribution base for the taxable year, or the excess of 50 percent of the taxpayer’s contribution base for the taxable year over— the amount of charitable contributions allowable under subparagraph (A) (determined without regard to subparagraph (C)) and subparagraph (G), reduced by so much of the contributions taken into account under subparagraph (G) as does not exceed 10 percent of the taxpayer’s contribution base. If the aggregate of such contributions exceeds the limitation of the preceding sentence, such excess shall be treated (in a manner consistent with the rules of subsection (d)(1)) as a charitable contribution (to which subparagraph (A) or (G) does not apply) in each of the 5 succeeding taxable years in order of time. In the case of charitable contributions described in subparagraph (A) of capital gain property to which subsection (e)(1)(B) does not apply, the total amount of contributions of such property which may be taken into account under subsection (a) for any taxable year shall not exceed 30 percent of the taxpayer’s contribution base for such year. For purposes of this subsection, contributions of capital gain property to which this subparagraph applies shall be taken into account after all other charitable contributions (other than charitable contributions to which subparagraph (D) applies). If charitable contributions described in subparagraph (A) of capital gain property to which clause (i) applies exceeds 30 percent of the taxpayer’s contribution base for any taxable year, such excess shall be treated, in a manner consistent with the rules of subsection (d)(1), as a charitable contribution of capital gain property to which clause (i) applies in each of the 5 succeeding taxable years in order of time. At the election of the taxpayer (made at such time and in such manner as the Secretary prescribes by regulations), subsection (e)(1) shall apply to all contributions of capital gain property (to which subsection (e)(1)(B) does not otherwise apply) made by the taxpayer during the taxable year. If such an election is made, clauses (i) and (ii) shall not apply to contributions of capital gain property made during the taxable year, and, in applying subsection (d)(1) for such taxable year with respect to contributions of capital gain property made in any prior contribution year for which an election was not made under this clause, such contributions shall be reduced as if subsection (e)(1) had applied to such contributions in the year in which made. For purposes of this paragraph, the term “capital gain property” means, with respect to any contribution, any capital asset the sale of which at its fair market value at the time of the contribution would have resulted in gain which would have been long-term capital gain. For purposes of the preceding sentence, any property which is property used in the trade or business (as defined in section 1231(b)) shall be treated as a capital asset. In the case of charitable contributions (other than charitable contributions to which subparagraph (A) applies) of capital gain property, the total amount of such contributions of such property taken into account under subsection (a) for any taxable year shall not exceed the lesser of— 20 percent of the taxpayer’s contribution base for the taxable year, or the excess of 30 percent of the taxpayer’s contribution base for the taxable year over the amount of the contributions of capital gain property to which subparagraph (C) applies. For purposes of this subsection, contributions of capital gain property to which this subparagraph applies shall be taken into account after all other charitable contributions. If the aggregate amount of contributions described in clause (i) exceeds the limitation of clause (i), such excess shall be treated (in a manner consistent with the rules of subsection (d)(1)) as a charitable contribution of capital gain property to which clause (i) applies in each of the 5 succeeding taxable years in order of time. Any qualified conservation contribution (as defined in subsection (h)(1)) shall be allowed to the extent the aggregate of such contributions does not exceed the excess of 50 percent of the taxpayer’s contribution base over the amount of all other charitable contributions allowable under this paragraph. If the aggregate amount of contributions described in clause (i) exceeds the limitation of clause (i), such excess shall be treated (in a manner consistent with the rules of subsection (d)(1)) as a charitable contribution to which clause (i) applies in each of the 15 succeeding years in order of time. For purposes of applying this subsection and subsection (d)(1), contributions described in clause (i) shall not be treated as described in subparagraph (A), (B), (C), or (D) and such subparagraphs shall apply without regard to such contributions. If the individual is a qualified farmer or rancher for the taxable year for which the contribution is made, clause (i) shall be applied by substituting “100 percent” for “50 percent”. Subclause (I) shall not apply to any contribution of property made after the date of the enactment of this subparagraph which is used in agriculture or livestock production (or available for such production) unless such contribution is subject to a restriction that such property remain available for such production. This subparagraph shall be applied separately with respect to property to which subclause (I) does not apply by reason of the preceding sentence prior to its application to property to which subclause (I) does apply. For purposes of clause (iv), the term “qualified farmer or rancher” means a taxpayer whose gross income from the trade or business of farming (within the meaning of section 2032A(e)(5)) is greater than 50 percent of the taxpayer’s gross income for the taxable year. The private foundations referred to in subparagraph (A)(vii) and subsection (e)(1)(B) are— a private operating foundation (as defined in section 4942(j)(3)), any other private foundation (as defined in section 509(a)) which, not later than the 15th day of the third month after the close of the foundation’s taxable year in which contributions are received, makes qualifying distributions (as defined in section 4942(g), without regard to paragraph (3) thereof), which are treated, after the application of section 4942(g)(3), as distributions out of corpus (in accordance with section 4942(h)) in an amount equal to 100 percent of such contributions, and with respect to which the taxpayer obtains adequate records or other sufficient evidence from the foundation showing that the foundation made such qualifying distributions, and a private foundation all of the contributions to which are pooled in a common fund and which would be described in section 509(a)(3) but for the right of any substantial contributor (hereafter in this clause called “donor”) or his spouse to designate annually the recipients, from among organizations described in paragraph (1) of section 509(a), of the income attributable to the donor’s contribution to the fund and to direct (by deed or by will) the payment, to an organization described in such paragraph (1), of the corpus in the common fund attributable to the donor’s contribution; but this clause shall apply only if all of the income of the common fund is required to be (and is) distributed to one or more organizations described in such paragraph (1) not later than the 15th day of the third month after the close of the taxable year in which the income is realized by the fund and only if all of the corpus attributable to any donor’s contribution to the fund is required to be (and is) distributed to one or more of such organizations not later than one year after his death or after the death of his surviving spouse if she has the right to designate the recipients of such corpus. For taxable years beginning after December 31, 2017 , any contribution of cash to an organization described in subparagraph (A) shall be allowed as a deduction under subsection (a) to the extent that the aggregate of such contributions does not exceed the excess of— 60 percent of the taxpayer’s contribution base for the taxable year, over the aggregate amount of contributions taken into account under subparagraph (A) for such taxable year. If the aggregate amount of contributions described in clause (i) exceeds the applicable limitation under clause (i) for any taxable year described in such clause, such excess shall be treated (in a manner consistent with the rules of subsection (d)(1)) as a charitable contribution to which clause (i) applies in each of the 5 succeeding years in order of time. Contributions taken into account under this subparagraph shall not be taken into account under subparagraph (A). For each taxable year described in clause (i), and each taxable year to which any contribution under this subparagraph is carried over under clause (ii), subparagraph (A) shall be applied by reducing (but not below zero) the contribution limitation allowed for the taxable year under such subparagraph by the aggregate contributions allowed under this subparagraph for such taxable year. For purposes of this section, the term “contribution base” means adjusted gross income (computed without regard to any net operating loss carryback to the taxable year under section 172). Any charitable contribution otherwise allowable (without regard to this subparagraph) as a deduction under this section shall be allowed only to the extent that the aggregate of such contributions exceeds 0.5 percent of the taxpayer’s contribution base for the taxable year. The preceding sentence shall be applied— first, by taking into account charitable contributions to which subparagraph (D) applies to the extent thereof, second, by taking into account charitable contributions to which subparagraph (C) applies to the extent thereof, third, by taking into account charitable contributions to which subparagraph (B) applies to the extent thereof, fourth, by taking into account charitable contributions to which subparagraph (E) applies to the extent thereof, fifth, by taking into account charitable contributions to which subparagraph (A) applies to the extent thereof, and sixth, by taking into account charitable contributions to which subparagraph (G) applies to the extent thereof. In the case of a corporation— Any charitable contribution otherwise allowable (without regard to this subparagraph) as a deduction under this section for any taxable year, other than any contribution to which subparagraph (B) or (C) applies, shall be allowed only to the extent that the aggregate of such contributions— exceeds 1 percent of the taxpayer’s taxable income for the taxable year, and does not exceed 10 percent of the taxpayer’s taxable income for the taxable year. Any qualified conservation contribution (as defined in subsection (h)(1))— which is made by a corporation which, for the taxable year during which the contribution is made, is a qualified farmer or rancher (as defined in paragraph (1)(E)(v)) and the stock of which is not readily tradable on an established securities market at any time during such year, and which, in the case of contributions made after the date of the enactment of this subparagraph, is a contribution of property which is used in agriculture or livestock production (or available for such production) and which is subject to a restriction that such property remain available for such production, shall be allowed to the extent the aggregate of such contributions does not exceed the excess of the taxpayer’s taxable income over the amount of charitable contributions allowable under subparagraph (A). If the aggregate amount of contributions described in clause (i) exceeds the limitation of clause (i), such excess shall be treated (in a manner consistent with the rules of subsection (d)(2) other than subparagraph (C) thereof) as a charitable contribution to which clause (i) applies in each of the 15 succeeding taxable years in order of time. Any qualified conservation contribution (as defined in subsection (h)(1)) which— is made by a Native Corporation, and is a contribution of property which was land conveyed under the Alaska Native Claims Settlement Act, shall be allowed to the extent that the aggregate amount of such contributions does not exceed the excess of the taxpayer’s taxable income over the amount of charitable contributions allowable under subparagraph (A). If the aggregate amount of contributions described in clause (i) exceeds the limitation of clause (i), such excess shall be treated (in a manner consistent with the rules of subsection (d)(2) other than subparagraph (C) thereof) as a charitable contribution to which clause (i) applies in each of the 15 succeeding taxable years in order of time. For purposes of this subparagraph, the term “Native Corporation” has the meaning given such term by section 3(m) of the Alaska Native Claims Settlement Act. For purposes of this paragraph, taxable income shall be computed without regard to— this section, part VIII (except section 248), any net operating loss carryback to the taxable year under section 172, any capital loss carryback to the taxable year under section 1212(a)(1) 1 section 199A(g).

(c) Charitable contribution defined For purposes of this section, the term “charitable contribution” means a contribution or gift to or for the use of— A State, a possession of the United States, or any political subdivision of any of the foregoing, or the United States or the District of Columbia, but only if the contribution or gift is made for exclusively public purposes. A corporation, trust, or community chest, fund, or foundation— created or organized in the United States or in any possession thereof, or under the law of the United States, any State, the District of Columbia, or any possession of the United States; organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, or to foster national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment), or for the prevention of cruelty to children or animals; no part of the net earnings of which inures to the benefit of any private shareholder or individual; and which is not disqualified for tax exemption under section 501(c)(3) by reason of attempting to influence legislation, and which does not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office. A contribution or gift by a corporation to a trust, chest, fund, or foundation shall be deductible by reason of this paragraph only if it is to be used within the United States or any of its possessions exclusively for purposes specified in subparagraph (B). Rules similar to the rules of section 501(j) shall apply for purposes of this paragraph. A post or organization of war veterans, or an auxiliary unit or society of, or trust or foundation for, any such post or organization— organized in the United States or any of its possessions, and no part of the net earnings of which inures to the benefit of any private shareholder or individual. In the case of a contribution or gift by an individual, a domestic fraternal society, order, or association, operating under the lodge system, but only if such contribution or gift is to be used exclusively for religious, charitable, scientific, literary, or educational purposes, or for the prevention of cruelty to children or animals. A cemetery company owned and operated exclusively for the benefit of its members, or any corporation chartered solely for burial purposes as a cemetery corporation and not permitted by its charter to engage in any business not necessarily incident to that purpose, if such company or corporation is not operated for profit and no part of the net earnings of such company or corporation inures to the benefit of any private shareholder or individual. An organization described in section 501(c)(19) that is a federally chartered corporation. For purposes of this section, the term “charitable contribution” also means an amount treated under subsection (g) as paid for the use of an organization described in paragraph (2), (3), or (4).

(d) Carryovers of excess contributions In the case of an individual, if the amount of charitable contributions described in subsection (b)(1)(A) payment of which is made within a taxable year (hereinafter in this paragraph referred to as the “contribution year”) exceeds 50 percent of the taxpayer’s contribution base for such year, such excess shall be treated as a charitable contribution described in subsection (b)(1)(A) paid in each of the 5 succeeding taxable years in order of time, but, with respect to any such succeeding taxable year, only to the extent of the lesser of the two following amounts: the amount by which 50 percent of the taxpayer’s contribution base for such succeeding taxable year exceeds the sum of the charitable contributions described in subsection (b)(1)(A) payment of which is made by the taxpayer within such succeeding taxable year (determined without regard to this subparagraph) and the charitable contributions described in subsection (b)(1)(A) payment of which was made in taxable years before the contribution year which are treated under this subparagraph as having been paid in such succeeding taxable year; or in the case of the first succeeding taxable year, the amount of such excess, and in the case of the second, third, fourth, or fifth succeeding taxable year, the portion of such excess not treated under this subparagraph as a charitable contribution described in subsection (b)(1)(A) paid in any taxable year intervening between the contribution year and such succeeding taxable year. In applying subparagraph (A), the excess determined under subparagraph (A) for the contribution year shall be reduced to the extent that such excess reduces taxable income (as computed for purposes of the second sentence of section 172(b)(2)) and increases the net operating loss deduction for a taxable year succeeding the contribution year. In the case of any taxable year from which an excess is carried forward (determined without regard to this subparagraph) under any carryover rule, the applicable carryover rule shall be applied by increasing the excess determined under such applicable carryover rule for the contribution year (before the application of subparagraph (B)) by the amount attributable to the charitable contributions to which such rule applies which is not allowed as a deduction for the contribution year by reason of subsection (b)(1)(I). For purposes of this subparagraph, the term “carryover rule” means— subparagraph (A) of this paragraph, subparagraphs (C)(ii), (D)(ii), (E)(ii), and (G)(ii) of subsection (b)(1), and the second sentence of subsection (b)(1)(B). For purposes of this subparagraph, the term “applicable carryover rule” means any carryover rule applicable to charitable contributions which were (in whole or in part) not allowed as a deduction for the contribution year by reason of subsection (b)(1)(I). Any charitable contribution taken into account under subsection (b)(2)(A) for any taxable year which is not allowed as a deduction by reason of clause (ii) thereof shall be taken into account as a charitable contribution for the succeeding taxable year, except that, for purposes of determining under this subparagraph whether such contribution is allowed in such succeeding taxable year, contributions in such succeeding taxable year (determined without regard to this paragraph) shall be taken into account under subsection (b)(2)(A) before any contribution taken into account by reason of this paragraph. No charitable contribution may be carried forward under subparagraph (A) to any taxable year following the fifth taxable year after the taxable year in which the charitable contribution was first taken into account. For purposes of the preceding sentence, contributions shall be treated as allowed on a first-in first-out basis. In the case of any taxable year from which a charitable contribution is carried forward under subparagraph (A) (determined without regard this subparagraph), subparagraph (A) shall be applied by substituting “clause (i) or (ii)” for “clause (ii)”. The amount of charitable contributions carried forward under subparagraph (A) shall be reduced to the extent that such carryfoward would (but for this subparagraph) reduce taxable income (as computed for purposes of the second sentence of section 172(b)(2)) and increase a net operating loss carryover under section 172 to a succeeding taxable year.

(e) Certain contributions of ordinary income and capital gain property The amount of any charitable contribution of property otherwise taken into account under this section shall be reduced by the sum of— the amount of gain which would not have been long-term capital gain (determined without regard to section 1221(b)(3)) if the property contributed had been sold by the taxpayer at its fair market value (determined at the time of such contribution), and in the case of a charitable contribution— of tangible personal property— if the use by the donee is unrelated to the purpose or function constituting the basis for its exemption under section 501 (or, in the case of a governmental unit, to any purpose or function described in subsection (c)), or which is applicable property (as defined in paragraph (7)(C), but without regard to clause (ii) thereof) which is sold, exchanged, or otherwise disposed of by the donee before the last day of the taxable year in which the contribution was made and with respect to which the donee has not made a certification in accordance with paragraph (7)(D), to or for the use of a private foundation (as defined in section 509(a)), other than a private foundation described in subsection (b)(1)(F), of any patent, copyright (other than a copyright described in section 1221(a)(3) or 1231(b)(1)(C)), trademark, trade name, trade secret, know-how, software (other than software described in section 197(e)(3)(A)(i)), or similar property, or applications or registrations of such property, or of any taxidermy property which is contributed by the person who prepared, stuffed, or mounted the property or by any person who paid or incurred the cost of such preparation, stuffing, or mounting, the amount of gain which would have been long-term capital gain if the property contributed had been sold by the taxpayer at its fair market value (determined at the time of such contribution). For purposes of applying this paragraph (other than in the case of gain to which section 617(d)(1), 1245(a), 1250(a), 1252(a), or 1254(a) applies), property which is property used in the trade or business (as defined in section 1231(b)) shall be treated as a capital asset. For purposes of applying this paragraph in the case of a charitable contribution of stock in an S corporation, rules similar to the rules of section 751 shall apply in determining whether gain on such stock would have been long-term capital gain if such stock were sold by the taxpayer. For purposes of paragraph (1), in the case of a charitable contribution of less than the taxpayer’s entire interest in the property contributed, the taxpayer’s adjusted basis in such property shall be allocated between the interest contributed and any interest not contributed in accordance with regulations prescribed by the Secretary. For purposes of this paragraph, a qualified contribution shall mean a charitable contribution of property described in paragraph (1) or (2) of section 1221(a), by a corporation (other than a corporation which is an S corporation) to an organization which is described in section 501(c)(3) and is exempt under section 501(a) (other than a private foundation, as defined in section 509(a), which is not an operating foundation, as defined in section 4942(j)(3)), but only if— the use of the property by the donee is related to the purpose or function constituting the basis for its exemption under section 501 and the property is to be used by the donee solely for the care of the ill, the needy, or infants; the property is not transferred by the donee in exchange for money, other property, or services; the taxpayer receives from the donee a written statement representing that its use and disposition of the property will be in accordance with the provisions of clauses (i) and (ii); and in the case where the property is subject to regulation under the Federal Food, Drug, and Cosmetic Act, as amended, such property must fully satisfy the applicable requirements of such Act and regulations promulgated thereunder on the date of transfer and for one hundred and eighty days prior thereto. The reduction under paragraph (1)(A) for any qualified contribution (as defined in subparagraph (A)) shall be no greater than the sum of— one-half of the amount computed under paragraph (1)(A) (computed without regard to this paragraph), and the amount (if any) by which the charitable contribution deduction under this section for any qualified contribution (computed by taking into account the amount determined in clause (i), but without regard to this clause) exceeds twice the basis of such property. In the case of a charitable contribution of food from any trade or business of the taxpayer, this paragraph shall be applied— without regard to whether the contribution is made by a C corporation, and only to food that is apparently wholesome food. The aggregate amount of such contributions for any taxable year which may be taken into account under this section shall not exceed— in the case of any taxpayer other than a C corporation, 15 percent of the taxpayer’s aggregate net income for such taxable year from all trades or businesses from which such contributions were made for such year, computed without regard to this section, and in the case of a C corporation, 15 percent of taxable income (as defined in subsection (b)(2)(D)). If such aggregate amount exceeds the limitation imposed under clause (ii), such excess shall be treated (in a manner consistent with the rules of subsection (d)) as a charitable contribution described in clause (i) in each of the 5 succeeding taxable years in order of time. In the case of any charitable contribution which is allowable after the application of clause (ii)(II), subsection (b)(2)(A) shall not apply to such contribution, but the limitation imposed by such subsection shall be reduced (but not below zero) by the aggregate amount of such contributions. For purposes of subsection (b)(2)(B), such contributions shall be treated as allowable under subsection (b)(2)(A). If a taxpayer— does not account for inventories under section 471, and is not required to capitalize indirect costs under section 263A, the taxpayer may elect, solely for purposes of subparagraph (B), to treat the basis of any apparently wholesome food as being equal to 25 percent of the fair market value of such food. In the case of any such contribution of apparently wholesome food which cannot or will not be sold solely by reason of internal standards of the taxpayer, lack of market, or similar circumstances, or by reason of being produced by the taxpayer exclusively for the purposes of transferring the food to an organization described in subparagraph (A), the fair market value of such contribution shall be determined— without regard to such internal standards, such lack of market, such circumstances, or such exclusive purpose, and by taking into account the price at which the same or substantially the same food items (as to both type and quality) are sold by the taxpayer at the time of the contribution (or, if not so sold at such time, in the recent past). For purposes of this subparagraph, the term “apparently wholesome food” has the meaning given to such term by section 22(b)(2) of the Bill Emerson Good Samaritan Food Donation Act ( 42 U.S.C. 1791(b)(2) ), as in effect on the date of the enactment of this subparagraph. This paragraph shall not apply to so much of the amount of the gain described in paragraph (1)(A) which would be long-term capital gain but for the application of sections 617, 1245, 1250, or 1252. In the case of a qualified research contribution, the reduction under paragraph (1)(A) shall be no greater than the amount determined under paragraph (3)(B). For purposes of this paragraph, the term “qualified research contribution” means a charitable contribution by a corporation of tangible personal property described in paragraph (1) of section 1221(a), but only if— the contribution is to an organization described in subparagraph (A) or subparagraph (B) of section 41(e)(6), the property is constructed or assembled by the taxpayer, the contribution is made not later than 2 years after the date the construction or assembly of the property is substantially completed, the original use of the property is by the donee, the property is scientific equipment or apparatus substantially all of the use of which by the donee is for research or experimentation (within the meaning of section 174), or for research training, in the United States in physical or biological sciences, the property is not transferred by the donee in exchange for money, other property, or services, and the taxpayer receives from the donee a written statement representing that its use and disposition of the property will be in accordance with the provisions of clauses (v) and (vi). For purposes of this paragraph, property shall be treated as constructed by the taxpayer only if the cost of the parts used in the construction of such property (other than parts manufactured by the taxpayer or a related person) do not exceed 50 percent of the taxpayer’s basis in such property. For purposes of this paragraph, the term “corporation” shall not include— an S corporation, a personal holding company (as defined in section 542), and a service organization (as defined in section 414(m)(3)). Subparagraph (B)(ii) of paragraph (1) shall not apply to any contribution of qualified appreciated stock. Except as provided in subparagraph (C), for purposes of this paragraph, the term “qualified appreciated stock” means any stock of a corporation— for which (as of the date of the contribution) market quotations are readily available on an established securities market, and which is capital gain property (as defined in subsection (b)(1)(C)(iv)). In the case of any donor, the term “qualified appreciated stock” shall not include any stock of a corporation contributed by the donor in a contribution to which paragraph (1)(B)(ii) applies (determined without regard to this paragraph) to the extent that the amount of the stock so contributed (when increased by the aggregate amount of all prior such contributions by the donor of stock in such corporation) exceeds 10 percent (in value) of all of the outstanding stock of such corporation. For purposes of clause (i), an individual shall be treated as making all contributions made by any member of his family (as defined in section 267(c)(4)). In the case of an applicable disposition of applicable property, there shall be included in the income of the donor of such property for the taxable year of such donor in which the applicable disposition occurs an amount equal to the excess (if any) of— the amount of the deduction allowed to the donor under this section with respect to such property, over the donor’s basis in such property at the time such property was contributed. For purposes of this paragraph, the term “applicable disposition” means any sale, exchange, or other disposition by the donee of applicable property— after the last day of the taxable year of the donor in which such property was contributed, and before the last day of the 3-year period beginning on the date of the contribution of such property, unless the donee makes a certification in accordance with subparagraph (D). For purposes of this paragraph, the term “applicable property” means charitable deduction property (as defined in section 6050L(a)(2)(A))— which is tangible personal property the use of which is identified by the donee as related to the purpose or function constituting the basis of the donee’s exemption under section 501, and for which a deduction in excess of the donor’s basis is allowed. A certification meets the requirements of this subparagraph if it is a written statement which is signed under penalty of perjury by an officer of the donee organization and— which— certifies that the use of the property by the donee was substantial and related to the purpose or function constituting the basis for the donee’s exemption under section 501, and describes how the property was used and how such use furthered such purpose or function, or which— states the intended use of the property by the donee at the time of the contribution, and certifies that such intended use has become impossible or infeasible to implement.

(f) Disallowance of deduction in certain cases and special rules No deduction shall be allowed under this section for a contribution to or for the use of an organization or trust described in section 508(d) or 4948(c)(4) subject to the conditions specified in such sections. In the case of property transferred in trust, no deduction shall be allowed under this section for the value of a contribution of a remainder interest unless the trust is a charitable remainder annuity trust or a charitable remainder unitrust (described in section 664), or a pooled income fund (described in section 642(c)(5)). No deduction shall be allowed under this section for the value of any interest in property (other than a remainder interest) transferred in trust unless the interest is in the form of a guaranteed annuity or the trust instrument specifies that the interest is a fixed percentage distributed yearly of the fair market value of the trust property (to be determined yearly) and the grantor is treated as the owner of such interest for purposes of applying section 671. If the donor ceases to be treated as the owner of such an interest for purposes of applying section 671, at the time the donor ceases to be so treated, the donor shall for purposes of this chapter be considered as having received an amount of income equal to the amount of any deduction he received under this section for the contribution reduced by the discounted value of all amounts of income earned by the trust and taxable to him before the time at which he ceases to be treated as the owner of the interest. Such amounts of income shall be discounted to the date of the contribution. The Secretary shall prescribe such regulations as may be necessary to carry out the purposes of this subparagraph. In any case in which a deduction is allowed under this section for the value of an interest in property described in subparagraph (B), transferred in trust, no deduction shall be allowed under this section to the grantor or any other person for the amount of any contribution made by the trust with respect to such interest. This paragraph shall not apply in a case in which the value of all interests in property transferred in trust are deductible under subsection (a). In the case of a contribution (not made by a transfer in trust) of an interest in property which consists of less than the taxpayer’s entire interest in such property, a deduction shall be allowed under this section only to the extent that the value of the interest contributed would be allowable as a deduction under this section if such interest had been transferred in trust. For purposes of this subparagraph, a contribution by a taxpayer of the right to use property shall be treated as a contribution of less than the taxpayer’s entire interest in such property. Subparagraph (A) shall not apply to— a contribution of a remainder interest in a personal residence or farm, a contribution of an undivided portion of the taxpayer’s entire interest in property, and a qualified conservation contribution. For purposes of this section, in determining the value of a remainder interest in real property, depreciation (computed on the straight line method) and depletion of such property shall be taken into account, and such value shall be discounted at a rate of 6 percent per annum, except that the Secretary may prescribe a different rate. If, in connection with any charitable contribution, a liability is assumed by the recipient or by any other person, or if a charitable contribution is of property which is subject to a liability, then, to the extent necessary to avoid the duplication of amounts, the amount taken into account for purposes of this section as the amount of the charitable contribution— shall be reduced for interest (i) which has been paid (or is to be paid) by the taxpayer, (ii) which is attributable to the liability, and (iii) which is attributable to any period after the making of the contribution, and in the case of a bond, shall be further reduced for interest (i) which has been paid (or is to be paid) by the taxpayer on indebtedness incurred or continued to purchase or carry such bond, and (ii) which is attributable to any period before the making of the contribution. The reduction pursuant to subparagraph (B) shall not exceed the interest (including interest equivalent) on the bond which is attributable to any period before the making of the contribution and which is not (under the taxpayer’s method of accounting) includible in the gross income of the taxpayer for any taxable year. For purposes of this paragraph, the term “bond” means any bond, debenture, note, or certificate or other evidence of indebtedness. No deduction shall be allowed under this section for an out-of-pocket expenditure made by any person on behalf of an organization described in subsection (c) (other than an organization described in section 501(h)(5) (relating to churches, etc.)) if the expenditure is made for the purpose of influencing legislation (within the meaning of section 501(c)(3)). A deduction shall be allowed under subsection (a) in respect of any qualified reformation (within the meaning of section 2055(e)(3)(B)). For purposes of this paragraph, rules similar to the rules of section 2055(e)(3) shall apply. No deduction shall be allowed under subsection (a) for any contribution of 500 is claimed unless such person meets the requirements of subparagraphs (B), (C), and (D), as the case may be, with respect to such contribution. Subparagraphs (C) and (D) shall not apply to cash, property described in subsection (e)(1)(B)(iii) or section 1221(a)(1), publicly traded securities (as defined in section 6050L(a)(2)(B)), and any qualified vehicle described in paragraph (12)(A)(ii) for which an acknowledgement under paragraph (12)(B)(iii) is provided. Clause (i) shall not apply if it is shown that the failure to meet such requirements is due to reasonable cause and not to willful neglect. In the case of contributions of property for which a deduction of more than $500 i sc l aim e d, t h ere q u i re m e n t so f t hi ss u b p a r a g r a p ha re m e t i f t h e in d i v i d u a l, p a r t n ers hi p orcor p or a t i o nin c l u d es w i t h t h ere t u r n f or t h e t a x ab l eye a r in w hi c h t h eco n t r ib u t i o ni s ma d e a d escr i pt i o n o f s u c h p ro p er t y an d s u c h o t h er in f or ma t i o na s t h e S ecre t a ry ma yre q u i re . T h ere q u i re m e n t so f t hi ss u b p a r a g r a p h s ha ll n o t a ppl y t o a C cor p or a t i o n w hi c hi s n o t a p erso na l ser v i cecor p or a t i o n or a c l ose l y h e l d C cor p or a t i o n . I n t h ec a seo f co n t r ib u t i o n so f p ro p er t y f or w hi c ha d e d u c t i o n o f m ore t han$ 5,000 is claimed, the requirements of this subparagraph are met if the individual, partnership, or corporation obtains a qualified appraisal of such property and attaches to the return for the taxable year in which such contribution is made such information regarding such property and such appraisal as the Secretary may require. In the case of contributions of property for which a deduction of more than 500— paragraph (8) shall not apply and no deduction shall be allowed under subsection (a) for such contribution unless the taxpayer substantiates the contribution by a contemporaneous written acknowledgement of the contribution by the donee organization that meets the requirements of subparagraph (B) and includes the acknowledgement with the taxpayer’s return of tax which includes the deduction, and if the organization sells the vehicle without any significant intervening use or material improvement of such vehicle by the organization, the amount of the deduction allowed under subsection (a) shall not exceed the gross proceeds received from such sale. An acknowledgement meets the requirements of this subparagraph if it includes the following information: The name and taxpayer identification number of the donor. The vehicle identification number or similar number. In the case of a qualified vehicle to which subparagraph (A)(ii) applies— a certification that the vehicle was sold in an arm’s length transaction between unrelated parties, the gross proceeds from the sale, and a statement that the deductible amount may not exceed the amount of such gross proceeds. In the case of a qualified vehicle to which subparagraph (A)(ii) does not apply— a certification of the intended use or material improvement of the vehicle and the intended duration of such use, and a certification that the vehicle would not be transferred in exchange for money, other property, or services before completion of such use or improvement. Whether the donee organization provided any goods or services in consideration, in whole or in part, for the qualified vehicle. A description and good faith estimate of the value of any goods or services referred to in clause (v) or, if such goods or services consist solely of intangible religious benefits (as defined in paragraph (8)(B)), a statement to that effect. For purposes of subparagraph (A), an acknowledgement shall be considered to be contemporaneous if the donee organization provides it within 30 days of— the sale of the qualified vehicle, or in the case of an acknowledgement including a certification described in subparagraph (B)(iv), the contribution of the qualified vehicle. A donee organization required to provide an acknowledgement under this paragraph shall provide to the Secretary the information contained in the acknowledgement. Such information shall be provided at such time and in such manner as the Secretary may prescribe. For purposes of this paragraph, the term “qualified vehicle” means any— motor vehicle manufactured primarily for use on public streets, roads, and highways, boat, or airplane. Such term shall not include any property which is described in section 1221(a)(1). The Secretary shall prescribe such regulations or other guidance as may be necessary to carry out the purposes of this paragraph. The Secretary may prescribe regulations or other guidance which exempts sales by the donee organization which are in direct furtherance of such organization’s charitable purpose from the requirements of subparagraphs (A)(ii) and (B)(iv)(II). No deduction shall be allowed with respect to any contribution described in subparagraph (B) unless the taxpayer includes with the return for the taxable year of the contribution a $500 f i l in g f ee . A co n t r ib u t i o ni s d escr ib e d in t hi ss u b p a r a g r a p hi f s u c h co n t r ib u t i o ni s a q u a l i f i e d co n ser v a t i o n co n t r ib u t i o n (a s d e f in e d in s u b sec t i o n (h)) w hi c hi s a res t r i c t i o n w i t h res p ec tt o t h ee x t er i oro f ab u i l d in g d escr ib e d in s u b sec t i o n (h) (4) (C) (ii) an df or w hi c ha d e d u c t i o ni sc l aim e d in e x cesso f$ 10,000. Any fee collected under this paragraph shall be used for the enforcement of the provisions of subsection (h). In the case of any qualified conservation contribution (as defined in subsection (h)), the amount of the deduction allowed under this section shall be reduced by an amount which bears the same ratio to the fair market value of the contribution as— the sum of the credits allowed to the taxpayer under section 47 for the 5 preceding taxable years with respect to any building which is a part of such contribution, bears to the fair market value of the building on the date of the contribution. For purposes of this section and notwithstanding section 1012, in the case of a charitable contribution of taxidermy property which is made by the person who prepared, stuffed, or mounted the property or by any person who paid or incurred the cost of such preparation, stuffing, or mounting, only the cost of the preparing, stuffing, or mounting shall be included in the basis of such property. For purposes of this section, the term “taxidermy property” means any work of art which— is the reproduction or preservation of an animal, in whole or in part, is prepared, stuffed, or mounted for purposes of recreating one or more characteristics of such animal, and contains a part of the body of the dead animal. In the case of an individual, partnership, or corporation, no deduction shall be allowed under subsection (a) for any contribution of clothing or a household item unless such clothing or household item is in good used condition or better. Notwithstanding subparagraph (A), the Secretary may by regulation deny a deduction under subsection (a) for any contribution of clothing or a household item which has minimal monetary value. Subparagraphs (A) and (B) shall not apply to any contribution of a single item of clothing or a household item for which a deduction of more than $500 is claimed if the taxpayer includes with the taxpayer’s return a qualified appraisal with respect to the property. For purposes of this paragraph— The term “household items” includes furniture, furnishings, electronics, appliances, linens, and other similar items. Such term does not include— food, paintings, antiques, and other objects of art, jewelry and gems, and collections. In the case of a partnership or S corporation, this paragraph shall be applied at the entity level, except that the deduction shall be denied at the partner or shareholder level. No deduction shall be allowed under subsection (a) for any contribution of a cash, check, or other monetary gift unless the donor maintains as a record of such contribution a bank record or a written communication from the donee showing the name of the donee organization, the date of the contribution, and the amount of the contribution. A deduction otherwise allowed under subsection (a) for any contribution to a donor advised fund (as defined in section 4966(d)(2)) shall only be allowed if— the sponsoring organization (as defined in section 4966(d)(1)) with respect to such donor advised fund is not— described in paragraph (3), (4), or (5) of subsection (c), or a type III supporting organization (as defined in section 4943(f)(5)(A)) which is not a functionally integrated type III supporting organization (as defined in section 4943(f)(5)(B)), and the taxpayer obtains a contemporaneous written acknowledgment (determined under rules similar to the rules of paragraph (8)(C)) from the sponsoring organization (as so defined) of such donor advised fund that such organization has exclusive legal control over the assets contributed. In the case of a qualified conservation contribution to which this paragraph applies, no deduction shall be allowed under subsection (a) for such contribution unless the partnership making such contribution— includes on its return for the taxable year in which the contribution is made a statement that the partnership made such a contribution, and provides such information about the contribution as the Secretary may require. This paragraph shall apply to any qualified conservation contribution— the conservation purpose of which is the preservation of any building which is a certified historic structure (as defined in subsection (h)(4)(C)), which is made by a partnership (whether directly or as a distributive share of a contribution of another partnership), and the amount of which exceeds 2.5 times the sum of each partner’s relevant basis (as defined in subsection (h)(7)) in the partnership making the contribution. Except as may be otherwise provided by the Secretary, the rules of this paragraph shall apply to S corporations and other pass-through entities in the same manner as such rules apply to partnerships.

(g) Amounts paid to maintain certain students as members of taxpayer’s household Subject to the limitations provided by paragraph (2), amounts paid by the taxpayer to maintain an individual (other than a dependent, as defined in section 152 (determined without regard to subsections (b)(1), (b)(2), and (d)(1)(B) thereof), or a relative of the taxpayer) as a member of his household during the period that such individual is— a member of the taxpayer’s household under a written agreement between the taxpayer and an organization described in paragraph (2), (3), or (4) of subsection (c) to implement a program of the organization to provide educational opportunities for pupils or students in private homes, and a full-time pupil or student in the twelfth or any lower grade at an educational organization described in section 170(b)(1)(A)(ii) located in the United States, shall be treated as amounts paid for the use of the organization. Paragraph (1) shall apply to amounts paid within the taxable year only to the extent that such amounts do not exceed $50 multiplied by the number of full calendar months during the taxable year which fall within the period described in paragraph (1). For purposes of the preceding sentence, if 15 or more days of a calendar month fall within such period such month shall be considered as a full calendar month. Paragraph (1) shall not apply to any amount paid by the taxpayer within the taxable year if the taxpayer receives any money or other property as compensation or reimbursement for maintaining the individual in his household during the period described in paragraph (1). For purposes of paragraph (1), the term “relative of the taxpayer” means an individual who, with respect to the taxpayer, bears any of the relationships described in subparagraphs (A) through (G) of section 152(d)(2). No deduction shall be allowed under subsection (a) for any amount paid by a taxpayer to maintain an individual as a member of his household under a program described in paragraph (1)(A) except as provided in this subsection.

(h) Qualified conservation contribution For purposes of subsection (f)(3)(B)(iii), the term “qualified conservation contribution” means a contribution— of a qualified real property interest, to a qualified organization, exclusively for conservation purposes. For purposes of this subsection, the term “qualified real property interest” means any of the following interests in real property: the entire interest of the donor other than a qualified mineral interest, a remainder interest, and a restriction (granted in perpetuity) on the use which may be made of the real property. For purposes of paragraph (1), the term “qualified organization” means an organization which— is described in clause (v) or (vi) of subsection (b)(1)(A), or is described in section 501(c)(3) and— meets the requirements of section 509(a)(2), or meets the requirements of section 509(a)(3) and is controlled by an organization described in subparagraph (A) or in clause (i) of this subparagraph. For purposes of this subsection, the term “conservation purpose” means— the preservation of land areas for outdoor recreation by, or the education of, the general public, the protection of a relatively natural habitat of fish, wildlife, or plants, or similar ecosystem, the preservation of open space (including farmland and forest land) where such preservation is— for the scenic enjoyment of the general public, or pursuant to a clearly delineated Federal, State, or local governmental conservation policy, and will yield a significant public benefit, or the preservation of an historically important land area or a certified historic structure. In the case of any contribution of a qualified real property interest which is a restriction with respect to the exterior of a building described in subparagraph (C)(ii), such contribution shall not be considered to be exclusively for conservation purposes unless— such interest— includes a restriction which preserves the entire exterior of the building (including the front, sides, rear, and height of the building), and prohibits any change in the exterior of the building which is inconsistent with the historical character of such exterior, the donor and donee enter into a written agreement certifying, under penalty of perjury, that the donee— is a qualified organization (as defined in paragraph (3)) with a purpose of environmental protection, land conservation, open space preservation, or historic preservation, and has the resources to manage and enforce the restriction and a commitment to do so, and in the case of any contribution made in a taxable year beginning after the date of the enactment of this subparagraph, the taxpayer includes with the taxpayer’s return for the taxable year of the contribution— a qualified appraisal (within the meaning of subsection (f)(11)(E)) of the qualified property interest, photographs of the entire exterior of the building, and a description of all restrictions on the development of the building. For purposes of subparagraph (A)(iv), the term “certified historic structure” means— any building, structure, or land area which is listed in the National Register, or any building which is located in a registered historic district (as defined in section 47(c)(3)(B)) and is certified by the Secretary of the Interior to the Secretary as being of historic significance to the district. A building, structure, or land area satisfies the preceding sentence if it satisfies such sentence either at the time of the transfer or on the due date (including extensions) for filing the transferor’s return under this chapter for the taxable year in which the transfer is made. For purposes of this subsection— A contribution shall not be treated as exclusively for conservation purposes unless the conservation purpose is protected in perpetuity. Except as provided in clause (ii), in the case of a contribution of any interest where there is a retention of a qualified mineral interest, subparagraph (A) shall not be treated as met if at any time there may be extraction or removal of minerals by any surface mining method. With respect to any contribution of property in which the ownership of the surface estate and mineral interests has been and remains separated, subparagraph (A) shall be treated as met if the probability of surface mining occurring on such property is so remote as to be negligible. For purposes of this subsection, the term “qualified mineral interest” means— subsurface oil, gas, or other minerals, and the right to access to such minerals. A contribution by a partnership (whether directly or as a distributive share of a contribution of another partnership) shall not be treated as a qualified conservation contribution for purposes of this section if the amount of such contribution exceeds 2.5 times the sum of each partner’s relevant basis in such partnership. For purposes of this paragraph— The term “relevant basis” means, with respect to any partner, the portion of such partner’s modified basis in the partnership which is allocable (under rules similar to the rules of section 755) to the portion of the real property with respect to which the contribution described in subparagraph (A) is made. The term “modified basis” means, with respect to any partner, such partner’s adjusted basis in the partnership as determined— immediately before the contribution described in subparagraph (A), without regard to section 752, and by the partnership after taking into account the adjustments described in subclauses (I) and (II) and such other adjustments as the Secretary may provide. Subparagraph (A) shall not apply to any contribution which is made at least 3 years after the latest of— the last date on which the partnership that made such contribution acquired any portion of the real property with respect to which such contribution is made, the last date on which any partner in the partnership that made such contribution acquired any interest in such partnership, and if the interest in the partnership that made such contribution is held through 1 or more partnerships— the last date on which any such partnership acquired any interest in any other such partnership, and the last date on which any partner in any such partnership acquired any interest in such partnership. Subparagraph (A) shall not apply with respect to any contribution made by any partnership if substantially all of the partnership interests in such partnership are held, directly or indirectly, by an individual and members of the family of such individual. For purposes of this subparagraph, the term “members of the family” means, with respect to any individual— the spouse of such individual, and any individual who bears a relationship to such individual which is described in subparagraphs (A) through (G) of section 152(d)(2). Subparagraph (A) shall not apply to any qualified conservation contribution the conservation purpose of which is the preservation of any building which is a certified historic structure (as defined in paragraph (4)(C)). Except as may be otherwise provided by the Secretary, the rules of this paragraph shall apply to S corporations and other pass-through entities in the same manner as such rules apply to partnerships. The Secretary shall prescribe such regulations or other guidance as may be necessary or appropriate to carry out the purposes of this paragraph, including regulations or other guidance— to require reporting, including reporting related to tiered partnerships and the modified basis of partners, and to prevent the avoidance of the purposes of this paragraph.

(i) Standard mileage rate for use of passenger automobile For purposes of computing the deduction under this section for use of a passenger automobile, the standard mileage rate shall be 14 cents per mile.

(j) Denial of deduction for certain travel expenses No deduction shall be allowed under this section for traveling expenses (including amounts expended for meals and lodging) while away from home, whether paid directly or by reimbursement, unless there is no significant element of personal pleasure, recreation, or vacation in such travel.

([(k) Repealed. Pub. L. 113–295, div. A, title II, § 221(a)(28)(C), Dec. 19, 2014, 128 Stat. 4041]

(l) Treatment of certain amounts paid to or for the benefit of institutions of higher education No deduction shall be allowed under this section for any amount described in paragraph (2). For purposes of paragraph (1), an amount is described in this paragraph if— the amount is paid by the taxpayer to or for the benefit of an educational organization— which is described in subsection (b)(1)(A)(ii), and which is an institution of higher education (as defined in section 3304(f)), and the taxpayer receives (directly or indirectly) as a result of paying such amount the right to purchase tickets for seating at an athletic event in an athletic stadium of such institution. If any portion of a payment is for the purchase of such tickets, such portion and the remaining portion (if any) of such payment shall be treated as separate amounts for purposes of this subsection.

(m) Certain donee income from intellectual property treated as an additional charitable contribution In the case of a taxpayer who makes a qualified intellectual property contribution, the deduction allowed under subsection (a) for each taxable year of the taxpayer ending on or after the date of such contribution shall be increased (subject to the limitations under subsection (b)) by the applicable percentage of qualified donee income with respect to such contribution which is properly allocable to such year under this subsection. With respect to any qualified intellectual property contribution, the deduction allowed under subsection (a) shall be increased under paragraph (1) only to the extent that the aggregate amount of such increases with respect to such contribution exceed the amount allowed as a deduction under subsection (a) with respect to such contribution determined without regard to this subsection. For purposes of this subsection, the term “qualified donee income” means any net income received by or accrued to the donee which is properly allocable to the qualified intellectual property. For purposes of this subsection, qualified donee income shall be treated as properly allocable to a taxable year of the donor if such income is received by or accrued to the donee for the taxable year of the donee which ends within or with such taxable year of the donor. Income shall not be treated as properly allocable to qualified intellectual property for purposes of this subsection if such income is received by or accrued to the donee after the 10-year period beginning on the date of the contribution of such property. Income shall not be treated as properly allocable to qualified intellectual property for purposes of this subsection if such income is received by or accrued to the donee after the expiration of the legal life of such property. For purposes of this subsection, the term “applicable percentage” means the percentage determined under the following table which corresponds to a taxable year of the donor ending on or after the date of the qualified intellectual property contribution: Taxable Year of Donor Ending on or After Date of Contribution: Applicable Percentage: 1st 100 2nd 100 3rd 90 4th 80 5th 70 6th 60 7th 50 8th 40 9th 30 10th 20 11th 10 12th 10. For purposes of this subsection, the term “qualified intellectual property contribution” means any charitable contribution of qualified intellectual property— the amount of which taken into account under this section is reduced by reason of subsection (e)(1), and with respect to which the donor informs the donee at the time of such contribution that the donor intends to treat such contribution as a qualified intellectual property contribution for purposes of this subsection and section 6050L. For purposes of this subsection, the term “qualified intellectual property” means property described in subsection (e)(1)(B)(iii) (other than property contributed to or for the use of an organization described in subsection (e)(1)(B)(ii)). Any increase under this subsection of the deduction provided under subsection (a) shall be treated for purposes of subsection (b) as a deduction which is attributable to a charitable contribution to the donee to which such increase relates. The net income taken into account under paragraph (3) shall not exceed the amount of such income reported under section 6050L(b)(1). Except as may be provided under subparagraph (D)(i), this subsection shall not apply with respect to any qualified intellectual property contribution for any taxable year of the donor after the 12th taxable year of the donor which ends on or after the date of such contribution. The Secretary may issue regulations or other guidance to carry out the purposes of this subsection, including regulations or guidance— modifying the application of this subsection in the case of a donor or donee with a short taxable year, and providing for the determination of an amount to be treated as net income of the donee which is properly allocable to qualified intellectual property in the case of a donee who uses such property to further a purpose or function constituting the basis of the donee’s exemption under section 501 (or, in the case of a governmental unit, any purpose described in section 170(c)) and does not possess a right to receive any payment from a third party with respect to such property.

(n) Expenses paid by certain whaling captains in support of Native Alaskan subsistence whaling In the case of an individual who is recognized by the Alaska Eskimo Whaling Commission as a whaling captain charged with the responsibility of maintaining and carrying out sanctioned whaling activities and who engages in such activities during the taxable year, the amount described in paragraph (2) (to the extent such amount does not exceed $50,000 for the taxable year) shall be treated for purposes of this section as a charitable contribution. The amount described in this paragraph is the aggregate of the reasonable and necessary whaling expenses paid by the taxpayer during the taxable year in carrying out sanctioned whaling activities. For purposes of subparagraph (A), the term “whaling expenses” includes expenses for— the acquisition and maintenance of whaling boats, weapons, and gear used in sanctioned whaling activities, the supplying of food for the crew and other provisions for carrying out such activities, and storage and distribution of the catch from such activities. For purposes of this subsection, the term “sanctioned whaling activities” means subsistence bowhead whale hunting activities conducted pursuant to the management plan of the Alaska Eskimo Whaling Commission. The Secretary shall issue guidance requiring that the taxpayer substantiate the whaling expenses for which a deduction is claimed under this subsection, including by maintaining appropriate written records with respect to the time, place, date, amount, and nature of the expense, as well as the taxpayer’s eligibility for such deduction, and that (to the extent provided by the Secretary) such substantiation be provided as part of the taxpayer’s return of tax.

(o) Special rules for fractional gifts No deduction shall be allowed for a contribution of an undivided portion of a taxpayer’s entire interest in tangible personal property unless all interests in the property are held immediately before such contribution by— the taxpayer, or the taxpayer and the donee. The Secretary may, by regulation, provide for exceptions to subparagraph (A) in cases where all persons who hold an interest in the property make proportional contributions of an undivided portion of the entire interest held by such persons. In the case of any additional contribution, the fair market value of such contribution shall be determined by using the lesser of— the fair market value of the property at the time of the initial fractional contribution, or the fair market value of the property at the time of the additional contribution. The Secretary shall provide for the recapture of the amount of any deduction allowed under this section (plus interest) with respect to any contribution of an undivided portion of a taxpayer’s entire interest in tangible personal property— in any case in which the donor does not contribute all of the remaining interests in such property to the donee (or, if such donee is no longer in existence, to any person described in section 170(c)) on or before the earlier of— the date that is 10 years after the date of the initial fractional contribution, or the date of the death of the donor, and in any case in which the donee has not, during the period beginning on the date of the initial fractional contribution and ending on the date described in clause (i)— had substantial physical possession of the property, and used the property in a use which is related to a purpose or function constituting the basis for the organizations’ exemption under section 501. The tax imposed under this chapter for any taxable year for which there is a recapture under subparagraph (A) shall be increased by 10 percent of the amount so recaptured. For purposes of this subsection— The term “additional contribution” means any charitable contribution by the taxpayer of any interest in property with respect to which the taxpayer has previously made an initial fractional contribution. The term “initial fractional contribution” means, with respect to any taxpayer, the first charitable contribution of an undivided portion of the taxpayer’s entire interest in any tangible personal property.

(p) Special rule for taxpayers who do not elect to itemize deductions In the case of any taxable year, if the individual does not elect to itemize deductions for such taxable year, the deduction under this section shall be equal to the deduction, not in excess of 1,000 ($2,000 in the case of a joint return), which would be determined under this section if the only charitable contributions taken into account in determining such deduction were contributions made in cash during such taxable year (determined without regard to subsections (b)(1)(G)(ii), (b)(1)(I), and (d)(1)) to an organization described in section 170(b)(1)(A) and not— to an organization described in section 509(a)(3), or for the establishment of a new, or maintenance of an existing, donor advised fund (as defined in section 4966(d)(2)).

(q) Other cross references For treatment of certain organizations providing child care, see section 501(k). For charitable contributions of estates and trusts, see section 642(c). For nondeductibility of contributions by common trust funds, see section 584. For charitable contributions of partners, see section 702. For charitable contributions of nonresident aliens, see section 873. For treatment of gifts for benefit of or use in connection with the Naval Academy as gifts to or for use of the United States, see section 8473 of title 10 , United States Code. For treatment of gifts accepted by the Secretary of State, the Director of the International Communication Agency, or the Director of the United States International Development Cooperation Agency, as gifts to or for the use of the United States, see section 25 of the State Department Basic Authorities Act of 1956. For treatment of gifts of money accepted by the Attorney General for credit to the “Commissary Funds Federal Prisons” as gifts to or for the use of the United States, see section 4043 of title 18 , United States Code. For charitable contributions to or for the use of Indian tribal governments (or their subdivisions), see section 7871.

“For purposes of section 170 of the Internal Revenue Code of 1986 [formerly I.R.C. 1954] (relating to deduction for charitable, etc., contributions and gifts), a contribution or gift made after December 31, 1961 , with respect to a referendum occurring during the calendar year 1962 to or for the use of any nonprofit organization created and operated exclusively— to consider proposals for the reorganization of the judicial branch of the government of any State of the United States or political subdivision of such State, and to provide information, make recommendations, and seek public support or opposition as to such proposals, shall be treated as a charitable contribution if no part of the net earnings of such organization inures to the benefit of any private shareholder or individual. The provisions of the preceding sentence shall not apply to any organization which participates in, or intervenes in, any political campaign on behalf of any candidate for public office.”

§ 171 Amortizable bond premium

(a) General rule In the case of any bond, as defined in subsection (d), the following rules shall apply to the amortizable bond premium (determined under subsection (b)) on the bond: In the case of a bond (other than a bond the interest on which is excludable from gross income), the amount of the amortizable bond premium for the taxable year shall be allowed as a deduction. In the case of any bond the interest on which is excludable from gross income, no deduction shall be allowed for the amortizable bond premium for the taxable year. For adjustment to basis on account of amortizable bond premium, see section 1016(a)(5).

(b) Amortizable bond premium For purposes of paragraph (2), the amount of bond premium, in the case of the holder of any bond, shall be determined— with reference to the amount of the basis (for determining loss on sale or exchange) of such bond, with reference to the amount payable on maturity (or if it results in a smaller amortizable bond premium attributable to the period before the call date, with reference to the amount payable on the earlier call date), in the case of a bond described in subsection (a)(1), and with reference to the amount payable on maturity or on an earlier call date, in the case of a bond described in subsection (a)(2). with adjustments proper to reflect unamortized bond premium, with respect to the bond, for the period before the date as of which subsection (a) becomes applicable with respect to the taxpayer with respect to such bond. In no case shall the amount of bond premium on a convertible bond include any amount attributable to the conversion features of the bond. The amortizable bond premium of the taxable year shall be the amount of the bond premium attributable to such year. In the case of a bond to which paragraph (1)(B)(i) applies and which has a call date, the amount of bond premium attributable to the taxable year in which the bond is called shall include an amount equal to the excess of the amount of the adjusted basis (for determining loss on sale or exchange) of such bond as of the beginning of the taxable year over the amount received on redemption of the bond or (if greater) the amount payable on maturity. Except as provided in regulations prescribed by the Secretary, the determinations required under paragraphs (1) and (2) shall be made on the basis of the taxpayer’s yield to maturity determined by— using the taxpayer’s basis (for purposes of determining loss on sale or exchange) of the obligation, and compounding at the close of each accrual period (as defined in section 1272(a)(5)). For purposes of subparagraph (A), if the amount payable on an earlier call date is used under paragraph (1)(B)(i) in determining the amortizable bond premium attributable to the period before the earlier call date, such bond shall be treated as maturing on such date for the amount so payable and then reissued on such date for the amount so payable. If— a bond is acquired by any person in exchange for other property, and the basis of such bond is determined (in whole or in part) by reference to the basis of such other property, for purposes of applying this subsection to such bond while held by such person, the basis of such bond shall not exceed its fair market value immediately after the exchange. A similar rule shall apply in the case of such bond while held by any other person whose basis is determined (in whole or in part) by reference to the basis in the hands of the person referred to in clause (i). Subparagraph (A) shall not apply to an exchange by the taxpayer of a bond for another bond if such exchange is a part of a reorganization (as defined in section 368). If any portion of the basis of the taxpayer in a bond transferred in such an exchange is not taken into account in determining bond premium by reason of this paragraph, such portion shall not be taken into account in determining the amount of bond premium on any bond received in the exchange.

(c) Election as to taxable bonds In the case of bonds the interest on which is not excludible from gross income, this section shall apply only if the taxpayer has so elected. The election authorized under this subsection shall be made in accordance with such regulations as the Secretary shall prescribe. If such election is made with respect to any bond (described in paragraph (1)) of the taxpayer, it shall also apply to all such bonds held by the taxpayer at the beginning of the first taxable year to which the election applies and to all such bonds thereafter acquired by him and shall be binding for all subsequent taxable years with respect to all such bonds of the taxpayer, unless, on application by the taxpayer, the Secretary permits him, subject to such conditions as the Secretary deems necessary, to revoke such election. In the case of bonds held by a common trust fund, as defined in section 584(a), the election authorized under this subsection shall be exercisable with respect to such bonds only by the common trust fund. In case of bonds held by an estate or trust, the election authorized under this subsection shall be exercisable with respect to such bonds only by the fiduciary.

(d) Bond defined For purposes of this section, the term “bond” means any bond, debenture, note, or certificate or other evidence of indebtedness, but does not include any such obligation which constitutes stock in trade of the taxpayer or any such obligation of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or any such obligation held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business.

(e) Treatment as offset to interest payments Except as provided in regulations, in the case of any taxable bond— the amount of any bond premium shall be allocated among the interest payments on the bond under rules similar to the rules of subsection (b)(3), and in lieu of any deduction under subsection (a), the amount of any premium so allocated to any interest payment shall be applied against (and operate to reduce) the amount of such interest payment. For purposes of the preceding sentence, the term “taxable bond” means any bond the interest of which is not excludable from gross income.

(f) Dealers in tax-exempt securities For special rules applicable, in the case of dealers in securities, with respect to premium attributable to certain wholly tax-exempt securities, see section 75.

“Notwithstanding the amendments made by subparagraph (A) [amending this section], in the case of a bond the interest on which is not excludable from gross income— which was issued after January 22, 1951 , with a call date not more than 3 years after the date of such issue, and which was acquired by the taxpayer after January 22, 1954 , and before January 1, 1958 , the bond premium for a taxable year beginning after December 31, 1975 , shall not be determined under section 171(b)(1)(B)(i) but shall be determined with reference to the amount payable on maturity, and if the bond is called before its maturity, the bond premium for the year in which the bond is called shall be determined in accordance with the provisions of section 171(b)(2).”

§ 172 Net operating loss deduction

(a) Deduction allowed There shall be allowed as a deduction for the taxable year an amount equal to— in the case of a taxable year beginning before January 1, 2021 , the aggregate of the net operating loss carryovers to such year, plus the net operating loss carrybacks to such year, and in the case of a taxable year beginning after December 31, 2020 , the sum of— the aggregate amount of net operating losses arising in taxable years beginning before January 1, 2018 , carried to such taxable year, plus the lesser of— the aggregate amount of net operating losses arising in taxable years beginning after December 31, 2017 , carried to such taxable year, or 80 percent of the excess (if any) of— taxable income computed without regard to the deductions under this section and sections 199A and 250, over the amount determined under subparagraph (A). For purposes of this subtitle, the term “net operating loss deduction” means the deduction allowed by this subsection.

(b) Net operating loss carrybacks and carryovers A net operating loss for any taxable year— shall be a net operating loss carryback to the extent provided in subparagraphs (B), (C)(i), and (D), and except as provided in subparagraph (C)(ii), shall be a net operating loss carryover— in the case of a net operating loss arising in a taxable year beginning before January 1, 2018 , to each of the 20 taxable years following the taxable year of the loss, and in the case of a net operating loss arising in a taxable year beginning after December 31, 2017 , to each taxable year following the taxable year of the loss. In the case of any portion of a net operating loss for the taxable year which is a farming loss with respect to the taxpayer, such loss shall be a net operating loss carryback to each of the 2 taxable years preceding the taxable year of such loss. For purposes of this section, the term “farming loss” means the lesser of— the amount which would be the net operating loss for the taxable year if only income and deductions attributable to farming businesses (as defined in section 263A(e)(4)) are taken into account, or the amount of the net operating loss for such taxable year. For purposes of applying paragraph (2), a farming loss for any taxable year shall be treated as a separate net operating loss for such taxable year to be taken into account after the remaining portion of the net operating loss for such taxable year. Any taxpayer entitled to a 2-year carryback under clause (i) from any loss year may elect not to have such clause apply to such loss year. Such election shall be made in such manner as prescribed by the Secretary and shall be made by the due date (including extensions of time) for filing the taxpayer’s return for the taxable year of the net operating loss. Such election, once made for any taxable year, shall be irrevocable for such taxable year. In the case of an insurance company (as defined in section 816(a)) other than a life insurance company, the net operating loss for any taxable year— shall be a net operating loss carryback to each of the 2 taxable years preceding the taxable year of such loss, and shall be a net operating loss carryover to each of the 20 taxable years following the taxable year of the loss. In the case of any net operating loss arising in a taxable year beginning after December 31, 2017 , and before January 1, 2021 — such loss shall be a net operating loss carryback to each of the 5 taxable years preceding the taxable year of such loss, and subparagraphs (B) and (C)(i) shall not apply. For purposes of this subparagraph— A net operating loss for a REIT year shall not be a net operating loss carryback to any taxable year preceding the taxable year of such loss. In the case of any net operating loss for a taxable year which is not a REIT year, such loss shall not be carried to any preceding taxable year which is a REIT year. For purposes of this subparagraph, the term “REIT year” means any taxable year for which the provisions of part II of subchapter M (relating to real estate investment trusts) apply to the taxpayer. In the case of a life insurance company, if a net operating loss is carried pursuant to clause (i)(I) to a life insurance company taxable year beginning before January 1, 2018 , such net operating loss carryback shall be treated in the same manner as an operations loss carryback (within the meaning of section 810 as in effect before its repeal) of such company to such taxable year. If a net operating loss of a taxpayer is carried pursuant to clause (i)(I) to any taxable year in which an amount is includible in gross income by reason of section 965(a), the taxpayer shall be treated as having made the election under section 965(n) with respect to each such taxable year. If the 5-year carryback period under clause (i)(I) with respect to any net operating loss of a taxpayer includes 1 or more taxable years in which an amount is includible in gross income by reason of section 965(a), the taxpayer may, in lieu of the election otherwise available under paragraph (3), elect under such paragraph to exclude all such taxable years from such carryback period. An election under paragraph (3) (including an election described in subclause (I)) with respect to a net operating loss arising in a taxable year beginning in 2018 or 2019 shall be made by the due date (including extensions of time) for filing the taxpayer’s return for the first taxable year ending after the date of the enactment of this subparagraph. The entire amount of the net operating loss for any taxable year (hereinafter in this section referred to as the “loss year”) shall be carried to the earliest of the taxable years to which (by reason of paragraph (1)) such loss may be carried. The portion of such loss which shall be carried to each of the other taxable years shall be the excess, if any, of the amount of such loss over the sum of the taxable income for each of the prior taxable years to which such loss may be carried. For purposes of the preceding sentence, the taxable income for any such prior taxable year shall— be computed with the modifications specified in subsection (d) other than paragraphs (1), (4), and (5) thereof, and by determining the amount of the net operating loss deduction without regard to the net operating loss for the loss year or for any taxable year thereafter, not be considered to be less than zero, and for taxable years beginning after December 31, 2020 , be reduced by 20 percent of the excess (if any) described in subsection (a)(2)(B)(ii) for such taxable year. Any taxpayer entitled to a carryback period under paragraph (1) may elect to relinquish the entire carryback period with respect to a net operating loss for any taxable year. Such election shall be made in such manner as may be prescribed by the Secretary, and shall be made by the due date (including extensions of time) for filing the taxpayer’s return for the taxable year of the net operating loss for which the election is to be in effect. Such election, once made for any taxable year, shall be irrevocable for such taxable year.

(c) Net operating loss defined For purposes of this section, the term “net operating loss” means the excess of the deductions allowed by this chapter over the gross income. Such excess shall be computed with the modifications specified in subsection (d).

(d) Modifications The modifications referred to in this section are as follows: No net operating loss deduction shall be allowed. In the case of a taxpayer other than a corporation— the amount deductible on account of losses from sales or exchanges of capital assets shall not exceed the amount includable on account of gains from sales or exchanges of capital assets; and the exclusion provided by section 1202 shall not be allowed. No deduction shall be allowed under section 151 (relating to personal exemptions). No deduction in lieu of any such deduction shall be allowed. In the case of a taxpayer other than a corporation, the deductions allowable by this chapter which are not attributable to a taxpayer’s trade or business shall be allowed only to the extent of the amount of the gross income not derived from such trade or business. For purposes of the preceding sentence— any gain or loss from the sale or other disposition of— property, used in the trade or business, of a character which is subject to the allowance for depreciation provided in section 167, or real property used in the trade or business, shall be treated as attributable to the trade or business; the modifications specified in paragraphs (1), (2)(B), and (3) shall be taken into account; any deduction for casualty or theft losses allowable under paragraph (2) or (3) of section 165(c) shall be treated as attributable to the trade or business; and any deduction allowed under section 404 to the extent attributable to contributions which are made on behalf of an individual who is an employee within the meaning of section 401(c)(1) shall not be treated as attributable to the trade or business of such individual. The deductions allowed by sections 243 (relating to dividends received by corporations) and 245 (relating to dividends received from certain foreign corporations) shall be computed without regard to section 246(b) (relating to limitation on aggregate amount of deductions). In the case of any taxable year for which part II of subchapter M (relating to real estate investment trusts) applies to the taxpayer— the net operating loss for such taxable year shall be computed by taking into account the adjustments described in section 857(b)(2) (other than the deduction for dividends paid described in section 857(b)(2)(B)); where such taxable year is a “prior taxable year” referred to in paragraph (2) of subsection (b), the term “taxable income” in such paragraph shall mean “real estate investment trust taxable income” (as defined in section 857(b)(2)); and subsection (a)(2)(B)(ii)(I) shall be applied by substituting “real estate investment trust taxable income (as defined in section 857(b)(2) but without regard to the deduction for dividends paid (as defined in section 561))” for “taxable income”. Any deduction under section 199A shall not be allowed. The deduction under section 250 shall not be allowed.

(e) Law applicable to computations In determining the amount of any net operating loss carryback or carryover to any taxable year, the necessary computations involving any other taxable year shall be made under the law applicable to such other taxable year.

(f) Special rule for insurance companies In the case of an insurance company (as defined in section 816(a)) other than a life insurance company— the amount of the deduction allowed under subsection (a) shall be the aggregate of the net operating loss carryovers to such year, plus the net operating loss carrybacks to such year, and subparagraph (C) of subsection (b)(2) shall not apply.

(g) Cross references For treatment of net operating loss carryovers in certain corporate acquisitions, see section 381. For special limitation on net operating loss carryovers in case of a corporate change of ownership, see section 382.

§ 173 Circulation expenditures

(a) General rule Notwithstanding section 263, all expenditures (other than expenditures for the purchase of land or depreciable property or for the acquisition of circulation through the purchase of any part of the business of another publisher of a newspaper, magazine, or other periodical) to establish, maintain, or increase the circulation of a newspaper, magazine, or other periodical shall be allowed as a deduction; except that the deduction shall not be allowed with respect to the portion of such expenditures as, under regulations prescribed by the Secretary, is chargeable to capital account if the taxpayer elects, in accordance with such regulations, to treat such portion as so chargeable. Such election, if made, must be for the total amount of such portion of the expenditures which is so chargeable to capital account, and shall be binding for all subsequent taxable years unless, upon application by the taxpayer, the Secretary permits a revocation of such election subject to such conditions as he deems necessary.

(b) Cross reference For election of 3-year amortization of expenditures allowable as a deduction under subsection (a), see section 59(e).

§ 174 Amortization of research and experimental expenditures

(a) In general In the case of a taxpayer’s foreign research or experimental expenditures for any taxable year— except as provided in paragraph (2), no deduction shall be allowed for such expenditures, and the taxpayer shall— charge such expenditures to capital account, and be allowed an amortization deduction of such expenditures ratably over the 15-year period beginning with the midpoint of the taxable year in which such expenditures are paid or incurred.

(b) Foreign research or experimental expenditures For purposes of this section, the term “foreign research or experimental expenditures” means, with respect to any taxable year, research or experimental expenditures which are paid or incurred by the taxpayer during such taxable year in connection with the taxpayer’s trade or business and which are attributable to foreign research (within the meaning of section 41(d)(4)(F)).

(c) Special rules This section shall not apply to any expenditure for the acquisition or improvement of land, or for the acquisition or improvement of property to be used in connection with the research or experimentation and of a character which is subject to the allowance under section 167 (relating to allowance for depreciation, etc.) or section 611 (relating to allowance for depletion); but for purposes of this section allowances under section 167, and allowances under section 611, shall be considered as expenditures. This section shall not apply to any expenditure paid or incurred for the purpose of ascertaining the existence, location, extent, or quality of any deposit of ore or other mineral (including oil and gas). For purposes of this section, any amount paid or incurred in connection with the development of any software shall be treated as a research or experimental expenditure.

(d) Treatment upon disposition, retirement, or abandonment If any property with respect to which foreign research or experimental expenditures are paid or incurred is disposed, retired, or abandoned during the period during which such expenditures are allowed as an amortization deduction under this section, no deduction or reduction to amount realized shall be allowed with respect to such expenditures on account of such disposition, retirement, or abandonment and such amortization deduction shall continue with respect to such expenditures.

§ 174A Domestic research or experimental expenditures

(a) Treatment as expenses Notwithstanding section 263, there shall be allowed as a deduction any domestic research or experimental expenditures which are paid or incurred by the taxpayer during the taxable year.

(b) Domestic research or experimental expenditures For purposes of this section, the term “domestic research or experimental expenditures” means research or experimental expenditures paid or incurred by the taxpayer in connection with the taxpayer’s trade or business other than such expenditures which are attributable to foreign research (within the meaning of section 41(d)(4)(F)).

(c) Amortization of certain domestic research or experimental expenditures At the election of the taxpayer, made in accordance with regulations or other guidance provided by the Secretary, in the case of domestic research or experimental expenditures which would (but for subsection (a)) be chargeable to capital account but not chargeable to property of a character which is subject to the allowance under section 167 (relating to allowance for depreciation, etc.) or section 611 (relating to allowance for depletion), subsection (a) shall not apply and the taxpayer shall— charge such expenditures to capital account, and be allowed an amortization deduction of such expenditures ratably over such period of not less than 60 months as may be selected by the taxpayer (beginning with the month in which the taxpayer first realizes benefits from such expenditures). The election provided by paragraph (1) may be made for any taxable year, but only if made not later than the time prescribed by law for filing the return for such taxable year (including extensions thereof). The method so elected, and the period selected by the taxpayer, shall be adhered to in computing taxable income for the taxable year for which the election is made and for all subsequent taxable years unless, with the approval of the Secretary, a change to a different method (or to a different period) is authorized with respect to part or all of such expenditures. The election shall not apply to any expenditure paid or incurred during any taxable year before the taxable year for which the taxpayer makes the election.

(d) Special rules This section shall not apply to any expenditure for the acquisition or improvement of land, or for the acquisition or improvement of property to be used in connection with the research or experimentation and of a character which is subject to the allowance under section 167 (relating to allowance for depreciation, etc.) or section 611 (relating to allowance for depletion); but for purposes of this section allowances under section 167, and allowances under section 611, shall be considered as expenditures. This section shall not apply to any expenditure paid or incurred for the purpose of ascertaining the existence, location, extent, or quality of any deposit of ore or other mineral (including oil and gas). For purposes of this section, any amount paid or incurred in connection with the development of any software shall be treated as a research or experimental expenditure.

§ 175 Soil and water conservation expenditures; endangered species recovery expenditures

(a) In general A taxpayer engaged in the business of farming may treat expenditures which are paid or incurred by him during the taxable year for the purpose of soil or water conservation in respect of land used in farming, or for the prevention of erosion of land used in farming, or for endangered species recovery, as expenses which are not chargeable to capital account. The expenditures so treated shall be allowed as a deduction.

(b) Limitation The amount deductible under subsection (a) for any taxable year shall not exceed 25 percent of the gross income derived from farming during the taxable year. If for any taxable year the total of the expenditures treated as expenses which are not chargeable to capital account exceeds 25 percent of the gross income derived from farming during the taxable year, such excess shall be deductible for succeeding taxable years in order of time; but the amount deductible under this section for any one such succeeding taxable year (including the expenditures actually paid or incurred during the taxable year) shall not exceed 25 percent of the gross income derived from farming during the taxable year.

(c) Definitions For purposes of subsection (a)— The term “expenditures which are paid or incurred by him during the taxable year for the purpose of soil or water conservation in respect of land used in farming, or for the prevention of erosion of land used in farming, or for endangered species recovery” means expenditures paid or incurred for the treatment or moving of earth, including (but not limited to) leveling, grading and terracing, contour furrowing, the construction, control, and protection of diversion channels, drainage ditches, earthen dams, watercourses, outlets, and ponds, the eradication of brush, and the planting of windbreaks. Such term shall include expenditures paid or incurred for the purpose of achieving site-specific management actions recommended in recovery plans approved pursuant to the Endangered Species Act of 1973. Such term does not include— the purchase, construction, installation, or improvement of structures, appliances, or facilities which are of a character which is subject to the allowance for depreciation provided in section 167, or any amount paid or incurred which is allowable as a deduction without regard to this section. Notwithstanding the preceding sentences, such term also includes any amount, not otherwise allowable as a deduction, paid or incurred to satisfy any part of an assessment levied by a soil or water conservation or drainage district to defray expenditures made by such district (i) which, if paid or incurred by the taxpayer, would without regard to this sentence constitute expenditures deductible under this section, or (ii) for property of a character subject to the allowance for depreciation provided in section 167 and used in the soil or water conservation or drainage district’s business as such (to the extent that the taxpayer’s share of the assessment levied on the members of the district for such property does not exceed 10 percent of such assessment). The term “land used in farming” means land used (before or simultaneously with the expenditures described in paragraph (1)) by the taxpayer or his tenant for the production of crops, fruits, or other agricultural products or for the sustenance of livestock. Notwithstanding any other provision of this section, subsection (a) shall not apply to any expenditures unless such expenditures are consistent with— the plan (if any) approved by the Soil Conservation Service of the Department of Agriculture or the recovery plan approved pursuant to the Endangered Species Act of 1973 for the area in which the land is located, or if there is no plan described in clause (i), any soil conservation plan of a comparable State agency. Subsection (a) shall not apply to any expenditures in connection with the draining or filling of wetlands or land preparation for center pivot irrigation systems.

(d) When method may be adopted A taxpayer may, without the consent of the Secretary, adopt the method provided in this section for the taxpayer’s first taxable year for which expenditures described in subsection (a) are paid or incurred. A taxpayer may, with the consent of the Secretary, adopt at any time the method provided in this section.

(e) Scope The method adopted under this section shall apply to all expenditures described in subsection (a). The method adopted shall be adhered to in computing taxable income for the taxable year and for all subsequent taxable years unless, with the approval of the Secretary, a change to a different method is authorized with respect to part or all of such expenditures.

(f) Rules applicable to assessments for depreciable property In the case of an assessment levied to defray expenditures for property described in clause (ii) of the last sentence of subsection (c)(1), if the amount of such assessment paid or incurred by the taxpayer during the taxable year (determined without the application of this paragraph) is in excess of an amount equal to 10 percent of the aggregate amounts which have been and will be assessed as the taxpayer’s share of the expenditures by the district for such property, and if such excess is more than $500, the entire excess shall be treated as paid or incurred ratably over each of the 9 succeeding taxable years. If paragraph (1) applies to an assessment and the land with respect to which such assessment was made is sold or otherwise disposed of by the taxpayer (other than by the reason of his death) during the 9 succeeding taxable years, any amount of the excess described in paragraph (1) which has not been treated as paid or incurred for a taxable year ending on or before the sale or other disposition shall be added to the adjusted basis of such land immediately prior to its sale or other disposition and shall not thereafter be treated as paid or incurred ratably under paragraph (1). If paragraph (1) applies to an assessment and the taxpayer dies during the 9 succeeding taxable years, any amount of the excess described in paragraph (1) which has not been treated as paid or incurred for a taxable year ending before his death shall be treated as paid or incurred in the taxable year in which he dies.

§ 176 Payments with respect to employees of certain foreign corporations

In the case of a domestic corporation, there shall be allowed as a deduction amounts (to the extent not compensated for) paid or incurred pursuant to an agreement entered into under section 3121( l ) with respect to services performed by United States citizens employed by foreign subsidiary corporations. Any reimbursement of any amount previously allowed as a deduction under this section shall be included in gross income for the taxable year in which received. (Added Sept. 1, 1954, ch. 1206 , title II, § 210(a), 68 Stat. 1096 .)

[§ 177 Repealed. Pub. L. 99–514, title II, § 241(a), Oct. 22, 1986, 100 Stat. 2181]

§ 178 Amortization of cost of acquiring a lease

(a) General rule In determining the amount of the deduction allowable to a lessee for exhaustion, wear and tear, obsolescence, or amortization in respect of any cost of acquiring the lease, the term of the lease shall be treated as including all renewal options (and any other period for which the parties reasonably expect the lease to be renewed) if less than 75 percent of such cost is attributable to the period of the term of the lease remaining on the date of its acquisition.

(b) Certain periods excluded For purposes of subsection (a), in determining the period of the term of the lease remaining on the date of acquisition, there shall not be taken into account any period for which the lease may subsequently be renewed, extended, or continued pursuant to an option exercisable by the lessee.

§ 179 Election to expense certain depreciable business assets

(a) Treatment as expenses A taxpayer may elect to treat the cost of any section 179 property as an expense which is not chargeable to capital account. Any cost so treated shall be allowed as a deduction for the taxable year in which the section 179 property is placed in service.

(b) Limitations The aggregate cost which may be taken into account under subsection (a) for any taxable year shall not exceed $2, 500, 000. T h e l imi t a t i o n u n d er p a r a g r a p h (1) f or an y t a x ab l eye a rs ha ll b ere d u ce d (b u t n o t b e l o w zero) b y t h e am o u n t b y w hi c h t h ecos t o f sec t i o n 179 p ro p er t y pl a ce d in ser v i ce d u r in g s u c h t a x ab l eye a re x cee d s$ 4,000,000. The amount allowed as a deduction under subsection (a) for any taxable year (determined after the application of paragraphs (1) and (2)) shall not exceed the aggregate amount of taxable income of the taxpayer for such taxable year which is derived from the active conduct by the taxpayer of any trade or business during such taxable year. The amount allowable as a deduction under subsection (a) for any taxable year shall be increased by the lesser of— the aggregate amount disallowed under subparagraph (A) for all prior taxable years (to the extent not previously allowed as a deduction by reason of this subparagraph), or the excess (if any) of— the limitation of paragraphs (1) and (2) (or if lesser, the aggregate amount of taxable income referred to in subparagraph (A)), over the amount allowable as a deduction under subsection (a) for such taxable year without regard to this subparagraph. For purposes of this paragraph, taxable income derived from the conduct of a trade or business shall be computed without regard to the deduction allowable under this section. In the case of a husband and wife filing separate returns for the taxable year— such individuals shall be treated as 1 taxpayer for purposes of paragraphs (1) and (2), and unless such individuals elect otherwise, 50 percent of the cost which may be taken into account under subsection (a) for such taxable year (before application of paragraph (3)) shall be allocated to each such individual. The cost of any sport utility vehicle for any taxable year which may be taken into account under this section shall not exceed 10,000 ($100 in the case of any increase in the amount under paragraph (5)(A)).

(c) Election An election under this section for any taxable year shall— specify the items of section 179 property to which the election applies and the portion of the cost of each of such items which is to be taken into account under subsection (a), and be made on the taxpayer’s return of the tax imposed by this chapter for the taxable year. Such election shall be made in such manner as the Secretary may by regulations prescribe. Any election made under this section, and any specification contained in any such election, may be revoked by the taxpayer with respect to any property, and such revocation, once made, shall be irrevocable.

(d) Definitions and special rules For purposes of this section, the term “section 179 property” means property— which is— tangible property (to which section 168 applies), or computer software (as defined in section 197(e)(3)(B)) which is described in section 197(e)(3)(A)(i) and to which section 167 applies, which is— section 1245 property (as defined in section 1245(a)(3)), or at the election of the taxpayer, qualified real property (as defined in subsection (e)), and which is acquired by purchase for use in the active conduct of a trade or business. Such term shall not include any property described in section 50(b) (other than paragraph (2) thereof). For purposes of paragraph (1), the term “purchase” means any acquisition of property, but only if— the property is not acquired from a person whose relationship to the person acquiring it would result in the disallowance of losses under section 267 or 707(b) (but, in applying section 267(b) and (c) for purposes of this section, paragraph (4) of section 267(c) shall be treated as providing that the family of an individual shall include only his spouse, ancestors, and lineal descendants), the property is not acquired by one component member of a controlled group from another component member of the same controlled group, and the basis of the property in the hands of the person acquiring it is not determined— in whole or in part by reference to the adjusted basis of such property in the hands of the person from whom acquired, or under section 1014(a) (relating to property acquired from a decedent). For purposes of this section, the cost of property does not include so much of the basis of such property as is determined by reference to the basis of other property held at any time by the person acquiring such property. This section shall not apply to estates and trusts. This section shall not apply to any section 179 property which is purchased by a person who is not a corporation and with respect to which such person is the lessor unless— the property subject to the lease has been manufactured or produced by the lessor, or the term of the lease (taking into account options to renew) is less than 50 percent of the class life of the property (as defined in section 168(i)(1)), and for the period consisting of the first 12 months after the date on which the property is transferred to the lessee the sum of the deductions with respect to such property which are allowable to the lessor solely by reason of section 162 (other than rents and reimbursed amounts with respect to such property) exceeds 15 percent of the rental income produced by such property. For purposes of subsection (b) of this section— all component members of a controlled group shall be treated as one taxpayer, and the Secretary shall apportion the dollar limitation contained in subsection (b)(1) among the component members of such controlled group in such manner as he shall by regulations prescribe. For purposes of paragraphs (2) and (6), the term “controlled group” has the meaning assigned to it by section 1563(a), except that, for such purposes, the phrase “more than 50 percent” shall be substituted for the phrase “at least 80 percent” each place it appears in section 1563(a)(1). In the case of a partnership, the limitations of subsection (b) shall apply with respect to the partnership and with respect to each partner. A similar rule shall apply in the case of an S corporation and its shareholders. No credit shall be allowed under section 38 with respect to any amount for which a deduction is allowed under subsection (a). The Secretary shall, by regulations, provide for recapturing the benefit under any deduction allowable under subsection (a) with respect to any property which is not used predominantly in a trade or business at any time.

(e) Qualified real property For purposes of this section, the term “qualified real property” means— any qualified improvement property described in section 168(e)(6), and any of the following improvements to nonresidential real property placed in service after the date such property was first placed in service: Roofs. Heating, ventilation, and air-conditioning property. Fire protection and alarm systems. Security systems.

[§ 179A Repealed. Pub. L. 113–295, div. A, title II, § 221(a)(34)(A), Dec. 19, 2014, 128 Stat. 4042]

§ 179B Deduction for capital costs incurred in complying with Environmental Protection Agency sulfur regulations

(a) Allowance of deduction In the case of a small business refiner (as defined in section 45H(c)(1)) which elects the application of this section, there shall be allowed as a deduction an amount equal to 75 percent of qualified costs (as defined in section 45H(c)(2)) which are paid or incurred by the taxpayer during the taxable year and which are properly chargeable to capital account.

(b) Reduced percentage In the case of a small business refiner with average daily domestic refinery runs for the 1-year period ending on December 31, 2002 , in excess of 155,000 barrels, the number of percentage points described in subsection (a) shall be reduced (not below zero) by the product of such number (before the application of this subsection) and the ratio of such excess to 50,000 barrels.

(c) Basis reduction For purposes of this title, the basis of any property shall be reduced by the portion of the cost of such property taken into account under subsection (a). For purposes of section 1245, the amount of the deduction allowable under subsection (a) with respect to any property which is of a character subject to the allowance for depreciation shall be treated as a deduction allowed for depreciation under section 167.

(d) Coordination with other provisions Section 280B shall not apply to amounts which are treated as expenses under this section.

(e) Election to allocate deduction to cooperative owner If— a small business refiner to which subsection (a) applies is an organization to which part I of subchapter T applies, and one or more persons directly holding an ownership interest in the refiner are organizations to which part I of subchapter T apply, the refiner may elect to allocate all or a portion of the deduction allowable under subsection (a) to such persons. Such allocation shall be equal to the person’s ratable share of the total amount allocated, determined on the basis of the person’s ownership interest in the taxpayer. The taxable income of the refiner shall not be reduced under section 1382 by reason of any amount to which the preceding sentence applies. An election under paragraph (1) for any taxable year shall be made on a timely filed return for such year. Such election, once made, shall be irrevocable for such taxable year. If any portion of the deduction available under subsection (a) is allocated to owners under paragraph (1), the cooperative shall provide any owner receiving an allocation written notice of the amount of the allocation. Such notice shall be provided before the date on which the return described in paragraph (2) is due.

§ 179C Election to expense certain refineries

(a) Treatment as expenses A taxpayer may elect to treat 50 percent of the cost of any qualified refinery property as an expense which is not chargeable to capital account. Any cost so treated shall be allowed as a deduction for the taxable year in which the qualified refinery property is placed in service.

(b) Election An election under this section for any taxable year shall be made on the taxpayer’s return of the tax imposed by this chapter for the taxable year. Such election shall be made in such manner as the Secretary may by regulations prescribe. Any election made under this section may not be revoked except with the consent of the Secretary.

(c) Qualified refinery property The term “qualified refinery property” means any portion of a qualified refinery— the original use of which commences with the taxpayer, which is placed in service by the taxpayer after the date of the enactment of this section and before January 1, 2014 , in the case any portion of a qualified refinery (other than a qualified refinery which is separate from any existing refinery), which meets the requirements of subsection (e), which meets all applicable environmental laws in effect on the date such portion was placed in service, no written binding contract for the construction of which was in effect on or before June 14, 2005 , and the construction of which is subject to a written binding construction contract entered into before January 1, 2010 , which is placed in service before January 1, 2010 , or in the case of self-constructed property, the construction of which began after June 14, 2005 , and before January 1, 2010 . For purposes of paragraph (1)(A), if property is— originally placed in service after the date of the enactment of this section by a person, and sold and leased back by such person within 3 months after the date such property was originally placed in service, such property shall be treated as originally placed in service not earlier than the date on which such property is used under the leaseback referred to in subparagraph (B). A waiver under the Clean Air Act shall not be taken into account in determining whether the requirements of paragraph (1)(D) are met.

(d) Qualified refinery For purposes of this section, the term “qualified refinery” means any refinery located in the United States which is designed to serve the primary purpose of processing liquid fuel from crude oil or qualified fuels (as defined in section 45K(c)), or directly from shale or tar sands.

(e) Production capacity The requirements of this subsection are met if the portion of the qualified refinery— enables the existing qualified refinery to increase total volume output (determined without regard to asphalt or lube oil) by 5 percent or more on an average daily basis, or enables the existing qualified refinery to process shale, tar sands, or qualified fuels (as defined in section 45K(c)) at a rate which is equal to or greater than 25 percent of the total throughput of such qualified refinery on an average daily basis.

(f) Ineligible refinery property No deduction shall be allowed under subsection (a) for any qualified refinery property— the primary purpose of which is for use as a topping plant, asphalt plant, lube oil facility, crude or product terminal, or blending facility, or which is built solely to comply with consent decrees or projects mandated by Federal, State, or local governments.

(g) Election to allocate deduction to cooperative owner If— a taxpayer to which subsection (a) applies is an organization to which part I of subchapter T applies, and one or more persons directly holding an ownership interest in the taxpayer are organizations to which part I of subchapter T apply, the taxpayer may elect to allocate all or a portion of the deduction allowable under subsection (a) to such persons. Such allocation shall be equal to the person’s ratable share of the total amount allocated, determined on the basis of the person’s ownership interest in the taxpayer. The taxable income of the taxpayer shall not be reduced under section 1382 by reason of any amount to which the preceding sentence applies. An election under paragraph (1) for any taxable year shall be made on a timely filed return for such year. Such election, once made, shall be irrevocable for such taxable year. If any portion of the deduction available under subsection (a) is allocated to owners under paragraph (1), the cooperative shall provide any owner receiving an allocation written notice of the amount of the allocation. Such notice shall be provided before the date on which the return described in paragraph (2) is due.

(h) Reporting No deduction shall be allowed under subsection (a) to any taxpayer for any taxable year unless such taxpayer files with the Secretary a report containing such information with respect to the operation of the refineries of the taxpayer as the Secretary shall require.

§ 179D Energy efficient commercial buildings deduction

(a) In general There shall be allowed as a deduction an amount equal to the cost of energy efficient commercial building property placed in service during the taxable year.

(b) Maximum amount of deduction The deduction under subsection (a) with respect to any building for any taxable year shall not exceed the excess (if any) of— the product of— the applicable dollar value, and the square footage of the building, over the aggregate amount of the deductions under subsections (a) and (f) with respect to the building for the 3 taxable years immediately preceding such taxable year (or, in the case of any such deduction allowable to a person other than the taxpayer, for any taxable year ending during the 4-taxable-year period ending with such taxable year). For purposes of paragraph (1)(A)(i), the applicable dollar value shall be an amount equal to $0.50 in cre a se d (b u t n o t ab o v e$ 1.00) by $0.02 f ore a c h p erce n t a g e p o in t b y w hi c h t h e t o t a l ann u a l e n er g y an d p o w ercos t s f or t h e b u i l d in g a recer t i f i e d t o b ere d u ce d b y a p erce n t a g e g re a t er t han 25 p erce n t . I n t h ec a seo f an y p ro p er t y w hi c h s a t i s f i es t h ere q u i re m e n t so f s u b p a r a g r a p h (B), p a r a g r a p h (2) s ha ll b e a ppl i e d b ys u b s t i t u t in g “$ 2.50” for “ $0.50”, “$ .10” for “ $.02”, an d “$ 5.00” for “$1.00”. In the case of any energy efficient commercial building property, energy efficient building retrofit property, or property installed pursuant to a qualified retrofit plan, such property shall meet the requirements of this subparagraph if— installation of such property begins prior to the date that is 60 days after the Secretary publishes guidance with respect to the requirements of paragraphs (4)(A) and (5), or installation of such property satisfies the requirements of paragraphs (4)(A) and (5). The requirements described in this subparagraph with respect to any property are that the taxpayer shall ensure that any laborers and mechanics employed by the taxpayer or any contractor or subcontractor in the installation of any property shall be paid wages at rates not less than the prevailing rates for construction, alteration, or repair of a similar character in the locality in which such property is located as most recently determined by the Secretary of Labor, in accordance with subchapter IV of chapter 31 of title 40, United States Code. Rules similar to the rules of section 45(b)(7)(B) shall apply. Rules similar to the rules of section 45(b)(8) shall apply. The Secretary shall issue such regulations or other guidance as the Secretary determines necessary to carry out the purposes of this subsection, including regulations or other guidance which provides for requirements for recordkeeping or information reporting for purposes of administering the requirements of this subsection.

(c) Definitions For purposes of this section— The term “energy efficient commercial building property” means property— with respect to which depreciation (or amortization in lieu of depreciation) is allowable, which is installed on or in any building which is— located in the United States, and within the scope of Reference Standard 90.1, which is installed as part of— the interior lighting systems, the heating, cooling, ventilation, and hot water systems, or the building envelope, and which is certified in accordance with subsection (d)(5) as being installed as part of a plan designed to reduce the total annual energy and power costs with respect to the interior lighting systems, heating, cooling, ventilation, and hot water systems of the building by 25 percent or more in comparison to a reference building which meets the minimum requirements of Reference Standard 90.1 using methods of calculation under subsection (d)(1). The term “Reference Standard 90.1” means, with respect to any property, the more recent of— Standard 90.1-2007 published by the American Society of Heating, Refrigerating, and Air Conditioning Engineers and the Illuminating Engineering Society of North America, or the most recent Standard 90.1 published by the American Society of Heating, Refrigerating, and Air Conditioning Engineers and the Illuminating Engineering Society of North America for which the Department of Energy has issued a final determination and which has been affirmed by the Secretary, after consultation with the Secretary of Energy, for purposes of this section not later than the date that is 4 years before the date such property is placed in service.

(d) Special rules The Secretary, after consultation with the Secretary of Energy, shall promulgate regulations which describe in detail methods for calculating and verifying energy and power consumption and cost with respect to any property, based on the provisions of the most recent California Nonresidential Alternative Calculation Method Approval Manual which has been affirmed by the Secretary, after consultation with the Secretary of Energy, for purposes of this section not later than the date that is 4 years before the date such property is placed in service. Any calculation under paragraph (1) shall be prepared by qualified computer software. For purposes of this paragraph, the term “qualified computer software” means software— for which the software designer has certified that the software meets all procedures and detailed methods for calculating energy and power consumption and costs as required by the Secretary, which provides such forms as required to be filed by the Secretary in connection with energy efficiency of property and the deduction allowed under this section, and which provides a notice form which documents the energy efficiency features of the building and its projected annual energy costs. In the case of energy efficient commercial building property installed on or in property owned by a specified tax-exempt entity, the Secretary shall promulgate regulations or guidance to allow the allocation of the deduction to the person primarily responsible for designing the property in lieu of the owner of such property. Such person shall be treated as the taxpayer for purposes of this section. For purposes of this paragraph, the term “specified tax-exempt entity” means— the United States, any State or political subdivision thereof, any possession of the United States, or any agency or instrumentality of any of the foregoing, an Indian tribal government (as defined in section 30D(g)(9)) or Alaska Native Corporation (as defined in section 3 of the Alaska Native Claims Settlement Act ( 43 U.S.C. 1602(m) ), 1 and any organization exempt from tax imposed by this chapter. Each certification required under this section shall include an explanation to the building owner regarding the energy efficiency features of the building and its projected annual energy costs as provided in the notice under paragraph (2)(B)(iii). The Secretary shall prescribe the manner and method for the making of certifications under this section. The Secretary shall include as part of the certification process procedures for inspection and testing by qualified individuals described in subparagraph (C) to ensure compliance of buildings with energy-savings plans and targets. Such procedures shall be comparable, given the difference between commercial and residential buildings, to the requirements in the Mortgage Industry National Accreditation Procedures for Home Energy Rating Systems. Individuals qualified to determine compliance shall be only those individuals who are recognized by an organization certified by the Secretary for such purposes.

(e) Basis reduction For purposes of this subtitle, if a deduction is allowed under this section with respect to any energy efficient commercial building property, the basis of such property shall be reduced by the amount of the deduction so allowed.

(f) Alternative deduction for energy efficient building retrofit property In the case of a taxpayer which elects (at such time and in such manner as the Secretary may provide) the application of this subsection with respect to any qualified building, there shall be allowed as a deduction for the taxable year which includes the date of the qualifying final certification with respect to the qualified retrofit plan of such building, an amount equal to the lesser of— the excess described in subsection (b) (determined by substituting “energy use intensity” for “total annual energy and power costs” in paragraph (2) thereof), or the aggregate adjusted basis (determined after taking into account all adjustments with respect to such taxable year other than the reduction under subsection (e)) of energy efficient building retrofit property placed in service by the taxpayer pursuant to such qualified retrofit plan. For purposes of this subsection, the term “qualified retrofit plan” means a written plan prepared by a qualified professional which specifies modifications to a building which, in the aggregate, are expected to reduce such building’s energy use intensity by 25 percent or more in comparison to the baseline energy use intensity of such building. Such plan shall provide for a qualified professional to— as of any date during the 1-year period ending on the date on which the property installed pursuant to such plan is placed in service, certify the energy use intensity of such building as of such date, certify the status of property installed pursuant to such plan as meeting the requirements of subparagraphs (B) and (C) of paragraph (3), and as of any date that is more than 1 year after the date on which the property installed pursuant to such plan is placed in service, certify the energy use intensity of such building as of such date. For purposes of this subsection, the term “energy efficient building retrofit property” means property— with respect to which depreciation (or amortization in lieu of depreciation) is allowable, which is installed on or in any qualified building, which is installed as part of— the interior lighting systems, the heating, cooling, ventilation, and hot water systems, or the building envelope, and which is certified in accordance with paragraph (2)(B) as meeting the requirements of subparagraphs (B) and (C). For purposes of this subsection, the term “qualified building” means any building which— is located in the United States, and was originally placed in service not less than 5 years before the establishment of the qualified retrofit plan with respect to such building. For purposes of this subsection, the term “qualifying final certification” means, with respect to any qualified retrofit plan, the certification described in paragraph (2)(C) if the energy use intensity certified in such certification is not more than 75 percent of the baseline energy use intensity of the building. For purposes of this subsection, the term “baseline energy use intensity” means the energy use intensity certified under paragraph (2)(A), as adjusted to take into account weather. For purposes of subparagraph (A), the adjustments described in such subparagraph shall be determined in such manner as the Secretary may provide. For purposes of this subsection— The term “energy use intensity” means the annualized, measured site energy use intensity determined in accordance with such regulations or other guidance as the Secretary may provide and measured in British thermal units. The term “qualified professional” means an individual who is a licensed architect or a licensed engineer and meets such other requirements as the Secretary may provide. In the case of any building with respect to which an election is made under paragraph (1), the term “energy efficient commercial building property” shall not include any energy efficient building retrofit property with respect to which a deduction is allowable under this subsection. Except as provided in clause (ii), subsection (d) shall not apply for purposes of this subsection. Rules similar to subsection (d)(3) shall apply for purposes of this subsection.

(g) Inflation adjustment In the case of a taxable year beginning after 2022, each dollar amount in subsection (b) shall be increased by an amount equal to— such dollar amount, multiplied by the cost-of-living adjustment determined under section 1(f)(3) for the calendar year in which the taxable year begins, determined by substituting “calendar year 2021” for “calendar year 2016” in subparagraph (A)(ii) thereof. Any increase determined under the preceding sentence which is not a multiple of 1 cent shall be rounded to the nearest cent.

(h) Regulations The Secretary shall promulgate such regulations as necessary— to take into account new technologies regarding energy efficiency and renewable energy for purposes of determining energy efficiency and savings under this section, and to provide for a recapture of the deduction allowed under this section if the plan described in subsection (c)(1)(D) is not fully implemented.

(i) Termination This section shall not apply with respect to property the construction of which begins after June 30, 2026 .

§ 179E Election to expense advanced mine safety equipment

(a) Treatment as expenses A taxpayer may elect to treat 50 percent of the cost of any qualified advanced mine safety equipment property as an expense which is not chargeable to capital account. Any cost so treated shall be allowed as a deduction for the taxable year in which the qualified advanced mine safety equipment property is placed in service.

(b) Election An election under this section for any taxable year shall be made on the taxpayer’s return of the tax imposed by this chapter for the taxable year. Such election shall specify the advanced mine safety equipment property to which the election applies and shall be made in such manner as the Secretary may by regulations prescribe. Any election made under this section may not be revoked except with the consent of the Secretary.

(c) Qualified advanced mine safety equipment property For purposes of this section, the term “qualified advanced mine safety equipment property” means any advanced mine safety equipment property for use in any underground mine located in the United States— the original use of which commences with the taxpayer, and which is placed in service by the taxpayer after the date of the enactment of this section.

(d) Advanced mine safety equipment property For purposes of this section, the term “advanced mine safety equipment property” means any of the following: Emergency communication technology or device which is used to allow a miner to maintain constant communication with an individual who is not in the mine. Electronic identification and location device which allows an individual who is not in the mine to track at all times the movements and location of miners working in or at the mine. Emergency oxygen-generating, self-rescue device which provides oxygen for at least 90 minutes. Pre-positioned supplies of oxygen which (in combination with self-rescue devices) can be used to provide each miner on a shift, in the event of an accident or other event which traps the miner in the mine or otherwise necessitates the use of such a self-rescue device, the ability to survive for at least 48 hours. Comprehensive atmospheric monitoring system which monitors the levels of carbon monoxide, methane, and oxygen that are present in all areas of the mine and which can detect smoke in the case of a fire in a mine.

(e) Coordination with section 179 No expenditures shall be taken into account under subsection (a) with respect to the portion of the cost of any property specified in an election under section 179.

(f) Reporting No deduction shall be allowed under subsection (a) to any taxpayer for any taxable year unless such taxpayer files with the Secretary a report containing such information with respect to the operation of the mines of the taxpayer as the Secretary shall require.

(g) Termination This section shall not apply to property placed in service after December 31, 2017 .

§ 180 Expenditures by farmers for fertilizer, etc.

(a) In general A taxpayer engaged in the business of farming may elect to treat as expenses which are not chargeable to capital account expenditures (otherwise chargeable to capital account) which are paid or incurred by him during the taxable year for the purchase or acquisition of fertilizer, lime, ground limestone, marl, or other materials to enrich, neutralize, or condition land used in farming, or for the application of such materials to such land. The expenditures so treated shall be allowed as a deduction.

(b) Land used in farming For purposes of subsection (a), the term “land used in farming” means land used (before or simultaneously with the expenditures described in subsection (a)) by the taxpayer or his tenant for the production of crops, fruits, or other agricultural products or for the sustenance of livestock.

(c) Election The election under subsection (a) for any taxable year shall be made within the time prescribed by law (including extensions thereof) for filing the return for such taxable year. Such election shall be made in such manner as the Secretary may by regulations prescribe. Such election may not be revoked except with the consent of the Secretary.

§ 181 Treatment of certain qualified productions

(a) Election to treat costs as expenses A taxpayer may elect to treat the cost of any qualified film or television production, any qualified live theatrical production, and any qualified sound recording production as an expense which is not chargeable to capital account. Any cost so treated shall be allowed as a deduction. Paragraph (1) shall not apply to so much of the aggregate cost of any qualified film or television production or any qualified live theatrical production as exceeds $15, 000, 000. I n t h ec a seo f an y q u a l i f i e df i l m or t e l e v i s i o n p ro d u c t i o n or an y q u a l i f i e d l i v e t h e a t r i c a lp ro d u c t i o n t h e a gg re g a t ecos t o f w hi c hi ss i g ni f i c an tl y in c u rre d inana re a e l i g ib l e f or d es i g na t i o na s — a l o w - in co m eco mm u ni t y u n d ersec t i o n 45 D, or a d i s t resse d co u n t yor i so l a t e d a re a o fd i s t ress b y t h eDe lt a R e g i o na l A u t h or i t yes t ab l i s h e d u n d ersec t i o n 2009 aa -1 o f t i tl e 7, U ni t e d St a t es C o d e, s u b p a r a g r a p h (A) s ha ll b e a ppl i e d b ys u b s t i t u t in g “$ 20,000,000” for “ $15, 000, 000”. P a r a g r a p h (1) s ha ll n o t a ppl y t oso m u c h o f t h e a gg re g a t ecos t o f an y q u a l i f i e d so u n d recor d in g p ro d u c t i o n, or t oso m u c h o f t h e a gg re g a t e, c u m u l a t i v ecos t o f a ll s u c h q u a l i f i e d so u n d recor d in g p ro d u c t i o n s in t h e t a x ab l eye a r, a se x cee d s$ 150,000.

(b) No other deduction or amortization deduction allowable With respect to the basis of any qualified film or television production, any qualified live theatrical production, or any qualified sound recording production to which an election is made under subsection (a), no other depreciation or amortization deduction shall be allowable.

(c) Election An election under this section with respect to any qualified film or television production, any qualified live theatrical production, or any qualified sound recording production shall be made in such manner as prescribed by the Secretary and by the due date (including extensions) for filing the taxpayer’s return of tax under this chapter for the taxable year in which costs of the production are first incurred. Any election made under this section may not be revoked without the consent of the Secretary.

(d) Qualified film or television production For purposes of this section— The term “qualified film or television production” means any production described in paragraph (2) if 75 percent of the total compensation of the production is qualified compensation. A production is described in this paragraph if such production is property described in section 168(f)(3). In the case of a television series— each episode of such series shall be treated as a separate production, and only the first 44 episodes of such series shall be taken into account. A production is not described in this paragraph if records are required under section 2257 of title 18 , United States Code, to be maintained with respect to any performer in such production. For purposes of paragraph (1)— The term “qualified compensation” means compensation for services performed in the United States by actors, production personnel, directors, and producers. The term “compensation” does not include participations and residuals (as defined in section 167(g)(7)(B)).

(e) Qualified live theatrical production For purposes of this section— The term “qualified live theatrical production” means any production described in paragraph (2) if 75 percent of the total compensation of the production is qualified compensation (as defined in subsection (d)(3)). A production is described in this paragraph if such production is a live staged production of a play (with or without music) which is derived from a written book or script and is produced or presented by a taxable entity in any venue which has an audience capacity of not more than 3,000 or a series of venues the majority of which have an audience capacity of not more than 3,000. In the case of multiple live staged productions— for which the election under this section would be allowable to the same taxpayer, and which are— separate phases of a production, or separate simultaneous stagings of the same production in different geographical locations (not including multiple performance locations of any one touring production), each such live staged production shall be treated as a separate production. For purposes of subparagraph (B), the term “phase” with respect to any qualified live theatrical production refers to each of the following, but only if each of the following is treated by the taxpayer as a separate activity for all purposes of this title: The initial staging of a live theatrical production. Subsequent additional stagings or touring of such production which are produced by the same producer as the initial staging. In the case of a live staged production not described in subparagraph (B) which is produced or presented by a taxable entity for not more than 10 weeks of the taxable year, subparagraph (A) shall be applied by substituting “6,500” for “3,000”. For purposes of clause (i), in the case of any taxable year of less than 12 months, the number of weeks for which a production is produced or presented shall be annualized by multiplying the number of weeks the production is produced or presented during such taxable year by 12 and dividing the result by the number of months in such taxable year. A production is not described in this paragraph if such production includes or consists of any performance of conduct described in section 2257(h)(1) of title 18 , United States Code.

(f) Qualified sound recording production For purposes of this section, the term “qualified sound recording production” means a sound recording (as defined in section 101 of title 17 , United States Code) produced and recorded in the United States.

(g) Application of certain other rules For purposes of this section, rules similar to the rules of subsections (b)(2) and (c)(4) of section 194 shall apply.

(h) Termination This section shall not apply to qualified film and television productions, qualified live theatrical productions, or qualified sound recording productions commencing after December 31, 2025 .

[§ 182 Repealed. Pub. L. 99–514, title IV, § 402(a), Oct. 22, 1986, 100 Stat. 2221]

§ 183 Activities not engaged in for profit

(a) General rule In the case of an activity engaged in by an individual or an S corporation, if such activity is not engaged in for profit, no deduction attributable to such activity shall be allowed under this chapter except as provided in this section.

(b) Deductions allowable In the case of an activity not engaged in for profit to which subsection (a) applies, there shall be allowed— the deductions which would be allowable under this chapter for the taxable year without regard to whether or not such activity is engaged in for profit, and a deduction equal to the amount of the deductions which would be allowable under this chapter for the taxable year only if such activity were engaged in for profit, but only to the extent that the gross income derived from such activity for the taxable year exceeds the deductions allowable by reason of paragraph (1).

(c) Activity not engaged in for profit defined For purposes of this section, the term “activity not engaged in for profit” means any activity other than one with respect to which deductions are allowable for the taxable year under section 162 or under paragraph (1) or (2) of section 212.

(d) Presumption If the gross income derived from an activity for 3 or more of the taxable years in the period of 5 consecutive taxable years which ends with the taxable year exceeds the deductions attributable to such activity (determined without regard to whether or not such activity is engaged in for profit), then, unless the Secretary establishes to the contrary, such activity shall be presumed for purposes of this chapter for such taxable year to be an activity engaged in for profit. In the case of an activity which consists in major part of the breeding, training, showing, or racing of horses, the preceding sentence shall be applied by substituting “2” for “3” and “7” for “5”.

(e) Special rule A determination as to whether the presumption provided by subsection (d) applies with respect to any activity shall, if the taxpayer so elects, not be made before the close of the fourth taxable year (sixth taxable year, in the case of an activity described in the last sentence of such subsection) following the taxable year in which the taxpayer first engages in the activity. If the taxpayer makes an election under paragraph (1), the presumption provided by subsection (d) shall apply to each taxable year in the 5-taxable year (or 7-taxable year) period beginning with the taxable year in which the taxpayer first engages in the activity, if the gross income derived from the activity for 3 (or 2 if applicable) or more of the taxable years in such period exceeds the deductions attributable to the activity (determined without regard to whether or not the activity is engaged in for profit). An election under paragraph (1) shall be made at such time and manner, and subject to such terms and conditions, as the Secretary may prescribe. If a taxpayer makes an election under paragraph (1) with respect to an activity, the statutory period for the assessment of any deficiency attributable to such activity shall not expire before the expiration of 2 years after the date prescribed by law (determined without extensions) for filing the return of tax under chapter 1 for the last taxable year in the period of 5 taxable years (or 7 taxable years) to which the election relates. Such deficiency may be assessed notwithstanding the provisions of any law or rule of law which would otherwise prevent such an assessment.

[§ 184 Repealed. Pub. L. 101–508, title XI, § 11801(a)(12), Nov. 5, 1990, 104 Stat. 1388–520]

[§ 185 Repealed. Pub. L. 99–514, title II, § 242(a), Oct. 22, 1986, 100 Stat. 2181]

§ 186 Recoveries of damages for antitrust violations, etc.

(a) Allowance of deduction If a compensatory amount which is included in gross income is received or accrued during the taxable year for a compensable injury, there shall be allowed as a deduction for the taxable year an amount equal to the lesser of— the amount of such compensatory amount, or the amount of the unrecovered losses sustained as a result of such compensable injury.

(b) Compensable injury For purposes of this section, the term “compensable injury” means— injuries sustained as a result of an infringement of a patent issued by the United States, injuries sustained as a result of a breach of contract or a breach of fiduciary duty or relationship, or injuries sustained in business, or to property, by reason of any conduct forbidden in the antitrust laws for which a civil action may be brought under section 4 of the Act entitled “An Act to supplement existing laws against unlawful restraints and monopolies, and for other purposes”, approved October 15, 1914 (commonly known as the Clayton Act).

(c) Compensatory amount For purposes of this section, the term “compensatory amount” means the amount received or accrued during the taxable year as damages as a result of an award in, or in settlement of, a civil action for recovery for a compensable injury, reduced by any amounts paid or incurred in the taxable year in securing such award or settlement.

(d) Unrecovered losses For purposes of this section, the amount of any unrecovered loss sustained as a result of any compensable injury is— the sum of the amount of the net operating losses (as determined under section 172) for each taxable year in whole or in part within the injury period, to the extent that such net operating losses are attributable to such compensable injury, reduced by the sum of— the amount of the net operating losses described in subparagraph (A) which were allowed for any prior taxable year as a deduction under section 172 as a net operating loss carryback or carryover to such taxable year, and the amounts allowed as a deduction under subsection (a) for any prior taxable year for prior recoveries of compensatory amounts for such compensable injury. For purposes of paragraph (1), the injury period is— with respect to any infringement of a patent, the period in which such infringement occurred, with respect to a breach of contract or breach of fiduciary duty or relationship, the period during which amounts would have been received or accrued but for the breach of contract or breach of fiduciary duty or relationship, and with respect to injuries sustained by reason of any conduct forbidden in the antitrust laws, the period in which such injuries were sustained. For purposes of paragraph (1)— a net operating loss for any taxable year shall be treated as attributable to a compensable injury to the extent of the compensable injury sustained during such taxable year, and if only a portion of a net operating loss for any taxable year is attributable to a compensable injury, such portion shall (in applying section 172 for purposes of this section) be considered to be a separate net operating loss for such year to be applied after the other portion of such net operating loss.

(e) Effect on net operating loss carryovers If for the taxable year in which a compensatory amount is received or accrued any portion of a net operating loss carryover to such year is attributable to the compensable injury for which such amount is received or accrued, such portion of such net operating loss carryover shall be reduced by an amount equal to— the deduction allowed under subsection (a) with respect to such compensatory amount, reduced by any portion of the unrecovered losses sustained as a result of the compensable injury with respect to which the period for carryover under section 172 has expired.

[§ 187 Repealed. Pub. L. 94–455, title XIX, § 1901(a)(31), Oct. 4, 1976, 90 Stat. 1769]

[§ 188 Repealed. Pub. L. 101–508, title XI, § 11801(a)(13), Nov. 5, 1990, 104 Stat. 1388–520]

[§ 189 Repealed. Pub. L. 99–514, title VIII, § 803(b)(1), Oct. 22, 1986, 100 Stat. 2355]

§ 190 Expenditures to remove architectural and transportation barriers to the handicapped and elderly

(a) Treatment as expenses A taxpayer may elect to treat qualified architectural and transportation barrier removal expenses which are paid or incurred by him during the taxable year as expenses which are not chargeable to capital account. The expenditures so treated shall be allowed as a deduction. An election under paragraph (1) shall be made at such time and in such manner as the Secretary prescribes by regulations.

(b) Definitions For purposes of this section— The term “architectural and transportation barrier removal expenses” means an expenditure for the purpose of making any facility or public transportation vehicle owned or leased by the taxpayer for use in connection with his trade or business more accessible to, and usable by, handicapped and elderly individuals. The term “qualified architectural and transportation barrier removal expense” means, with respect to any such facility or public transportation vehicle, an architectural or transportation barrier removal expense with respect to which the taxpayer establishes, to the satisfaction of the Secretary, that the resulting removal of any such barrier meets the standards promulgated by the Secretary with the concurrence of the Architectural and Transportation Barriers Compliance Board and set forth in regulations prescribed by the Secretary. The term “handicapped individual” means any individual who has a physical or mental disability (including, but not limited to, blindness or deafness) which for such individual constitutes or results in a functional limitation to employment, or who has any physical or mental impairment (including, but not limited to, a sight or hearing impairment) which substantially limits one or more major life activities of such individual.

(c) Limitation The deduction allowed by subsection (a) for any taxable year shall not exceed $15,000.

[§ 191 Repealed. Pub. L. 97–34, title II, § 212(d)(1), Aug. 13, 1981, 95 Stat. 239]

§ 192 Contributions to black lung benefit trust

(a) Allowance of deduction There is allowed as a deduction for the taxable year an amount equal to the sum of the amounts contributed by the taxpayer during the taxable year to or under a trust or trusts described in section 501(c)(21).

(b) Limitation The maximum amount of the deduction allowed by subsection (a) for any taxpayer for any taxable year shall not exceed the greater of— the amount necessary to fund (with level funding) the remaining unfunded liability of the taxpayer for black lung claims filed (or expected to be filed) by (or with respect to) past or present employees of the taxpayer, or the aggregate amount necessary to increase each trust described in section 501(c)(21) to the amount required to pay all amounts payable out of such trust for the taxable year.

(c) Special rules The amounts described in subsection (b) shall be determined by using reasonable actuarial methods and assumptions which are not inconsistent with regulations prescribed by the Secretary. Except as provided in subparagraph (C), the funding period for purposes of subsection (b)(1) shall be the greater of— the average remaining working life of miners who are present employees of the taxpayer, or 10 taxable years. For purposes of the preceding sentence, the term “miner” has the same meaning as such term has when used in section 402(d) of the Black Lung Benefits Act ( 30 U.S.C. 902(d) ). To the extent that— regulations prescribed by the Secretary provide for a different period, or the Secretary consents to a different period proposed by the taxpayer, such different period shall be substituted for the funding period provided in subparagraph (B). In determining the amounts described in subsection (b), only those black lung benefit claims the payment of which is expected to be made from the trust shall be taken into account. For purposes of this section, a taxpayer shall be deemed to have made a payment of a contribution on the last day of a taxable year if the payment is on account of that taxable year and is made not later than the time prescribed by law for filing the return for that taxable year (including extensions thereof). No deduction shall be allowed under subsection (a) with respect to any contribution to a trust described in section 501(c)(21) other than a contribution in cash or in items in which such trust may invest under subclause (II) of section 501(c)(21)(A)(ii). No deduction shall be allowed under section 162(a) with respect to any liability taken into account in determining the deduction under subsection (a) of this section of the taxpayer (or a predecessor).

(d) Carryover of excess contributions If the amount of the deduction determined under subsection (a) for the taxable year (without regard to the limitation imposed by subsection (b)) with respect to a trust exceeds the limitation imposed by subsection (b) for the taxable year, the excess shall be carried over to the succeeding taxable year and treated as contributed to the trust during that year.

(e) Definition of black lung benefit claim For purposes of this section, the term “black lung benefit claim” means a claim for compensation for disability or death due to pneumoconiosis under part C of title IV of the Federal Mine Safety and Health Act of 1977 or under any State law providing for such compensation.

§ 193 Tertiary injectants

(a) Allowance of deduction There shall be allowed as a deduction for the taxable year an amount equal to the qualified tertiary injectant expenses of the taxpayer for tertiary injectants injected during such taxable year.

(b) Qualified tertiary injectant expenses For purposes of this section— The term “qualified tertiary injectant expenses” means any cost paid or incurred (whether or not chargeable to capital account) for any tertiary injectant (other than a hydrocarbon injectant which is recoverable) which is used as a part of a tertiary recovery method. The term “hydrocarbon injectant” includes natural gas, crude oil, and any other injectant which is comprised of more than an insignificant amount of natural gas or crude oil. The term does not include any tertiary injectant which is hydrocarbon-based, or a hydrocarbon-derivative, and which is comprised of no more than an insignificant amount of natural gas or crude oil. For purposes of this paragraph, that portion of a hydrocarbon injectant which is not a hydrocarbon shall not be treated as a hydrocarbon injectant. The term “tertiary recovery method” means— any method which is described in subparagraphs (1) through (9) of section 212.78(c) of the June 1979 energy regulations (as defined by section 4996(b)(8)(C) as in effect before its repeal), or any other method to provide tertiary enhanced recovery which is approved by the Secretary for purposes of this section.

(c) Application with other deductions No deduction shall be allowed under subsection (a) with respect to any expenditure— with respect to which the taxpayer has made an election under section 263(c), or with respect to which a deduction is allowed or allowable to the taxpayer under any other provision of this chapter.

§ 194 Treatment of reforestation expenditures

(a) Allowance of deduction In the case of any qualified timber property with respect to which the taxpayer has made (in accordance with regulations prescribed by the Secretary) an election under this subsection, the taxpayer shall be entitled to a deduction with respect to the amortization of the amortizable basis of qualified timber property based on a period of 84 months. Such amortization deduction shall be an amount, with respect to each month of such period within the taxable year, equal to the amortizable basis at the end of such month divided by the number of months (including the month for which the deduction is computed) remaining in the period. Such amortizable basis at the end of the month shall be computed without regard to the amortization deduction for such month. The 84-month period shall begin on the first day of the first month of the second half of the taxable year in which the amortizable basis is acquired.

(b) Treatment as expenses In the case of any qualified timber property with respect to which the taxpayer has made (in accordance with regulations prescribed by the Secretary) an election under this subsection, the taxpayer shall treat reforestation expenditures which are paid or incurred during the taxable year with respect to such property as an expense which is not chargeable to capital account. The reforestation expenditures so treated shall be allowed as a deduction. The aggregate amount of reforestation expenditures which may be taken into account under subparagraph (A) with respect to each qualified timber property for any taxable year shall not exceed— except as provided in clause (ii) or (iii), $10, 000, in t h ec a seo f a se p a r a t ere t u r nb y ama rr i e d in d i v i d u a l (a s d e f in e d in sec t i o n 7703),$ 5,000, and in the case of a trust, zero. For purposes of applying the dollar limitation under paragraph (1)(B)— all component members of a controlled group shall be treated as one taxpayer, and the Secretary shall, under regulations prescribed by him, apportion such dollar limitation among the component members of such controlled group. For purposes of the preceding sentence, the term “controlled group” has the meaning assigned to it by section 1563(a), except that the phrase “more than 50 percent” shall be substituted for the phrase “at least 80 percent” each place it appears in section 1563(a)(1). In the case of a partnership, the dollar limitation contained in paragraph (1)(B) shall apply with respect to the partnership and with respect to each partner. A similar rule shall apply in the case of an S corporation and its shareholders.

(c) Definitions and special rule For purposes of this section— The term “qualified timber property” means a woodlot or other site located in the United States which will contain trees in significant commercial quantities and which is held by the taxpayer for the planting, cultivating, caring for, and cutting of trees for sale or use in the commercial production of timber products. The term “amortizable basis” means that portion of the basis of the qualified timber property attributable to reforestation expenditures which have not been taken into account under subsection (b). The term “reforestation expenditures” means direct costs incurred in connection with forestation or reforestation by planting or artificial or natural seeding, including costs— for the preparation of the site; of seeds or seedlings; and for labor and tools, including depreciation of equipment such as tractors, trucks, tree planters, and similar machines used in planting or seeding. Reforestation expenditures shall not include any expenditures for which the taxpayer has been reimbursed under any governmental reforestation cost-sharing program unless the amounts reimbursed have been included in the gross income of the taxpayer. The aggregate amount of reforestation expenditures incurred by any trust or estate shall be apportioned between the income beneficiaries and the fiduciary under regulations prescribed by the Secretary. Any amount so apportioned to a beneficiary shall be taken into account as expenditures incurred by such beneficiary in applying this section to such beneficiary. No deduction shall be allowed under any other provision of this chapter with respect to any expenditure with respect to which a deduction is allowed or allowable under this section to the taxpayer.

(d) Life tenant and remainderman In the case of property held by one person for life with remainder to another person, the deduction under this section shall be computed as if the life tenant were the absolute owner of the property and shall be allowed to the life tenant.

§ 194A Contributions to employer liability trusts

(a) Allowance of deduction There shall be allowed as a deduction for the taxable year an amount equal to the amount— which is contributed by an employer to a trust described in section 501(c)(22) (relating to withdrawal liability payment fund) which meets the requirements of section 4223(h) of the Employee Retirement Income Security Act of 1974, and which is properly allocable to such taxable year.

(b) Allocation to taxable year In the case of a contribution described in subsection (a) which relates to any specified period of time which includes more than one taxable year, the amount properly allocable to any taxable year in such period shall be determined by prorating such amounts to such taxable years under regulations prescribed by the Secretary.

(c) Disallowance of deduction No deduction shall be allowed under subsection (a) with respect to any contribution described in subsection (a) which does not relate to any specified period of time.

§ 195 Start-up expenditures

(a) Capitalization of expenditures Except as otherwise provided in this section, no deduction shall be allowed for start-up expenditures.

(b) Election to deduct If a taxpayer elects the application of this subsection with respect to any start-up expenditures— the taxpayer shall be allowed a deduction for the taxable year in which the active trade or business begins in an amount equal to the lesser of— the amount of start-up expenditures with respect to the active trade or business, or $5, 000, re d u ce d (b u t n o t b e l o w zero) b y t h e am o u n t b y w hi c h s u c h s t a r t - u p e x p e n d i t u rese x cee d$ 50,000, and the remainder of such start-up expenditures shall be allowed as a deduction ratably over the 180-month period beginning with the month in which the active trade or business begins. In any case in which a trade or business is completely disposed of by the taxpayer before the end of the period to which paragraph (1) applies, any deferred expenses attributable to such trade or business which were not allowed as a deduction by reason of this section may be deducted to the extent allowable under section 165. In the case of a taxable year beginning in 2010, paragraph (1)(A)(ii) shall be applied— by substituting “ $10, 000” f or “$ 5,000”, and by substituting “ $60, 000” f or “$ 50,000”.

(c) Definitions For purposes of this section— The term “start-up expenditure” means any amount— paid or incurred in connection with— investigating the creation or acquisition of an active trade or business, or creating an active trade or business, or any activity engaged in for profit and for the production of income before the day on which the active trade or business begins, in anticipation of such activity becoming an active trade or business, and which, if paid or incurred in connection with the operation of an existing active trade or business (in the same field as the trade or business referred to in subparagraph (A)), would be allowable as a deduction for the taxable year in which paid or incurred. The term “start-up expenditure” does not include any amount with respect to which a deduction is allowable under section 163(a), 164, 174, or 174A. Except as provided in subparagraph (B), the determination of when an active trade or business begins shall be made in accordance with such regulations as the Secretary may prescribe. An acquired active trade or business shall be treated as beginning when the taxpayer acquires it.

(d) Election An election under subsection (b) shall be made not later than the time prescribed by law for filing the return for the taxable year in which the trade or business begins (including extensions thereof). The period selected under subsection (b) shall be adhered to in computing taxable income for the taxable year for which the election is made and all subsequent taxable years.

§ 196 Deduction for certain unused business credits

(a) Allowance of deduction If any portion of the qualified business credits determined for any taxable year has not, after the application of section 38(c), been allowed to the taxpayer as a credit under section 38 for any taxable year, an amount equal to the credit not so allowed shall be allowed to the taxpayer as a deduction for the first taxable year following the last taxable year for which such credit could, under section 39, have been allowed as a credit.

(b) Taxpayer’s dying or ceasing to exist If a taxpayer dies or ceases to exist before the first taxable year following the last taxable year for which the qualified business credits could, under section 39, have been allowed as a credit, the amount described in subsection (a) (or the proper portion thereof) shall, under regulations prescribed by the Secretary, be allowed to the taxpayer as a deduction for the taxable year in which such death or cessation occurs.

(c) Qualified business credits For purposes of this section, the term “qualified business credits” means— the investment credit determined under section 46 (but only to the extent attributable to property the basis of which is reduced by section 50(c)), the work opportunity credit determined under section 51(a), the alcohol fuels credit determined under section 40(a), the research credit determined under section 41(a) (other than such credit determined under section 280C(c)(3)) 1 for taxable years beginning after December 31, 1988 , the enhanced oil recovery credit determined under section 43(a), the empowerment zone employment credit determined under section 1396(a), the Indian employment credit determined under section 45A(a), the employer Social Security credit determined under section 45B(a), the new markets tax credit determined under section 45D(a), the small employer pension plan startup cost credit determined under section 45E(a), the biodiesel fuels credit determined under section 40A(a), the low sulfur diesel fuel production credit determined under section 45H(a), the new energy efficient home credit determined under section 45L(a), and the small employer health insurance credit determined under section 45R(a).

(d) Special rule for investment tax credit Subsection (a) shall be applied by substituting “an amount equal to 50 percent of” for “an amount equal to” in the case of the investment credit determined under section 46 (other than the rehabilitation credit).

§ 197 Amortization of goodwill and certain other intangibles

(a) General rule A taxpayer shall be entitled to an amortization deduction with respect to any amortizable section 197 intangible. The amount of such deduction shall be determined by amortizing the adjusted basis (for purposes of determining gain) of such intangible ratably over the 15-year period beginning with the month in which such intangible was acquired.

(b) No other depreciation or amortization deduction allowable Except as provided in subsection (a), no depreciation or amortization deduction shall be allowable with respect to any amortizable section 197 intangible.

(c) Amortizable section 197 intangible For purposes of this section— Except as otherwise provided in this section, the term “amortizable section 197 intangible” means any section 197 intangible— which is acquired by the taxpayer after the date of the enactment of this section, and which is held in connection with the conduct of a trade or business or an activity described in section 212. The term “amortizable section 197 intangible” shall not include any section 197 intangible— which is not described in subparagraph (D), (E), or (F) of subsection (d)(1), and which is created by the taxpayer. This paragraph shall not apply if the intangible is created in connection with a transaction (or series of related transactions) involving the acquisition of assets constituting a trade or business or substantial portion thereof. For exclusion of intangibles acquired in certain transactions, see subsection (f)(9).

(d) Section 197 intangible For purposes of this section— Except as otherwise provided in this section, the term “section 197 intangible” means— goodwill, going concern value, any of the following intangible items: workforce in place including its composition and terms and conditions (contractual or otherwise) of its employment, business books and records, operating systems, or any other information base (including lists or other information with respect to current or prospective customers), any patent, copyright, formula, process, design, pattern, knowhow, format, or other similar item, any customer-based intangible, any supplier-based intangible, and any other similar item, any license, permit, or other right granted by a governmental unit or an agency or instrumentality thereof, any covenant not to compete (or other arrangement to the extent such arrangement has substantially the same effect as a covenant not to compete) entered into in connection with an acquisition (directly or indirectly) of an interest in a trade or business or substantial portion thereof, and any franchise, trademark, or trade name. The term “customer-based intangible” means— composition of market, market share, and any other value resulting from future provision of goods or services pursuant to relationships (contractual or otherwise) in the ordinary course of business with customers. In the case of a financial institution, the term “customer-based intangible” includes deposit base and similar items. The term “supplier-based intangible” means any value resulting from future acquisitions of goods or services pursuant to relationships (contractual or otherwise) in the ordinary course of business with suppliers of goods or services to be used or sold by the taxpayer.

(e) Exceptions For purposes of this section, the term “section 197 intangible” shall not include any of the following: Any interest— in a corporation, partnership, trust, or estate, or under an existing futures contract, foreign currency contract, notional principal contract, or other similar financial contract. Any interest in land. Any— computer software which is readily available for purchase by the general public, is subject to a nonexclusive license, and has not been substantially modified, and other computer software which is not acquired in a transaction (or series of related transactions) involving the acquisition of assets constituting a trade or business or substantial portion thereof. For purposes of subparagraph (A), the term “computer software” means any program designed to cause a computer to perform a desired function. Such term shall not include any data base or similar item unless the data base or item is in the public domain and is incidental to the operation of otherwise qualifying computer software. Any of the following not acquired in a transaction (or series of related transactions) involving the acquisition of assets constituting a trade business or substantial portion thereof: Any interest in a film, sound recording, video tape, book, or similar property. Any right to receive tangible property or services under a contract or granted by a governmental unit or agency or instrumentality thereof. Any interest in a patent or copyright. To the extent provided in regulations, any right under a contract (or granted by a governmental unit or an agency or instrumentality thereof) if such right— has a fixed duration of less than 15 years, or is fixed as to amount and, without regard to this section, would be recoverable under a method similar to the unit-of-production method. Any interest under— an existing lease of tangible property, or except as provided in subsection (d)(2)(B), any existing indebtedness. Any right to service indebtedness which is secured by residential real property unless such right is acquired in a transaction (or series of related transactions) involving the acquisition of assets (other than rights described in this paragraph) constituting a trade or business or substantial portion thereof. Any fees for professional services, and any transaction costs, incurred by parties to a transaction with respect to which any portion of the gain or loss is not recognized under part III of subchapter C.

(f) Special rules If there is a disposition of any amortizable section 197 intangible acquired in a transaction or series of related transactions (or any such intangible becomes worthless) and one or more other amortizable section 197 intangibles acquired in such transaction or series of related transactions are retained— no loss shall be recognized by reason of such disposition (or such worthlessness), and appropriate adjustments to the adjusted bases of such retained intangibles shall be made for any loss not recognized under clause (i). In the case of any section 197 intangible which is a covenant not to compete (or other arrangement) described in subsection (d)(1)(E), in no event shall such covenant or other arrangement be treated as disposed of (or becoming worthless) before the disposition of the entire interest described in such subsection in connection with which such covenant (or other arrangement) was entered into. All persons treated as a single taxpayer under section 41(f)(1) shall be so treated for purposes of this paragraph. In the case of any section 197 intangible transferred in a transaction described in subparagraph (B), the transferee shall be treated as the transferor for purposes of applying this section with respect to so much of the adjusted basis in the hands of the transferee as does not exceed the adjusted basis in the hands of the transferor. The transactions described in this subparagraph are— any transaction described in section 332, 351, 361, 721, 731, 1031, or 1033, and any transaction between members of the same affiliated group during any taxable year for which a consolidated return is made by such group. Any amount paid or incurred pursuant to a covenant or arrangement referred to in subsection (d)(1)(E) shall be treated as an amount chargeable to capital account. The term “franchise” has the meaning given to such term by section 1253(b)(1). Any renewal of a franchise, trademark, or trade name (or of a license, a permit, or other right referred to in subsection (d)(1)(D)) shall be treated as an acquisition. The preceding sentence shall only apply with respect to costs incurred in connection with such renewal. Any amount to which section 1253(d)(1) applies shall not be taken into account under this section. In the case of any amortizable section 197 intangible resulting from an assumption reinsurance transaction, the amount taken into account as the adjusted basis of such intangible under this section shall be the excess of— the amount paid or incurred by the acquirer under the assumption reinsurance transaction, over the amount required to be capitalized under section 848 in connection with such transaction. Subsection (b) shall not apply to any amount required to be capitalized under section 848. For purposes of this section, a sublease shall be treated in the same manner as a lease of the underlying property involved. For purposes of this chapter, any amortizable section 197 intangible shall be treated as property which is of a character subject to the allowance for depreciation provided in section 167. This section shall not apply to any increment in value if, without regard to this section, such increment is properly taken into account in determining the cost of property which is not a section 197 intangible. For purposes of this section— The term “amortizable section 197 intangible” shall not include any section 197 intangible which is described in subparagraph (A) or (B) of subsection (d)(1) (or for which depreciation or amortization would not have been allowable but for this section) and which is acquired by the taxpayer after the date of the enactment of this section, if— the intangible was held or used at any time on or after July 25, 1991 , and on or before such date of enactment by the taxpayer or a related person, the intangible was acquired from a person who held such intangible at any time on or after July 25, 1991 , and on or before such date of enactment, and, as part of the transaction, the user of such intangible does not change, or the taxpayer grants the right to use such intangible to a person (or a person related to such person) who held or used such intangible at any time on or after July 25, 1991 , and on or before such date of enactment. For purposes of this subparagraph, the determination of whether the user of property changes as part of a transaction shall be determined in accordance with regulations prescribed by the Secretary. For purposes of this subparagraph, deductions allowable under section 1253(d) shall be treated as deductions allowable for amortization. If— subparagraph (A) would not apply to an intangible acquired by the taxpayer but for the last sentence of subparagraph (C)(i), and the person from whom the taxpayer acquired the intangible elects, notwithstanding any other provision of this title— to recognize gain on the disposition of the intangible, and to pay a tax on such gain which, when added to any other income tax on such gain under this title, equals such gain multiplied by the highest rate of income tax applicable to such person under this title, then subparagraph (A) shall apply to the intangible only to the extent that the taxpayer’s adjusted basis in the intangible exceeds the gain recognized under clause (ii)(I). For purposes of this paragraph— A person (hereinafter in this paragraph referred to as the “related person”) is related to any person if— the related person bears a relationship to such person specified in section 267(b) or section 707(b)(1), or the related person and such person are engaged in trades or businesses under common control (within the meaning of subparagraphs (A) and (B) of section 41(f)(1)). For purposes of subclause (I), in applying section 267(b) or 707(b)(1), “20 percent” shall be substituted for “50 percent”. A person shall be treated as related to another person if such relationship exists immediately before or immediately after the acquisition of the intangible involved. Subparagraph (A) shall not apply to the acquisition of any property by the taxpayer if the basis of the property in the hands of the taxpayer is determined under section 1014(a). With respect to any increase in the basis of partnership property under section 732, 734, or 743, determinations under this paragraph shall be made at the partner level and each partner shall be treated as having owned and used such partner’s proportionate share of the partnership assets. The term “amortizable section 197 intangible” does not include any section 197 intangible acquired in a transaction, one of the principal purposes of which is to avoid the requirement of subsection (c)(1) that the intangible be acquired after the date of the enactment of this section or to avoid the provisions of subparagraph (A). In the case of any section 197 intangible which would be tax-exempt use property as defined in subsection (h) of section 168 if such section applied to such intangible, the amortization period under this section shall not be less than 125 percent of the lease term (within the meaning of section 168(i)(3)).

(g) Regulations The Secretary shall prescribe such regulations as may be appropriate to carry out the purposes of this section, including such regulations as may be appropriate to prevent avoidance of the purposes of this section through related persons or otherwise.

§ 198 Expensing of environmental remediation costs

(a) In general A taxpayer may elect to treat any qualified environmental remediation expenditure which is paid or incurred by the taxpayer as an expense which is not chargeable to capital account. Any expenditure which is so treated shall be allowed as a deduction for the taxable year in which it is paid or incurred.

(b) Qualified environmental remediation expenditure For purposes of this section— The term “qualified environmental remediation expenditure” means any expenditure— which is otherwise chargeable to capital account, and which is paid or incurred in connection with the abatement or control of hazardous substances at a qualified contaminated site. Such term shall not include any expenditure for the acquisition of property of a character subject to the allowance for depreciation which is used in connection with the abatement or control of hazardous substances at a qualified contaminated site; except that the portion of the allowance under section 167 for such property which is otherwise allocated to such site shall be treated as a qualified environmental remediation expenditure.

(c) Qualified contaminated site For purposes of this section— The term “qualified contaminated site” means any area— which is held by the taxpayer for use in a trade or business or for the production of income, or which is property described in section 1221(a)(1) in the hands of the taxpayer, and at or on which there has been a release (or threat of release) or disposal of any hazardous substance. Such term shall not include any site which is on, or proposed for, the national priorities list under section 105(a)(8)(B) of the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (as in effect on the date of the enactment of this section). An area shall be treated as a qualified contaminated site with respect to expenditures paid or incurred during any taxable year only if the taxpayer receives a statement from the appropriate agency of the State in which such area is located that such area meets the requirement of paragraph (1)(B). For purposes of paragraph (3), the chief executive officer of each State may, in consultation with the Administrator of the Environmental Protection Agency, designate the appropriate State environmental agency within 60 days of the date of the enactment of this section. If the chief executive officer of a State has not designated an appropriate environmental agency within such 60-day period, the appropriate environmental agency for such State shall be designated by the Administrator of the Environmental Protection Agency.

(d) Hazardous substance For purposes of this section— The term “hazardous substance” means— any substance which is a hazardous substance as defined in section 101(14) of the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, any substance which is designated as a hazardous substance under section 102 of such Act, and any petroleum product (as defined in section 4612(a)(3)). Such term shall not include any substance with respect to which a removal or remedial action is not permitted under section 104 of such Act by reason of subsection (a)(3) thereof.

(e) Deduction recaptured as ordinary income on sale, etc. Solely for purposes of section 1245, in the case of property to which a qualified environmental remediation expenditure would have been capitalized but for this section— the deduction allowed by this section for such expenditure shall be treated as a deduction for depreciation, and such property (if not otherwise section 1245 property) shall be treated as section 1245 property solely for purposes of applying section 1245 to such deduction.

(f) Coordination with other provisions Sections 280B and 468 shall not apply to amounts which are treated as expenses under this section.

(g) Regulations The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section.

(h) Termination This section shall not apply to expenditures paid or incurred after December 31, 2011 .

[§ 198A Repealed. Pub. L. 113–295, div. A, title II, § 221(a)(35), Dec. 19, 2014, 128 Stat. 4042]

[§ 199 Repealed. Pub. L. 115–97, title I, § 13305(a), Dec. 22, 2017, 131 Stat. 2126]

§ 199A Qualified business income

(a) Allowance of deduction In the case of a taxpayer other than a corporation, except as provided in subsection (i), there shall be allowed as a deduction for any taxable year an amount equal to the lesser of— the combined qualified business income amount of the taxpayer, or an amount equal to 20 percent of the excess (if any) of— the taxable income of the taxpayer for the taxable year, over the net capital gain (as defined in section 1(h)) of the taxpayer for such taxable year.

(b) Combined qualified business income amount For purposes of this section— The term “combined qualified business income amount” means, with respect to any taxable year, an amount equal to— the sum of the amounts determined under paragraph (2) for each qualified trade or business carried on by the taxpayer, plus 20 percent of the aggregate amount of the qualified REIT dividends and qualified publicly traded partnership income of the taxpayer for the taxable year. The amount determined under this paragraph with respect to any qualified trade or business is the lesser of— 20 percent of the taxpayer’s qualified business income with respect to the qualified trade or business, or the greater of— 50 percent of the W–2 wages with respect to the qualified trade or business, or the sum of 25 percent of the W–2 wages with respect to the qualified trade or business, plus 2.5 percent of the unadjusted basis immediately after acquisition of all qualified property. In the case of any taxpayer whose taxable income for the taxable year does not exceed the threshold amount, paragraph (2) shall be applied without regard to subparagraph (B). If— the taxable income of a taxpayer for any taxable year exceeds the threshold amount, but does not exceed the sum of the threshold amount plus $75, 000 ($ 150,000 in the case of a joint return), and the amount determined under paragraph (2)(B) (determined without regard to this subparagraph) with respect to any qualified trade or business carried on by the taxpayer is less than the amount determined under paragraph (2)(A) with respect such trade or business, then paragraph (2) shall be applied with respect to such trade or business without regard to subparagraph (B) thereof and by reducing the amount determined under subparagraph (A) thereof by the amount determined under clause (ii). The amount determined under this subparagraph is the amount which bears the same ratio to the excess amount as— the amount by which the taxpayer’s taxable income for the taxable year exceeds the threshold amount, bears to $75, 000 ($ 150,000 in the case of a joint return). For purposes of clause (ii), the excess amount is the excess of— the amount determined under paragraph (2)(A) (determined without regard to this paragraph), over the amount determined under paragraph (2)(B) (determined without regard to this paragraph). The term “W–2 wages” means, with respect to any person for any taxable year of such person, the amounts described in paragraphs (3) and (8) of section 6051(a) paid by such person with respect to employment of employees by such person during the calendar year ending during such taxable year. Such term shall not include any amount which is not properly allocable to qualified business income for purposes of subsection (c)(1). Such term shall not include any amount which is not properly included in a return filed with the Social Security Administration on or before the 60th day after the due date (including extensions) for such return. The Secretary shall provide for the application of this subsection in cases of a short taxable year or where the taxpayer acquires, or disposes of, the major portion of a trade or business or the major portion of a separate unit of a trade or business during the taxable year. For purposes of this section: The term “qualified property” means, with respect to any qualified trade or business for a taxable year, tangible property of a character subject to the allowance for depreciation under section 167— which is held by, and available for use in, the qualified trade or business at the close of the taxable year, which is used at any point during the taxable year in the production of qualified business income, and the depreciable period for which has not ended before the close of the taxable year. The term “depreciable period” means, with respect to qualified property of a taxpayer, the period beginning on the date the property was first placed in service by the taxpayer and ending on the later of— the date that is 10 years after such date, or the last day of the last full year in the applicable recovery period that would apply to the property under section 168 (determined without regard to subsection (g) thereof). In the case of any qualified trade or business of a patron of a specified agricultural or horticultural cooperative, the amount determined under paragraph (2) with respect to such trade or business shall be reduced by the lesser of— 9 percent of so much of the qualified business income with respect to such trade or business as is properly allocable to qualified payments received from such cooperative, or 50 percent of so much of the W–2 wages with respect to such trade or business as are so allocable.

(c) Qualified business income For purposes of this section— The term “qualified business income” means, for any taxable year, the net amount of qualified items of income, gain, deduction, and loss with respect to any qualified trade or business of the taxpayer. Such term shall not include any qualified REIT dividends or qualified publicly traded partnership income. If the net amount of qualified income, gain, deduction, and loss with respect to qualified trades or businesses of the taxpayer for any taxable year is less than zero, such amount shall be treated as a loss from a qualified trade or business in the succeeding taxable year. For purposes of this subsection— The term “qualified items of income, gain, deduction, and loss” means items of income, gain, deduction, and loss to the extent such items are— effectively connected with the conduct of a trade or business within the United States (within the meaning of section 864(c), determined by substituting “qualified trade or business (within the meaning of section 199A)” for “nonresident alien individual or a foreign corporation” or for “a 1 foreign corporation” each place it appears), and included or allowed in determining taxable income for the taxable year. The following items shall not be taken into account as a qualified item of income, gain, deduction, or loss: Any item of short-term capital gain, short-term capital loss, long-term capital gain, or long-term capital loss. Any dividend, income equivalent to a dividend, or payment in lieu of dividends described in section 954(c)(1)(G). Any amount described in section 1385(a)(1) shall not be treated as described in this clause. Any interest income other than interest income which is properly allocable to a trade or business. Any item of gain or loss described in subparagraph (C) or (D) of section 954(c)(1) (applied by substituting “qualified trade or business” for “controlled foreign corporation”). Any item of income, gain, deduction, or loss taken into account under section 954(c)(1)(F) (determined without regard to clause (ii) thereof and other than items attributable to notional principal contracts entered into in transactions qualifying under section 1221(a)(7)). Any amount received from an annuity which is not received in connection with the trade or business. Any item of deduction or loss properly allocable to an amount described in any of the preceding clauses. Qualified business income shall not include— reasonable compensation paid to the taxpayer by any qualified trade or business of the taxpayer for services rendered with respect to the trade or business, any guaranteed payment described in section 707(c) paid to a partner for services rendered with respect to the trade or business, to the extent provided in regulations, any payment described in section 707(a) to a partner for services rendered with respect to the trade or business, and any amount with respect to which a deduction is allowable to the taxpayer under section 224(a) for the taxable year.

(d) Qualified trade or business For purposes of this section— The term “qualified trade or business” means any trade or business other than— a specified service trade or business, or the trade or business of performing services as an employee. The term “specified service trade or business” means any trade or business— which is described in section 1202(e)(3)(A) (applied without regard to the words “engineering, architecture,”) or which would be so described if the term “employees or owners” were substituted for “employees” therein, or which involves the performance of services that consist of investing and investment management, trading, or dealing in securities (as defined in section 475(c)(2)), partnership interests, or commodities (as defined in section 475(e)(2)). If, for any taxable year, the taxable income of any taxpayer is less than the sum of the threshold amount plus $75, 000 ($ 150,000 in the case of a joint return), then— any specified service trade or business of the taxpayer shall not fail to be treated as a qualified trade or business due to paragraph (1)(A), but only the applicable percentage of qualified items of income, gain, deduction, or loss, and the W–2 wages and the unadjusted basis immediately after acquisition of qualified property, of the taxpayer allocable to such specified service trade or business shall be taken into account in computing the qualified business income, W–2 wages, and the unadjusted basis immediately after acquisition of qualified property of the taxpayer for the taxable year for purposes of applying this section. For purposes of subparagraph (A), the term “applicable percentage” means, with respect to any taxable year, 100 percent reduced (not below zero) by the percentage equal to the ratio of— the taxable income of the taxpayer for the taxable year in excess of the threshold amount, bears to $75, 000 ($ 150,000 in the case of a joint return).

(e) Other definitions For purposes of this section— Except as otherwise provided in subsection (g)(2)(B), taxable income shall be computed without regard to section 68 and without regard to any deduction allowable under this section. The term “threshold amount” means $157,500 (200 percent of such amount in the case of a joint return). In the case of any taxable year beginning after 2018, the dollar amount in subparagraph (A) shall be increased by an amount equal to— such dollar amount, multiplied by the cost-of-living adjustment determined under section 1(f)(3) for the calendar year in which the taxable year begins, determined by substituting “calendar year 2017” for “calendar year 2016” in subparagraph (A)(ii) thereof. The amount of any increase under the preceding sentence shall be rounded as provided in section 1(f)(7). The term “qualified REIT dividend” means any dividend from a real estate investment trust received during the taxable year which— is not a capital gain dividend, as defined in section 857(b)(3), and is not qualified dividend income, as defined in section 1(h)(11). The term “qualified publicly traded partnership income” means, with respect to any qualified trade or business of a taxpayer, the sum of— the net amount of such taxpayer’s allocable share of each qualified item of income, gain, deduction, and loss (as defined in subsection (c)(3) and determined after the application of subsection (c)(4)) from a publicly traded partnership (as defined in section 7704(a)) 2 which is not treated as a corporation under section 7704(c), plus any gain recognized by such taxpayer upon disposition of its interest in such partnership to the extent such gain is treated as an amount realized from the sale or exchange of property other than a capital asset under section 751(a).

(f) Special rules In the case of a partnership or S corporation— this section shall be applied at the partner or shareholder level, each partner or shareholder shall take into account such person’s allocable share of each qualified item of income, gain, deduction, and loss, and each partner or shareholder shall be treated for purposes of subsection (b) as having W–2 wages and unadjusted basis immediately after acquisition of qualified property for the taxable year in an amount equal to such person’s allocable share of the W–2 wages and the unadjusted basis immediately after acquisition of qualified property of the partnership or S corporation for the taxable year (as determined under regulations prescribed by the Secretary). For purposes of clause (iii), a partner’s or shareholder’s allocable share of W–2 wages shall be determined in the same manner as the partner’s or shareholder’s allocable share of wage expenses. For purposes of such clause, partner’s or shareholder’s allocable share of the unadjusted basis immediately after acquisition of qualified property shall be determined in the same manner as the partner’s or shareholder’s allocable share of depreciation. For purposes of this subparagraph, in the case of an S corporation, an allocable share shall be the shareholder’s pro rata share of an item. Rules similar to the rules under section 199(d)(1)(B)(i) (as in effect on December 1, 2017 ) for the apportionment of W–2 wages shall apply to the apportionment of W–2 wages and the apportionment of unadjusted basis immediately after acquisition of qualified property under this section. In the case of any taxpayer with qualified business income from sources within the commonwealth of Puerto Rico, if all such income is taxable under section 1 for such taxable year, then for purposes of determining the qualified business income of such taxpayer for such taxable year, the term “United States” shall include the Commonwealth of Puerto Rico. In the case of any taxpayer described in clause (i), the determination of W–2 wages of such taxpayer with respect to any qualified trade or business conducted in Puerto Rico shall be made without regard to any exclusion under section 3401(a)(8) for remuneration paid for services in Puerto Rico. For purposes of determining alternative minimum taxable income under section 55, qualified business income shall be determined without regard to any adjustments under sections 56 through 59. The deduction under subsection (a) shall only be allowed for purposes of this chapter. The Secretary shall prescribe such regulations as are necessary to carry out the purposes of this section, including regulations— for requiring or restricting the allocation of items and wages under this section and such reporting requirements as the Secretary determines appropriate, and for the application of this section in the case of tiered entities.

(g) Deduction for income attributable to domestic production activities of specified agricultural or horticultural cooperatives In the case of a taxpayer which is a specified agricultural or horticultural cooperative, there shall be allowed as a deduction an amount equal to 9 percent of the lesser of— the qualified production activities income of the taxpayer for the taxable year, or the taxable income of the taxpayer for the taxable year. The deduction allowable under subparagraph (A) for any taxable year shall not exceed 50 percent of the W–2 wages of the taxpayer for the taxable year. For purposes of this subparagraph, the W–2 wages of the taxpayer shall be determined in the same manner as under subsection (b)(4) (without regard to subparagraph (B) thereof and after application of subsection (b)(5)), except that such wages shall not include any amount which is not properly allocable to domestic production gross receipts for purposes of paragraph (3)(A). For purposes of this subsection, the taxable income of a specified agricultural or horticultural cooperative shall be computed without regard to any deduction allowable under subsection (b) or (c) of section 1382 (relating to patronage dividends, per-unit retain allocations, and nonpatronage distributions). In the case of any eligible taxpayer who receives a qualified payment from a specified agricultural or horticultural cooperative, there shall be allowed as a deduction for the taxable year in which such payment is received an amount equal to the portion of the deduction allowed under paragraph (1) to such cooperative which is— allowed with respect to the portion of the qualified production activities income to which such payment is attributable, and identified by such cooperative in a written notice mailed to such taxpayer during the payment period described in section 1382(d). The deduction allowed to any taxpayer under this paragraph shall not exceed the taxable income of the taxpayer determined without regard to section 68 or the deduction allowed under this paragraph and after taking into account any deduction allowed to the taxpayer under subsection (a) for the taxable year. The taxable income of a specified agricultural or horticultural cooperative shall not be reduced under section 1382 by reason of that portion of any qualified payment as does not exceed the deduction allowable under subparagraph (A) with respect to such payment. For purposes of this paragraph, the term “eligible taxpayer” means— a taxpayer other than a corporation, or a specified agricultural or horticultural cooperative. For purposes of this section, the term “qualified payment” means, with respect to any eligible taxpayer, any amount which— is described in paragraph (1) or (3) of section 1385(a), is received by such taxpayer from a specified agricultural or horticultural cooperative, and is attributable to qualified production activities income with respect to which a deduction is allowed to such cooperative under paragraph (1). For purposes of this subsection— The term “qualified production activities income” for any taxable year means an amount equal to the excess (if any) of— the taxpayer’s domestic production gross receipts for such taxable year, over the sum of— the cost of goods sold that are allocable to such receipts, and other expenses, losses, or deductions (other than the deduction allowed under this subsection), which are properly allocable to such receipts. The Secretary shall prescribe rules for the proper allocation of items described in subparagraph (A) for purposes of determining qualified production activities income. Such rules shall provide for the proper allocation of items whether or not such items are directly allocable to domestic production gross receipts. For purposes of determining costs under subclause (I) of subparagraph (A)(ii), any item or service brought into the United States shall be treated as acquired by purchase, and its cost shall be treated as not less than its value immediately after it entered the United States. A similar rule shall apply in determining the adjusted basis of leased or rented property where the lease or rental gives rise to domestic production gross receipts. In the case of any property described in clause (i) that had been exported by the taxpayer for further manufacture, the increase in cost or adjusted basis under clause (i) shall not exceed the difference between the value of the property when exported and the value of the property when brought back into the United States after the further manufacture. The term “domestic production gross receipts” means the gross receipts of the taxpayer which are derived from any lease, rental, license, sale, exchange, or other disposition of any agricultural or horticultural product which was manufactured, produced, grown, or extracted by the taxpayer (determined after the application of paragraph (4)(B)) in whole or significant part within the United States. Such term shall not include gross receipts of the taxpayer which are derived from the lease, rental, license, sale, exchange, or other disposition of land. The term “domestic production gross receipts” shall not include any gross receipts of the taxpayer derived from property leased, licensed, or rented by the taxpayer for use by any related person. For purposes of subclause (I), a person shall be treated as related to another person if such persons are treated as a single employer under subsection (a) or (b) of section 52 or subsection (m) or ( o ) of section 414, except that determinations under subsections (a) and (b) of section 52 shall be made without regard to section 1563(b). For purposes of this section— The term “specified agricultural or horticultural cooperative” means an organization to which part I of subchapter T applies which is engaged— in the manufacturing, production, growth, or extraction in whole or significant part of any agricultural or horticultural product, or in the marketing of agricultural or horticultural products. A specified agricultural or horticultural cooperative described in subparagraph (A)(ii) shall be treated as having manufactured, produced, grown, or extracted in whole or significant part any agricultural or horticultural product marketed by the specified agricultural or horticultural cooperative which its patrons have so manufactured, produced, grown, or extracted. All members of an expanded affiliated group shall be treated as a single corporation for purposes of this subsection. For purposes of paragraph (3)(D), if all of the interests in the capital and profits of a partnership are owned by members of a single expanded affiliated group at all times during the taxable year of such partnership, the partnership and all members of such group shall be treated as a single taxpayer during such period. For purposes of this subsection, the term “expanded affiliated group” means an affiliated group as defined in section 1504(a), determined— by substituting “more than 50 percent” for “at least 80 percent” each place it appears, and without regard to paragraphs (2) and (4) of section 1504(b). Except as provided in regulations, the deduction under paragraph (1) shall be allocated among the members of the expanded affiliated group in proportion to each member’s respective amount (if any) of qualified production activities income. In the case of a specified agricultural or horticultural cooperative which is a partner in a partnership, rules similar to the rules of subsection (f)(1) shall apply for purposes of this subsection. This subsection shall be applied by only taking into account items which are attributable to the actual conduct of a trade or business. For purposes of determining the tax imposed by section 511, this section shall be applied by substituting “unrelated business taxable income” for “taxable income” each place it appears in this section (other than this subparagraph). If a specified agricultural or horticultural cooperative has oil related qualified production activities income for any taxable year, the amount otherwise allowable as a deduction under paragraph (1) shall be reduced by 3 percent of the least of— the oil related qualified production activities income of the cooperative for the taxable year, the qualified production activities income of the cooperative for the taxable year, or taxable income. For purposes of this subparagraph, the term “oil related qualified production activities income” means for any taxable year the qualified production activities income which is attributable to the production, refining, processing, transportation, or distribution of oil, gas, or any primary product thereof (within the meaning of section 927(a)(2)(C), as in effect before its repeal) during such taxable year. The Secretary shall prescribe such regulations as are necessary to carry out the purposes of this subsection, including regulations which prevent more than 1 taxpayer from being allowed a deduction under this subsection with respect to any activity described in paragraph (3)(D)(i). Such regulations shall be based on the regulations applicable to cooperatives and their patrons under section 199 (as in effect before its repeal).

(h) Anti-abuse rules The Secretary shall— apply rules similar to the rules under section 179(d)(2) in order to prevent the manipulation of the depreciable period of qualified property using transactions between related parties, and prescribe rules for determining the unadjusted basis immediately after acquisition of qualified property acquired in like-kind exchanges or involuntary conversions.

(i) Minimum deduction for active qualified business income In the case of an applicable taxpayer for any taxable year, the deduction allowed under subsection (a) for the taxable year shall be equal to the greater of— the amount of such deduction determined without regard to this subsection, or $400. F or p u r p oseso f t hi ss u b sec t i o n — T h e t er m “ a ppl i c ab l e t a x p a yer ” m e an s, w i t h res p ec tt o an y t a x ab l eye a r, a t a x p a yer w h ose a gg re g a t e q u a l i f i e d b u s in ess in co m e w i t h res p ec tt o a ll a c t i v e q u a l i f i e d t r a d esor b u s in esseso f t h e t a x p a yer f ors u c h t a x ab l eye a r i s a tl e a s t$ 1,000. The term “active qualified trade or business” means, with respect to any taxpayer for any taxable year, any qualified trade or business of the taxpayer in which the taxpayer materially participates (within the meaning of section 469(h)). In the case of any taxable year beginning after 2026, the $400 am o u n t in p a r a g r a p h (1) (B) an d t h e$ 1,000 amount in paragraph (2)(A) shall each be increased by an amount equal to— such dollar amount, multiplied by the cost-of-living adjustment determined under section 1(f)(3) for the calendar year in which the taxable year begins, determined by substituting “calendar year 2025” for “calendar year 2016” in subparagraph (A)(ii) thereof. If any increase under this paragraph is not a multiple of $5, s u c hin cre a ses ha ll b ero u n d e d t o t h e n e a res t m u lt i pl eo f$ 5

§ 211 Allowance of deductions

In computing taxable income under section 63, there shall be allowed as deductions the items specified in this part, subject to the exceptions provided in part IX (section 261 and following, relating to items not deductible). ( Aug. 16, 1954, ch. 736 , 68A Stat. 69 ; Pub. L. 95–30, title I, § 102(b)(3) , May 23, 1977 , 91 Stat. 137 .)

§ 212 Expenses for production of income

In the case of an individual, there shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year— for the production or collection of income; for the management, conservation, or maintenance of property held for the production of income; or in connection with the determination, collection, or refund of any tax. ( Aug. 16, 1954, ch. 736 , 68A Stat. 69 .)

§ 213 Medical, dental, etc., expenses

(a) Allowance of deduction There shall be allowed as a deduction the expenses paid during the taxable year, not compensated for by insurance or otherwise, for medical care of the taxpayer, his spouse, or a dependent (as defined in section 152, determined without regard to subsections (b)(1), (b)(2), and (d)(1)(B) thereof), to the extent that such expenses exceed 7.5 percent of adjusted gross income.

(b) Limitation with respect to medicine and drugs An amount paid during the taxable year for medicine or a drug shall be taken into account under subsection (a) only if such medicine or drug is a prescribed drug or is insulin.

(c) Special rule for decedents For purposes of subsection (a), expenses for the medical care of the taxpayer which are paid out of his estate during the 1-year period beginning with the day after the date of his death shall be treated as paid by the taxpayer at the time incurred. Paragraph (1) shall not apply if the amount paid is allowable under section 2053 as a deduction in computing the taxable estate of the decedent, but this paragraph shall not apply if (within the time and in the manner and form prescribed by the Secretary) there is filed— a statement that such amount has not been allowed as a deduction under section 2053, and a waiver of the right to have such amount allowed at any time as a deduction under section 2053.

(d) Definitions For purposes of this section— The term “medical care” means amounts paid— for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body, for transportation primarily for and essential to medical care referred to in subparagraph (A), for qualified long-term care services (as defined in section 7702B(c)), or for insurance (including amounts paid as premiums under part B of title XVIII of the Social Security Act, relating to supplementary medical insurance for the aged) covering medical care referred to in subparagraphs (A) and (B) or for any qualified long-term care insurance contract (as defined in section 7702B(b)). In the case of a qualified long-term care insurance contract (as defined in section 7702B(b)), only eligible long-term care premiums (as defined in paragraph (10)) shall be taken into account under subparagraph (D). Amounts paid for lodging (not lavish or extravagant under the circumstances) while away from home primarily for and essential to medical care referred to in paragraph (1)(A) shall be treated as amounts paid for medical care if— the medical care referred to in paragraph (1)(A) is provided by a physician in a licensed hospital (or in a medical care facility which is related to, or the equivalent of, a licensed hospital), and there is no significant element of personal pleasure, recreation, or vacation in the travel away from home. The amount taken into account under the preceding sentence shall not exceed 200 More than 40 but not more than 50 375 More than 50 but not more than 60 750 More than 60 but not more than 70 2,000 More than 70 2,500. In the case of any taxable year beginning in a calendar year after 1997, each dollar amount contained in subparagraph (A) shall be increased by the medical care cost adjustment of such amount for such calendar year. If any increase determined under the preceding sentence is not a multiple of $10, s u c hin cre a ses ha ll b ero u n d e d t o t h e n e a res t m u lt i pl eo f$ 10. For purposes of clause (i), the medical care cost adjustment for any calendar year is the percentage (if any) by which— the medical care component of the C-CPI-U (as defined in section 1(f)(6)) for August of the preceding calendar year, exceeds such component of the CPI (as defined in section 1(f)(4)) for August of 1996, multiplied by the amount determined under section 1(f)(3)(B). The Secretary shall, in consultation with the Secretary of Health and Human Services, prescribe an adjustment which the Secretary determines is more appropriate for purposes of this paragraph than the adjustment described in the preceding sentence, and the adjustment so prescribed shall apply in lieu of the adjustment described in the preceding sentence. An amount paid for a qualified long-term care service (as defined in section 7702B(c)) provided to an individual shall be treated as not paid for medical care if such service is provided— by the spouse of the individual or by a relative (directly or through a partnership, corporation, or other entity) unless the service is provided by a licensed professional with respect to such service, or by a corporation or partnership which is related (within the meaning of section 267(b) or 707(b)) to the individual. For purposes of this paragraph, the term “relative” means an individual bearing a relationship to the individual which is described in any of subparagraphs (A) through (G) of section 152(d)(2). This paragraph shall not apply for purposes of section 105(b) with respect to reimbursements through insurance.

(e) Exclusion of amounts allowed for care of certain dependents Any expense allowed as a credit under section 21 shall not be treated as an expense paid for medical care.

[§ 214 Repealed. Pub. L. 94–455, title V, § 504(b)(1), Oct. 4, 1976, 90 Stat. 1565]

[§ 215 Repealed. Pub. L. 115–97, title I, § 11051(a), Dec. 22, 2017, 131 Stat. 2089]

§ 216 Deduction of taxes, interest, and business depreciation by cooperative housing corporation tenant-stockholder

(a) Allowance of deduction In the case of a tenant-stockholder (as defined in subsection (b)(2)), there shall be allowed as a deduction amounts (not otherwise deductible) paid or accrued to a cooperative housing corporation within the taxable year, but only to the extent that such amounts represent the tenant-stockholder’s proportionate share of— the real estate taxes allowable as a deduction to the corporation under section 164 which are paid or incurred by the corporation on the houses or apartment building and on the land on which such houses (or building) are situated, or the interest allowable as a deduction to the corporation under section 163 which is paid or incurred by the corporation on its indebtedness contracted— in the acquisition, construction, alteration, rehabilitation, or maintenance of the houses or apartment building, or in the acquisition of the land on which the houses (or apartment building) are situated.

(b) Definitions For purposes of this section— The term “cooperative housing corporation” means a corporation— having one and only one class of stock outstanding, each of the stockholders of which is entitled, solely by reason of his ownership of stock in the corporation, to occupy for dwelling purposes a house, or an apartment in a building, owned or leased by such corporation, no stockholder of which is entitled (either conditionally or unconditionally) to receive any distribution not out of earnings and profits of the corporation except on a complete or partial liquidation of the corporation, and meeting 1 or more of the following requirements for the taxable year in which the taxes and interest described in subsection (a) are paid or incurred: 80 percent or more of the corporation’s gross income for such taxable year is derived from tenant-stockholders. At all times during such taxable year, 80 percent or more of the total square footage of the corporation’s property is used or available for use by the tenant-stockholders for residential purposes or purposes ancillary to such residential use. 90 percent or more of the expenditures of the corporation paid or incurred during such taxable year are paid or incurred for the acquisition, construction, management, maintenance, or care of the corporation’s property for the benefit of the tenant-stockholders. The term “tenant-stockholder” means a person who is a stockholder in a cooperative housing corporation, and whose stock is fully paid-up in an amount not less than an amount shown to the satisfaction of the Secretary as bearing a reasonable relationship to the portion of the value of the corporation’s equity in the houses or apartment building and the land on which situated which is attributable to the house or apartment which such person is entitled to occupy. Except as provided in subparagraph (B), the term “tenant-stockholder’s proportionate share” means that proportion which the stock of the cooperative housing corporation owned by the tenant-stockholder is of the total outstanding stock of the corporation (including any stock held by the corporation). If, for any taxable year— each dwelling unit owned or leased by a cooperative housing corporation is separately allocated a share of such corporation’s real estate taxes described in subsection (a)(1) or a share of such corporation’s interest described in subsection (a)(2), and such allocations reasonably reflect the cost to such corporation of such taxes, or of such interest, attributable to the tenant-stockholder’s dwelling unit (and such unit’s share of the common areas), then the term “tenant-stockholder’s proportionate share” means the shares determined in accordance with the allocations described in subclause (II). Clause (i) shall apply with respect to any cooperative housing corporation only if such corporation elects its application. Such an election, once made, may be revoked only with the consent of the Secretary. For purposes of this subsection, in determining whether a corporation is a cooperative housing corporation, stock owned and apartments leased by the United States or any of its possessions, a State or any political subdivision thereof, or any agency or instrumentality of the foregoing empowered to acquire shares in a cooperative housing corporation for the purpose of providing housing facilities, shall not be taken into account. For purposes of this section, in the following cases there shall not be taken into account the fact that (by agreement with the cooperative housing corporation) the person or his nominee may not occupy the house or apartment without the prior approval of such corporation: In any case where a person acquires stock of a cooperative housing corporation by operation of law. In any case where a person other than an individual acquires stock of a cooperative housing corporation. In any case where the original seller acquires any stock of the cooperative housing corporation from the corporation not later than 1 year after the date on which the apartments or houses (or leaseholds therein) are transferred by the original seller to the corporation. For purposes of paragraph (5), the term “original seller” means the person from whom the corporation has acquired the apartments or houses (or leaseholds therein).

(c) Treatment as property subject to depreciation So much of the stock of a tenant-stockholder in a cooperative housing corporation as is allocable, under regulations prescribed by the Secretary, to a proprietary lease or right of tenancy in property subject to the allowance for depreciation under section 167(a) shall, to the extent such proprietary lease or right of tenancy is used by such tenant-stockholder in a trade or business or for the production of income, be treated as property subject to the allowance for depreciation under section 167(a). The preceding sentence shall not be construed to limit or deny a deduction for depreciation under section 167(a) by a cooperative housing corporation with respect to property owned by such a corporation and leased to tenant-stockholders. The amount of any deduction for depreciation allowable under section 167(a) to a tenant-stockholder with respect to any stock for any taxable year by reason of paragraph (1) shall not exceed the adjusted basis of such stock as of the close of the taxable year of the tenant-stockholder in which such deduction was incurred. The amount of any deduction which is not allowed by reason of subparagraph (A) shall, subject to the provisions of subparagraph (A), be treated as a deduction allowable under section 167(a) in the succeeding taxable year.

(d) Disallowance of deduction for certain payments to the corporation No deduction shall be allowed to a stockholder in a cooperative housing corporation for any amount paid or accrued to such corporation during any taxable year (in excess of the stockholder’s proportionate share of the items described in subsections (a)(1) and (a)(2)) to the extent that, under regulations prescribed by the Secretary, such amount is properly allocable to amounts paid or incurred at any time by the corporation which are chargeable to the corporation’s capital account. The stockholder’s adjusted basis in the stock in the corporation shall be increased by the amount of such disallowance.

(e) Distributions by cooperative housing corporations Except as provided in regulations no gain or loss shall be recognized on the distribution by a cooperative housing corporation of a dwelling unit to a stockholder in such corporation if such distribution is in exchange for the stockholder’s stock in such corporation and such dwelling unit is used as his principal residence (within the meaning of section 121).

§ 217 Moving expenses

(a) Deduction allowed There shall be allowed as a deduction moving expenses paid or incurred during the taxable year in connection with the commencement of work by the taxpayer as an employee or as a self-employed individual at a new principal place of work.

(b) Definition of moving expenses For purposes of this section, the term “moving expenses” means only the reasonable expenses— of moving household goods and personal effects from the former residence to the new residence, and of traveling (including lodging) from the former residence to the new place of residence. Such term shall not include any expenses for meals. In the case of any individual other than the taxpayer, expenses referred to in paragraph (1) shall be taken into account only if such individual has both the former residence and the new residence as his principal place of abode and is a member of the taxpayer’s household.

(c) Conditions for allowance No deduction shall be allowed under this section unless— the taxpayer’s new principal place of work— is at least 50 miles farther from his former residence than was his former principal place of work, or if he had no former principal place of work, is at least 50 miles from his former residence, and either— during the 12-month period immediately following his arrival in the general location of his new principal place of work, the taxpayer is a full-time employee, in such general location, during at least 39 weeks, or during the 24-month period immediately following his arrival in the general location of his new principal place of work, the taxpayer is a full-time employee or performs services as a self-employed individual on a full-time basis, in such general location, during at least 78 weeks, of which not less than 39 weeks are during the 12-month period referred to in subparagraph (A). For purposes of paragraph (1), the distance between two points shall be the shortest of the more commonly traveled routes between such two points.

(d) Rules for application of subsection (c)(2) The condition of subsection (c)(2) shall not apply if the taxpayer is unable to satisfy such condition by reason of— death or disability, or involuntary separation (other than for willful misconduct) from the service of, or transfer for the benefit of, an employer after obtaining full-time employment in which the taxpayer could reasonably have been expected to satisfy such condition. If a taxpayer has not satisfied the condition of subsection (c)(2) before the time prescribed by law (including extensions thereof) for filing the return for the taxable year during which he paid or incurred moving expenses which would otherwise be deductible under this section, but may still satisfy such condition, then such expenses may (at the election of the taxpayer) be deducted for such taxable year notwithstanding subsection (c)(2). If— for any taxable year moving expenses have been deducted in accordance with the rule provided in paragraph (2), and the condition of subsection (c)(2) cannot be satisfied at the close of a subsequent taxable year, then an amount equal to the expenses which were so deducted shall be included in gross income for the first such subsequent taxable year.

([(e) Repealed. Pub. L. 103–66, title XIII, § 13213(a)(2)(A), Aug. 10, 1993, 107 Stat. 473]

(f) Self-employed individual For purposes of this section, the term “self-employed individual” means an individual who performs personal services— as the owner of the entire interest in an unincorporated trade or business, or as a partner in a partnership carrying on a trade or business.

(g) Rules for members of the Armed Forces of the United States In the case of a member of the Armed Forces of the United States on active duty who moves pursuant to a military order and incident to a permanent change of station— the limitations under subsection (c) shall not apply; any moving and storage expenses which are furnished in kind (or for which reimbursement or an allowance is provided, but only to the extent of the expenses paid or incurred) to such member, his spouse, or his dependents, shall not be includible in gross income, and no reporting with respect to such expenses shall be required by the Secretary of Defense or the Secretary of Transportation, as the case may be; and if moving and storage expenses are furnished in kind (or if reimbursement or an allowance for such expenses is provided) to such member’s spouse and his dependents with regard to moving to a location other than the one to which such member moves (or from a location other than the one from which such member moves), this section shall apply with respect to the moving expenses of his spouse and dependents— as if his spouse commenced work as an employee at a new principal place of work at such location; and without regard to the limitations under subsection (c).

(h) Special rules for foreign moves In the case of a foreign move, for purposes of this section, the moving expenses described in subsection (b)(1)(A) include the reasonable expenses— of moving household goods and personal effects to and from storage, and of storing such goods and effects for part or all of the period during which the new place of work continues to be the taxpayer’s principal place of work. For purposes of this subsection, the term “foreign move” means the commencement of work by the taxpayer at a new principal place of work located outside the United States. For purposes of this subsection and subsection (i), the term “United States” includes the possessions of the United States.

(i) Allowance of deductions in case of retirees or decedents who were working abroad In the case of any qualified retiree moving expenses or qualified survivor moving expenses— this section (other than subsection (h)) shall be applied with respect to such expenses as if they were incurred in connection with the commencement of work by the taxpayer as an employee at a new principal place of work located within the United States, and the limitations of subsection (c)(2) shall not apply. For purposes of paragraph (1), the term “qualified retiree moving expenses” means any moving expenses— which are incurred by an individual whose former principal place of work and former residence were outside the United States, and which are incurred for a move to a new residence in the United States in connection with the bona fide retirement of the individual. For purposes of paragraph (1), the term “qualified survivor moving expenses” means moving expenses— which are paid or incurred by the spouse or any dependent of any decedent who (as of the time of his death) had a principal place of work outside the United States, and which are incurred for a move which begins within 6 months after the death of such decedent and which is to a residence in the United States from a former residence outside the United States which (as of the time of the decedent’s death) was the residence of such decedent and the individual paying or incurring the expense.

(j) Regulations The Secretary shall prescribe such regulations as may be necessary to carry out the purposes of this section.

(k) Suspension of deduction for taxable years beginning after 2017 Except in the case of an individual to whom subsection (g) applies, this section shall not apply to any taxable year beginning after December 31, 2017 . An employee or new appointee of the intelligence community (as defined in section 3 of the National Security Act of 1947 ( 50 U.S.C. 3003 )) (other than a member of the Armed Forces of the United States) who moves pursuant to a change in assignment which requires relocation shall be treated for purposes of this section in the same manner as an individual to whom subsection (g) applies.

[§ 218 Repealed. Pub. L. 95–600, title I, § 113(a)(1), Nov. 6, 1978, 92 Stat. 2778]

§ 219 Retirement savings

(a) Allowance of deduction In the case of an individual, there shall be allowed as a deduction an amount equal to the qualified retirement contributions of the individual for the taxable year.

(b) Maximum amount of deduction The amount allowable as a deduction under subsection (a) to any individual for any taxable year shall not exceed the lesser of— the deductible amount, or an amount equal to the compensation includible in the individual’s gross income for such taxable year. This section shall not apply with respect to an employer contribution to a simplified employee pension. Notwithstanding paragraph (1), the amount allowable as a deduction under subsection (a) with respect to any contributions on behalf of an employee to a plan described in section 501(c)(18) shall not exceed the lesser of— $7, 000, or anam o u n t e q u a lt o 25 p erce n t o f t h eco m p e n s a t i o n (a s d e f in e d in sec t i o n 415 (c) (3)) in c l u d ib l e in t h e in d i v i d u a l ’ s g ross in co m e f ors u c h t a x ab l eye a r . T hi ssec t i o n s ha ll n o t a ppl y w i t h res p ec tt o an y am o u n t co n t r ib u t e d t o a s im pl ere t i re m e n t a cco u n t es t ab l i s h e d u n d ersec t i o n 408 (p) . F or p u r p oseso f p a r a g r a p h (1) (A) — T h e d e d u c t ib l e am o u n t i s$ 5,000. In the case of an individual who has attained the age of 50 before the close of the taxable year, the deductible amount for such taxable year shall be increased by the applicable amount. For purposes of clause (i), the applicable amount is $1, 000. I n t h ec a seo f an y t a x ab l eye a r b e g innin g ina c a l e n d a rye a r a f t er 2008, t h e$ 5,000 amount under subparagraph (A) shall be increased by an amount equal to— such dollar amount, multiplied by the cost-of-living adjustment determined under section 1(f)(3) for the calendar year in which the taxable year begins, determined by substituting “calendar year 2007” for “calendar year 2016” in subparagraph (A)(ii) thereof. If any amount after adjustment under clause (i) is not a multiple of $500, s u c ham o u n t s ha ll b ero u n d e d t o t h e n e x tl o w er m u lt i pl eo f$ 500. In the case of any taxable year beginning in a calendar year after 2023, the $1, 000 am o u n t u n d ers u b p a r a g r a p h (B) (ii) s ha ll b e in cre a se d b y anam o u n t e q u a lt o — s u c h d o ll a r am o u n t, m u lt i pl i e d b y t h ecos t - o f - l i v in g a d j u s t m e n t d e t er min e d u n d ersec t i o n 1 (f) (3) f or t h ec a l e n d a rye a r in w hi c h t h e t a x ab l eye a r b e g in s, d e t er min e d b ys u b s t i t u t in g “ c a l e n d a rye a r 2022” f or “ c a l e n d a rye a r 2016” in s u b p a r a g r a p h (A) (ii) t h ereo f . I f an y am o u n t a f t er a d j u s t m e n t u n d er t h e p rece d in g se n t e n ce i s n o t am u lt i pl eo f$ 100, such amount shall be rounded to the next lower multiple of $100.

(c) Kay Bailey Hutchison Spousal IRA In the case of an individual to whom this paragraph applies for the taxable year, the limitation of paragraph (1) of subsection (b) shall be equal to the lesser of— the dollar amount in effect under subsection (b)(1)(A) for the taxable year, or the sum of— the compensation includible in such individual’s gross income for the taxable year, plus the compensation includible in the gross income of such individual’s spouse for the taxable year reduced by— the amount allowed as a deduction under subsection (a) to such spouse for such taxable year, the amount of any designated nondeductible contribution (as defined in section 408( o )) on behalf of such spouse for such taxable year, and the amount of any contribution on behalf of such spouse to a Roth IRA under section 408A for such taxable year. Paragraph (1) shall apply to any individual if— such individual files a joint return for the taxable year, and the amount of compensation (if any) includible in such individual’s gross income for the taxable year is less than the compensation includible in the gross income of such individual’s spouse for the taxable year.

(d) Other limitations and restrictions No deduction shall be allowed under this section with respect to a rollover contribution described in section 402(c), 403(a)(4), 403(b)(8), 408(d)(3), or 457(e)(16). In the case of an endowment contract described in section 408(b), no deduction shall be allowed under this section for that portion of the amounts paid under the contract for the taxable year which is properly allocable, under regulations prescribed by the Secretary, to the cost of life insurance. No deduction shall be allowed under this section with respect to any amount paid to an inherited individual retirement account or individual retirement annuity (within the meaning of section 408(d)(3)(C)(ii)).

(e) Qualified retirement contribution For purposes of this section, the term “qualified retirement contribution” means— any amount paid in cash for the taxable year by or on behalf of an individual to an individual retirement plan for such individual’s benefit, and any amount contributed on behalf of any individual to a plan described in section 501(c)(18).

(f) Other definitions and special rules For purposes of this section, the term “compensation” includes earned income (as defined in section 401(c)(2)). The term “compensation” does not include any amount received as a pension or annuity and does not include any amount received as deferred compensation. For purposes of this paragraph, section 401(c)(2) shall be applied as if the term trade or business for purposes of section 1402 included service described in subsection (c)(6). The term “compensation” includes any differential wage payment (as defined in section 3401(h)(2)). The term “compensation” shall include any amount which is included in the individual’s gross income and paid to the individual to aid the individual in the pursuit of graduate or postdoctoral study. The maximum deduction under subsection (b) shall be computed separately for each individual, and this section shall be applied without regard to any community property laws. For purposes of this section, a taxpayer shall be deemed to have made a contribution to an individual retirement plan on the last day of the preceding taxable year if the contribution is made on account of such taxable year and is made not later than the time prescribed by law for filing the return for such taxable year (not including extensions thereof). For purposes of this title, any amount paid by an employer to an individual retirement plan shall be treated as payment of compensation to the employee (other than a self-employed individual who is an employee within the meaning of section 401(c)(1)) includible in his gross income in the taxable year for which the amount was contributed, whether or not a deduction for such payment is allowable under this section to the employee. If for the taxable year the maximum amount allowable as a deduction under this section for contributions to an individual retirement plan exceeds the amount contributed, then the taxpayer shall be treated as having made an additional contribution for the taxable year in an amount equal to the lesser of— the amount of such excess, or the amount of the excess contributions for such taxable year (determined under section 4973(b)(2) without regard to subparagraph (C) thereof). For purposes of this paragraph, the amount contributed— shall be determined without regard to this paragraph, and shall not include any rollover contribution. Proper reduction shall be made in the amount allowable as a deduction by reason of this paragraph for any amount allowed as a deduction under this section for a prior taxable year for which the period for assessing deficiency has expired if the amount so allowed exceeds the amount which should have been allowed for such prior taxable year. For purposes of subsections (b)(1)(B) and (c), the amount of compensation includible in an individual’s gross income shall be determined without regard to section 112. For election not to deduct contributions to individual retirement plans, see section 408( o )(2)(B)(ii).

(g) Limitation on deduction for active participants in certain pension plans If (for any part of any plan year ending with or within a taxable year) an individual or the individual’s spouse is an active participant, each of the dollar limitations contained in subsections (b)(1)(A) and (c)(1)(A) for such taxable year shall be reduced (but not below zero) by the amount determined under paragraph (2). The amount determined under this paragraph with respect to any dollar limitation shall be the amount which bears the same ratio to such limitation as— the excess of— the taxpayer’s adjusted gross income for such taxable year, over the applicable dollar amount, bears to $10, 000 ($ 20,000 in the case of a joint return). No dollar limitation shall be reduced below $200 u n d er p a r a g r a p h (1) u n l ess (w i t h o u t re g a r d t o t hi ss u b p a r a g r a p h) s u c h l imi t a t i o ni sre d u ce d t ozero . A n y am o u n t d e t er min e d u n d er t hi s p a r a g r a p h w hi c hi s n o t am u lt i pl eo f$ 10 shall be rounded to the next lowest $10. F or p u r p oseso f t hi ss u b sec t i o n — A d j u s t e d g ross in co m eo f an y t a x p a yers ha ll b e d e t er min e d — a f t er a ppl i c a t i o n o f sec t i o n s 86 an d 469, an d w i t h o u t re g a r d t osec t i o n s 85 (c), 135, 137, 221, an d 911 or t h e d e d u c t i o na ll o w ab l e u n d er t hi ssec t i o n . T h e t er m “ a ppl i c ab l e d o ll a r am o u n t ” m e an s t h e f o ll o w in g : I n t h ec a seo f a t a x p a yer f i l in g aj o in t re t u r n,$ 80,000. In the case of any other taxpayer (other than a married individual filing a separate return), 1,800 (when expressed as a single life annuity commencing at age 65). If this subsection applies to an individual for any taxable year solely because their spouse is an active participant, then, in applying this subsection to the individual (but not their spouse)— the applicable dollar amount under paragraph (3)(B)(i) shall be $150, 000; an d t h e am o u n t a ppl i c ab l e u n d er p a r a g r a p h (2) (A) (ii) s ha ll b e$ 10,000. In the case of any taxable year beginning in a calendar year after 2006, each of the dollar amounts in paragraphs (3)(B)(i), (3)(B)(ii), and (7)(A) shall be increased by an amount equal to— such dollar amount, multiplied by the cost-of-living adjustment determined under section 1(f)(3) for the calendar year in which the taxable year begins, determined by substituting “calendar year 2005” for “calendar year 2016” in subparagraph (A)(ii) thereof. Any increase determined under the preceding sentence shall be rounded to the nearest multiple of $1,000.

§ 220 Archer MSAs

(a) Deduction allowed In the case of an individual who is an eligible individual for any month during the taxable year, there shall be allowed as a deduction for the taxable year an amount equal to the aggregate amount paid in cash during such taxable year by such individual to an Archer MSA of such individual.

(c) Definitions For purposes of this section— The term “eligible individual” means, with respect to any month, any individual if— such individual is covered under a high deductible health plan as of the 1st day of such month, such individual is not, while covered under a high deductible health plan, covered under any health plan— which is not a high deductible health plan, and which provides coverage for any benefit which is covered under the high deductible health plan, and the high deductible health plan covering such individual is established and maintained by the employer of such individual or of the spouse of such individual and such employer is a small employer, or such individual is an employee (within the meaning of section 401(c)(1)) or the spouse of such an employee and the high deductible health plan covering such individual is not established or maintained by any employer of such individual or spouse. Subparagraph (A)(ii) shall be applied without regard to— coverage for any benefit provided by permitted insurance, and coverage (whether through insurance or otherwise) for accidents, disability, dental care, vision care, or long-term care. If, while an employer is a small employer— any amount is contributed to an Archer MSA of an individual who is an employee of such employer or the spouse of such an employee, and such amount is excludable from gross income under section 106(b) or allowable as a deduction under this section, such individual shall not cease to meet the requirement of subparagraph (A)(iii)(I) by reason of such employer ceasing to be a small employer so long as such employee continues to be an employee of such employer. For limitations on number of taxpayers who are eligible to have Archer MSAs, see subsection (i). The term “high deductible health plan” means a health plan— in the case of self-only coverage, which has an annual deductible which is not less than $1, 500 an d n o t m ore t han$ 2,250, in the case of family coverage, which has an annual deductible which is not less than $3, 000 an d n o t m ore t han$ 4,500, and the annual out-of-pocket expenses required to be paid under the plan (other than for premiums) for covered benefits does not exceed— $3, 000 f orse l f - o n l yco v er a g e, an d$ 5,500 for family coverage. Such term does not include a health plan if substantially all of its coverage is coverage described in paragraph (1)(B). A plan shall not fail to be treated as a high deductible health plan by reason of failing to have a deductible for preventive care if the absence of a deductible for such care is required by State law. The term “permitted insurance” means— insurance if substantially all of the coverage provided under such insurance relates to— liabilities incurred under workers’ compensation laws, tort liabilities, liabilities relating to ownership or use of property, or such other similar liabilities as the Secretary may specify by regulations, insurance for a specified disease or illness, and insurance paying a fixed amount per day (or other period) of hospitalization. The term “small employer” means, with respect to any calendar year, any employer if such employer employed an average of 50 or fewer employees on business days during either of the 2 preceding calendar years. For purposes of the preceding sentence, a preceding calendar year may be taken into account only if the employer was in existence throughout such year. In the case of an employer which was not in existence throughout the 1st preceding calendar year, the determination under subparagraph (A) shall be based on the average number of employees that it is reasonably expected such employer will employ on business days in the current calendar year. The term “small employer” includes, with respect to any calendar year, any employer if— such employer met the requirement of subparagraph (A) (determined without regard to subparagraph (B)) for any preceding calendar year after 1996, any amount was contributed to the Archer MSA of any employee of such employer with respect to coverage of such employee under a high deductible health plan of such employer during such preceding calendar year and such amount was excludable from gross income under section 106(b) or allowable as a deduction under this section, and such employer employed an average of 200 or fewer employees on business days during each preceding calendar year after 1996. For purposes of this paragraph, all persons treated as a single employer under subsection (b), (c), (m), or ( o ) of section 414 shall be treated as 1 employer. Any reference in this paragraph to an employer shall include a reference to any predecessor of such employer. The term “family coverage” means any coverage other than self-only coverage.

(d) Archer MSA For purposes of this section— The term “Archer MSA” means a trust created or organized in the United States as a medical savings account exclusively for the purpose of paying the qualified medical expenses of the account holder, but only if the written governing instrument creating the trust meets the following requirements: Except in the case of a rollover contribution described in subsection (f)(5), no contribution will be accepted— unless it is in cash, or to the extent such contribution, when added to previous contributions to the trust for the calendar year, exceeds 75 percent of the highest annual limit deductible permitted under subsection (c)(2)(A)(ii) for such calendar year. The trustee is a bank (as defined in section 408(n)), an insurance company (as defined in section 816), or another person who demonstrates to the satisfaction of the Secretary that the manner in which such person will administer the trust will be consistent with the requirements of this section. No part of the trust assets will be invested in life insurance contracts. The assets of the trust will not be commingled with other property except in a common trust fund or common investment fund. The interest of an individual in the balance in his account is nonforfeitable. The term “qualified medical expenses” means, with respect to an account holder, amounts paid by such holder for medical care (as defined in section 213(d)) for such individual, the spouse of such individual, and any dependent (as defined in section 152, determined without regard to subsections (b)(1), (b)(2), and (d)(1)(B) thereof) of such individual, but only to the extent such amounts are not compensated for by insurance or otherwise. For purposes of this subparagraph, amounts paid for menstrual care products (as defined in section 223(d)(2)(D)) shall be treated as paid for medical care. Subparagraph (A) shall not apply to any payment for insurance. Clause (i) shall not apply to any expense for coverage under— a health plan during any period of continuation coverage required under any Federal law, a qualified long-term care insurance contract (as defined in section 7702B(b)), or a health plan during a period in which the individual is receiving unemployment compensation under any Federal or State law. Subparagraph (A) shall apply to an amount paid by an account holder for medical care of an individual who is not described in clauses (i) and (ii) of subsection (c)(1)(A) for the month in which the expense for such care is incurred only if no amount is contributed (other than a rollover contribution) to any Archer MSA of such account holder for the taxable year which includes such month. This subparagraph shall not apply to any expense for coverage described in subclause (I) or (III) of subparagraph (B)(ii). The term “account holder” means the individual on whose behalf the Archer MSA was established. Rules similar to the following rules shall apply for purposes of this section: Section 219(d)(2) (relating to no deduction for rollovers). Section 219(f)(3) (relating to time when contributions deemed made). Except as provided in section 106(b), section 219(f)(5) (relating to employer payments). Section 408(g) (relating to community property laws). Section 408(h) (relating to custodial accounts).

(e) Tax treatment of accounts An Archer MSA is exempt from taxation under this subtitle unless such account has ceased to be an Archer MSA. Notwithstanding the preceding sentence, any such account is subject to the taxes imposed by section 511 (relating to imposition of tax on unrelated business income of charitable, etc. organizations). Rules similar to the rules of paragraphs (2) and (4) of section 408(e) shall apply to Archer MSAs, and any amount treated as distributed under such rules shall be treated as not used to pay qualified medical expenses.

(f) Tax treatment of distributions Any amount paid or distributed out of an Archer MSA which is used exclusively to pay qualified medical expenses of any account holder shall not be includible in gross income. Any amount paid or distributed out of an Archer MSA which is not used exclusively to pay the qualified medical expenses of the account holder shall be included in the gross income of such holder. If any excess contribution is contributed for a taxable year to any Archer MSA of an individual, paragraph (2) shall not apply to distributions from the Archer MSAs of such individual (to the extent such distributions do not exceed the aggregate excess contributions to all such accounts of such individual for such year) if— such distribution is received by the individual on or before the last day prescribed by law (including extensions of time) for filing such individual’s return for such taxable year, and such distribution is accompanied by the amount of net income attributable to such excess contribution. Any net income described in clause (ii) shall be included in the gross income of the individual for the taxable year in which it is received. For purposes of subparagraph (A), the term “excess contribution” means any contribution (other than a rollover contribution) which is neither excludable from gross income under section 106(b) nor deductible under this section. The tax imposed by this chapter on the account holder for any taxable year in which there is a payment or distribution from an Archer MSA of such holder which is includible in gross income under paragraph (2) shall be increased by 20 percent of the amount which is so includible. Subparagraph (A) shall not apply if the payment or distribution is made after the account holder becomes disabled within the meaning of section 72(m)(7) or dies. Subparagraph (A) shall not apply to any payment or distribution after the date on which the account holder attains the age specified in section 1811 of the Social Security Act. An amount is described in this paragraph as a rollover contribution if it meets the requirements of subparagraphs (A) and (B). Paragraph (2) shall not apply to any amount paid or distributed from an Archer MSA to the account holder to the extent the amount received is paid into an Archer MSA or a health savings account (as defined in section 223(d)) for the benefit of such holder not later than the 60th day after the day on which the holder receives the payment or distribution. This paragraph shall not apply to any amount described in subparagraph (A) received by an individual from an Archer MSA if, at any time during the 1-year period ending on the day of such receipt, such individual received any other amount described in subparagraph (A) from an Archer MSA which was not includible in the individual’s gross income because of the application of this paragraph. For purposes of determining the amount of the deduction under section 213, any payment or distribution out of an Archer MSA for qualified medical expenses shall not be treated as an expense paid for medical care. The transfer of an individual’s interest in an Archer MSA to an individual’s spouse or former spouse under a divorce or separation instrument described in clause (i) of section 121(d)(3)(C) shall not be considered a taxable transfer made by such individual notwithstanding any other provision of this subtitle, and such interest shall, after such transfer, be treated as an Archer MSA with respect to which such spouse is the account holder. If the account holder’s surviving spouse acquires such holder’s interest in an Archer MSA by reason of being the designated beneficiary of such account at the death of the account holder, such Archer MSA shall be treated as if the spouse were the account holder. If, by reason of the death of the account holder, any person acquires the account holder’s interest in an Archer MSA in a case to which subparagraph (A) does not apply— such account shall cease to be an Archer MSA as of the date of death, and an amount equal to the fair market value of the assets in such account on such date shall be includible if such person is not the estate of such holder, in such person’s gross income for the taxable year which includes such date, or if such person is the estate of such holder, in such holder’s gross income for the last taxable year of such holder. The amount includible in gross income under clause (i) by any person (other than the estate) shall be reduced by the amount of qualified medical expenses which were incurred by the decedent before the date of the decedent’s death and paid by such person within 1 year after such date. An appropriate deduction shall be allowed under section 691(c) to any person (other than the decedent or the decedent’s spouse) with respect to amounts included in gross income under clause (i) by such person.

(g) Cost-of-living adjustment In the case of any taxable year beginning in a calendar year after 1998, each dollar amount in subsection (c)(2) shall be increased by an amount equal to— such dollar amount, multiplied by the cost-of-living adjustment determined under section 1(f)(3) for the calendar year in which such taxable year begins by substituting “calendar year 1997” for “calendar year 2016” in subparagraph (A)(ii) thereof. If any increase under the preceding sentence is not a multiple of $50, s u c hin cre a ses ha ll b ero u n d e d t o t h e n e a res t m u lt i pl eo f$ 50.

(h) Reports The Secretary may require the trustee of an Archer MSA to make such reports regarding such account to the Secretary and to the account holder with respect to contributions, distributions, and such other matters as the Secretary determines appropriate. The reports required by this subsection shall be filed at such time and in such manner and furnished to such individuals at such time and in such manner as may be required by the Secretary.

(i) Limitation on number of taxpayers having Archer MSAs Except as provided in paragraph (5), no individual shall be treated as an eligible individual for any taxable year beginning after the cut-off year unless— such individual was an active MSA participant for any taxable year ending on or before the close of the cut-off year, or such individual first became an active MSA participant for a taxable year ending after the cut-off year by reason of coverage under a high deductible health plan of an MSA-participating employer. For purposes of paragraph (1), the term “cut-off year” means the earlier of— calendar year 2007, or the first calendar year before 2007 for which the Secretary determines under subsection (j) that the numerical limitation for such year has been exceeded. For purposes of this subsection— The term “active MSA participant” means, with respect to any taxable year, any individual who is the account holder of any Archer MSA into which any contribution was made which was excludable from gross income under section 106(b), or allowable as a deduction under this section, for such taxable year. In the case of a cut-off year before 2007— an individual shall not be treated as an eligible individual for any month of such year or an active MSA participant under paragraph (1)(A) unless such individual is, on or before the cut-off date, covered under a high deductible health plan, and an employer shall not be treated as an MSA-participating employer unless the employer, on or before the cut-off date, offered coverage under a high deductible health plan to any employee. For purposes of subparagraph (B)— Except as otherwise provided in this subparagraph, the cut-off date is October 1 of the cut-off year. In the case of an individual described in subclause (I) of subsection (c)(1)(A)(iii), if the regularly scheduled enrollment period for health plans of the individual’s employer occurs during the last 3 months of the cut-off year, the cut-off date is December 31 of the cut-off year. In the case of an individual described in subclause (II) of subsection (c)(1)(A)(iii), the cut-off date is November 1 of the cut-off year. If 1997 is a cut-off year by reason of subsection (j)(1)(A)— each of the cut-off dates under clauses (i) and (iii) shall be 1 month earlier than the date determined without regard to this clause, and clause (ii) shall be applied by substituting “4 months” for “3 months”. For purposes of this subsection, the term “MSA-participating employer” means any small employer if— such employer made any contribution to the Archer MSA of any employee during the cut-off year or any preceding calendar year which was excludable from gross income under section 106(b), or at least 20 percent of the employees of such employer who are eligible individuals for any month of the cut-off year by reason of coverage under a high deductible health plan of such employer each made a contribution of at least $100 to their Archer MSAs for any taxable year ending with or within the cut-off year which was allowable as a deduction under this section. If the Secretary determines under subsection (j)(2)(A) that the numerical limit for the calendar year following a cut-off year described in paragraph (2)(B) has not been exceeded— this subsection shall not apply to any otherwise eligible individual who is covered under a high deductible health plan during the first 6 months of the second calendar year following the cut-off year (and such individual shall be treated as an active MSA participant for purposes of this subsection if a contribution is made to any Archer MSA with respect to such coverage), and any employer who offers coverage under a high deductible health plan to any employee during such 6-month period shall be treated as an MSA-participating employer for purposes of this subsection if the requirements of paragraph (4) are met with respect to such coverage. For purposes of this paragraph, subsection (j)(2)(A) shall be applied for 1998 by substituting “750,000” for “600,000”.

(j) Determination of whether numerical limits are exceeded The numerical limitation for 1997 is exceeded if, based on the reports required under paragraph (4), the number of Archer MSAs established as of— April 30, 1997 , exceeds 375,000, or June 30, 1997 , exceeds 525,000. The numerical limitation for 1998, 1999, 2001, 2002, 2004, 2005, or 2006 is exceeded if the sum of— the number of MSA returns filed on or before April 15 of such calendar year for taxable years ending with or within the preceding calendar year, plus the Secretary’s estimate (determined on the basis of the returns described in clause (i)) of the number of MSA returns for such taxable years which will be filed after such date, exceeds 750,000 (600,000 in the case of 1998). For purposes of the preceding sentence, the term “MSA return” means any return on which any exclusion is claimed under section 106(b) or any deduction is claimed under this section. The numerical limitation for 1998, 1999, 2001, 2002, 2004, 2005, or 2006 is also exceeded if the sum of— 90 percent of the sum determined under subparagraph (A) for such calendar year, plus the product of 2.5 and the number of Archer MSAs established during the portion of such year preceding July 1 (based on the reports required under paragraph (4)) for taxable years beginning in such year, exceeds 750,000. The numerical limitation shall not apply for 2000 or 2003. The determination of whether any calendar year is a cut-off year shall be made by not counting the Archer MSA of any previously uninsured individual. For purposes of this subsection, the term “previously uninsured individual” means, with respect to any Archer MSA, any individual who had no health plan coverage (other than coverage referred to in subsection (c)(1)(B)) at any time during the 6-month period before the date such individual’s coverage under the high deductible health plan commences. Not later than August 1 of 1997, 1998, 1999, 2001, 2002, 2004, 2005, and 2006, each person who is the trustee of an Archer MSA established before July 1 of such calendar year shall make a report to the Secretary (in such form and manner as the Secretary shall specify) which specifies— the number of Archer MSAs established before such July 1 (for taxable years beginning in such calendar year) of which such person is the trustee, the name and TIN of the account holder of each such account, and the number of such accounts which are accounts of previously uninsured individuals. Not later than June 1, 1997 , each person who is the trustee of an Archer MSA established before May 1, 1997 , shall make an additional report described in subparagraph (A) but only with respect to accounts established before May 1, 1997 . The penalty provided in section 6693(a) shall apply to any report required by this paragraph, except that— such section shall be applied by substituting “ $25” f or “$ 50”, and the maximum penalty imposed on any trustee shall not exceed $5,000. To the extent practicable, in determining the number of Archer MSAs on the basis of the reports under this paragraph, all Archer MSAs of an individual shall be treated as 1 account and all accounts of individuals who are married to each other shall be treated as 1 account. Any determination under this subsection that a calendar year is a cut-off year shall be made by the Secretary and shall be published not later than October 1 of such year.

§ 221 Interest on education loans

(a) Allowance of deduction In the case of an individual, there shall be allowed as a deduction for the taxable year an amount equal to the interest paid by the taxpayer during the taxable year on any qualified education loan.

(b) Maximum deduction Except as provided in paragraph (2), the deduction allowed by subsection (a) for the taxable year shall not exceed $2, 500. T h e am o u n tw hi c h w o u l d (b u t f or t hi s p a r a g r a p h) b e a ll o w ab l e a s a d e d u c t i o n u n d er t hi ssec t i o n s ha ll b ere d u ce d (b u t n o t b e l o w zero) b y t h e am o u n t d e t er min e d u n d ers u b p a r a g r a p h (B) . T h e am o u n t d e t er min e d u n d er t hi ss u b p a r a g r a p hi s t h e am o u n tw hi c hb e a rs t h es am er a t i o t o t h e am o u n tw hi c h w o u l d b eso t ak e nin t o a cco u n t a s — t h ee x cesso f — t h e t a x p a yer ’ s m o d i f i e d a d j u s t e d g ross in co m e f ors u c h t a x ab l eye a r, o v er$ 50,000 ( $100, 000 in t h ec a seo f aj o in t re t u r n), b e a rs t o$ 15,000 ($30,000 in the case of a joint return). The term “modified adjusted gross income” means adjusted gross income determined— without regard to this section and sections 85(c) 1 911, 931, and 933, and after application of sections 86, 135, 137, 219, and 469.

(c) Dependents not eligible for deduction No deduction shall be allowed by this section to an individual for the taxable year if a deduction under section 151 with respect to such individual is allowed to another taxpayer for the taxable year beginning in the calendar year in which such individual’s taxable year begins.

(d) Definitions For purposes of this section— The term “qualified education loan” means any indebtedness incurred by the taxpayer solely to pay qualified higher education expenses— which are incurred on behalf of the taxpayer, the taxpayer’s spouse, or any dependent of the taxpayer as of the time the indebtedness was incurred, which are paid or incurred within a reasonable period of time before or after the indebtedness is incurred, and which are attributable to education furnished during a period during which the recipient was an eligible student. Such term includes indebtedness used to refinance indebtedness which qualifies as a qualified education loan. The term “qualified education loan” shall not include any indebtedness owed to a person who is related (within the meaning of section 267(b) or 707(b)(1)) to the taxpayer or to any person by reason of a loan under any qualified employer plan (as defined in section 72(p)(4)) or under any contract referred to in section 72(p)(5). The term “qualified higher education expenses” means the cost of attendance (as defined in section 472 of the Higher Education Act of 1965, 20 U.S.C. 1087 ll , as in effect on the day before the date of the enactment of the Taxpayer Relief Act of 1997) at an eligible educational institution, reduced by the sum of— the amount excluded from gross income under section 127, 135, 529, or 530 by reason of such expenses, and the amount of any scholarship, allowance, or payment described in section 25A(g)(2). For purposes of the preceding sentence, the term “eligible educational institution” has the same meaning given such term by section 25A(f)(2), except that such term shall also include an institution conducting an internship or residency program leading to a degree or certificate awarded by an institution of higher education, a hospital, or a health care facility which offers postgraduate training. The term “eligible student” has the meaning given such term by section 25A(b)(3). The term “dependent” has the meaning given such term by section 152 (determined without regard to subsections (b)(1), (b)(2), and (d)(1)(B) thereof).

(e) Special rules No deduction shall be allowed under this section for any amount for which a deduction is allowable under any other provision of this chapter, or for which an exclusion is allowable under section 127 to the taxpayer by reason of the payment by the taxpayer’s employer of any indebtedness on a qualified education loan of the taxpayer. The deduction otherwise allowable under subsection (a) (prior to the application of subsection (b)) to the taxpayer for any taxable year shall be reduced (but not below zero) by so much of the distributions treated as a qualified higher education expense under section 529(c)(9) with respect to loans of the taxpayer as would be includible in gross income under section 529(c)(3)(A) for such taxable year but for such treatment. If the taxpayer is married at the close of the taxable year, the deduction shall be allowed under subsection (a) only if the taxpayer and the taxpayer’s spouse file a joint return for the taxable year. Marital status shall be determined in accordance with section 7703.

(f) Inflation adjustments In the case of a taxable year beginning after 2002, the $50, 000 an d$ 100,000 amounts in subsection (b)(2) shall each be increased by an amount equal to— such dollar amount, multiplied by the cost-of-living adjustment determined under section 1(f)(3) for the calendar year in which the taxable year begins, determined by substituting “calendar year 2001” for “calendar year 2016” in subparagraph (A)(ii) thereof. If any amount as adjusted under paragraph (1) is not a multiple of $5, 000, s u c ham o u n t s ha ll b ero u n d e d t o t h e n e x tl o w es t m u lt i pl eo f$ 5,000.

[§ 222 Repealed. Pub. L. 116–260, div. EE, title I, § 104(b)(1), Dec. 27, 2020, 134 Stat. 3041]

§ 223 Health savings accounts

(a) Deduction allowed In the case of an individual who is an eligible individual for any month during the taxable year, there shall be allowed as a deduction for the taxable year an amount equal to the aggregate amount paid in cash during such taxable year by or on behalf of such individual to a health savings account of such individual.

(b) Limitations The amount allowable as a deduction under subsection (a) to an individual for the taxable year shall not exceed the sum of the monthly limitations for months during such taxable year that the individual is an eligible individual. The monthly limitation for any month is 1 ⁄ 12 of— in the case of an eligible individual who has self-only coverage under a high deductible health plan as of the first day of such month, $2, 250. in t h ec a seo f an e l i g ib l e in d i v i d u a lw h o ha s f ami l yco v er a g e u n d er ahi g h d e d u c t ib l e h e a lt h pl ana so f t h e f i rs t d a yo f s u c hm o n t h,$ 4,500. In the case of an individual who has attained age 55 before the close of the taxable year, the applicable limitation under subparagraphs (A) and (B) of paragraph (2) shall be increased by the additional contribution amount. For purposes of this section, the additional contribution amount is the amount determined in accordance with the following table: For taxable years beginning in: The additional contribution amount is: 2004 $5002005$ 600 2006 $7002007$ 800 2008 $9002009 an d t h ere a f t er$ 1,000. The limitation which would (but for this paragraph) apply under this subsection to an individual for any taxable year shall be reduced (but not below zero) by the sum of— the aggregate amount paid for such taxable year to Archer MSAs of such individual, the aggregate amount contributed to health savings accounts of such individual which is excludable from the taxpayer’s gross income for such taxable year under section 106(d) (and such amount shall not be allowed as a deduction under subsection (a)), and the aggregate amount contributed to health savings accounts of such individual for such taxable year under section 408(d)(9) (and such amount shall not be allowed as a deduction under subsection (a)). Subparagraph (A) shall not apply with respect to any individual to whom paragraph (5) applies. In the case of individuals who are married to each other, if either spouse has family coverage— both spouses shall be treated as having only such family coverage (and if such spouses each have family coverage under different plans, as having the family coverage with the lowest annual deductible), and the limitation under paragraph (1) (after the application of subparagraph (A) and without regard to any additional contribution amount under paragraph (3))— shall be reduced by the aggregate amount paid to Archer MSAs of such spouses for the taxable year, and after such reduction, shall be divided equally between them unless they agree on a different division. No deduction shall be allowed under this section to any individual with respect to whom a deduction under section 151 is allowable to another taxpayer for a taxable year beginning in the calendar year in which such individual’s taxable year begins. The limitation under this subsection for any month with respect to an individual shall be zero for the first month such individual is entitled to benefits under title XVIII of the Social Security Act and for each month thereafter. For purposes of computing the limitation under paragraph (1) for any taxable year, an individual who is an eligible individual during the last month of such taxable year shall be treated— as having been an eligible individual during each of the months in such taxable year, and as having been enrolled, during each of the months such individual is treated as an eligible individual solely by reason of clause (i), in the same high deductible health plan in which the individual was enrolled for the last month of such taxable year. If, at any time during the testing period, the individual is not an eligible individual, then— gross income of the individual for the taxable year in which occurs the first month in the testing period for which such individual is not an eligible individual is increased by the aggregate amount of all contributions to the health savings account of the individual which could not have been made but for subparagraph (A), and the tax imposed by this chapter for any taxable year on the individual shall be increased by 10 percent of the amount of such increase. Subclauses (I) and (II) of clause (i) shall not apply if the individual ceased to be an eligible individual by reason of the death of the individual or the individual becoming disabled (within the meaning of section 72(m)(7)). The term “testing period” means the period beginning with the last month of the taxable year referred to in subparagraph (A) and ending on the last day of the 12th month following such month.

(c) Definitions and special rules For purposes of this section— The term “eligible individual” means, with respect to any month, any individual if— such individual is covered under a high deductible health plan as of the 1st day of such month, and such individual is not, while covered under a high deductible health plan, covered under any health plan— which is not a high deductible health plan, and which provides coverage for any benefit which is covered under the high deductible health plan. Subparagraph (A)(ii) shall be applied without regard to— coverage for any benefit provided by permitted insurance, coverage (whether through insurance or otherwise) for accidents, disability, dental care, vision care, long-term care, or telehealth and other remote care, and for taxable years beginning after December 31, 2006 , coverage under a health flexible spending arrangement during any period immediately following the end of a plan year of such arrangement during which unused benefits or contributions remaining at the end of such plan year may be paid or reimbursed to plan participants for qualified benefit expenses incurred during such period if— the balance in such arrangement at the end of such plan year is zero, or the individual is making a qualified HSA distribution (as defined in section 106(e)) in an amount equal to the remaining balance in such arrangement as of the end of such plan year, in accordance with rules prescribed by the Secretary. An individual shall not fail to be treated as an eligible individual for any period merely because the individual receives hospital care or medical services under any law administered by the Secretary of Veterans Affairs for a service-connected disability (within the meaning of section 101(16) of title 38 , United States Code). An individual shall not fail to be treated as an eligible individual for any period merely because the individual receives benefits for medical care subject to and in accordance with section 9816 or 9817, section 2799A–1 or 2799A–2 of the Public Health Service Act, or section 716 or 717 of the Employee Retirement Income Security Act of 1974, or any State law providing similar protections to such individual. A direct primary care service arrangement shall not be treated as a health plan for purposes of subparagraph (A)(ii). For purposes of this subparagraph— The term “direct primary care service arrangement” means, with respect to any individual, an arrangement under which such individual is provided medical care (as defined in section 213(d)) consisting solely of primary care services provided by primary care practitioners (as defined in section 1833(x)(2)(A) of the Social Security Act, determined without regard to clause (ii) thereof), if the sole compensation for such care is a fixed periodic fee. With respect to any individual for any month, such term shall not include any arrangement if the aggregate fees for all direct primary care service arrangements (determined without regard to this subclause) with respect to such individual for such month exceed $150 (tw i ces u c h d o ll a r am o u n t in t h ec a seo f anin d i v i d u a lw i t han y d i rec tp r ima ryc a reser v i ce a rr an g e m e n t (a sso d e t er min e d) t ha t co v ers m ore t han o n e in d i v i d u a l) . F or p u r p oseso f t hi ss u b p a r a g r a p h, t h e t er m “ p r ima ryc a reser v i ces ” s ha ll n o t in c l u d e — p roce d u res t ha t re q u i re t h e u seo f g e n er a l an es t h es ia, p rescr i pt i o n d r ug s (o t h er t han v a cc in es), an d l ab or a t oryser v i ces n o tt y p i c a ll y a d mini s t ere d inanamb u l a t ory p r ima ryc a rese tt in g . T h e S ecre t a ry, a f t erco n s u lt a t i o n w i t h t h e S ecre t a ryo f He a lt han d H u man S er v i ces, s ha ll i ss u ere gu l a t i o n soro t h er gu i d an cere g a r d in g t h e a ppl i c a t i o n o f t hi sc l a u se . T h e t er m “ hi g h d e d u c t ib l e h e a lt h pl an ” m e an s ah e a lt h pl an — w hi c hha s anann u a l d e d u c t ib l e w hi c hi s n o tl ess t han —$ 1,000 for self-only coverage, and twice the dollar amount in subclause (I) for family coverage, and the sum of the annual deductible and the other annual out-of-pocket expenses required to be paid under the plan (other than for premiums) for covered benefits does not exceed— $5,000 for self-only coverage, and twice the dollar amount in subclause (I) for family coverage. Such term does not include a health plan if substantially all of its coverage is coverage described in paragraph (1)(B). A plan shall not fail to be treated as a high deductible health plan by reason of failing to have a deductible for preventive care (within the meaning of section 1861 of the Social Security Act, except as otherwise provided by the Secretary). In the case of a plan using a network of providers— Such plan shall not fail to be treated as a high deductible health plan by reason of having an out-of-pocket limitation for services provided outside of such network which exceeds the applicable limitation under subparagraph (A)(ii). Such plan’s annual deductible for services provided outside of such network shall not be taken into account for purposes of subsection (b)(2). A plan shall not fail to be treated as a high deductible health plan by reason of failing to have a deductible for telehealth and other remote care services. A plan shall not fail to be treated as a high deductible health plan by reason of providing benefits for medical care in accordance with section 9816 or 9817, section 2799A–1 or 2799A–2 of the Public Health Service Act, or section 716 or 717 of the Employee Retirement Income Security Act of 1974, or any State law providing similar protections to individuals, prior to the satisfaction of the deductible under paragraph (2)(A)(i). A plan shall not fail to be treated as a high deductible health plan by reason of failing to have a deductible for selected insulin products. For purposes of this subparagraph— The term “selected insulin products” means any dosage form (such as vial, pump, or inhaler dosage forms) of any different type (such as rapid-acting, short-acting, intermediate-acting, long-acting, ultra long-acting, and premixed) of insulin. The term “insulin” means insulin that is licensed under subsection (a) or (k) of section 351 of the Public Health Service Act ( 42 U.S.C. 262 ) and continues to be marketed under such section, including any insulin product that has been deemed to be licensed under section 351(a) of such Act pursuant to section 7002(e)(4) of the Biologics Price Competition and Innovation Act of 2009 ( Public Law 111–148 ) and continues to be marketed pursuant to such licensure. The term “high deductible health plan” shall include any plan which is— available as individual coverage through an Exchange established under section 1311 or 1321 of the Patient Protection and Affordable Care Act, and described in subsection (d)(1)(A) or (e) of section 1302 of such Act. The term “permitted insurance” means— insurance if substantially all of the coverage provided under such insurance relates to— liabilities incurred under workers’ compensation laws, tort liabilities, liabilities relating to ownership or use of property, or such other similar liabilities as the Secretary may specify by regulations, insurance for a specified disease or illness, and insurance paying a fixed amount per day (or other period) of hospitalization. The term “family coverage” means any coverage other than self-only coverage. The term “Archer MSA” has the meaning given such term in section 220(d).

(d) Health savings account For purposes of this section— The term “health savings account” means a trust created or organized in the United States as a health savings account exclusively for the purpose of paying the qualified medical expenses of the account beneficiary, but only if the written governing instrument creating the trust meets the following requirements: Except in the case of a rollover contribution described in subsection (f)(5) or section 220(f)(5), no contribution will be accepted— unless it is in cash, or to the extent such contribution, when added to previous contributions to the trust for the calendar year, exceeds the sum of— the dollar amount in effect under subsection (b)(2)(B), and the dollar amount in effect under subsection (b)(3)(B). The trustee is a bank (as defined in section 408(n)), an insurance company (as defined in section 816), or another person who demonstrates to the satisfaction of the Secretary that the manner in which such person will administer the trust will be consistent with the requirements of this section. No part of the trust assets will be invested in life insurance contracts. The assets of the trust will not be commingled with other property except in a common trust fund or common investment fund. The interest of an individual in the balance in his account is nonforfeitable. The term “qualified medical expenses” means, with respect to an account beneficiary, amounts paid by such beneficiary for medical care (as defined in section 213(d)) for such individual, the spouse of such individual, and any dependent (as defined in section 152, determined without regard to subsections (b)(1), (b)(2), and (d)(1)(B) thereof) of such individual, but only to the extent such amounts are not compensated for by insurance or otherwise. For purposes of this subparagraph, amounts paid for menstrual care products shall be treated as paid for medical care. Subparagraph (A) shall not apply to any payment for insurance. Subparagraph (B) shall not apply to any expense for coverage under— a health plan during any period of continuation coverage required under any Federal law, a qualified long-term care insurance contract (as defined in section 7702B(b)), a health plan during a period in which the individual is receiving unemployment compensation under any Federal or State law, or in the case of an account beneficiary who has attained the age specified in section 1811 of the Social Security Act, any health insurance other than a medicare supplemental policy (as defined in section 1882 of the Social Security Act). any direct primary care service arrangement. For purposes of this paragraph, the term “menstrual care product” means a tampon, pad, liner, cup, sponge, or similar product used by individuals with respect to menstruation or other genital-tract secretions. The term “account beneficiary” means the individual on whose behalf the health savings account was established. Rules similar to the following rules shall apply for purposes of this section: Section 219(d)(2) (relating to no deduction for rollovers). Section 219(f)(3) (relating to time when contributions deemed made). Except as provided in section 106(d), section 219(f)(5) (relating to employer payments). Section 408(g) (relating to community property laws). Section 408(h) (relating to custodial accounts).

(e) Tax treatment of accounts A health savings account is exempt from taxation under this subtitle unless such account has ceased to be a health savings account. Notwithstanding the preceding sentence, any such account is subject to the taxes imposed by section 511 (relating to imposition of tax on unrelated business income of charitable, etc. organizations). Rules similar to the rules of paragraphs (2) and (4) of section 408(e) shall apply to health savings accounts, and any amount treated as distributed under such rules shall be treated as not used to pay qualified medical expenses.

(f) Tax treatment of distributions Any amount paid or distributed out of a health savings account which is used exclusively to pay qualified medical expenses of any account beneficiary shall not be includible in gross income. Any amount paid or distributed out of a health savings account which is not used exclusively to pay the qualified medical expenses of the account beneficiary shall be included in the gross income of such beneficiary. If any excess contribution is contributed for a taxable year to any health savings account of an individual, paragraph (2) shall not apply to distributions from the health savings accounts of such individual (to the extent such distributions do not exceed the aggregate excess contributions to all such accounts of such individual for such year) if— such distribution is received by the individual on or before the last day prescribed by law (including extensions of time) for filing such individual’s return for such taxable year, and such distribution is accompanied by the amount of net income attributable to such excess contribution. Any net income described in clause (ii) shall be included in the gross income of the individual for the taxable year in which it is received. For purposes of subparagraph (A), the term “excess contribution” means any contribution (other than a rollover contribution described in paragraph (5) or section 220(f)(5)) which is neither excludable from gross income under section 106(d) nor deductible under this section. The tax imposed by this chapter on the account beneficiary for any taxable year in which there is a payment or distribution from a health savings account of such beneficiary which is includible in gross income under paragraph (2) shall be increased by 20 percent of the amount which is so includible. Subparagraph (A) shall not apply if the payment or distribution is made after the account beneficiary becomes disabled within the meaning of section 72(m)(7) or dies. Subparagraph (A) shall not apply to any payment or distribution after the date on which the account beneficiary attains the age specified in section 1811 of the Social Security Act. An amount is described in this paragraph as a rollover contribution if it meets the requirements of subparagraphs (A) and (B). Paragraph (2) shall not apply to any amount paid or distributed from a health savings account to the account beneficiary to the extent the amount received is paid into a health savings account for the benefit of such beneficiary not later than the 60th day after the day on which the beneficiary receives the payment or distribution. This paragraph shall not apply to any amount described in subparagraph (A) received by an individual from a health savings account if, at any time during the 1-year period ending on the day of such receipt, such individual received any other amount described in subparagraph (A) from a health savings account which was not includible in the individual’s gross income because of the application of this paragraph. For purposes of determining the amount of the deduction under section 213, any payment or distribution out of a health savings account for qualified medical expenses shall not be treated as an expense paid for medical care. The transfer of an individual’s interest in a health savings account to an individual’s spouse or former spouse under a divorce or separation instrument described in clause (i) of section 121(d)(3)(C) shall not be considered a taxable transfer made by such individual notwithstanding any other provision of this subtitle, and such interest shall, after such transfer, be treated as a health savings account with respect to which such spouse is the account beneficiary. If the account beneficiary’s surviving spouse acquires such beneficiary’s interest in a health savings account by reason of being the designated beneficiary of such account at the death of the account beneficiary, such health savings account shall be treated as if the spouse were the account beneficiary. If, by reason of the death of the account beneficiary, any person acquires the account beneficiary’s interest in a health savings account in a case to which subparagraph (A) does not apply— such account shall cease to be a health savings account as of the date of death, and an amount equal to the fair market value of the assets in such account on such date shall be includible if such person is not the estate of such beneficiary, in such person’s gross income for the taxable year which includes such date, or if such person is the estate of such beneficiary, in such beneficiary’s gross income for the last taxable year of such beneficiary. The amount includible in gross income under clause (i) by any person (other than the estate) shall be reduced by the amount of qualified medical expenses which were incurred by the decedent before the date of the decedent’s death and paid by such person within 1 year after such date. An appropriate deduction shall be allowed under section 691(c) to any person (other than the decedent or the decedent’s spouse) with respect to amounts included in gross income under clause (i) by such person.

(g) Cost-of-living adjustment Each dollar amount in subsections (b)(2), (c)(2)(A), and in the case of taxable years beginning after 2026, (c)(1)(E)(ii)(II) shall be increased by an amount equal to— such dollar amount, multiplied by the cost-of-living adjustment determined under section 1(f)(3) for the calendar year in which such taxable year begins determined by substituting for “calendar year 2016” in subparagraph (A)(ii) thereof— except as provided in clauses (ii) and (iii), “calendar year 1997”, in the case of each dollar amount in subsection (c)(2)(A), “calendar year 2003”, and in the case of the dollar amount in subsection (c)(1)(E)(ii)(II), “calendar year 2025”. In the case of adjustments made for any taxable year beginning after 2007, section 1(f)(4) shall be applied for purposes of this paragraph by substituting “March 31” for “August 31”, and the Secretary shall publish the adjusted amounts under subsections (b)(2), (c)(1)(E)(ii)(II), and (c)(2)(A) for taxable years beginning in any calendar year no later than June 1 of the preceding calendar year. If any increase under paragraph (1) is not a multiple of $50, s u c hin cre a ses ha ll b ero u n d e d t o t h e n e a res t m u lt i pl eo f$ 50.

(h) Reports The Secretary may require— the trustee of a health savings account to make such reports regarding such account to the Secretary and to the account beneficiary with respect to contributions, distributions, the return of excess contributions, and such other matters as the Secretary determines appropriate, and any person who provides an individual with a high deductible health plan to make such reports to the Secretary and to the account beneficiary with respect to such plan as the Secretary determines appropriate. The reports required by this subsection shall be filed at such time and in such manner and furnished to such individuals at such time and in such manner as may be required by the Secretary.

§ 224 Qualified tips

(a) In general There shall be allowed as a deduction an amount equal to the qualified tips received during the taxable year that are included on statements furnished to the individual pursuant to section 6041(d)(3), 6041A(e)(3), 6050W(f)(2), or 6051(a)(18), or reported by the taxpayer on Form 4137 (or successor).

(b) Limitation The amount allowed as a deduction under this section for any taxable year shall not exceed $25, 000. T h e am o u n t a ll o w ab l e a s a d e d u c t i o n u n d ers u b sec t i o n (a) (a f t er a ppl i c a t i o n o f p a r a g r a p h (1)) s ha ll b ere d u ce d (b u t n o t b e l o w zero) b y$ 100 for each $1, 000 b y w hi c h t h e t a x p a yer ’ s m o d i f i e d a d j u s t e d g ross in co m ee x cee d s$ 150,000 ($300,000 in the case of a joint return). For purposes of this paragraph, the term “modified adjusted gross income” means the adjusted gross income of the taxpayer for the taxable year increased by any amount excluded from gross income under section 911, 931, or 933.

(c) Tips received in course of trade or business In the case of qualified tips received by an individual during any taxable year in the course of a trade or business (other than the trade or business of performing services as an employee) of such individual, such qualified tips shall be taken into account under subsection (a) only to the extent that the gross income for the taxpayer from such trade or business for such taxable year (including such qualified tips) exceeds the sum of the deductions (other than the deduction allowed under this section) allocable to the trade or business in which such qualified tips are received by the individual for such taxable year.

(d) Qualified tips For purposes of this section— The term “qualified tips” means cash tips received by an individual in an occupation which customarily and regularly received tips on or before December 31, 2024 , as provided by the Secretary. Such term shall not include any amount received by an individual unless— such amount is paid voluntarily without any consequence in the event of nonpayment, is not the subject of negotiation, and is determined by the payor, the trade or business in the course of which the individual receives such amount is not a specified service trade or business (as defined in section 199A(d)(2)), and such other requirements as may be established by the Secretary in regulations or other guidance are satisfied. For purposes of subparagraph (B), in the case of an individual receiving tips in the trade or business of performing services as an employee, such individual shall be treated as receiving tips in the course of a trade or business which is a specified service trade or business if the trade or business of the employer is a specified service trade or business. For purposes of paragraph (1), the term “cash tips” includes tips received from customers that are paid in cash or charged and, in the case of an employee, tips received under any tip-sharing arrangement.

(e) Social security number required No deduction shall be allowed under this section unless the taxpayer includes on the return of tax for the taxable year such individual’s social security number. For purposes of paragraph (1), the term “social security number” shall have the meaning given such term in section 24(h)(7).

(f) Married individuals If the taxpayer is a married individual (within the meaning of section 7703), this section shall apply only if the taxpayer and the taxpayer’s spouse file a joint return for the taxable year.

(g) Regulations The Secretary shall prescribe such regulations or other guidance as may be necessary to prevent reclassification of income as qualified tips, including regulations or other guidance to prevent abuse of the deduction allowed by this section.

(h) Termination No deduction shall be allowed under this section for any taxable year beginning after December 31, 2028 .

§ 225 Qualified overtime compensation

(a) In general There shall be allowed as a deduction an amount equal to the qualified overtime compensation received during the taxable year and included on statements furnished to the individual pursuant to section 6041(d)(4) or 6051(a)(19).

(b) Limitation The amount allowed as a deduction under this section for any taxable year shall not exceed $12, 500 ($ 25,000 in the case of a joint return). The amount allowable as a deduction under subsection (a) (after application of paragraph (1)) shall be reduced (but not below zero) by $100 f ore a c h$ 1,000 by which the taxpayer’s modified adjusted gross income exceeds $150, 000 ($ 300,000 in the case of a joint return). For purposes of this paragraph, the term “modified adjusted gross income” means the adjusted gross income of the taxpayer for the taxable year increased by any amount excluded from gross income under section 911, 931, or 933.

(c) Qualified overtime compensation For purposes of this section, the term “qualified overtime compensation” means overtime compensation paid to an individual required under section 7 of the Fair Labor Standards Act of 1938 that is in excess of the regular rate (as used in such section) at which such individual is employed. Such term shall not include any qualified tip (as defined in section 224(d)).

(d) Social security number required No deduction shall be allowed under this section unless the taxpayer includes on the return of tax for the taxable year such individual’s social security number. For purposes of paragraph (1), the term “social security number” shall have the meaning given such term in section 24(h)(7).

(e) Married individuals If the taxpayer is a married individual (within the meaning of section 7703), this section shall apply only if the taxpayer and the taxpayer’s spouse file a joint return for the taxable year.

(f) Regulations The Secretary shall issue such regulations or other guidance as may be necessary or appropriate to carry out the purposes of this section, including regulations or other guidance to prevent abuse of the deduction allowed by this section.

(g) Termination No deduction shall be allowed under this section for any taxable year beginning after December 31, 2028 .

§ 226 Cross reference

For deductions in respect of a decedent, see section 691. ( Aug. 16, 1954, ch. 736 , 68A Stat. 72 , § 217; renumbered § 218, Pub. L. 88–272, title II, § 213(a)(1) , Feb. 26, 1964 , 78 Stat. 50 ; renumbered § 219, Pub. L. 92–178, title VII, § 702(a) , Dec. 10, 1971 , 85 Stat. 561 ; renumbered § 220, Pub. L. 93–406, title II, § 2002(a)(1) , Sept. 2, 1974 , 88 Stat. 958 ; renumbered § 221, Pub. L. 94–455, title XV, § 1501(a) , Oct. 4, 1976 , 90 Stat. 1734 ; renumbered § 222, renumbered § 223, Pub. L. 97–34, title I , §§ 103(a), 125(a), Aug. 13, 1981 , 95 Stat. 187 , 201; renumbered § 220 and amended Pub. L. 99–514, title I, § 135(b)(1) , title III, § 301(b)(5)(A), Oct. 22, 1986 , 100 Stat. 2116 , 2217; renumbered § 221, Pub. L. 100–647, title VI, § 6007(a) , Nov. 10, 1988 , 102 Stat. 3687 ; renumbered § 220, Pub. L. 101–508, title XI, § 11802(e)(2) , Nov. 5, 1990 , 104 Stat. 1388–530 ; renumbered § 221, Pub. L. 104–191, title III, § 301(a) , Aug. 21, 1996 , 110 Stat. 2037 ; renumbered § 222, Pub. L. 105–34, title II, § 202(a) , Aug. 5, 1997 , 111 Stat. 806 ; renumbered § 223, Pub. L. 107–16, title IV, § 431(a) , June 7, 2001 , 115 Stat. 66 ; renumbered § 224, Pub. L. 108–173, title XII, § 1201(a) , Dec. 8, 2003 , 117 Stat. 2469 ; renumbered § 225, renumbered § 226, Pub. L. 119–21, title VII , §§ 70201(a), 70202(a), July 4, 2025 , 139 Stat. 170 , 174.)

§ 241 Allowance of special deductions

In addition to the deductions provided in part VI (sec. 161 and following), there shall be allowed as deductions in computing taxable income the items specified in this part. ( Aug. 16, 1954, ch. 736 , 68A Stat. 72 .)

[§ 242 Repealed. Pub. L. 94–455, title XIX, § 1901(a)(33), Oct. 4, 1976, 90 Stat. 1769]

§ 243 Dividends received by corporations

(a) General rule In the case of a corporation, there shall be allowed as a deduction an amount equal to the following percentages of the amount received as dividends from a domestic corporation which is subject to taxation under this chapter: 50 percent, in the case of dividends other than dividends described in paragraph (2) or (3); 100 percent, in the case of dividends received by a small business investment company operating under the Small Business Investment Act of 1958 ( 15 U.S.C. 661 and following); and 100 percent, in the case of qualifying dividends (as defined in subsection (b)(1)).

(b) Qualifying dividends For purposes of this section, the term “qualifying dividend” means any dividend received by a corporation— if at the close of the day on which such dividend is received, such corporation is a member of the same affiliated group as the corporation distributing such dividend, and if such dividend is distributed out of the earnings and profits of a taxable year of the distributing corporation which ends after December 31, 1963 , and on each day of which the distributing corporation and the corporation receiving the dividend were members of such affiliated group. For purposes of this subsection: The term “affiliated group” has the meaning given such term by section 1504(a), except that for such purposes sections 1504(b)(2) and 1504(c) shall not apply. The requirements of paragraph (1)(A) shall not be treated as being met with respect to any dividend received by a corporation if, for any taxable year which includes the day on which such dividend is received— 1 or more members of the affiliated group referred to in paragraph (1)(A) choose to any extent to take the benefits of section 901, and 1 or more other members of such group claim to any extent a deduction for taxes otherwise creditable under section 901. In the case of an affiliated group which includes 1 or more insurance companies under section 801, no dividend by any member of such group shall be treated as a qualifying dividend unless an election under this paragraph is in effect for the taxable year in which the dividend is received. The preceding sentence shall not apply in the case of a dividend described in paragraph (1)(B)(ii). If an election under this paragraph is in effect with respect to any affiliated group— part II of subchapter B of chapter 6 (relating to certain controlled corporations) shall be applied with respect to the members of such group without regard to sections 1563(a)(4) and 1563(b)(2)(D), and for purposes of this subsection, a distribution by any member of such group which is subject to tax under section 801 shall not be treated as a qualifying dividend if such distribution is out of earnings and profits for a taxable year for which an election under this paragraph is not effective and for which such distributing corporation was not a component member of a controlled group of corporations within the meaning of section 1563 solely by reason of section 1563(b)(2)(D). An election under this paragraph shall be made by the common parent of the affiliated group and at such time and in such manner as the Secretary shall by regulations prescribe. Any such election shall be binding on all members of such group and may be revoked only with the consent of the Secretary.

(c) Increased percentage for dividends from 20-percent owned corporations In the case of any dividend received from a 20-percent owned corporation, subsection (a)(1) shall be applied by substituting “65 percent” for “50 percent”. For purposes of this section, the term “20-percent owned corporation” means any corporation if 20 percent or more of the stock of such corporation (by vote and value) is owned by the taxpayer. For purposes of the preceding sentence, stock described in section 1504(a)(4) shall not be taken into account.

(d) Special rules for certain distributions For purposes of subsection (a)— Any amount allowed as a deduction under section 591 (relating to deduction for dividends paid by mutual savings banks, etc.) shall not be treated as a dividend. A dividend received from a regulated investment company shall be subject to the limitations prescribed in section 854. Any dividend received from a real estate investment trust which, for the taxable year of the trust in which the dividend is paid, qualifies under part II of subchapter M (section 856 and following) shall not be treated as a dividend.

(e) Certain dividends from foreign corporations For purposes of subsection (a) and for purposes of section 245, any dividend from a foreign corporation from earnings and profits accumulated by a domestic corporation during a period with respect to which such domestic corporation was subject to taxation under this chapter (or corresponding provisions of prior law) shall be treated as a dividend from a domestic corporation which is subject to taxation under this chapter.

[§ 244 Repealed. Pub. L. 113–295, div. A, title II, § 221(a)(41)(A), Dec. 19, 2014, 128 Stat. 4043]

§ 245 Dividends received from certain foreign corporations

(a) Dividends from 10-percent owned foreign corporations In the case of dividends received by a corporation from a qualified 10-percent owned foreign corporation, there shall be allowed as a deduction an amount equal to the percent (specified in section 243 for the taxable year) of the U.S.-source portion of such dividends. For purposes of this subsection, the term “qualified 10-percent owned foreign corporation” means any foreign corporation (other than a passive foreign investment company) if at least 10 percent of the stock of such corporation (by vote and value) is owned by the taxpayer. For purposes of this subsection, the U.S.-source portion of any dividend is an amount which bears the same ratio to such dividend as— the post-1986 undistributed U.S. earnings, bears to the total post-1986 undistributed earnings. The term “post-1986 undistributed earnings” means the amount of the earnings and profits of the foreign corporation (computed in accordance with sections 964(a) and 986) accumulated in taxable years beginning after December 31, 1986 — as of the close of the taxable year of the foreign corporation in which the dividend is distributed, and without diminution by reason of dividends distributed during such taxable year. For purposes of this subsection, the term “post-1986 undistributed U.S. earnings” means the portion of the post-1986 undistributed earnings which is attributable to— income of the qualified 10-percent owned foreign corporation which is effectively connected with the conduct of a trade or business within the United States and subject to tax under this chapter, or any dividend received (directly or through a wholly owned foreign corporation) from a domestic corporation at least 80 percent of the stock of which (by vote and value) is owned (directly or through such wholly owned foreign corporation) by the qualified 10-percent owned foreign corporation. If the 1st day on which the requirements of paragraph (2) are met with respect to any foreign corporation is in a taxable year of such corporation beginning after December 31, 1986 , the post-1986 undistributed earnings and the post-1986 undistributed U.S. earnings of such corporation shall be determined by only taking into account periods beginning on and after the 1st day of the 1st taxable year in which such requirements are met. Earnings and profits of any qualified 10-percent owned foreign corporation for any taxable year shall not be taken into account under this subsection if the deduction provided by subsection (b) would be allowable with respect to dividends paid out of such earnings and profits. No credit shall be allowed under section 901 for any taxes paid or accrued (or treated as paid or accrued) with respect to the United States-source portion of any dividend received by a corporation from a qualified 10-percent-owned foreign corporation. For purposes of section 904, the U.S.-source portion of any dividend received by a corporation from a qualified 10-percent owned foreign corporation shall be treated as from sources in the United States. If— any portion of a dividend received by a corporation from a qualified 10-percent-owned foreign corporation would be treated as from sources in the United States under paragraph (9), under a treaty obligation of the United States (applied without regard to this subsection), such portion would be treated as arising from sources outside the United States, and the taxpayer chooses the benefits of this paragraph, this subsection shall not apply to such dividend (but subsections (a), (b), and (c) of section 904 and sections 907 and 960 shall be applied separately with respect to such portion of such dividend). For purposes of this subsection, the term “dividend” does not include any amount treated as a dividend under section 1248. Regulated investment companies and real estate investment trusts shall not be treated as domestic corporations for purposes of paragraph (5)(B).

(b) Certain dividends received from wholly owned foreign subsidiaries In the case of dividends described in paragraph (2) received from a foreign corporation by a domestic corporation which, for its taxable year in which such dividends are received, owns (directly or indirectly) all of the outstanding stock of such foreign corporation, there shall be allowed as a deduction (in lieu of the deduction provided by subsection (a)) an amount equal to 100 percent of such dividends. Paragraph (1) shall apply only to dividends which are paid out of the earnings and profits of a foreign corporation for a taxable year during which— all of its outstanding stock is owned (directly or indirectly) by the domestic corporation to which such dividends are paid; and all of its gross income from all sources is effectively connected with the conduct of a trade or business within the United States. Paragraph (1) shall not apply to any dividends if an election under section 1562 is effective for either— the taxable year of the domestic corporation in which such dividends are received, or the taxable year of the foreign corporation out of the earnings and profits of which such dividends are paid.

(c) Certain dividends received from FSC In the case of a domestic corporation, there shall be allowed as a deduction an amount equal to— 100 percent of any dividend received from another corporation which is distributed out of earnings and profits attributable to foreign trade income for a period during which such other corporation was a FSC, and 50 percent (65 percent in the case of dividends from a 20-percent owned corporation as defined in section 243(c)(2)) of any dividend received from another corporation which is distributed out of earnings and profits attributable to effectively connected income received or accrued by such other corporation while such other corporation was a FSC. Paragraph (1) shall not apply to any dividend which is distributed out of earnings and profits attributable to foreign trade income which— is section 923(a)(2) nonexempt income (within the meaning of section 927(d)(6)), or would not, but for section 923(a)(4), be treated as exempt foreign trade income. No deduction shall be allowable under subsection (a) or (b) with respect to any dividend which is distributed out of earnings and profits of a corporation accumulated while such corporation was a FSC. For purposes of this subsection— The terms “foreign trade income” and “exempt foreign trade income” have the respective meanings given such terms by section 923. The term “effectively connected income” means any income which is effectively connected (or treated as effectively connected) with the conduct of a trade or business in the United States and is subject to tax under this chapter. Such term shall not include any foreign trade income. The term “FSC” has the meaning given such term by section 922. Any reference in this subsection to section 922, 923, or 927 shall be treated as a reference to such section as in effect before its repeal by the FSC Repeal and Extraterritorial Income Exclusion Act of 2000.

§ 245A Deduction for foreign source-portion of dividends received by domestic corporations from specified 10-percent owned foreign corporations

(a) In general In the case of any dividend received from a specified 10-percent owned foreign corporation by a domestic corporation which is a United States shareholder with respect to such foreign corporation, there shall be allowed as a deduction an amount equal to the foreign-source portion of such dividend.

(b) Specified 10-percent owned foreign corporation For purposes of this section— The term “specified 10-percent owned foreign corporation” means any foreign corporation with respect to which any domestic corporation is a United States shareholder with respect to such corporation. Such term shall not include any corporation which is a passive foreign investment company (as defined in section 1297) with respect to the shareholder and which is not a controlled foreign corporation.

(c) Foreign-source portion For purposes of this section— The foreign-source portion of any dividend from a specified 10-percent owned foreign corporation is an amount which bears the same ratio to such dividend as— the undistributed foreign earnings of the specified 10-percent owned foreign corporation, bears to the total undistributed earnings of such foreign corporation. The term “undistributed earnings” means the amount of the earnings and profits of the specified 10-percent owned foreign corporation (computed in accordance with sections 964(a) and 986)— as of the close of the taxable year of the specified 10-percent owned foreign corporation in which the dividend is distributed, and without diminution by reason of dividends distributed during such taxable year. The term “undistributed foreign earnings” means the portion of the undistributed earnings which is attributable to neither— income described in subparagraph (A) of section 245(a)(5), nor dividends described in subparagraph (B) of such section (determined without regard to section 245(a)(12)).

(d) Disallowance of foreign tax credit, etc. No credit shall be allowed under section 901 for any taxes paid or accrued (or treated as paid or accrued) with respect to any dividend for which a deduction is allowed under this section. No deduction shall be allowed under this chapter for any tax for which credit is not allowable under section 901 by reason of paragraph (1) (determined by treating the taxpayer as having elected the benefits of subpart A of part III of subchapter N).

(e) Special rules for hybrid dividends Subsection (a) shall not apply to any dividend received by a United States shareholder from a controlled foreign corporation if the dividend is a hybrid dividend. If a controlled foreign corporation with respect to which a domestic corporation is a United States shareholder receives a hybrid dividend from any other controlled foreign corporation with respect to which such domestic corporation is also a United States shareholder, then, notwithstanding any other provision of this title— the hybrid dividend shall be treated for purposes of section 951(a)(1)(A) as subpart F income of the receiving controlled foreign corporation for the taxable year of the controlled foreign corporation in which the dividend was received, and the United States shareholder shall include in gross income an amount equal to the shareholder’s pro rata share (determined in the same manner as under section 951(a)(2)) of the subpart F income described in subparagraph (A). The rules of subsection (d) shall apply to any hybrid dividend received by, or any amount included under paragraph (2) in the gross income of, a United States shareholder. The term “hybrid dividend” means an amount received from a controlled foreign corporation— for which a deduction would be allowed under subsection (a) but for this subsection, and for which the controlled foreign corporation received a deduction (or other tax benefit) with respect to any income, war profits, or excess profits taxes imposed by any foreign country or possession of the United States.

(f) Special rule for purging distributions of passive foreign investment companies Any amount which is treated as a dividend under section 1291(d)(2)(B) shall not be treated as a dividend for purposes of this section.

(g) Regulations The Secretary shall prescribe such regulations or other guidance as may be necessary or appropriate to carry out the provisions of this section, including regulations for the treatment of United States shareholders owning stock of a specified 10 percent 1 owned foreign corporation through a partnership.

§ 246 Rules applying to deductions for dividends received

(a) Deduction not allowed for dividends from certain corporations The deductions allowed by sections 243 1 245, and 245A shall not apply to any dividend from a corporation which, for the taxable year of the corporation in which the distribution is made, or for the next preceding taxable year of the corporation, is a corporation exempt from tax under section 501 (relating to certain charitable, etc., organizations) or section 521 (relating to farmers’ cooperative associations). In the case of any dividend paid by any FHLB out of earnings and profits of the FHLB for the taxable year in which such dividend was paid, paragraph (1) shall not apply to that portion of such dividend which bears the same ratio to the total dividend as— the dividends received by the FHLB from the FHLMC during such taxable year, bears to the total earnings and profits of the FHLB for such taxable year. In the case of any dividend which is paid out of any accumulated earnings and profits of any FHLB, paragraph (1) shall not apply to that portion of the dividend which bears the same ratio to the total dividend as— the amount of dividends received by such FHLB from the FHLMC which are out of earnings and profits of the FHLMC— for taxable years ending after December 31, 1984 , and which were not previously treated as distributed under subparagraph (A) or this subparagraph, bears to the total accumulated earnings and profits of the FHLB as of the time such dividend is paid. For purposes of clause (ii), the accumulated earnings and profits of the FHLB as of January 1, 1985 , shall be treated as equal to its retained earnings as of such date. To the extent that paragraph (1) does not apply to any dividend by reason of subparagraph (A) or (B) of this paragraph, the requirement contained in section 243(a) that the corporation paying the dividend be subject to taxation under this chapter shall not apply. For purposes of this paragraph— The term “FHLB” means any Federal Home Loan Bank. The term “FHLMC” means the Federal Home Loan Mortgage Corporation. The taxable year of an FHLB shall, except as provided in regulations prescribed by the Secretary, be treated as the calendar year. The earnings and profits of any FHLB for any taxable year shall be treated as equal to the sum of— any dividends received by the FHLB from the FHLMC during such taxable year, and the total earnings and profits (determined without regard to dividends described in subclause (I)) of the FHLB as reported in its annual financial statement prepared in accordance with section 20 of the Federal Home Loan Bank Act ( 12 U.S.C. 1440 ).

(b) Limitation on aggregate amount of deductions Except as provided in paragraph (2), the aggregate amount of the deductions allowed by section 243(a)(1), subsection 2 (a) and 2 (b) of section 245, and section 250 shall not exceed the percentage determined under paragraph (3) of the taxable income computed without regard to the deductions allowed by sections 172, 199A, 243(a)(1), subsection 2 (a) and 2 (b) of section 245, and 250, without regard to any adjustment under section 1059, and without regard to any capital loss carryback to the taxable year under section 1212(a)(1). Paragraph (1) shall not apply for any taxable year for which there is a net operating loss (as determined under section 172). The provisions of paragraph (1) shall be applied— first separately with respect to dividends from 20-percent owned corporations (as defined in section 243(c)(2)) and the percentage determined under this paragraph shall be 65 percent, and then separately with respect to dividends not from 20-percent owned corporations and the percentage determined under this paragraph shall be 50 percent and the taxable income shall be reduced by the aggregate amount of dividends from 20-percent owned corporations (as so defined).

(c) Exclusion of certain dividends No deduction shall be allowed under section 243 1 245, or 245A, in respect of any dividend on any share of stock— which is held by the taxpayer for 45 days or less during the 91-day period beginning on the date which is 45 days before the date on which such share becomes ex-dividend with respect to such dividend, or to the extent that the taxpayer is under an obligation (whether pursuant to a short sale or otherwise) to make related payments with respect to positions in substantially similar or related property. In the case of stock having preference in dividends, if the taxpayer receives dividends with respect to such stock which are attributable to a period or periods aggregating in excess of 366 days, paragraph (1)(A) shall be applied— by substituting “90 days” for “45 days” each place it appears, and by substituting “181-day period” for “91-day period”. For purposes of this subsection, in determining the period for which the taxpayer has held any share of stock— the day of disposition, but not the day of acquisition, shall be taken into account, and paragraph (3) of section 1223 shall not apply. The holding periods determined for purposes of this subsection shall be appropriately reduced (in the manner provided in regulations prescribed by the Secretary) for any period (during such periods) in which— the taxpayer has an option to sell, is under a contractual obligation to sell, or has made (and not closed) a short sale of, substantially identical stock or securities, the taxpayer is the grantor of an option to buy substantially identical stock or securities, or under regulations prescribed by the Secretary, a taxpayer has diminished his risk of loss by holding 1 or more other positions with respect to substantially similar or related property. The preceding sentence shall not apply in the case of any qualified covered call (as defined in section 1092(c)(4) but without regard to the requirement that gain or loss with respect to the option not be ordinary income or loss), other than a qualified covered call option to which section 1092(f) applies. For purposes of section 245A— paragraph (1)(A) shall be applied— by substituting “365 days” for “45 days” each place it appears, and by substituting “731-day period” for “91-day period”, and paragraph (2) shall not apply. For purposes of applying paragraph (1) with respect to section 245A, the taxpayer shall be treated as holding the stock referred to in paragraph (1) for any period only if— the specified 10-percent owned foreign corporation referred to in section 245A(a) is a specified 10-percent owned foreign corporation at all times during such period, and the taxpayer is a United States shareholder with respect to such specified 10-percent owned foreign corporation at all times during such period.

(d) Dividends from a DISC or former DISC No deduction shall be allowed under section 243 in respect of a dividend from a corporation which is a DISC or former DISC (as defined in section 992(a)) to the extent such dividend is paid out of the corporation’s accumulated DISC income or previously taxed income, or is a deemed distribution pursuant to section 995(b)(1).

§ 246A Dividends received deduction reduced where portfolio stock is debt financed

(a) General rule In the case of any dividend on debt-financed portfolio stock, there shall be substituted for the percentage which (but for this subsection) would be used in determining the amount of the deduction allowable under section 243 or 245(a) a percentage equal to the product of— 50 percent (65 percent in the case of any dividend from a 20-percent owned corporation as defined in section 243(c)(2)), and 100 percent minus the average indebtedness percentage.

(b) Section not to apply to dividends for which 100 percent dividends received deduction allowable Subsection (a) shall not apply to— qualifying dividends (as defined in section 243(b)), and dividends received by a small business investment company operating under the Small Business Investment Act of 1958.

(c) Debt financed portfolio stock For purposes of this section— The term “debt financed portfolio stock” means any portfolio stock if at some time during the base period there is portfolio indebtedness with respect to such stock. The term “portfolio stock” means any stock of a corporation unless— as of the beginning of the ex-dividend date, the taxpayer owns stock of such corporation— possessing at least 50 percent of the total voting power of the stock of such corporation, and having a value equal to at least 50 percent of the total value of the stock of such corporation, or as of the beginning of the ex-dividend date— the taxpayer owns stock of such corporation which would meet the requirements of subparagraph (A) if “20 percent” were substituted for “50 percent” each place it appears in such subparagraph, and stock meeting the requirements of subparagraph (A) is owned by 5 or fewer corporate shareholders. If, as of the beginning of the ex-dividend date, the taxpayer owns stock of any bank or bank holding company having a value equal to at least 80 percent of the total value of the stock of such bank or bank holding company, for purposes of paragraph (2)(A)(i), the taxpayer shall be treated as owning any stock of such bank or bank holding company which the taxpayer has an option to acquire. For purposes of subparagraph (A)— The term “bank” has the meaning given such term by section 581. The term “bank holding company” means a bank holding company (within the meaning of section 2(a) of the Bank Holding Company Act of 1956). For purposes of determining whether the requirements of subparagraph (A) or (B) of paragraph (2) or of subparagraph (A) of paragraph (3) are met, stock described in section 1504(a)(4) shall not be taken into account.

(d) Average indebtedness percentage For purposes of this section— Except as provided in paragraph (2), the term “average indebtedness percentage” means the percentage obtained by dividing— the average amount (determined under regulations prescribed by the Secretary) of the portfolio indebtedness with respect to the stock during the base period, by the average amount (determined under regulations prescribed by the Secretary) of the adjusted basis of the stock during the base period. In the case of any stock which was not held by the taxpayer throughout the base period, paragraph (1) shall be applied as if the base period consisted only of that portion of the base period during which the stock was held by the taxpayer. The term “portfolio indebtedness” means any indebtedness directly attributable to investment in the portfolio stock. For purposes of subparagraph (A), any amount received from a short sale shall be treated as indebtedness for the period beginning on the day on which such amount is received and ending on the day the short sale is closed. The term “base period” means, with respect to any dividend, the shorter of— the period beginning on the ex-dividend date for the most recent previous dividend on the stock and ending on the day before the ex-dividend date for the dividend involved, or the 1-year period ending on the day before the ex-dividend date for the dividend involved.

(e) Reduction in dividends received deduction not to exceed allocable interest Under regulations prescribed by the Secretary, any reduction under this section in the amount allowable as a deduction under section 243 or 245 with respect to any dividend shall not exceed the amount of any interest deduction (including any deductible short sale expense) allocable to such dividend.

(f) Regulations The regulations prescribed for purposes of this section under section 7701(f) shall include regulations providing for the disallowance of interest deductions or other appropriate treatment (in lieu of reducing the dividend received deduction) where the obligor of the indebtedness is a person other than the person receiving the dividend.

§ 247 Contributions to Alaska Native Settlement Trusts

(a) In general In the case of a Native Corporation, there shall be allowed a deduction for any contributions made by such Native Corporation to a Settlement Trust (regardless of whether an election under section 646 is in effect for such Settlement Trust) for which the Native Corporation has made an annual election under subsection (e).

(b) Amount of deduction The amount of the deduction under subsection (a) shall be equal to— in the case of a cash contribution (regardless of the method of payment, including currency, coins, money order, or check), the amount of such contribution, or in the case of a contribution not described in paragraph (1), the lesser of— the Native Corporation’s adjusted basis in the property contributed, or the fair market value of the property contributed.

(c) Limitation and carryover Subject to paragraph (2), the deduction allowed under subsection (a) for any taxable year shall not exceed the taxable income (as determined without regard to such deduction) of the Native Corporation for the taxable year in which the contribution was made. If the aggregate amount of contributions described in subsection (a) for any taxable year exceeds the limitation under paragraph (1), such excess shall be treated as a contribution described in subsection (a) in each of the 15 succeeding years in order of time.

(d) Definitions For purposes of this section, the terms “Native Corporation” and “Settlement Trust” have the same meaning given such terms under section 646(h).

(e) Manner of making election For each taxable year, a Native Corporation may elect to have this section apply for such taxable year on the income tax return or an amendment or supplement to the return of the Native Corporation, with such election to have effect solely for such taxable year. Any election made by a Native Corporation pursuant to this subsection may be revoked pursuant to a timely filed amendment or supplement to the income tax return of such Native Corporation.

(f) Additional rules Notwithstanding section 646(d)(2), in the case of a Native Corporation which claims a deduction under this section for any taxable year, the earnings and profits of such Native Corporation for such taxable year shall be reduced by the amount of such deduction. No gain or loss shall be recognized by the Native Corporation with respect to a contribution of property for which a deduction is allowed under this section. Subject to subsection (g), a Settlement Trust shall include in income the amount of any deduction allowed under this section in the taxable year in which the Settlement Trust actually receives such contribution. The holding period under section 1223 of the Settlement Trust shall include the period the property was held by the Native Corporation. The basis that a Settlement Trust has for which a deduction is allowed under this section shall be equal to the lesser of— the adjusted basis of the Native Corporation in such property immediately before such contribution, or the fair market value of the property immediately before such contribution. No deduction shall be allowed under this section with respect to any contributions made to a Settlement Trust which are in violation of subsection (a)(2) or (c)(2) of section 39 of the Alaska Native Claims Settlement Act ( 43 U.S.C. 1629e ).

(g) Election by Settlement Trust to defer income recognition In the case of a contribution which consists of property other than cash, a Settlement Trust may elect to defer recognition of any income related to such property until the sale or exchange of such property, in whole or in part, by the Settlement Trust. In the case of property described in paragraph (1), any income or gain realized on the sale or exchange of such property shall be treated as— for such amount of the income or gain as is equal to or less than the amount of income which would be included in income at the time of contribution under subsection (f)(3) but for the taxpayer’s election under this subsection, ordinary income, and for any amounts of the income or gain which are in excess of the amount of income which would be included in income at the time of contribution under subsection (f)(3) but for the taxpayer’s election under this subsection, having the same character as if this subsection did not apply. For each taxable year, a Settlement Trust may elect to apply this subsection for any property described in paragraph (1) which was contributed during such year. Any property to which the election applies shall be identified and described with reasonable particularity on the income tax return or an amendment or supplement to the return of the Settlement Trust, with such election to have effect solely for such taxable year. Any election made by a Settlement Trust pursuant to this subsection may be revoked pursuant to a timely filed amendment or supplement to the income tax return of such Settlement Trust. In the case of any property for which an election is in effect under this subsection and which is disposed of within the first taxable year subsequent to the taxable year in which such property was contributed to the Settlement Trust— this section shall be applied as if the election under this subsection had not been made, any income or gain which would have been included in the year of contribution under subsection (f)(3) but for the taxpayer’s election under this subsection shall be included in income for the taxable year of such contribution, and the Settlement Trust shall pay any increase in tax resulting from such inclusion, including any applicable interest, and increased by 10 percent of the amount of such increase with interest. Notwithstanding section 6501(a), any amount described in subclause (III) of clause (i) may be assessed, or a proceeding in court with respect to such amount may be initiated without assessment, within 4 years after the date on which the return making the election under this subsection for such property was filed.

§ 248 Organizational expenditures

(a) Election to deduct If a corporation elects the application of this subsection (in accordance with regulations prescribed by the Secretary) with respect to any organizational expenditures— the corporation shall be allowed a deduction for the taxable year in which the corporation begins business in an amount equal to the lesser of— the amount of organizational expenditures with respect to the taxpayer, or $5, 000, re d u ce d (b u t n o t b e l o w zero) b y t h e am o u n t b y w hi c h s u c h or g ani z a t i o na l e x p e n d i t u rese x cee d$ 50,000, and the remainder of such organizational expenditures shall be allowed as a deduction ratably over the 180-month period beginning with the month in which the corporation begins business.

(b) Organizational expenditures defined The term “organizational expenditures” means any expenditure which— is incident to the creation of the corporation; is chargeable to capital account; and is of a character which, if expended incident to the creation of a corporation having a limited life, would be amortizable over such life.

(c) Time for and scope of election The election provided by subsection (a) may be made for any taxable year but only if made not later than the time prescribed by law for filing the return for such taxable year (including extensions thereof). The period so elected shall be adhered to in computing the taxable income of the corporation for the taxable year for which the election is made and all subsequent taxable years.

§ 249 Limitation on deduction of bond premium on repurchase

(a) General rule No deduction shall be allowed to the issuing corporation for any premium paid or incurred upon the repurchase of a bond, debenture, note, or certificate or other evidence of indebtedness which is convertible into the stock of the issuing corporation, or a corporation in the same parent-subsidiary controlled group (within the meaning of section 1563(a)(1)) as the issuing corporation, to the extent the repurchase price exceeds an amount equal to the adjusted issue price plus a normal call premium on bonds or other evidences of indebtedness which are not convertible. The preceding sentence shall not apply to the extent that the corporation can demonstrate to the satisfaction of the Secretary that such excess is attributable to the cost of borrowing and is not attributable to the conversion feature.

(b) Adjusted issue price For purposes of subsection (a), the adjusted issue price is the issue price (as defined in sections 1273(b) and 1274) increased by any amount of discount deducted before repurchase, or decreased by any amount of premium included in gross income before repurchase by the issuing corporation.

§ 250 Foreign-derived deduction eligible income and net CFC tested income

(a) Allowance of deduction In the case of a domestic corporation for any taxable year, there shall be allowed as a deduction an amount equal to the sum of— 33.34 percent of the foreign-derived deduction eligible income of such domestic corporation for such taxable year, plus 40 percent of— the net CFC tested income amount (if any) which is included in the gross income of such domestic corporation under section 951A for such taxable year, and the amount treated as a dividend received by such corporation under section 78 which is attributable to the amount described in clause (i). If, for any taxable year— the sum of the foreign-derived deduction eligible income and the net CFC tested income amount otherwise taken into account by the domestic corporation under paragraph (1), exceeds the taxable income of the domestic corporation (determined without regard to this section), then the amount of the foreign-derived deduction eligible income and the net CFC tested income amount so taken into account shall be reduced as provided in subparagraph (B). For purposes of subparagraph (A)— foreign-derived deduction eligible income shall be reduced by an amount which bears the same ratio to the excess described in subparagraph (A) as such foreign-derived deduction eligible income bears to the sum described in subparagraph (A)(i), and the net CFC tested income amount shall be reduced by the remainder of such excess.

(b) Foreign-derived deduction eligible income For purposes of this section— The term “foreign-derived deduction eligible income” means, with respect to any taxpayer for any taxable year, any deduction eligible income of such taxpayer which is derived in connection with— property— which is sold by the taxpayer to any person who is not a United States person, and which the taxpayer establishes to the satisfaction of the Secretary is for a foreign use, or services provided by the taxpayer which the taxpayer establishes to the satisfaction of the Secretary are provided to any person, or with respect to property, not located within the United States. For purposes of this subsection— The term “foreign use” means any use, consumption, or disposition which is not within the United States. If a taxpayer sells property to another person (other than a related party) for further manufacture or other modification within the United States, such property shall not be treated as sold for a foreign use even if such other person subsequently uses such property for a foreign use. If a taxpayer provides services to another person (other than a related party) located within the United States, such services shall not be treated as described in paragraph (1)(B) even if such other person uses such services in providing services which are so described. If property is sold to a related party who is not a United States person, such sale shall not be treated as for a foreign use unless— such property is ultimately sold by a related party, or used by a related party in connection with property which is sold or the provision of services, to another person who is an unrelated party who is not a United States person, and the taxpayer establishes to the satisfaction of the Secretary that such property is for a foreign use. For purposes of this clause, a sale of property shall be treated as a sale of each of the components thereof. If a service is provided to a related party who is not located in the United States, such service shall not be treated described 1 in subparagraph (A)(ii) 2 unless the taxpayer established to the satisfaction of the Secretary that such service is not substantially similar to services provided by such related party to persons located within the United States. For purposes of this paragraph, the term “related party” means any member of an affiliated group as defined in section 1504(a), determined— by substituting “more than 50 percent” for “at least 80 percent” each place it appears, and without regard to paragraphs (2) and (3) of section 1504(b). Any person (other than a corporation) shall be treated as a member of such group if such person is controlled by members of such group (including any entity treated as a member of such group by reason of this sentence) or controls any such member. For purposes of the preceding sentence, control shall be determined under the rules of section 954(d)(3). For purposes of this subsection (other than paragraph (3)(A)(i)(VII)), the terms “sold”, “sells”, and “sale” shall include any lease, license, exchange, or other disposition. The term “deduction eligible income” means, with respect to any domestic corporation, the excess (if any) of— gross income of such corporation determined without regard to— any amount included in the gross income of such corporation under section 951(a)(1), the net CFC tested income included in the gross income of such corporation under section 951A, any financial services income (as defined in section 904(d)(2)(D)) of such corporation, any dividend received from a corporation which is a controlled foreign corporation of such domestic corporation, any domestic oil and gas extraction income of such corporation, any foreign branch income (as defined in section 904(d)(2)(J)), and except as otherwise provided by the Secretary, any income and gain from the sale or other disposition (including pursuant to the deemed sale or other deemed disposition or a transaction subject to section 367(d)) of— intangible property (as defined in section 367(d)(4)), and any other property of a type that is subject to depreciation, amortization, or depletion by the seller, over expenses and deductions (including taxes), other than interest expense and research or experimental expenditures, properly allocable to such gross income. For purposes of subparagraph (A), the term “domestic oil and gas extraction income” means income described in section 907(c)(1), determined by substituting “within the United States” for “without the United States”.

(c) Regulations The Secretary shall prescribe such regulations or other guidance as may be necessary or appropriate to carry out the provisions of this section.

§ 261 General rule for disallowance of deductions

In computing taxable income no deduction shall in any case be allowed in respect of the items specified in this part. ( Aug. 16, 1954, ch. 736 , 68A Stat. 76 .)

§ 262 Personal, living, and family expenses

(a) General rule Except as otherwise expressly provided in this chapter, no deduction shall be allowed for personal, living, or family expenses.

(b) Treatment of certain phone expenses For purposes of subsection (a), in the case of an individual, any charge (including taxes thereon) for basic local telephone service with respect to the 1st telephone line provided to any residence of the taxpayer shall be treated as a personal expense.

§ 263 Capital expenditures

(a) General rule No deduction shall be allowed for— Any amount paid out for new buildings or for permanent improvements or betterments made to increase the value of any property or estate. This paragraph shall not apply to— expenditures for the development of mines or deposits deductible under section 616, research and experimental expenditures deductible under section 174 or 174A, soil and water conservation expenditures deductible under section 175, expenditures by farmers for fertilizer, etc., deductible under section 180, expenditures for removal of architectural and transportation barriers to the handicapped and elderly which the taxpayer elects to deduct under section 190, expenditures for tertiary injectants with respect to which a deduction is allowed under section 193, expenditures for which a deduction is allowed under section 179, expenditures for which a deduction is allowed under section 179B, expenditures for which a deduction is allowed under section 179C, expenditures for which a deduction is allowed under section 179D, or expenditures for which a deduction is allowed under section 179E. Any amount expended in restoring property or in making good the exhaustion thereof for which an allowance is or has been made.

([(b) Repealed. Pub. L. 101–508, title XI, § 11801(a)(16), Nov. 5, 1990, 104 Stat. 1388–520]

(c) Intangible drilling and development costs in the case of oil and gas wells and geothermal wells Notwithstanding subsection (a), and except as provided in subsection (i), regulations shall be prescribed by the Secretary under this subtitle corresponding to the regulations which granted the option to deduct as expenses intangible drilling and development costs in the case of oil and gas wells and which were recognized and approved by the Congress in House Concurrent Resolution 50, Seventy-ninth Congress. Such regulations shall also grant the option to deduct as expenses intangible drilling and development costs in the case of wells drilled for any geothermal deposit (as defined in section 613(e)(2)) to the same extent and in the same manner as such expenses are deductible in the case of oil and gas wells. This subsection shall not apply with respect to any costs to which any deduction is allowed under section 59(e) or 291.

(d) Expenditures in connection with certain railroad rolling stock In the case of expenditures in connection with the rehabilitation of a unit of railroad rolling stock (except a locomotive) used by a domestic common carrier by railroad which would, but for this subsection, be properly chargeable to capital account, such expenditures, if during any 12-month period they do not exceed an amount equal to 20 percent of the basis of such unit in the hands of the taxpayer, shall, at the election of the taxpayer, be treated (notwithstanding subsection (a)) as deductible repairs under section 162 or 212. An election under this subsection shall be made for any taxable year at such time and in such manner as the Secretary prescribes by regulations. An election may not be made under this subsection for any taxable year to which an election under subsection (e) applies to railroad rolling stock (other than locomotives).

([(e) Repealed. Pub. L. 97–34, title II, § 201(c), Aug. 13, 1981, 95 Stat. 219]

(f) Railroad ties In the case of a domestic common carrier by rail (including a railroad switching or terminal company) which uses the retirement-replacement method of accounting for depreciation of its railroad track, expenditures for acquiring and installing replacement ties of any material (and fastenings related to such ties) shall be accorded the same tax accounting treatment as expenditures for replacement ties of wood (and fastenings related to such ties).

(g) Certain interest and carrying costs in the case of straddles No deduction shall be allowed for interest and carrying charges properly allocable to personal property which is part of a straddle (as defined in section 1092(c)). Any amount not allowed as a deduction by reason of the preceding sentence shall be chargeable to the capital account with respect to the personal property to which such amount relates. For purposes of paragraph (1), the term “interest and carrying charges” means the excess of— the sum of— interest on indebtedness incurred or continued to purchase or carry the personal property, and all other amounts (including charges to insure, store, or transport the personal property) paid or incurred to carry the personal property, over the sum of— the amount of interest (including original issue discount) includible in gross income for the taxable year with respect to the property described in subparagraph (A), any amount treated as ordinary income under section 1271(a)(3)(A), 1276, or 1281(a) with respect to such property for the taxable year, the excess of any dividends includible in gross income with respect to such property for the taxable year over the amount of any deduction allowable with respect to such dividends under section 243 or 245, and any amount which is a payment with respect to a security loan (within the meaning of section 512(a)(5)) includible in gross income with respect to such property for the taxable year. For purposes of subparagraph (A), the term “interest” includes any amount paid or incurred in connection with personal property used in a short sale. This subsection shall not apply in the case of any hedging transaction (as defined in section 1256(e)). In the case of any short sale, this subsection shall be applied after subsection (h). In the case of any obligation to which section 1277 or 1282 applies, this subsection shall be applied after section 1277 or 1282.

(h) Payments in lieu of dividends in connection with short sales If— a taxpayer makes any payment with respect to any stock used by such taxpayer in a short sale and such payment is in lieu of a dividend payment on such stock, and the closing of such short sale occurs on or before the 45th day after the date of such short sale, then no deduction shall be allowed for such payment. The basis of the stock used to close the short sale shall be increased by the amount not allowed as a deduction by reason of the preceding sentence. If the payment described in paragraph (1)(A) is in respect of an extraordinary dividend, paragraph (1)(B) shall be applied by substituting “the day 1 year after the date of such short sale” for “the 45th day after the date of such short sale”. For purposes of this subsection, the term “extraordinary dividend” has the meaning given to such term by section 1059(c); except that such section shall be applied by treating the amount realized by the taxpayer in the short sale as his adjusted basis in the stock. The running of any period of time applicable under paragraph (1)(B) (as modified by paragraph (2)) shall be suspended during any period in which— the taxpayer holds, has an option to buy, or is under a contractual obligation to buy, substantially identical stock or securities, or under regulations prescribed by the Secretary, a taxpayer has diminished his risk of loss by holding 1 or more other positions with respect to substantially similar or related property. Paragraph (1) shall apply only to the extent that the payments or distributions with respect to any short sale exceed the amount which— is treated as ordinary income by the taxpayer, and is received by the taxpayer as compensation for the use of any collateral with respect to any stock used in such short sale. Subparagraph (A) shall not apply if one or more payments or distributions is in respect of an extraordinary dividend. In the case of any short sale, this subsection shall be applied before subsection (g).

(i) Special rules for intangible drilling and development costs incurred outside the United States In the case of intangible drilling and development costs paid or incurred with respect to an oil, gas, or geothermal well located outside the United States— subsection (c) shall not apply, and such costs shall— at the election of the taxpayer, be included in adjusted basis for purposes of computing the amount of any deduction allowable under section 611 (determined without regard to section 613), or if subparagraph (A) does not apply, be allowed as a deduction ratably over the 10-taxable year period beginning with the taxable year in which such costs were paid or incurred. This subsection shall not apply to costs paid or incurred with respect to a nonproductive well.

§ 263A Capitalization and inclusion in inventory costs of certain expenses

(a) Nondeductibility of certain direct and indirect costs In the case of any property to which this section applies, any costs described in paragraph (2)— in the case of property which is inventory in the hands of the taxpayer, shall be included in inventory costs, and in the case of any other property, shall be capitalized. The costs described in this paragraph with respect to any property are— the direct costs of such property, and such property’s proper share of those indirect costs (including taxes) part or all of which are allocable to such property. Any cost which (but for this subsection) could not be taken into account in computing taxable income for any taxable year shall not be treated as a cost described in this paragraph.

(b) Property to which section applies Except as otherwise provided in this section, this section shall apply to— Real or tangible personal property produced by the taxpayer. Real or personal property described in section 1221(a)(1) which is acquired by the taxpayer for resale. For purposes of paragraph (1), the term “tangible personal property” shall include a film, sound recording, video tape, book, or similar property.

(c) General exceptions This section shall not apply to any property produced by the taxpayer for use by the taxpayer other than in a trade or business or an activity conducted for profit. This section shall not apply to any amount allowable as a deduction under section 174 or 174A. This section shall not apply to any cost allowable as a deduction under section 167(h), 179B, 263(c), 263(i), 291(b)(2), 616, or 617. This section shall not apply to any property produced by the taxpayer pursuant to a long-term contract. This section shall not apply to— trees raised, harvested, or grown by the taxpayer other than trees described in clause (ii) of subsection (e)(4)(B) (after application of the last sentence thereof), and any real property underlying such trees. Paragraphs (2) and (3) shall apply to any amount allowable as a deduction under section 59(e) for qualified expenditures described in subparagraphs (B), (C), (D), and (E) of paragraph (2) thereof. This section shall not apply to any amount allowed as a deduction by reason of section 168(k)(5) (relating to special rules for certain plants bearing fruits and nuts).

(d) Exception for farming businesses This section shall not apply to any of the following which is produced by the taxpayer in a farming business: Any animal. Any plant which has a preproductive period of 2 years or less. Subparagraph (A) shall not apply to any corporation, partnership, or tax shelter required to use an accrual method of accounting under section 447 or 448(a)(3). If plants bearing an edible crop for human consumption were lost or damaged (while in the hands of the taxpayer) by reason of freezing temperatures, disease, drought, pests, or casualty, this section shall not apply to any costs of the taxpayer of replanting plants bearing the same type of crop (whether on the same parcel of land on which such lost or damaged plants were located or any other parcel of land of the same acreage in the United States). Subparagraph (A) shall apply to amounts paid or incurred by a person (other than the taxpayer described in subparagraph (A)) if— the taxpayer described in subparagraph (A) has an equity interest of more than 50 percent in the plants described in subparagraph (A) at all times during the taxable year in which such amounts were paid or incurred, and such other person holds any part of the remaining equity interest and materially participates in the planting, maintenance, cultivation, or development of the plants described in subparagraph (A) during the taxable year in which such amounts were paid or incurred. The determination of whether an individual materially participates in any activity shall be made in a manner similar to the manner in which such determination is made under section 2032A(e)(6). In the case of the replanting of citrus plants, subparagraph (A) shall apply to amounts paid or incurred by a person (other than the taxpayer described in subparagraph (A)) if— the taxpayer described in subparagraph (A) has an equity interest of not less than 50 percent in the replanted citrus plants at all times during the taxable year in which such amounts were paid or incurred and such other person holds any part of the remaining equity interest, or such other person acquired the entirety of such taxpayer’s equity interest in the land on which the lost or damaged citrus plants were located at the time of such loss or damage, and the replanting is on such land. Clause (i) shall not apply to any cost paid or incurred after the date which is 10 years after the date of the enactment of the Tax Cuts and Jobs Act. If a taxpayer makes an election under this paragraph, this section shall not apply to any plant produced in any farming business carried on by such taxpayer. No election may be made under this paragraph by a corporation, partnership, or tax shelter, if such corporation, partnership, or tax shelter is required to use an accrual method of accounting under section 447 or 448(a)(3). An election under this paragraph shall not apply with respect to any item which is attributable to the planting, cultivation, maintenance, or development of any citrus or almond grove (or part thereof) and which is incurred before the close of the 4th taxable year beginning with the taxable year in which the trees were planted. For purposes of the preceding sentence, the portion of a citrus or almond grove planted in 1 taxable year shall be treated separately from the portion of such grove planted in another taxable year. Unless the Secretary otherwise consents, an election under this paragraph may be made only for the taxpayer’s 1st taxable year which begins after December 31, 1986 , and during which the taxpayer engages in a farming business. Any such election, once made, may be revoked only with the consent of the Secretary.

(e) Definitions and special rules for purposes of subsection (d) In the case of any plant with respect to which amounts would have been capitalized under subsection (a) but for an election under subsection (d)(3)— such plant (if not otherwise section 1245 property) shall be treated as section 1245 property, and for purposes of section 1245, the recapture amount shall be treated as a deduction allowed for depreciation with respect to such property. For purposes of subparagraph (A), the term “recapture amount” means any amount allowable as a deduction to the taxpayer which, but for an election under subsection (d)(3), would have been capitalized with respect to the plant. If the taxpayer (or any related person) makes an election under subsection (d)(3), the provisions of section 168(g)(2) (relating to alternative depreciation) shall apply to all property of the taxpayer used predominantly in the farming business and placed in service in any taxable year during which any such election is in effect. For purposes of subparagraph (A), the term “related person” means— the taxpayer and members of the taxpayer’s family, any corporation (including an S corporation) if 50 percent or more (in value) of the stock of such corporation is owned (directly or through the application of section 318) by the taxpayer or members of the taxpayer’s family, a corporation and any other corporation which is a member of the same controlled group described in section 1563(a)(1), and any partnership if 50 percent or more (in value) of the interests in such partnership is owned directly or indirectly by the taxpayer or members of the taxpayer’s family. For purposes of this paragraph, the term “family” means the taxpayer, the spouse of the taxpayer, and any of their children who have not attained age 18 before the close of the taxable year. For purposes of this section, the term “preproductive period” means— in the case of a plant which will have more than 1 crop or yield, the period before the 1st marketable crop or yield from such plant, or in the case of any other plant, the period before such plant is reasonably expected to be disposed of. For purposes of this subparagraph, use by the taxpayer in a farming business of any supply produced in such business shall be treated as a disposition. In the case of a plant grown in commercial quantities in the United States, the preproductive period for such plant if grown in the United States shall be based on the nationwide weighted average preproductive period for such plant. For purposes of this section— The term “farming business” means the trade or business of farming. The term “farming business” shall include the trade or business of— operating a nursery or sod farm, or the raising or harvesting of trees bearing fruit, nuts, or other crops, or ornamental trees. For purposes of clause (ii), an evergreen tree which is more than 6 years old at the time severed from the roots shall not be treated as an ornamental tree. The Secretary shall by regulations permit the taxpayer to use reasonable inventory valuation methods to compute the amount required to be capitalized under subsection (a) in the case of any plant.

(f) Special rules for allocation of interest to property produced by the taxpayer Subsection (a) shall only apply to interest costs which are— paid or incurred during the production period, and allocable to property which is described in subsection (b)(1) and which has— a long useful life, an estimated production period exceeding 2 years, or an estimated production period exceeding 1 year and a cost exceeding $1,000,000. In determining the amount of interest required to be capitalized under subsection (a) with respect to any property— interest on any indebtedness directly attributable to production expenditures with respect to such property shall be assigned to such property, and interest on any other indebtedness shall be assigned to such property to the extent that the taxpayer’s interest costs could have been reduced if production expenditures (not attributable to indebtedness described in clause (i)) had not been incurred. Subparagraph (A) shall not apply to any qualified residence interest (within the meaning of section 163(h)). Except as provided in regulations, in the case of any flow-through entity, this paragraph shall be applied first at the entity level and then at the beneficiary level. This subsection shall apply to any interest on indebtedness allocable (as determined under paragraph (2)) to property used to produce property to which this subsection applies to the extent such interest is allocable (as so determined) to the produced property. For purposes of this subsection, the production period shall not include the aging period for— beer (as defined in section 5052(a)), wine (as described in section 5041(a)), or distilled spirits (as defined in section 5002(a)(8)), except such spirits that are unfit for use for beverage purposes. For purposes of this subsection— Property has a long useful life if such property is— real property, or property with a class life of 20 years or more (as determined under section 168). The term “production period” means, when used with respect to any property, the period— beginning on the date on which production of the property begins, and except as provided in paragraph (4), ending on the date on which the property is ready to be placed in service or is ready to be held for sale. The term “production expenditures” means the costs (whether or not incurred during the production period) required to be capitalized under subsection (a) with respect to the property.

(g) Production For purposes of this section— The term “produce” includes construct, build, install, manufacture, develop, or improve. The taxpayer shall be treated as producing any property produced for the taxpayer under a contract with the taxpayer; except that only costs paid or incurred by the taxpayer (whether under such contract or otherwise) shall be taken into account in applying subsection (a) to the taxpayer.

(h) Exemption for free lance authors, photographers, and artists Nothing in this section shall require the capitalization of any qualified creative expense. For purposes of this subsection, the term “qualified creative expense” means any expense— which is paid or incurred by an individual in the trade or business of such individual (other than as an employee) of being a writer, photographer, or artist, and which, without regard to this section, would be allowable as a deduction for the taxable year. Such term does not include any expense related to printing, photographic plates, motion picture films, video tapes, or similar items. For purposes of this subsection— The term “writer” means any individual if the personal efforts of such individual create (or may reasonably be expected to create) a literary manuscript, musical composition (including any accompanying words), or dance score. The term “photographer” means any individual if the personal efforts of such individual create (or may reasonably be expected to create) a photograph or photographic negative or transparency. The term “artist” means any individual if the personal efforts of such individual create (or may reasonably be expected to create) a picture, painting, sculpture, statue, etching, drawing, cartoon, graphic design, or original print edition. In determining whether any expense is paid or incurred in the trade or business of being an artist, the following criteria shall be taken into account: The originality and uniqueness of the item created (or to be created). The predominance of aesthetic value over utilitarian value of the item created (or to be created). If— substantially all of the stock of a corporation is owned by a qualified employee-owner and members of his family (as defined in section 267(c)(4)), and the principal activity of such corporation is performance of personal services directly related to the activities of the qualified employee-owner and such services are substantially performed by the qualified employee-owner, this subsection shall apply to any expense of such corporation which directly relates to the activities of such employee-owner in the same manner as if such expense were incurred by such employee-owner. For purposes of this subparagraph, the term “qualified employee-owner” means any individual who is an employee-owner of the corporation (as defined in section 269A(b)(2)) and who is a writer, photographer, or artist.

(i) Exemption for certain small businesses In the case of any taxpayer (other than a tax shelter prohibited from using the cash receipts and disbursements method of accounting under section 448(a)(3)) which meets the gross receipts test of section 448(c) for any taxable year, this section shall not apply with respect to such taxpayer for such taxable year. In the case of any taxpayer which is not a corporation or a partnership, the gross receipts test of section 448(c) shall be applied in the same manner as if each trade or business of such taxpayer were a corporation or partnership. Any change in method of accounting made pursuant to this subsection shall be treated for purposes of section 481 as initiated by the taxpayer and made with the consent of the Secretary.

(j) Regulations The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section, including— regulations to prevent the use of related parties, pass-thru entities, or intermediaries to avoid the application of this section, and regulations providing for simplified procedures for the application of this section in the case of property described in subsection (b)(2).

§ 264 Certain amounts paid in connection with insurance contracts

(a) General rule No deduction shall be allowed for— Premiums on any life insurance policy, or endowment or annuity contract, if the taxpayer is directly or indirectly a beneficiary under the policy or contract. Any amount paid or accrued on indebtedness incurred or continued to purchase or carry a single premium life insurance, endowment, or annuity contract. Except as provided in subsection (d), any amount paid or accrued on indebtedness incurred or continued to purchase or carry a life insurance, endowment, or annuity contract (other than a single premium contract or a contract treated as a single premium contract) pursuant to a plan of purchase which contemplates the systematic direct or indirect borrowing of part or all of the increases in the cash value of such contract (either from the insurer or otherwise). Except as provided in subsection (e), any interest paid or accrued on any indebtedness with respect to 1 or more life insurance policies owned by the taxpayer covering the life of any individual, or any endowment or annuity contracts owned by the taxpayer covering any individual. Paragraph (2) shall apply in respect of annuity contracts only as to contracts purchased after March 1, 1954 . Paragraph (3) shall apply only in respect of contracts purchased after August 6, 1963 . Paragraph (4) shall apply with respect to contracts purchased after June 20, 1986 .

(b) Exceptions to subsection (a)(1) Subsection (a)(1) shall not apply to— any annuity contract described in section 72(s)(5), and any annuity contract to which section 72(u) applies.

(c) Contracts treated as single premium contracts For purposes of subsection (a)(2), a contract shall be treated as a single premium contract— if substantially all the premiums on the contract are paid within a period of 4 years from the date on which the contract is purchased, or if an amount is deposited after March 1, 1954 , with the insurer for payment of a substantial number of future premiums on the contract.

(d) Exceptions Subsection (a)(3) shall not apply to any amount paid or accrued by a person during a taxable year on indebtedness incurred or continued as part of a plan referred to in subsection (a)(3)— if no part of 4 of the annual premiums due during the 7-year period (beginning with the date the first premium on the contract to which such plan relates was paid) is paid under such plan by means of indebtedness, if the total of the amounts paid or accrued by such person during such taxable year for which (without regard to this paragraph) no deduction would be allowable by reason of subsection (a)(3) does not exceed $100, if such amount was paid or accrued on indebtedness incurred because of an unforeseen substantial loss of income or unforeseen substantial increase in his financial obligations, or if such indebtedness was incurred in connection with his trade or business. For purposes of applying paragraph (1), if there is a substantial increase in the premiums on a contract, a new 7-year period described in such paragraph with respect to such contract shall commence on the date the first such increased premium is paid.

(e) Special rules for application of subsection (a)(4) Subsection (a)(4) shall not apply to any interest paid or accrued on any indebtedness with respect to policies or contracts covering an individual who is a key person to the extent that the aggregate amount of such indebtedness with respect to policies and contracts covering such individual does not exceed 50,000 limitation in paragraph (1)— all members of a controlled group shall be treated as one taxpayer, and such limitation shall be allocated among the members of such group in such manner as the Secretary may prescribe. For purposes of this paragraph, all persons treated as a single employer under subsection (a) or (b) of section 52 or subsection (m) or ( o ) of section 414 shall be treated as members of a controlled group.

(f) Pro rata allocation of interest expense to policy cash values No deduction shall be allowed for that portion of the taxpayer’s interest expense which is allocable to unborrowed policy cash values. For purposes of paragraph (1), the portion of the taxpayer’s interest expense which is allocable to unborrowed policy cash values is an amount which bears the same ratio to such interest expense as— the taxpayer’s average unborrowed policy cash values of life insurance policies, and annuity and endowment contracts, issued after June 8, 1997 , bears to the sum of— in the case of assets of the taxpayer which are life insurance policies or annuity or endowment contracts, the average unborrowed policy cash values of such policies and contracts, and in the case of assets of the taxpayer not described in clause (i), the average adjusted bases (within the meaning of section 1016) of such assets. For purposes of this subsection, the term “unborrowed policy cash value” means, with respect to any life insurance policy or annuity or endowment contract, the excess of— the cash surrender value of such policy or contract determined without regard to any surrender charge, over the amount of any loan with respect to such policy or contract. If the amount described in subparagraph (A) with respect to any policy or contract does not reasonably approximate its actual value, the amount taken into account under subparagraph (A) shall be the greater of the amount of the insurance company liability or the insurance company reserve with respect to such policy or contract (as determined for purposes of the annual statement approved by the National Association of Insurance Commissioners) or shall be such other amount as is determined by the Secretary. Paragraph (1) shall not apply to any policy or contract owned by an entity engaged in a trade or business if such policy or contract covers only 1 individual and if such individual is (at the time first covered by the policy or contract)— a 20-percent owner of such entity, or an individual (not described in clause (i)) who is an officer, director, or employee of such trade or business. A policy or contract covering a 20-percent owner of such entity shall not be treated as failing to meet the requirements of the preceding sentence by reason of covering the joint lives of such owner and such owner’s spouse. Paragraph (1) shall not apply to any annuity contract to which section 72(u) applies. Any policy or contract to which paragraph (1) does not apply by reason of this paragraph shall not be taken into account under paragraph (2). For purposes of subparagraph (A), the term “20-percent owner” has the meaning given such term by subsection (e)(4). If coverage for each insured under a master contract is treated as a separate contract for purposes of sections 817(h), 7702, and 7702A, coverage for each such insured shall be treated as a separate contract for purposes of subparagraph (A). For purposes of the preceding sentence, the term “master contract” shall not include any group life insurance contract (as defined in section 848(e)(2)). This subsection shall not apply to any policy or contract held by a natural person. If a trade or business is directly or indirectly the beneficiary under any policy or contract, such policy or contract shall be treated as held by such trade or business and not by a natural person. Clause (ii) shall not apply to any trade or business carried on as a sole proprietorship and to any trade or business performing services as an employee. The amount of the unborrowed cash value of any policy or contract which is taken into account by reason of clause (ii) shall not exceed the benefit to which the trade or business is directly or indirectly entitled under the policy or contract. The Secretary shall require such reporting from policyholders and issuers as is necessary to carry out clause (ii). In the case of a partnership or S corporation, this subsection shall be applied at the partnership and corporate levels. If interest on any indebtedness is disallowed under subsection (a) or section 265— such disallowed interest shall not be taken into account for purposes of applying this subsection, and the amount otherwise taken into account under paragraph (2)(B) shall be reduced (but not below zero) by the amount of such indebtedness. This subsection shall be applied before the application of section 263A (relating to capitalization of certain expenses where taxpayer produces property). The term “interest expense” means the aggregate amount allowable to the taxpayer as a deduction for interest (within the meaning of section 265(b)(4)) for the taxable year (determined without regard to this subsection, section 265(b), and section 291). All members of a controlled group (within the meaning of subsection (e)(5)(B)) shall be treated as 1 taxpayer for purposes of this subsection. This subsection shall not apply to an insurance company subject to tax under subchapter L, and subparagraph (A) shall be applied without regard to any member of an affiliated group which is an insurance company.

§ 265 Expenses and interest relating to tax-exempt income

(a) General rule No deduction shall be allowed for— Any amount otherwise allowable as a deduction which is allocable to one or more classes of income other than interest (whether or not any amount of income of that class or classes is received or accrued) wholly exempt from the taxes imposed by this subtitle, or any amount otherwise allowable under section 212 (relating to expenses for production of income) which is allocable to interest (whether or not any amount of such interest is received or accrued) wholly exempt from the taxes imposed by this subtitle. Interest on indebtedness incurred or continued to purchase or carry obligations the interest on which is wholly exempt from the taxes imposed by this subtitle. In the case of a regulated investment company which distributes during the taxable year an exempt-interest dividend (including exempt-interest dividends paid after the close of the taxable year as described in section 855), that portion of any amount otherwise allowable as a deduction which the amount of the income of such company wholly exempt from taxes under this subtitle bears to the total of such exempt income and its gross income (excluding from gross income, for this purpose, capital gain net income, as defined in section 1222(9)). Interest on indebtedness incurred or continued to purchase or carry shares of stock of a regulated investment company which during the taxable year of the holder thereof distributes exempt-interest dividends. For purposes of paragraph (2)— The term “interest” includes any amount paid or incurred— by any person making a short sale in connection with personal property used in such short sale, or by any other person for the use of any collateral with respect to such short sale. If— the taxpayer provides cash as collateral for any short sale, and the taxpayer receives no material earnings on such cash during the period of the sale, subparagraph (A)(i) shall not apply to such short sale. No deduction shall be denied under this section for interest on a mortgage on, or real property taxes on, the home of the taxpayer by reason of the receipt of an amount as— a military housing allowance, or a parsonage allowance excludable from gross income under section 107.

(b) Pro rata allocation of interest expense of financial institutions to tax-exempt interest In the case of a financial institution, no deduction shall be allowed for that portion of the taxpayer’s interest expense which is allocable to tax-exempt interest. For purposes of paragraph (1), the portion of the taxpayer’s interest expense which is allocable to tax-exempt interest is an amount which bears the same ratio to such interest expense as— the taxpayer’s average adjusted bases (within the meaning of section 1016) of tax-exempt obligations acquired after August 7, 1986 , bears to such average adjusted bases for all assets of the taxpayer. Any qualified tax-exempt obligation acquired after August 7, 1986 , shall be treated for purposes of paragraph (2) and section 291(e)(1)(B) as if it were acquired on August 7, 1986 . For purposes of subparagraph (A), the term “qualified tax-exempt obligation” means a tax-exempt obligation— which is issued after August 7, 1986 , by a qualified small issuer, which is not a private activity bond (as defined in section 141), and which is designated by the issuer for purposes of this paragraph. For purposes of clause (i)(II), there shall not be treated as a private activity bond— any qualified 501(c)(3) bond (as defined in section 145), or any obligation issued to refund (or which is part of a series of obligations issued to refund) an obligation issued before August 8, 1986 , which was not an industrial development bond (as defined in section 103(b)(2) as in effect on the day before the date of the enactment of the Tax Reform Act of 1986) or a private loan bond (as defined in section 103( o )(2)(A), as so in effect, but without regard to any exemption from such definition other than section 103( o )(2)(A)). For purposes of subparagraph (B), the term “qualified small issuer” means, with respect to obligations issued during any calendar year, any issuer if the reasonably anticipated amount of tax-exempt obligations (other than obligations described in clause (ii)) which will be issued by such issuer during such calendar year does not exceed 10,000,000 of obligations issued by an issuer during any calendar year may be designated by such issuer for purposes of this paragraph. Except as provided in clause (iii), in the case of a refunding (or series of refundings) of a qualified tax-exempt obligation, the refunding obligation shall be treated as a qualified tax-exempt obligation (and shall not be taken into account under clause (i)) if— the refunding obligation was not taken into account under subparagraph (C) by reason of clause (ii)(III) thereof, the average maturity date of the refunding obligations issued as part of the issue of which such refunding obligation is a part is not later than the average maturity date of the obligations to be refunded by such issue, and the refunding obligation has a maturity date which is not later than the date which is 30 years after the date the original qualified tax-exempt obligation was issued. Subclause (II) shall not apply if the average maturity of the issue of which the original qualified tax-exempt obligation was a part (and of the issue of which the obligations to be refunded are a part) is 3 years or less. For purposes of this clause, average maturity shall be determined in accordance with section 147(b)(2)(A). No obligation issued as part of an issue may be designated under this paragraph (or may be treated as designated under clause (ii)) if— any obligation issued as part of such issue is issued to refund another obligation, and the aggregate face amount of such issue exceeds $10, 000, 000. F or p u r p oseso f s u b p a r a g r a p h s (C) an d (D) — ani ss u er an d a ll e n t i t i es w hi c hi ss u eo b l i g a t i o n so nb e ha l f o f s u c hi ss u ers ha ll b e t re a t e d a s 1 i ss u er, a ll o b l i g a t i o n s i ss u e d b y a s u b or d ina t ee n t i t ys ha ll, f or p u r p oseso f a ppl y in g s u b p a r a g r a p h s (C) an d (D) t oe a c h o t h ere n t i t y t o w hi c h s u c h e n t i t y i ss u b or d ina t e, b e t re a t e d a s i ss u e d b ys u c h o t h ere n t i t y, an d an e n t i t y f or m e d (or, t o t h ee x t e n tp ro v i d e d b y t h e S ecre t a ry, a v ai l e d o f) t o a v o i d t h e p u r p oseso f s u b p a r a g r a p h (C) or (D) an d a ll e n t i t i es b e n e f i t in g t h ere b ys ha ll b e t re a t e d a s 1 i ss u er . I n t h ec a seo f an o b l i g a t i o n w hi c hi s i ss u e d a s p a r t o f a d i rec t or in d i rec t co m p os i t e i ss u e, s u c h o b l i g a t i o n s ha ll n o t b e t re a t e d a s a q u a l i f i e d t a x - e x e m pt o b l i g a t i o n u n l ess — t h ere q u i re m e n t so f t hi s p a r a g r a p ha re m e tw i t h res p ec tt os u c h co m p os i t e i ss u e (d e t er min e d b y t re a t in g s u c h co m p os i t e i ss u e a s a s in g l e i ss u e), an d t h ere q u i re m e n t so f t hi s p a r a g r a p ha re m e tw i t h res p ec tt oe a c h se p a r a t e l o t o f o b l i g a t i o n s w hi c ha re p a r t o f t h e i ss u e (d e t er min e d b y t re a t in g e a c h s u c h se p a r a t e l o t a s a se p a r a t e i ss u e) . I n t h ec a seo f o b l i g a t i o n s i ss u e dd u r in g 2009 or 2010, s u b p a r a g r a p h s (C) (i), (D) (i), an d (D) (iii) (II) s ha ll e a c hb e a ppl i e d b ys u b s t i t u t in g “$ 30,000,000” for “$10,000,000”. In the case of a qualified 501(c)(3) bond (as defined in section 145) issued during 2009 or 2010, this paragraph shall be applied by treating the 501(c)(3) organization for whose benefit such bond was issued as the issuer. In the case of a qualified financing issue issued during 2009 or 2010— subparagraph (F) shall not apply, and any obligation issued as a part of such issue shall be treated as a qualified tax-exempt obligation if the requirements of this paragraph are met with respect to each qualified portion of the issue (determined by treating each qualified portion as a separate issue which is issued by the qualified borrower with respect to which such portion relates). For purposes of this subparagraph, the term “qualified financing issue” means any composite, pooled, or other conduit financing issue the proceeds of which are used directly or indirectly to make or finance loans to 1 or more ultimate borrowers each of whom is a qualified borrower. For purposes of this subparagraph, the term “qualified portion” means that portion of the proceeds which are used with respect to each qualified borrower under the issue. For purposes of this subparagraph, the term “qualified borrower” means a borrower which is a State or political subdivision thereof or an organization described in section 501(c)(3) and exempt from taxation under section 501(a). For purposes of this subsection— The term “interest expense” means the aggregate amount allowable to the taxpayer as a deduction for interest for the taxable year (determined without regard to this subsection, section 264, and section 291). For purposes of the preceding sentence, the term “interest” includes amounts (whether or not designated as interest) paid in respect of deposits, investment certificates, or withdrawable or repurchasable shares. The term “tax-exempt obligation” means any obligation the interest on which is wholly exempt from taxes imposed by this subtitle. Such term includes shares of stock of a regulated investment company which during the taxable year of the holder thereof distributes exempt-interest dividends. For purposes of this subsection, the term “financial institution” means any person who— accepts deposits from the public in the ordinary course of such person’s trade or business, and is subject to Federal or State supervision as a financial institution, or is a corporation described in section 585(a)(2). If interest on any indebtedness is disallowed under subsection (a) with respect to any tax-exempt obligation— such disallowed interest shall not be taken into account for purposes of applying this subsection, and for purposes of applying paragraph (2), the adjusted basis of such tax-exempt obligation shall be reduced (but not below zero) by the amount of such indebtedness. This section shall be applied before the application of section 263A (relating to capitalization of certain expenses where taxpayer produces property). In applying paragraph (2)(A), there shall not be taken into account tax-exempt obligations issued during 2009 or 2010. The amount of tax-exempt obligations not taken into account by reason of subparagraph (A) shall not exceed 2 percent of the amount determined under paragraph (2)(B). For purposes of this paragraph, a refunding bond (whether a current or advance refunding) shall be treated as issued on the date of the issuance of the refunded bond (or in the case of a series of refundings, the original bond).

§ 266 Carrying charges

No deduction shall be allowed for amounts paid or accrued for such taxes and carrying charges as, under regulations prescribed by the Secretary, are chargeable to capital account with respect to property, if the taxpayer elects, in accordance with such regulations, to treat such taxes or charges as so chargeable. ( Aug. 16, 1954, ch. 736 , 68A Stat. 78 ; Pub. L. 94–455, title XIX, § 1906(b)(13)(A) , Oct. 4, 1976 , 90 Stat. 1834 .)

(a) In general No deduction shall be allowed in respect of any loss from the sale or exchange of property, directly or indirectly, between persons specified in any of the paragraphs of subsection (b). The preceding sentence shall not apply to any loss of the distributing corporation (or the distributee) in the case of a distribution in complete liquidation. If— by reason of the method of accounting of the person to whom the payment is to be made, the amount thereof is not (unless paid) includible in the gross income of such person, and at the close of the taxable year of the taxpayer for which (but for this paragraph) the amount would be deductible under this chapter, both the taxpayer and the person to whom the payment is to be made are persons specified in any of the paragraphs of subsection (b), then any deduction allowable under this chapter in respect of such amount shall be allowable as of the day as of which such amount is includible in the gross income of the person to whom the payment is made (or, if later, as of the day on which it would be so allowable but for this paragraph). For purposes of this paragraph, in the case of a personal service corporation (within the meaning of section 441(i)(2)), such corporation and any employee-owner (within the meaning of section 269A(b)(2), as modified by section 441(i)(2)) shall be treated as persons specified in subsection (b). The Secretary shall by regulations apply the matching principle of paragraph (2) in cases in which the person to whom the payment is to be made is not a United States person. Notwithstanding subparagraph (A), in the case of any item payable to a controlled foreign corporation (as defined in section 957) or a passive foreign investment company (as defined in section 1297), a deduction shall be allowable to the payor with respect to such amount for any taxable year before the taxable year in which paid only to the extent that an amount attributable to such item is includible (determined without regard to properly allocable deductions and qualified deficits under section 952(c)(1)(B)) during such prior taxable year in the gross income of a United States person who owns (within the meaning of section 958(a)) stock in such corporation. The Secretary may by regulation exempt transactions from the application of clause (i), including any transaction which is entered into by a payor in the ordinary course of a trade or business in which the payor is predominantly engaged and in which the payment of the accrued amounts occurs within 8½ months after accrual or within such other period as the Secretary may prescribe.

(b) Relationships The persons referred to in subsection (a) are: Members of a family, as defined in subsection (c)(4); An individual and a corporation more than 50 percent in value of the outstanding stock of which is owned, directly or indirectly, by or for such individual; Two corporations which are members of the same controlled group (as defined in subsection (f)); A grantor and a fiduciary of any trust; A fiduciary of a trust and a fiduciary of another trust, if the same person is a grantor of both trusts; A fiduciary of a trust and a beneficiary of such trust; A fiduciary of a trust and a beneficiary of another trust, if the same person is a grantor of both trusts; A fiduciary of a trust and a corporation more than 50 percent in value of the outstanding stock of which is owned, directly or indirectly, by or for the trust or by or for a person who is a grantor of the trust; A person and an organization to which section 501 (relating to certain educational and charitable organizations which are exempt from tax) applies and which is controlled directly or indirectly by such person or (if such person is an individual) by members of the family of such individual; A corporation and a partnership if the same persons own— more than 50 percent in value of the outstanding stock of the corporation, and more than 50 percent of the capital interest, or the profits interest, in the partnership; An S corporation and another S corporation if the same persons own more than 50 percent in value of the outstanding stock of each corporation; An S corporation and a C corporation, if the same persons own more than 50 percent in value of the outstanding stock of each corporation; or Except in the case of a sale or exchange in satisfaction of a pecuniary bequest, an executor of an estate and a beneficiary of such estate.

(c) Constructive ownership of stock For purposes of determining, in applying subsection (b), the ownership of stock— Stock owned, directly or indirectly, by or for a corporation, partnership, estate, or trust shall be considered as being owned proportionately by or for its shareholders, partners, or beneficiaries; An individual shall be considered as owning the stock owned, directly or indirectly, by or for his family; An individual owning (otherwise than by the application of paragraph (2)) any stock in a corporation shall be considered as owning the stock owned, directly or indirectly, by or for his partner; The family of an individual shall include only his brothers and sisters (whether by the whole or half blood), spouse, ancestors, and lineal descendants; and Stock constructively owned by a person by reason of the application of paragraph (1) shall, for the purpose of applying paragraph (1), (2), or (3), be treated as actually owned by such person, but stock constructively owned by an individual by reason of the application of paragraph (2) or (3) shall not be treated as owned by him for the purpose of again applying either of such paragraphs in order to make another the constructive owner of such stock.

(d) Amount of gain where loss previously disallowed If— in the case of a sale or exchange of property to the taxpayer a loss sustained by the transferor is not allowable to the transferor as a deduction by reason of subsection (a)(1), and the taxpayer sells or otherwise disposes of such property (or of other property the basis of which in the taxpayer’s hands is determined directly or indirectly by reference to such property) at a gain, then such gain shall be recognized only to the extent that it exceeds so much of such loss as is properly allocable to the property sold or otherwise disposed of by the taxpayer. Paragraph (1) shall not apply if the loss sustained by the transferor is not allowable to the transferor as a deduction by reason of section 1091 (relating to wash sales). Paragraph (1) shall not apply to the extent any loss sustained by the transferor (if allowed) would not be taken into account in determining a tax imposed under section 1 or 11 or a tax computed as provided by either of such sections.

(e) Special rules for pass-thru entities In the case of any amount paid or incurred by, to, or on behalf of, a pass-thru entity, for purposes of applying subsection (a)(2)— such entity, in the case of— a partnership, any person who owns (directly or indirectly) any capital interest or profits interest of such partnership, or an S corporation, any person who owns (directly or indirectly) any of the stock of such corporation, any person who owns (directly or indirectly) any capital interest or profits interest of a partnership in which such entity owns (directly or indirectly) any capital interest or profits interest, and any person related (within the meaning of subsection (b) of this section or section 707(b)(1)) to a person described in subparagraph (B) or (C), shall be treated as persons specified in a paragraph of subsection (b). Subparagraph (C) shall apply to a transaction only if such transaction is related either to the operations of the partnership described in such subparagraph or to an interest in such partnership. For purposes of this section, the term “pass-thru entity” means— a partnership, and an S corporation. For purposes of determining ownership of a capital interest or profits interest of a partnership, the principles of subsection (c) shall apply, except that— paragraph (3) of subsection (c) shall not apply, and interests owned (directly or indirectly) by or for a C corporation shall be considered as owned by or for any shareholder only if such shareholder owns (directly or indirectly) 5 percent or more in value of the stock of such corporation. In the case of any amount paid or incurred by a partnership, subsection (a)(2) shall not apply to the extent that section 707(c) applies to such amount. This subsection shall not apply with respect to qualified expenses and interest paid or incurred by a partnership owning low-income housing to— any qualified 5-percent or less partner of such partnership, or any person related (within the meaning of subsection (b) of this section or section 707(b)(1)) to any qualified 5-percent or less partner of such partnership. For purposes of this paragraph, the term “qualified 5-percent or less partner” means any partner who has (directly or indirectly) an interest of 5 percent or less in the aggregate capital and profits interests of the partnership but only if— such partner owned the low-income housing at all times during the 2-year period ending on the date such housing was transferred to the partnership, or such partnership acquired the low-income housing pursuant to a purchase, assignment, or other transfer from the Department of Housing and Urban Development or any State or local housing authority. For purposes of the preceding sentence, a partner shall be treated as holding any interest in the partnership which is held (directly or indirectly) by any person related (within the meaning of subsection (b) of this section or section 707(b)(1)) to such partner. For purpose of this paragraph, the term “qualified expenses and interest” means any expense or interest incurred by the partnership with respect to low-income housing held by the partnership but— only if the amount of such expense or interest (as the case may be) is unconditionally required to be paid by the partnership not later than 10 years after the date such amount was incurred, and in the case of such interest, only if such interest is incurred at an annual rate not in excess of 12 percent. For purposes of this paragraph, the term “low-income housing” means— any interest in property described in clause (i), (ii), (iii), or (iv) of section 1250(a)(1)(B), and any interest in a partnership owning such property. For additional rules relating to partnerships, see section 707(b).

(f) Controlled group defined; special rules applicable to controlled groups For purposes of this section, the term “controlled group” has the meaning given to such term by section 1563(a), except that— “more than 50 percent” shall be substituted for “at least 80 percent” each place it appears in section 1563(a), and the determination shall be made without regard to subsections (a)(4) and (e)(3)(C) of section 1563. In the case of any loss from the sale or exchange of property which is between members of the same controlled group and to which subsection (a)(1) applies (determined without regard to this paragraph but with regard to paragraph (3))— subsections (a)(1) and (d) shall not apply to such loss, but such loss shall be deferred until the property is transferred outside such controlled group and there would be recognition of loss under consolidated return principles or until such other time as may be prescribed in regulations. For purposes of applying subsection (a)(1), the term “controlled group” shall not include a DISC. Except to the extent provided in regulations prescribed by the Secretary, subsection (a)(1) shall not apply to the sale or exchange of property between members of the same controlled group (or persons described in subsection (b)(10)) if— such property in the hands of the transferor is property described in section 1221(a)(1), such sale or exchange is in the ordinary course of the transferor’s trade or business, such property in the hands of the transferee is property described in section 1221(a)(1), and the transferee or the transferor is a foreign corporation. To the extent provided in regulations, subsection (a)(1) shall not apply to any loss sustained by a member of a controlled group on the repayment of a loan made to another member of such group if such loan is payable in a foreign currency or is denominated in such a currency and such loss is attributable to a reduction in value of such foreign currency. Except to the extent provided in regulations prescribed by the Secretary, subsection (a)(1) shall not apply to any distribution in redemption of stock of a regulated investment company if— such company issues only stock which is redeemable upon the demand of the stockholder, and such redemption is upon the demand of another regulated investment company. For purposes of any other section of this title which refers to a relationship which would result in a disallowance of losses under this section, deferral under paragraph (2) shall be treated as disallowance.

(g) Coordination with section 1041 Subsection (a)(1) shall not apply to any transfer described in section 1041(a) (relating to transfers of property between spouses or incident to divorce).

(a) In general No deduction shall be allowed under this chapter for any disqualified related party amount paid or accrued pursuant to a hybrid transaction or by, or to, a hybrid entity.

(b) Disqualified related party amount For purposes of this section— The term “disqualified related party amount” means any interest or royalty paid or accrued to a related party to the extent that— such amount is not included in the income of such related party under the tax law of the country of which such related party is a resident for tax purposes or is subject to tax, or such related party is allowed a deduction with respect to such amount under the tax law of such country. Such term shall not include any payment to the extent such payment is included in the gross income of a United States shareholder under section 951(a). The term “related party” means a related person as defined in section 954(d)(3), except that such section shall be applied with respect to the person making the payment described in paragraph (1) in lieu of the controlled foreign corporation otherwise referred to in such section.

(c) Hybrid transaction For purposes of this section, the term “hybrid transaction” means any transaction, series of transactions, agreement, or instrument one or more payments with respect to which are treated as interest or royalties for purposes of this chapter and which are not so treated for purposes the tax law of the foreign country of which the recipient of such payment is resident for tax purposes or is subject to tax.

(d) Hybrid entity For purposes of this section, the term “hybrid entity” means any entity which is either— treated as fiscally transparent for purposes of this chapter but not so treated for purposes of the tax law of the foreign country of which the entity is resident for tax purposes or is subject to tax, or treated as fiscally transparent for purposes of such tax law but not so treated for purposes of this chapter.

(e) Regulations The Secretary shall issue such regulations or other guidance as may be necessary or appropriate to carry out the purposes of this section, including regulations or other guidance providing for— rules for treating certain conduit arrangements which involve a hybrid transaction or a hybrid entity as subject to subsection (a), rules for the application of this section to branches or domestic entities, rules for treating certain structured transactions as subject to subsection (a), rules for treating a tax preference as an exclusion from income for purposes of applying subsection (b)(1) if such tax preference has the effect of reducing the generally applicable statutory rate by 25 percent or more, rules for treating the entire amount of interest or royalty paid or accrued to a related party as a disqualified related party amount if such amount is subject to a participation exemption system or other system which provides for the exclusion or deduction of a substantial portion of such amount, rules for determining the tax residence of a foreign entity if the entity is otherwise considered a resident of more than one country or of no country, exceptions from subsection (a) with respect to— cases in which the disqualified related party amount is taxed under the laws of a foreign country other than the country of which the related party is a resident for tax purposes, and other cases which the Secretary determines do not present a risk of eroding the Federal tax base, 1 requirements for record keeping and information reporting in addition to any requirements imposed by section 6038A.

§ 268 Sale of land with unharvested crop

Where an unharvested crop sold by the taxpayer is considered under the provisions of section 1231 as “property used in the trade or business”, in computing taxable income no deduction (whether or not for the taxable year of the sale and whether for expenses, depreciation, or otherwise) attributable to the production of such crop shall be allowed. ( Aug. 16, 1954, ch. 736 , 68A Stat. 80 .)

§ 269 Acquisitions made to evade or avoid income tax

(a) In general If— any person or persons acquire, directly or indirectly, control of a corporation, or any corporation acquires, directly or indirectly, property of another corporation, not controlled, directly or indirectly, immediately before such acquisition, by such acquiring corporation or its stockholders, the basis of which property, in the hands of the acquiring corporation, is determined by reference to the basis in the hands of the transferor corporation, and the principal purpose for which such acquisition was made is evasion or avoidance of Federal income tax by securing the benefit of a deduction, credit, or other allowance which such person or corporation would not otherwise enjoy, then the Secretary may disallow such deduction, credit, or other allowance. For purposes of paragraphs (1) and (2), control means the ownership of stock possessing at least 50 percent of the total combined voting power of all classes of stock entitled to vote or at least 50 percent of the total value of shares of all classes of stock of the corporation.

(b) Certain liquidations after qualified stock purchases If— there is a qualified stock purchase by a corporation of another corporation, an election is not made under section 338 with respect to such purchase, the acquired corporation is liquidated pursuant to a plan of liquidation adopted not more than 2 years after the acquisition date, and the principal purpose for such liquidation is the evasion or avoidance of Federal income tax by securing the benefit of a deduction, credit, or other allowance which the acquiring corporation would not otherwise enjoy, then the Secretary may disallow such deduction, credit, or other allowance. For purposes of paragraph (1), the terms “qualified stock purchase” and “acquisition date” have the same respective meanings as when used in section 338.

(c) Power of Secretary to allow deduction, etc., in part In any case to which subsection (a) or (b) applies the Secretary is authorized— to allow as a deduction, credit, or allowance any part of any amount disallowed by such subsection, if he determines that such allowance will not result in the evasion or avoidance of Federal income tax for which the acquisition was made; or to distribute, apportion, or allocate gross income, and distribute, apportion, or allocate the deductions, credits, or allowances the benefit of which was sought to be secured, between or among the corporations, or properties, or parts thereof, involved, and to allow such deductions, credits, or allowances so distributed, apportioned, or allocated, but to give effect to such allowance only to such extent as he determines will not result in the evasion or avoidance of Federal income tax for which the acquisition was made; or to exercise his powers in part under paragraph (1) and in part under paragraph (2).

§ 269A Personal service corporations formed or availed of to avoid or evade income tax

(a) General rule If— substantially all of the services of a personal service corporation are performed for (or on behalf of) 1 other corporation, partnership, or other entity, and the principal purpose for forming, or availing of, such personal service corporation is the avoidance or evasion of Federal income tax by reducing the income of, or securing the benefit of any expense, deduction, credit, exclusion, or other allowance for, any employee-owner which would not otherwise be available, then the Secretary may allocate all income, deductions, credits, exclusions, and other allowances between such personal service corporation and its employee-owners, if such allocation is necessary to prevent avoidance or evasion of Federal income tax or clearly to reflect the income of the personal service corporation or any of its employee-owners.

(b) Definitions For purposes of this section— The term “personal service corporation” means a corporation the principal activity of which is the performance of personal services and such services are substantially performed by employee-owners. The term “employee-owner” means any employee who owns, on any day during the taxable year, more than 10 percent of the outstanding stock of the personal service corporation. For purposes of the preceding sentence, section 318 shall apply, except that “5 percent” shall be substituted for “50 percent” in section 318(a)(2)(C). All related persons (within the meaning of section 144(a)(3)) shall be treated as 1 entity.

§ 269B Stapled entities

(a) General rule Except as otherwise provided by regulations, for purposes of this title— if a domestic corporation and a foreign corporation are stapled entities, the foreign corporation shall be treated as a domestic corporation. in applying section 1563, stock in a second corporation which constitutes a stapled interest with respect to stock of a first corporation shall be treated as owned by such first corporation, and in applying subchapter M for purposes of determining whether any stapled entity is a regulated investment company or a real estate investment trust, all entities which are stapled entities with respect to each other shall be treated as 1 entity.

(b) Secretary to prescribe regulations The Secretary shall prescribe such regulations as may be necessary to prevent avoidance or evasion of Federal income tax through the use of stapled entities. Such regulations may include (but shall not be limited to) regulations providing the extent to which 1 of such entities shall be treated as owning the other entity (to the extent of the stapled interest) and regulations providing that any tax imposed on the foreign corporation referred to in subsection (a)(1) may, if not paid by such corporation, be collected from the domestic corporation referred to in such subsection or the shareholders of such foreign corporation.

(c) Definitions For purposes of this section— The term “entity” means any corporation, partnership, trust, association, estate, or other form of carrying on a business or activity. The term “stapled entities” means any group of 2 or more entities if more than 50 percent in value of the beneficial ownership in each of such entities consists of stapled interests. Two or more interests are stapled interests if, by reason of form of ownership, restrictions on transfer, or other terms or conditions, in connection with the transfer of 1 of such interests the other such interests are also transferred or required to be transferred.

(d) Special rule for treaties Nothing in section 894 or 7852(d) or in any other provision of law shall be construed as permitting an exemption, by reason of any treaty obligation of the United States heretofore or hereafter entered into, from the provisions of this section.

(e) Subsection (a)(1) not to apply in certain cases Subsection (a)(1) shall not apply if it is established to the satisfaction of the Secretary that the domestic corporation and the foreign corporation referred to in such subsection are foreign owned. For purposes of paragraph (1), a corporation is foreign owned if less than 50 percent of— the total combined voting power of all classes of stock of such corporation entitled to vote, and the total value of the stock of the corporation, is held directly (or indirectly through applying paragraphs (2) and (3) of section 958(a) and paragraph (4) of section 318(a)) by United States persons (as defined in section 7701(a)(30)).

[§ 270 Repealed. Pub. L. 91–172, title II, § 213(b), Dec. 30, 1969, 83 Stat. 572]

§ 271 Debts owed by political parties, etc.

(a) General rule In the case of a taxpayer (other than a bank as defined in section 581) no deduction shall be allowed under section 166 (relating to bad debts) or under section 165(g) (relating to worthlessness of securities) by reason of the worthlessness of any debt owed by a political party.

(b) Definitions For purposes of subsection (a), the term “political party” means— a political party; a national, State, or local committee of a political party; or a committee, association, or organization which accepts contributions or makes expenditures for the purpose of influencing or attempting to influence the election of presidential or vice-presidential electors or of any individual whose name is presented for election to any Federal, State, or local elective public office, whether or not such individual is elected. For purposes of paragraph (1)(C), the term “contributions” includes a gift, subscription, loan, advance, or deposit, of money, or anything of value, and includes a contract, promise, or agreement to make a contribution, whether or not legally enforceable. For purposes of paragraph (1)(C), the term “expenditures” includes a payment, distribution, loan, advance, deposit, or gift, of money, or anything of value, and includes a contract, promise, or agreement to make an expenditure, whether or not legally enforceable.

(c) Exception In the case of a taxpayer who uses an accrual method of accounting, subsection (a) shall not apply to a debt which accrued as a receivable on a bona fide sale of goods or services in the ordinary course of the taxpayer’s trade or business if— for the taxable year in which such receivable accrued, more than 30 percent of all receivables which accrued in the ordinary course of the trades and businesses of the taxpayer were due from political parties, and the taxpayer made substantial continuing efforts to collect on the debt.

§ 272 Disposal of coal or domestic iron ore

Where the disposal of coal or iron ore is covered by section 631, no deduction shall be allowed for expenditures attributable to the making and administering of the contract under which such disposition occurs and to the preservation of the economic interest retained under such contract, except that if in any taxable year such expenditures plus the adjusted depletion basis of the coal or iron ore disposed of in such taxable year exceed the amount realized under such contract, such excess, to the extent not availed of as a reduction of gain under section 1231, shall be a loss deductible under section 165(a). This section shall not apply to any taxable year during which there is no income under the contract. ( Aug. 16, 1954, ch. 736 , 68A Stat. 82 ; Pub. L. 88–272, title II, § 227(a)(3) , (b)(3), Feb. 26, 1964 , 78 Stat. 98 .)

§ 273 Holders of life or terminable interest

Amounts paid under the laws of a State, the District of Columbia, a possession of the United States, or a foreign country as income to the holder of a life or terminable interest acquired by gift, bequest, or inheritance shall not be reduced or diminished by any deduction for shrinkage (by whatever name called) in the value of such interest due to the lapse of time. ( Aug. 16, 1954, ch. 736 , 68A Stat. 83 ; Pub. L. 94–455, title XIX, § 1901(c)(2) , Oct. 4, 1976 , 90 Stat. 1803 .)

§ 274 Disallowance of certain entertainment, etc., expenses

(a) Entertainment, amusement, recreation, or qualified transportation fringes No deduction otherwise allowable under this chapter shall be allowed for any item— With respect to an activity which is of a type generally considered to constitute entertainment, amusement, or recreation, or With respect to a facility used in connection with an activity referred to in subparagraph (A). For purposes of applying paragraph (1)— Dues or fees to any social, athletic, or sporting club or organization shall be treated as items with respect to facilities. An activity described in section 212 shall be treated as a trade or business. Notwithstanding the preceding provisions of this subsection, no deduction shall be allowed under this chapter for amounts paid or incurred for membership in any club organized for business, pleasure, recreation, or other social purpose. No deduction shall be allowed under this chapter for the expense of any qualified transportation fringe (as defined in section 132(f)) provided to an employee of the taxpayer.

(b) Gifts No deduction shall be allowed under section 162 or section 212 for any expense for gifts made directly or indirectly to any individual to the extent that such expense, when added to prior expenses of the taxpayer for gifts made to such individual during the same taxable year, exceeds $25. F or p u r p oseso f t hi ssec t i o n, t h e t er m “ g i f t ” m e an s an y i t e m e x c l u d ab l e f ro m g ross in co m eo f t h erec i p i e n t u n d ersec t i o n 102 w hi c hi s n o t e x c l u d ab l e f ro mhi s g ross in co m e u n d er an yo t h er p ro v i s i o n o f t hi sc ha pt er, b u t s u c h t er m d oes n o t in c l u d e — ani t e mha v in g a cos tt o t h e t a x p a yer n o t in e x cesso f$ 4.00 on which the name of the taxpayer is clearly and permanently imprinted and which is one of a number of identical items distributed generally by the taxpayer, or a sign, display rack, or other promotional material to be used on the business premises of the recipient. In the case of a gift by a partnership, the limitation contained in paragraph (1) shall apply to the partnership as well as to each member thereof. For purposes of paragraph (1), a husband and wife shall be treated as one taxpayer.

(c) Certain foreign travel In the case of any individual who travels outside the United States away from home in pursuit of a trade or business or in pursuit of an activity described in section 212, no deduction shall be allowed under section 162 or section 212 for that portion of the expenses of such travel otherwise allowable under such section which, under regulations prescribed by the Secretary, is not allocable to such trade or business or to such activity. Paragraph (1) shall not apply to the expenses of any travel outside the United States away from home if— such travel does not exceed one week, or the portion of the time of travel outside the United States away from home which is not attributable to the pursuit of the taxpayer’s trade or business or an activity described in section 212 is less than 25 percent of the total time on such travel. For purposes of this subsection, travel outside the United States does not include any travel from one point in the United States to another point in the United States.

(d) Substantiation required No deduction or credit shall be allowed— under section 162 or 212 for any traveling expense (including meals and lodging while away from home), for any expense for gifts, or with respect to any listed property (as defined in section 280F(d)(4)), unless the taxpayer substantiates by adequate records or by sufficient evidence corroborating the taxpayer’s own statement (A) the amount of such expense or other item, (B) the time and place of the travel or the date and description of the gift, (C) the business purpose of the expense or other item, and (D) the business relationship to the taxpayer of the person receiving the benefit. The Secretary may by regulations provide that some or all of the requirements of the preceding sentence shall not apply in the case of an expense which does not exceed an amount prescribed pursuant to such regulations. This subsection shall not apply to any qualified nonpersonal use vehicle (as defined in subsection (i)).

(e) Specific exceptions to application of subsection (a) Subsection (a) shall not apply to— Expenses for food and beverages (and facilities used in connection therewith) furnished on the business premises of the taxpayer primarily for his employees. Except as provided in subparagraph (B), expenses for goods, services, and facilities, to the extent that the expenses are treated by the taxpayer, with respect to the recipient of the entertainment, amusement, or recreation, as compensation to an employee on the taxpayer’s return of tax under this chapter and as wages to such employee for purposes of chapter 24 (relating to withholding of income tax at source on wages). In the case of a recipient who is a specified individual, subparagraph (A) and paragraph (9) shall each be applied by substituting “to the extent that the expenses do not exceed the amount of the expenses which” for “to the extent that the expenses”. For purposes of clause (i), the term “specified individual” means any individual who— is subject to the requirements of section 16(a) of the Securities Exchange Act of 1934 with respect to the taxpayer or a related party to the taxpayer, or would be subject to such requirements if the taxpayer (or such related party) were an issuer of equity securities referred to in such section. For purposes of this clause, a person is a related party with respect to another person if such person bears a relationship to such other person described in section 267(b) or 707(b). Expenses paid or incurred by the taxpayer, in connection with the performance by him of services for another person (whether or not such other person is his employer), under a reimbursement or other expense allowance arrangement with such other person, but this paragraph shall apply— where the services are performed for an employer, only if the employer has not treated such expenses in the manner provided in paragraph (2), or where the services are performed for a person other than an employer, only if the taxpayer accounts (to the extent provided by subsection (d)) to such person. Expenses for recreational, social, or similar activities (including facilities therefor) primarily for the benefit of employees (other than employees who are highly compensated employees (within the meaning of section 414(q))). For purposes of this paragraph, an individual owning less than a 10-percent interest in the taxpayer’s trade or business shall not be considered a shareholder or other owner, and for such purposes an individual shall be treated as owning any interest owned by a member of his family (within the meaning of section 267(c)(4)). This paragraph shall not apply for purposes of subsection (a)(3). Expenses incurred by a taxpayer which are directly related to business meetings of his employees, stockholders, agents, or directors. Expenses directly related and necessary to attendance at a business meeting or convention of any organization described in section 501(c)(6) (relating to business leagues, chambers of commerce, real estate boards, and boards of trade) and exempt from taxation under section 501(a). Expenses for goods, services, and facilities made available by the taxpayer to the general public. Expenses for goods or services (including the use of facilities) which are sold by the taxpayer in a bona fide transaction for an adequate and full consideration in money or money’s worth. Expenses paid or incurred by the taxpayer for goods, services, and facilities to the extent that the expenses are includible in the gross income of a recipient of the entertainment, amusement, or recreation who is not an employee of the taxpayer as compensation for services rendered or as a prize or award under section 74. The preceding sentence shall not apply to any amount paid or incurred by the taxpayer if such amount is required to be included (or would be so required except that the amount is less than $600) in any information return filed by such taxpayer under part III of subchapter A of chapter 61 and is not so included. For purposes of this subsection, any item referred to in subsection (a) shall be treated as an expense.

(f) Interest, taxes, casualty losses, etc. This section shall not apply to any deduction allowable to the taxpayer without regard to its connection with his trade or business (or with his income-producing activity). In the case of a taxpayer which is not an individual, the preceding sentence shall be applied as if it were an individual.

(g) Treatment of entertainment, etc., type facility For purposes of this chapter, if deductions are disallowed under subsection (a) with respect to any portion of a facility, such portion shall be treated as an asset which is used for personal, living, and family purposes (and not as an asset used in the trade or business).

(h) Attendance at conventions, etc. In the case of any individual who attends a convention, seminar, or similar meeting which is held outside the North American area, no deduction shall be allowed under section 162 for expenses allocable to such meeting unless the taxpayer establishes that the meeting is directly related to the active conduct of his trade or business and that, after taking into account in the manner provided by regulations prescribed by the Secretary— the purpose of such meeting and the activities taking place at such meeting, the purposes and activities of the sponsoring organizations or groups, the residences of the active members of the sponsoring organization and the places at which other meetings of the sponsoring organization or groups have been held or will be held, and such other relevant factors as the taxpayer may present, it is as reasonable for the meeting to be held outside the North American area as within the North American area. In the case of any individual who attends a convention, seminar, or other meeting which is held on any cruise ship, no deduction shall be allowed under section 162 for expenses allocable to such meeting, unless the taxpayer meets the requirements of paragraph (5) and establishes that the meeting is directly related to the active conduct of his trade or business and that— the cruise ship is a vessel registered in the United States; and all ports of call of such cruise ship are located in the United States or in possessions of the United States. With respect to cruises beginning in any calendar year, not more than $2,000 of the expenses attributable to an individual attending one or more meetings may be taken into account under section 162 by reason of the preceding sentence. For purposes of this subsection— The term “North American area” means the United States, its possessions, and the Trust Territory of the Pacific Islands, and Canada and Mexico. The term “cruise ship” means any vessel sailing within or without the territorial waters of the United States. Except as provided in subparagraph (B), this subsection shall apply to deductions otherwise allowable under section 162 to any person, whether or not such person is the individual attending the convention, seminar, or similar meeting. This subsection shall not deny a deduction to any person other than the individual attending the convention, seminar, or similar meeting with respect to any amount paid by such person to or on behalf of such individual if includible in the gross income of such individual. The preceding sentence shall not apply if the amount is required to be included in any information return filed by such person under part III of subchapter A of chapter 61 and is not so included. No deduction shall be allowed under section 162 for expenses allocable to attendance at a convention, seminar, or similar meeting on any cruise ship unless the taxpayer claiming the deduction attaches to the return of tax on which the deduction is claimed— a written statement signed by the individual attending the meeting which includes— information with respect to the total days of the trip, excluding the days of transportation to and from the cruise ship port, and the number of hours of each day of the trip which such individual devoted to scheduled business activities, a program of the scheduled business activities of the meeting, and such other information as may be required in regulations prescribed by the Secretary; and a written statement signed by an officer of the organization or group sponsoring the meeting which includes— a schedule of the business activities of each day of the meeting, the number of hours which the individual attending the meeting attended such scheduled business activities, and such other information as may be required in regulations prescribed by the Secretary. For purposes of this subsection, the term “North American area” includes, with respect to any convention, seminar, or similar meeting, any beneficiary country if (as of the time such meeting begins)— there is in effect a bilateral or multilateral agreement described in subparagraph (C) between such country and the United States providing for the exchange of information between the United States and such country, and there is not in effect a finding by the Secretary that the tax laws of such country discriminate against conventions held in the United States. For purposes of this paragraph, the term “beneficiary country” has the meaning given to such term by section 212(a)(1)(A) of the Caribbean Basin Economic Recovery Act; except that such term shall include Bermuda. The Secretary is authorized to negotiate and conclude an agreement for the exchange of information with any beneficiary country. Except as provided in clause (ii), an exchange of information agreement shall provide for the exchange of such information (not limited to information concerning nationals or residents of the United States or the beneficiary country) as may be necessary or appropriate to carry out and enforce the tax laws of the United States and the beneficiary country (whether criminal or civil proceedings), including information which may otherwise be subject to nondisclosure provisions of the local law of the beneficiary country such as provisions respecting bank secrecy and bearer shares. The exchange of information agreement shall be terminable by either country on reasonable notice and shall provide that information received by either country will be disclosed only to persons or authorities (including courts and administrative bodies) involved in the administration or oversight of, or in the determination of appeals in respect of, taxes of the United States or the beneficiary country and will be used by such persons or authorities only for such purposes. An exchange of information agreement need not provide for the exchange of qualified confidential information which is sought only for civil tax purposes if— the Secretary of the Treasury, after making all reasonable efforts to negotiate an agreement which includes the exchange of such information, determines that such an agreement cannot be negotiated but that the agreement which was negotiated will significantly assist in the administration and enforcement of the tax laws of the United States, and the President determines that the agreement as negotiated is in the national security interest of the United States. For purposes of this subparagraph, the term “qualified confidential information” means information which is subject to the nondisclosure provisions of any local law of the beneficiary country regarding bank secrecy or ownership of bearer shares. For purposes of this subparagraph, the determination of whether information is sought only for civil tax purposes shall be made by the requesting party. Any exchange of information agreement negotiated under subparagraph (C) shall be treated as an income tax convention for purposes of section 6103(k)(4). The Secretary may exercise his authority under subchapter A of chapter 78 to carry out any obligation of the United States under an agreement referred to in subparagraph (C). The following shall be published in the Federal Register— any determination by the President under subparagraph (C)(ii) (including the reasons for such determination), any determination by the Secretary under subparagraph (C)(ii) (including the reasons for such determination), and any finding by the Secretary under subparagraph (A)(ii) (and any termination thereof). No deduction shall be allowed under section 212 for expenses allocable to a convention, seminar, or similar meeting.

(i) Qualified nonpersonal use vehicle For purposes of subsection (d), the term “qualified nonpersonal use vehicle” means any vehicle which, by reason of its nature, is not likely to be used more than a de minimis amount for personal purposes.

(j) Employee achievement awards No deduction shall be allowed under section 162 or section 212 for the cost of an employee achievement award except to the extent that such cost does not exceed the deduction limitations of paragraph (2). The deduction for the cost of an employee achievement award made by an employer to an employee— which is not a qualified plan award, when added to the cost to the employer for all other employee achievement awards made to such employee during the taxable year which are not qualified plan awards, shall not exceed $400, an d w hi c hi s a q u a l i f i e d pl ana w a r d, w h e na dd e d t o t h ecos tt o t h ee m pl oyer f or a ll o t h ere m pl oyee a c hi e v e m e n t a w a r d s ma d e t os u c h e m pl oyee d u r in g t h e t a x ab l eye a r (in c l u d in g e m pl oyee a c hi e v e m e n t a w a r d s w hi c ha re n o tq u a l i f i e d pl ana w a r d s), s ha ll n o t e x cee d$ 1,600. For purposes of this subsection— The term “employee achievement award” means an item of tangible personal property which is— transferred by an employer to an employee for length of service achievement or safety achievement, awarded as part of a meaningful presentation, and awarded under conditions and circumstances that do not create a significant likelihood of the payment of disguised compensation. For purposes of clause (i), the term “tangible personal property” shall not include— cash, cash equivalents, gift cards, gift coupons, or gift certificates (other than arrangements conferring only the right to select and receive tangible personal property from a limited array of such items pre-selected or pre-approved by the employer), or vacations, meals, lodging, tickets to theater or sporting events, stocks, bonds, other securities, and other similar items. The term “qualified plan award” means an employee achievement award awarded as part of an established written plan or program of the taxpayer which does not discriminate in favor of highly compensated employees (within the meaning of section 414(q)) as to eligibility or benefits. An employee achievement award shall not be treated as a qualified plan award for any taxable year if the average cost of all employee achievement awards which are provided by the employer during the year, and which would be qualified plan awards but for this subparagraph, exceeds $400. For purposes of the preceding sentence, average cost shall be determined by including the entire cost of qualified plan awards, without taking into account employee achievement awards of nominal value. For purposes of this subsection— In the case of an employee achievement award made by a partnership, the deduction limitations contained in paragraph (2) shall apply to the partnership as well as to each member thereof. An item shall not be treated as having been provided for length of service achievement if the item is received during the recipient’s 1st 5 years of employment or if the recipient received a length of service achievement award (other than an award excludable under section 132(e)(1)) during that year or any of the prior 4 years. An item provided by an employer to an employee shall not be treated as having been provided for safety achievement if— during the taxable year, employee achievement awards (other than awards excludable under section 132(e)(1)) for safety achievement have previously been awarded by the employer to more than 10 percent of the employees of the employer (excluding employees described in clause (ii)), or such item is awarded to a manager, administrator, clerical employee, or other professional employee.

(k) Business meals No deduction shall be allowed under this chapter for the expense of any food or beverages unless— such expense is not lavish or extravagant under the circumstances, and the taxpayer (or an employee of the taxpayer) is present at the furnishing of such food or beverages. Paragraph (1) shall not apply to— any expense described in paragraph (2), (3), (4), (7), (8), or (9) of subsection (e), and any other expense to the extent provided in regulations.

(l) Transportation and commuting benefits No deduction shall be allowed under this chapter for any expense incurred for providing any transportation, or any payment or reimbursement, to an employee of the taxpayer in connection with travel between the employee’s residence and place of employment, except as necessary for ensuring the safety of the employee.

(m) Additional limitations on travel expenses No deduction shall be allowed under this chapter for expenses incurred for transportation by water to the extent such expenses exceed twice the aggregate per diem amounts for days of such transportation. For purposes of the preceding sentence, the term “per diem amounts” means the highest amount generally allowable with respect to a day to employees of the executive branch of the Federal Government for per diem while away from home but serving in the United States. Subparagraph (A) shall not apply to— any expense allocable to a convention, seminar, or other meeting which is held on any cruise ship, and any expense described in paragraph (2), (3), (4), (7), (8), or (9) of subsection (e). No deduction shall be allowed under this chapter for expenses for travel as a form of education. No deduction shall be allowed under this chapter (other than section 217) for travel expenses paid or incurred with respect to a spouse, dependent, or other individual accompanying the taxpayer (or an officer or employee of the taxpayer) on business travel, unless— the spouse, dependent, or other individual is an employee of the taxpayer, the travel of the spouse, dependent, or other individual is for a bona fide business purpose, and such expenses would otherwise be deductible by the spouse, dependent, or other individual.

(n) Only 50 percent of meal expenses allowed as deduction The amount allowable as a deduction under this chapter for any expense for food or beverages shall not exceed 50 percent of the amount of such expense which would (but for this paragraph) be allowable as a deduction under this chapter. Paragraph (1) shall not apply to any expense if— such expense is described in paragraph (2), (3), (4), (7), (8), or (9) of subsection (e), in the case of an employer who pays or reimburses moving expenses of an employee, such expenses are includible in the income of the employee under section 82, such expense is for food or beverages— required by any Federal law to be provided to crew members of a commercial vessel, provided to crew members of a commercial vessel— which is operating on the Great Lakes, the Saint Lawrence Seaway, or any inland waterway of the United States, and which is of a kind which would be required by Federal law to provide food and beverages to crew members if it were operated at sea, provided on an oil or gas platform or drilling rig if the platform or rig is located offshore, provided on an oil or gas platform or drilling rig, or at a support camp which is in proximity and integral to such platform or rig, if the platform or rig is located in the United States north of 54 degrees north latitude, or provided— on a fishing vessel, fish processing vessel, or fish tender vessel (as such terms are defined in section 2101 of title 46 , United States Code), or at a facility for the processing of fish for commercial use or consumption which— is located in the United States north of 50 degrees north latitude, and is not located in a metropolitan statistical area (within the meaning of section 143(k)(2)(B)), or such expense is— for food or beverages provided by a restaurant, and paid or incurred before January 1, 2023 . Clauses (i) and (ii) of subparagraph (C) shall not apply to vessels primarily engaged in providing luxury water transportation (determined under the principles of subsection (m)). In the case of the employee, the exception of subparagraph (A) shall not apply to expenses described in subparagraph (B). In the case of any expenses for food or beverages consumed while away from home (within the meaning of section 162(a)(2)) by an individual during, or incident to, the period of duty subject to the hours of service limitations of the Department of Transportation, paragraph (1) shall be applied by substituting “80 percent” for “50 percent”.

(o) Meals provided at convenience of employer Except in the case of an expense described in subsection (e)(8) or (n)(2)(C), no deduction shall be allowed under this chapter for— any expense for the operation of a facility described in section 132(e)(2), and any expense for food or beverages, including under section 132(e)(1), associated with such facility, or any expense for meals described in section 119(a).

(p) Regulatory authority The Secretary shall prescribe such regulations as he may deem necessary to carry out the purposes of this section, including regulations prescribing whether subsection (a) or subsection (b) applies in cases where both such subsections would otherwise apply.

§ 275 Certain taxes

(a) General rule No deduction shall be allowed for the following taxes: Federal income taxes, including— the tax imposed by section 3101 (relating to the tax on employees under the Federal Insurance Contributions Act); the taxes imposed by sections 3201 and 3211 (relating to the taxes on railroad employees and railroad employee representatives); and the tax withheld at source on wages under section 3402. Federal war profits and excess profits taxes. Estate, inheritance, legacy, succession, and gift taxes. Income, war profits, and excess profits taxes imposed by the authority of any foreign country or possession of the United States if the taxpayer chooses to take to any extent the benefits of section 901. Taxes on real property, to the extent that section 164(d) requires such taxes to be treated as imposed on another taxpayer. Taxes imposed by chapters 37, 41, 42, 43, 44, 45, 46, 50A, and 54. Paragraph (1) shall not apply to any taxes to the extent such taxes are allowable as a deduction under section 164(f).

(b) Cross reference For disallowance of certain other taxes, see section 164(c).

§ 276 Certain indirect contributions to political parties

(a) Disallowance of deduction No deduction otherwise allowable under this chapter shall be allowed for any amount paid or incurred for— advertising in a convention program of a political party, or in any other publication if any part of the proceeds of such publication directly or indirectly inures (or is intended to inure) to or for the use of a political party or a political candidate, admission to any dinner or program, if any part of the proceeds of such dinner or program directly or indirectly inures (or is intended to inure) to or for the use of a political party or a political candidate, or admission to an inaugural ball, inaugural gala, inaugural parade, or inaugural concert, or to any similar event which is identified with a political party or a political candidate.

(b) Definitions For purposes of this section— The term “political party” means— a political party; a National, State, or local committee of a political party; or a committee, association, or organization, whether incorporated or not, which directly or indirectly accepts contributions (as defined in section 271(b)(2)) or make expenditures (as defined in section 271(b)(3)) for the purpose of influencing or attempting to influence the selection, nomination, or election of any individual to any Federal, State, or local elective public office, or the election of presidential and vice-presidential electors, whether or not such individual or electors are selected, nominated, or elected. Proceeds shall be treated as inuring to or for the use of a political candidate only if— such proceeds may be used directly or indirectly for the purpose of furthering his candidacy for selection, nomination, or election to any elective public office, and such proceeds are not received by such candidate in the ordinary course of a trade or business (other than the trade or business of holding elective public office).

(c) Cross reference For disallowance of certain entertainment, etc., expenses, see section 274.

§ 277 Deductions incurred by certain membership organizations in transactions with members

(a) General rule In the case of a social club or other membership organization which is operated primarily to furnish services or goods to members and which is not exempt from taxation, deductions for the taxable year attributable to furnishing services, insurance, goods, or other items of value to members shall be allowed only to the extent of income derived during such year from members or transactions with members (including income derived during such year from institutes and trade shows which are primarily for the education of members). If for any taxable year such deductions exceed such income, the excess shall be treated as a deduction attributable to furnishing services, insurance, goods, or other items of value to members paid or incurred in the succeeding taxable year. The deductions provided by sections 243 and 245 (relating to dividends received by corporations) shall not be allowed to any organization to which this section applies for the taxable year.

(b) Exceptions Subsection (a) shall not apply to any organization— which for the taxable year is subject to taxation under subchapter H or L, which has made an election before October 9, 1969 , under section 456(c) or which is affiliated with such an organization, which for each day of any taxable year is a national securities exchange subject to regulation under the Securities Exchange Act of 1934 or a contract market subject to regulation under the Commodity Exchange Act, or which is engaged primarily in the gathering and distribution of news to its members for publication.

[§ 278 Repealed. Pub. L. 99–514, title VIII, § 803(b)(6), Oct. 22, 1986, 100 Stat. 2356]

§ 279 Interest on indebtedness incurred by corporation to acquire stock or assets of another corporation

(a) General rule No deduction shall be allowed for any interest paid or incurred by a corporation during the taxable year with respect to its corporate acquisition indebtedness to the extent that such interest exceeds— $5,000,000, reduced by the amount of interest paid or incurred by such corporation during such year on obligations (A) issued to provide consideration for an acquisition described in paragraph (1) of subsection (b), but (B) which are not corporate acquisition indebtedness.

(b) Corporate acquisition indebtedness For purposes of this section, the term “corporate acquisition indebtedness” means any obligation evidenced by a bond, debenture, note, or certificate or other evidence of indebtedness issued by a corporation (hereinafter in this section referred to as “issuing corporation”) if— such obligation is issued to provide consideration for the acquisition of— stock in another corporation (hereinafter in this section referred to as “acquired corporation”), or assets of another corporation (hereinafter in this section referred to as “acquired corporation”) pursuant to a plan under which at least two-thirds (in value) of all the assets (excluding money) used in trades and businesses carried on by such corporation are acquired, such obligation is either— subordinated to the claims of trade creditors of the issuing corporation generally, or expressly subordinated in right of payment to the payment of any substantial amount of unsecured indebtedness, whether outstanding or subsequently issued, of the issuing corporation, the bond or other evidence of indebtedness is either— convertible directly or indirectly into stock of the issuing corporation, or part of an investment unit or other arrangement which includes, in addition to such bond or other evidence of indebtedness, an option to acquire, directly or indirectly, stock in the issuing corporation, and as of a day determined under subsection (c)(1), either— the ratio of debt to equity (as defined in subsection (c)(2)) of the issuing corporation exceeds 2 to 1, or the projected earnings (as defined in subsection (c)(3)) do not exceed 3 times the annual interest to be paid or incurred (determined under subsection (c)(4)).

(c) Rules for application of subsection (b)(4) For purposes of subsection (b)(4)— Determinations are to be made as of the last day of any taxable year of the issuing corporation in which it issues any obligation to provide consideration for an acquisition described in subsection (b)(1) of stock in, or assets of, the acquired corporation. The term “ratio of debt to equity” means the ratio which the total indebtedness of the issuing corporation bears to the sum of its money and all its other assets (in an amount equal to their adjusted basis for determining gain) less such total indebtedness. The term “projected earnings” means the “average annual earnings” (as defined in subparagraph (B)) of— the issuing corporation only, if clause (ii) does not apply, or both the issuing corporation and the acquired corporation, in any case where the issuing corporation has acquired control (as defined in section 368(c)), or has acquired substantially all of the properties, of the acquired corporation. The average annual earnings referred to in subparagraph (A) is, for any corporation, the amount of its earnings and profits for any 3-year period ending with the last day of a taxable year of the issuing corporation described in paragraph (1), computed without reduction for— interest paid or incurred, depreciation or amortization allowed under this chapter, liability for tax under this chapter, and distributions to which section 301(c)(1) applies (other than such distributions from the acquired to the issuing corporation), and reduced to an annual average for such 3-year period pursuant to regulations prescribed by the Secretary. Such regulations shall include rules for cases where any corporation was not in existence for all of such 3-year period or such period includes only a portion of a taxable year of any corporation. The term “annual interest to be paid or incurred” means— if subparagraph (B) does not apply, the annual interest to be paid or incurred by the issuing corporation only, determined by reference to its total indebtedness outstanding, or if projected earnings are determined under clause (ii) of paragraph (3)(A), the annual interest to be paid or incurred by both the issuing corporation and the acquired corporation, determined by reference to their combined total indebtedness outstanding. With respect to any corporation which is a bank (as defined in section 581) or is primarily engaged in a lending or finance business— in determining under paragraph (2) the ratio of debt to equity of such corporation (or of the affiliated group of which such corporation is a member), the total indebtedness of such corporation (and the assets of such corporation) shall be reduced by an amount equal to the total indebtedness owed to such corporation which arises out of the banking business of such corporation, or out of the lending or finance business of such corporation, as the case may be; in determining under paragraph (4) the annual interest to be paid or incurred by such corporation (or by the issuing and acquired corporations referred to in paragraph (4)(B) or by the affiliated group of which such corporation is a member) the amount of such interest (determined without regard to this paragraph) shall be reduced by an amount which bears the same ratio to the amount of such interest as the amount of the reduction for the taxable year under subparagraph (A) bears to the total indebtedness of such corporation; and in determining under paragraph (3)(B) the average annual earnings, the amount of the earnings and profits for the 3-year period shall be reduced by the sum of the reductions under subparagraph (B) for such period. For purposes of this paragraph, the term “lending or finance business” means a business of making loans or purchasing or discounting accounts receivable, notes, or installment obligations.

(d) Taxable years to which applicable In applying this section— The deduction of interest on any obligation shall not be disallowed under subsection (a) before the first taxable year of the issuing corporation as of the last day of which the application of either subparagraph (A) or subparagraph (B) of subsection (b)(4) results in such obligation being corporate acquisition indebtedness. Except as provided in paragraphs (3), (4), and (5), if an obligation is determined to be corporate acquisition indebtedness as of the last day of any taxable year of the issuing corporation, it shall be corporate acquisition indebtedness for such taxable year and all subsequent taxable years. If an obligation is determined to be corporate acquisition indebtedness as of the close of a taxable year of the issuing corporation in which clause (i) of subsection (c)(3)(A) applied, but would not be corporate acquisition indebtedness if the determination were made as of the close of the first taxable year of such corporation thereafter in which clause (ii) of subsection (c)(3)(A) could apply, such obligation shall be considered not to be corporate acquisition indebtedness for such later taxable year and all taxable years thereafter. If an obligation which has been determined to be corporate acquisition indebtedness for any taxable year would not be such indebtedness for each of any 3 consecutive taxable years thereafter if subsection (b)(4) were applied as of the close of each of such 3 years, then such obligation shall not be corporate acquisition indebtedness for all taxable years after such 3 consecutive taxable years. In the case of obligations issued to provide consideration for the acquisition of stock in another corporation, such obligations shall be corporate acquisition indebtedness for a taxable year only if at some time before the close of such year the issuing corporation owns 5 percent or more of the total combined voting power of all classes of stock entitled to vote of such other corporation.

(e) Certain nontaxable transactions An acquisition of stock of a corporation of which the issuing corporation is in control (as defined in section 368(c)) in a transaction in which gain or loss is not recognized shall be deemed an acquisition described in paragraph (1) of subsection (b) only if immediately before such transaction (1) the acquired corporation was in existence, and (2) the issuing corporation was not in control (as defined in section 368(c)) of such corporation.

(f) Exemption for certain acquisitions of foreign corporations For purposes of this section, the term “corporate acquisition indebtedness” does not include any indebtedness issued to any person to provide consideration for the acquisition of stock in, or assets of, any foreign corporation substantially all of the income of which, for the 3-year period ending with the date of such acquisition or for such part of such period as the foreign corporation was in existence, is from sources without the United States.

(g) Affiliated groups In any case in which the issuing corporation is a member of an affiliated group, the application of this section shall be determined, pursuant to regulations prescribed by the Secretary, by treating all of the members of the affiliated group in the aggregate as the issuing corporation, except that the ratio of debt to equity of, projected earnings of, and annual interest to be paid or incurred by any corporation (other than the issuing corporation determined without regard to this subsection) shall be included in the determinations required under subparagraphs (A) and (B) of subsection (b)(4) as of any day only if such corporation is a member of the affiliated group on such day, and, in determining projected earnings of such corporation under subsection (c)(3), there shall be taken into account only the earnings and profits of such corporation for the period during which it was a member of the affiliated group. For purposes of the preceding sentence, the term “affiliated group” has the meaning assigned to such term by section 1504(a), except that all corporations other than the acquired corporation shall be treated as includible corporations (without any exclusion under section 1504(b)) and the acquired corporation shall not be treated as an includible corporation.

(h) Changes in obligation For purposes of this section— Any extension, renewal, or refinancing of an obligation evidencing a preexisting indebtedness shall not be deemed to be the issuance of a new obligation. Any obligation which is corporate acquisition indebtedness of the issuing corporation is also corporate acquisition indebtedness of any corporation which becomes liable for such obligation as guarantor, endorser, or indemnitor or which assumes liability for such obligation in any transaction.

(i) Effect on other provisions No inference shall be drawn from any provision in this section that any instrument designated as a bond, debenture, note, or certificate or other evidence of indebtedness by its issuer represents an obligation or indebtedness of such issuer in applying any other provision of this title.

[§ 280 Repealed. Pub. L. 99–514, title VIII, § 803(b)(2)(A), Oct. 22, 1986, 100 Stat. 2355]

§ 280A Disallowance of certain expenses in connection with business use of home, rental of vacation homes, etc.

(a) General rule Except as otherwise provided in this section, in the case of a taxpayer who is an individual or an S corporation, no deduction otherwise allowable under this chapter shall be allowed with respect to the use of a dwelling unit which is used by the taxpayer during the taxable year as a residence.

(b) Exception for interest, taxes, casualty losses, etc. Subsection (a) shall not apply to any deduction allowable to the taxpayer without regard to its connection with his trade or business (or with his income-producing activity).

(c) Exceptions for certain business or rental use; limitation on deductions for such use Subsection (a) shall not apply to any item to the extent such item is allocable to a portion of the dwelling unit which is exclusively used on a regular basis— as the principal place of business for any trade or business of the taxpayer, as a place of business which is used by patients, clients, or customers in meeting or dealing with the taxpayer in the normal course of his trade or business, or in the case of a separate structure which is not attached to the dwelling unit, in connection with the taxpayer’s trade or business. In the case of an employee, the preceding sentence shall apply only if the exclusive use referred to in the preceding sentence is for the convenience of his employer. For purposes of subparagraph (A), the term “principal place of business” includes a place of business which is used by the taxpayer for the administrative or management activities of any trade or business of the taxpayer if there is no other fixed location of such trade or business where the taxpayer conducts substantial administrative or management activities of such trade or business. Subsection (a) shall not apply to any item to the extent such item is allocable to space within the dwelling unit which is used on a regular basis as a storage unit for the inventory or product samples of the taxpayer held for use in the taxpayer’s trade or business of selling products at retail or wholesale, but only if the dwelling unit is the sole fixed location of such trade or business. Subsection (a) shall not apply to any item which is attributable to the rental of the dwelling unit or portion thereof (determined after the application of subsection (e)). Subsection (a) shall not apply to any item to the extent that such item is allocable to the use of any portion of the dwelling unit on a regular basis in the taxpayer’s trade or business of providing day care for children, for individuals who have attained age 65, or for individuals who are physically or mentally incapable of caring for themselves. Subparagraph (A) shall apply to items accruing for a period only if the owner or operator of the trade or business referred to in subparagraph (A)— has applied for (and such application has not been rejected), has been granted (and such granting has not been revoked), or is exempt from having, a license, certification, registration, or approval as a day care center or as a family or group day care home under the provisions of any applicable State law. This subparagraph shall apply only to items accruing in periods beginning on or after the first day of the first month which begins more than 90 days after the date of the enactment of the Tax Reduction and Simplification Act of 1977. If a portion of the taxpayer’s dwelling unit used for the purposes described in subparagraph (A) is not used exclusively for those purposes, the amount of the expenses attributable to that portion shall not exceed an amount which bears the same ratio to the total amount of the items allocable to such portion as the number of hours the portion is used for such purposes bears to the number of hours the portion is available for use. In the case of a use described in paragraph (1), (2), or (4), and in the case of a use described in paragraph (3) where the dwelling unit is used by the taxpayer during the taxable year as a residence, the deductions allowed under this chapter for the taxable year by reason of being attributed to such use shall not exceed the excess of— the gross income derived from such use for the taxable year, over the sum of— the deductions allocable to such use which are allowable under this chapter for the taxable year whether or not such unit (or portion thereof) was so used, and the deductions allocable to the trade or business (or rental activity) in which such use occurs (but which are not allocable to such use) for such taxable year. Any amount not allowable as a deduction under this chapter by reason of the preceding sentence shall be taken into account as a deduction (allocable to such use) under this chapter for the succeeding taxable year. Any amount taken into account for any taxable year under the preceding sentence shall be subject to the limitation of the 1st sentence of this paragraph whether or not the dwelling unit is used as a residence during such taxable year. Paragraphs (1) and (3) shall not apply to any item which is attributable to the rental of the dwelling unit (or any portion thereof) by the taxpayer to his employer during any period in which the taxpayer uses the dwelling unit (or portion) in performing services as an employee of the employer.

(d) Use as residence For purposes of this section, a taxpayer uses a dwelling unit during the taxable year as a residence if he uses such unit (or portion thereof) for personal purposes for a number of days which exceeds the greater of— 14 days, or 10 percent of the number of days during such year for which such unit is rented at a fair rental. For purposes of subparagraph (B), a unit shall not be treated as rented at a fair rental for any day for which it is used for personal purposes. For purposes of this section, the taxpayer shall be deemed to have used a dwelling unit for personal purposes for a day if, for any part of such day, the unit is used— for personal purposes by the taxpayer or any other person who has an interest in such unit, or by any member of the family (as defined in section 267(c)(4)) of the taxpayer or such other person; by any individual who uses the unit under an arrangement which enables the taxpayer to use some other dwelling unit (whether or not a rental is charged for the use of such other unit); or by any individual (other than an employee with respect to whose use section 119 applies), unless for such day the dwelling unit is rented for a rental which, under the facts and circumstances, is fair rental. The Secretary shall prescribe regulations with respect to the circumstances under which use of the unit for repairs and annual maintenance will not constitute personal use under this paragraph, except that if the taxpayer is engaged in repair and maintenance on a substantially full time basis for any day, such authority shall not allow the Secretary to treat a dwelling unit as being used for personal use by the taxpayer on such day merely because other individuals who are on the premises on such day are not so engaged. A taxpayer shall not be treated as using a dwelling unit for personal purposes by reason of a rental arrangement for any period if for such period such dwelling unit is rented, at a fair rental, to any person for use as such person’s principal residence. Subparagraph (A) shall apply to a rental to a person who has an interest in the dwelling unit only if such rental is pursuant to a shared equity financing agreement. In the case of a rental pursuant to a shared equity financing agreement, fair rental shall be determined as of the time the agreement is entered into and by taking into account the occupant’s qualified ownership interest. For purposes of this paragraph, the term “shared equity financing agreement” means an agreement under which— 2 or more persons acquire qualified ownership interests in a dwelling unit, and the person (or persons) holding 1 or more of such interests— is entitled to occupy the dwelling unit for use as a principal residence, and is required to pay rent to 1 or more other persons holding qualified ownership interests in the dwelling unit. For purposes of this paragraph, the term “qualified ownership interest” means an undivided interest for more than 50 years in the entire dwelling unit and appurtenant land being acquired in the transaction to which the shared equity financing agreement relates. For purposes of applying subsection (c)(5) to deductions allocable to a qualified rental period, a taxpayer shall not be considered to have used a dwelling unit for personal purposes for any day during the taxable year which occurs before or after a qualified rental period described in subparagraph (B)(i), or before a qualified rental period described in subparagraph (B)(ii), if with respect to such day such unit constitutes the principal residence (within the meaning of section 121) of the taxpayer. For purposes of subparagraph (A), the term “qualified rental period” means a consecutive period of— 12 or more months which begins or ends in such taxable year, or less than 12 months which begins in such taxable year and at the end of which such dwelling unit is sold or exchanged, and for which such unit is rented, or is held for rental, at a fair rental.

(e) Expenses attributable to rental In any case where a taxpayer who is an individual or an S corporation uses a dwelling unit for personal purposes on any day during the taxable year (whether or not he is treated under this section as using such unit as a residence), the amount deductible under this chapter with respect to expenses attributable to the rental of the unit (or portion thereof) for the taxable year shall not exceed an amount which bears the same relationship to such expenses as the number of days during each year that the unit (or portion thereof) is rented at a fair rental bears to the total number of days during such year that the unit (or portion thereof) is used. This subsection shall not apply with respect to deductions which would be allowable under this chapter for the taxable year whether or not such unit (or portion thereof) was rented.

(f) Definitions and special rules For purposes of this section— The term “dwelling unit” includes a house, apartment, condominium, mobile home, boat, or similar property, and all structures or other property appurtenant to such dwelling unit. The term “dwelling unit” does not include that portion of a unit which is used exclusively as a hotel, motel, inn, or similar establishment. In the case of an S corporation, subparagraphs (A) and (B) of subsection (d)(2) shall be applied by substituting “any shareholder of the S corporation” for “the taxpayer” each place it appears. If subsection (a) applies with respect to any dwelling unit (or portion thereof) for the taxable year— section 183 (relating to activities not engaged in for profit) shall not apply to such unit (or portion thereof) for such year, but such year shall be taken into account as a taxable year for purposes of applying subsection (d) of section 183 (relating to 5-year presumption). Nothing in this section shall be construed to disallow any deduction allowable under section 162(a)(2) (or any deduction which meets the tests of section 162(a)(2) but is allowable under another provision of this title) by reason of the taxpayer’s being away from home in the pursuit of a trade or business (other than the trade or business of renting dwelling units).

(g) Special rule for certain rental use Notwithstanding any other provision of this section or section 183, if a dwelling unit is used during the taxable year by the taxpayer as a residence and such dwelling unit is actually rented for less than 15 days during the taxable year, then— no deduction otherwise allowable under this chapter because of the rental use of such dwelling unit shall be allowed, and the income derived from such use for the taxable year shall not be included in the gross income of such taxpayer under section 61.

§ 280B Demolition of structures

In the case of the demolition of any structure— no deduction otherwise allowable under this chapter shall be allowed to the owner or lessee of such structure for— any amount expended for such demolition, or any loss sustained on account of such demolition; and amounts described in paragraph (1) shall be treated as properly chargeable to capital account with respect to the land on which the demolished structure was located. (Added Pub. L. 94–455, title XXI, § 2124(b)(1) , Oct. 4, 1976 , 90 Stat. 1918 ; amended Pub. L. 95–600, title VII, § 701(f)(5) , Nov. 6, 1978 , 92 Stat. 2902 ; Pub. L. 96–541, § 2(b) , Dec. 17, 1980 , 94 Stat. 3204 ; Pub. L. 97–34, title II, § 212(d)(2)(C) , Aug. 13, 1981 , 95 Stat. 239 ; Pub. L. 98–369, div. A, title X, § 1063(a) , (b)(1), July 18, 1984 , 98 Stat. 1047 .)

§ 280C Certain expenses for which credits are allowable

(a) Rule for employment credits No deduction shall be allowed for that portion of the wages or salaries paid or incurred for the taxable year which is equal to the sum of the credits determined for the taxable year under sections 45A(a), 45P(a), 45S(a)(1)(A), 51(a), and 1396(a). No deduction shall be allowed for that portion of the premiums paid or incurred for the taxable year which is equal to that portion of the paid family and medical leave credit which is determined for the taxable year under section 45S(a)(1)(B). In the case of a corporation which is a member of a controlled group of corporations (within the meaning of section 52(a)) or a trade or business which is treated as being under common control with other trades or businesses (within the meaning of section 52(b)), this subsection shall be applied under rules prescribed by the Secretary similar to the rules applicable under subsections (a) and (b) of section 52.

(b) Credit for qualified clinical testing expenses for certain drugs No deduction shall be allowed for that portion of the qualified clinical testing expenses (as defined in section 45C(b)) otherwise allowable as a deduction for the taxable year which is equal to the amount of the credit allowable for the taxable year under section 45C (determined without regard to section 38(c)). If— the amount of the credit allowable for the taxable year under section 45C (determined without regard to section 38(c)), exceeds the amount allowable as a deduction for the taxable year for qualified clinical testing expenses (determined without regard to paragraph (1)), the amount chargeable to capital account for the taxable year for such expenses shall be reduced by the amount of such excess. In the case of any taxable year for which an election is made under this paragraph— paragraphs (1) and (2) shall not apply, and the amount of the credit under section 45C(a) shall be the amount determined under subparagraph (B). The amount of credit determined under this subparagraph for any taxable year shall be the amount equal to the excess of— the amount of credit determined under section 45C(a) without regard to this paragraph, over the product of— the amount described in clause (i), and the maximum rate of tax under section 11(b). An election under this paragraph for any taxable year shall be made not later than the time for filing the return of tax for such year (including extensions), shall be made on such return, and shall be made in such manner as the Secretary shall prescribe. Such an election, once made, shall be irrevocable. In the case of a corporation which is a member of a controlled group of corporations (within the meaning of section 41(f)(5)) or a trade or business which is treated as being under common control with other trades or business (within the meaning of section 41(f)(1)(B)), this subsection shall be applied under rules prescribed by the Secretary similar to the rules applicable under subparagraphs (A) and (B) of section 41(f)(1).

(c) Credit for increasing research activities The domestic research or experimental expenditures (as defined in section 174A(b)) otherwise taken into account as a deduction or charged to capital account under this chapter shall be reduced by the amount of the credit allowed under section 41(a). In the case of any taxable year for which an election is made under this paragraph— paragraph (1) shall not apply, and the amount of the credit under section 41(a) shall be the amount determined under subparagraph (B). The amount of credit determined under this subparagraph for any taxable year shall be the amount equal to the excess of— the amount of credit determined under section 41(a) without regard to this paragraph, over the product of— the amount described in clause (i), and the maximum rate of tax under section 11(b). An election under this paragraph for any taxable year shall be made not later than the time for filing the return of tax for such year (including extensions), shall be made on such return, and shall be made in such manner as the Secretary may prescribe. Such an election, once made, shall be irrevocable. Paragraph (3) of subsection (b) shall apply for purposes of this subsection.

(d) Credit for low sulfur diesel fuel production The deductions otherwise allowed under this chapter for the taxable year shall be reduced by the amount of the credit determined for the taxable year under section 45H(a).

(e) Mine rescue team training credit No deduction shall be allowed for that portion of the expenses otherwise allowable as a deduction for the taxable year which is equal to the amount of the credit determined for the taxable year under section 45N(a).

(f) Credit for security of agricultural chemicals No deduction shall be allowed for that portion of the expenses otherwise allowable as a deduction taken into account in determining the credit under section 45O for the taxable year which is equal to the amount of the credit determined for such taxable year under section 45O(a).

(g) Credit for health insurance premiums No deduction shall be allowed for the portion of the premiums paid by the taxpayer for coverage of 1 or more individuals under a qualified health plan which is equal to the amount of the credit determined for the taxable year under section 36B(a) with respect to such premiums.

(h) Credit for employee health insurance expenses of small employers No deduction shall be allowed for that portion of the premiums for qualified health plans (as defined in section 1301(a) of the Patient Protection and Affordable Care Act), or for health insurance coverage in the case of taxable years beginning in 2010, 2011, 2012, or 2013, paid by an employer which is equal to the amount of the credit determined under section 45R(a) with respect to the premiums.

[§ 280D Repealed. Pub. L. 100–418, title I, § 1941(b)(4)(A), Aug. 23, 1988, 102 Stat. 1324]

§ 280E Expenditures in connection with the illegal sale of drugs

No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted. (Added Pub. L. 97–248, title III, § 351(a) , Sept. 3, 1982 , 96 Stat. 640 .)

§ 280F Limitation on depreciation for luxury automobiles; limitation where certain property used for personal purposes

(a) Limitation on amount of depreciation for luxury automobiles The amount of the depreciation deduction for any taxable year for any passenger automobile shall not exceed— $10, 000 f or t h e 1 s tt a x ab l eye a r in t h ereco v ery p er i o d,$ 16,000 for the 2nd taxable year in the recovery period, $9, 600 f or t h e 3 r d t a x ab l eye a r in t h ereco v ery p er i o d, an d$ 5,760 for each succeeding taxable year in the recovery period. Except as provided in clause (ii), the unrecovered basis of any passenger automobile shall be treated as an expense for the 1st taxable year after the recovery period. Any excess of the unrecovered basis over the limitation of clause (ii) shall be treated as an expense in the succeeding taxable year. The amount treated as an expense under clause (i) for any taxable year shall not exceed $5,760. No amount shall be allowable as a deduction by reason of this subparagraph with respect to any property for any taxable year unless a depreciation deduction would be allowable with respect to such property for such taxable year. For purposes of this subtitle, any amount allowable as a deduction by reason of this subparagraph shall be treated as a depreciation deduction allowable under section 168. This subsection shall be applied before— the application of subsection (b), and the application of any other reduction in the amount of any depreciation deduction allowable under section 168 by reason of any use not qualifying the property for such credit or depreciation deduction.

(b) Limitation where business use of listed property not greater than 50 percent If any listed property is not predominantly used in a qualified business use for any taxable year, the deduction allowed under section 168 with respect to such property for such taxable year and any subsequent taxable year shall be determined under section 168(g) (relating to alternative depreciation system). If— property is predominantly used in a qualified business use in a taxable year in which it is placed in service, and such property is not predominantly used in a qualified business use for any subsequent taxable year, then any excess depreciation shall be included in gross income for the taxable year referred to in clause (ii), and the depreciation deduction for the taxable year referred to in clause (ii) and any subsequent taxable years shall be determined under section 168(g) (relating to alternative depreciation system). For purposes of subparagraph (A), the term “excess depreciation” means the excess (if any) of— the amount of the depreciation deductions allowable with respect to the property for taxable years before the 1st taxable year in which the property was not predominantly used in a qualified business use, over the amount which would have been so allowable if the property had not been predominantly used in a qualified business use for the taxable year in which it was placed in service. For purposes of this subsection, property shall be treated as predominantly used in a qualified business use for any taxable year if the business use percentage for such taxable year exceeds 50 percent.

(c) Treatment of leases This section shall not apply to any listed property leased or held for leasing by any person regularly engaged in the business of leasing such property. For purposes of determining the amount allowable as a deduction under this chapter for rentals or other payments under a lease for a period of 30 days or more of listed property, only the allowable percentage of such payments shall be taken into account. For purposes of paragraph (2), the allowable percentage shall be determined under tables prescribed by the Secretary. Such tables shall be prescribed so that the reduction in the deduction under paragraph (2) is substantially equivalent to the applicable restrictions contained in subsections (a) and (b). In determining the term of any lease for purposes of paragraph (2), the rules of section 168(i)(3)(A) shall apply. Under regulations prescribed by the Secretary, rules similar to the rules of subsection (b)(3) shall apply to any lessee to which paragraph (2) applies.

(d) Definitions and special rules For purposes of this section— Any deduction allowable under section 179 with respect to any listed property shall be subject to the limitations of subsections (a) and (b), and the limitation of paragraph (3) of this subsection, in the same manner as if it were a depreciation deduction allowable under section 168. Solely for purposes of determining the amount of the depreciation deduction for subsequent taxable years, if less than 100 percent of the use of any listed property during any taxable year is use in a trade or business (including the holding for the production of income), all of the use of such property during such taxable year shall be treated as use so described. Any employee use of listed property shall not be treated as use in a trade or business for purposes of determining the amount of any depreciation deduction allowable to the employee (or the amount of any deduction allowable to the employee for rentals or other payments under a lease of listed property) unless such use is for the convenience of the employer and required as a condition of employment. For purposes of subparagraph (A), the term “employee use” means any use in connection with the performance of services as an employee. Except as provided in subparagraph (B), the term “listed property” means— any passenger automobile, any other property used as a means of transportation, any property of a type generally used for purposes of entertainment, recreation, or amusement, and any other property of a type specified by the Secretary by regulations. Except to the extent provided in regulations, clause (ii) of subparagraph (A) shall not apply to any property substantially all of the use of which is in a trade or business of providing to unrelated persons services consisting of the transportation of persons or property for compensation or hire. Except as provided in subparagraph (B), the term “passenger automobile” means any 4-wheeled vehicle— which is manufactured primarily for use on public streets, roads, and highways, and which is rated at 6,000 pounds unloaded gross vehicle weight or less. In the case of a truck or van, clause (ii) shall be applied by substituting “gross vehicle weight” for “unloaded gross vehicle weight”. The term “passenger automobile” shall not include— any ambulance, hearse, or combination ambulance-hearse used by the taxpayer directly in a trade or business, any vehicle used by the taxpayer directly in the trade or business of transporting persons or property for compensation or hire, and under regulations, any truck or van. The term “business use percentage” means the percentage of the use of any listed property during any taxable year which is a qualified business use. Except as provided in subparagraph (C), the term “qualified business use” means any use in a trade or business of the taxpayer. The term “qualified business use” shall not include— leasing property to any 5-percent owner or related person, use of property provided as compensation for the performance of services by a 5-percent owner or related person, or use of property provided as compensation for the performance of services by any person not described in subclause (II) unless an amount is included in the gross income of such person with respect to such use, and, where required, there was withholding under chapter 24. Clause (i) shall not apply with respect to any aircraft if at least 25 percent of the total use of the aircraft during the taxable year consists of qualified business use not described in clause (i). For purposes of this paragraph— The term “5-percent owner” means any person who is a 5-percent owner with respect to the taxpayer (as defined in section 416(i)(1)(B)(i)). The term “related person” means any person related to the taxpayer (within the meaning of section 267(b)). In the case of any passenger automobile placed in service after 2018, subsection (a) shall be applied by increasing each dollar amount contained in such subsection by the automobile price inflation adjustment for the calendar year in which such automobile is placed in service. Any increase under the preceding sentence shall be rounded to the nearest multiple of $100 (or i f t h e in cre a se i s am u lt i pl eo f$ 50, such increase shall be increased to the next higher multiple of $100). For purposes of this paragraph— The automobile price inflation adjustment for any calendar year is the percentage (if any) by which— the C-CPI-U automobile component for October of the preceding calendar year, exceeds the automobile component of the CPI (as defined in section 1(f)(4)) for October of 2017, multiplied by the amount determined under 1(f)(3)(B). The term “C-CPI-U automobile component” means the automobile component of the Chained Consumer Price Index for All Urban Consumers (as described in section 1(f)(6)). For purposes of subsection (a)(1), the term “unrecovered basis” means the adjusted basis of the passenger automobile determined after the application of subsection (a) and as if all use during the recovery period were use in a trade or business (including the holding of property for the production of income). All taxpayers holding interests in any passenger automobile shall be treated as 1 taxpayer for purposes of applying subsection (a) to such automobile, and the limitations of subsection (a) shall be allocated among such taxpayers in proportion to their interests in such automobile. For purposes of subsection (a)(1) any property acquired in a nonrecognition transaction shall be treated as a single property originally placed in service in the taxable year in which it was placed in service after being so acquired.

(e) Regulations The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section, including regulations with respect to items properly included in, or excluded from, the adjusted basis of any listed property.

§ 280G Golden parachute payments

(a) General rule No deduction shall be allowed under this chapter for any excess parachute payment.

(b) Excess parachute payment For purposes of this section— The term “excess parachute payment” means an amount equal to the excess of any parachute payment over the portion of the base amount allocated to such payment. The term “parachute payment” means any payment in the nature of compensation to (or for the benefit of) a disqualified individual if— such payment is contingent on a change— in the ownership or effective control of the corporation, or in the ownership of a substantial portion of the assets of the corporation, and the aggregate present value of the payments in the nature of compensation to (or for the benefit of) such individual which are contingent on such change equals or exceeds an amount equal to 3 times the base amount. For purposes of clause (ii), payments not treated as parachute payments under paragraph (4)(A), (5), or (6) shall not be taken into account. The term “parachute payment” shall also include any payment in the nature of compensation to (or for the benefit of) a disqualified individual if such payment is made pursuant to an agreement which violates any generally enforced securities laws or regulations. In any proceeding involving the issue of whether any payment made to a disqualified individual is a parachute payment on account of a violation of any generally enforced securities laws or regulations, the burden of proof with respect to establishing the occurrence of a violation of such a law or regulation shall be upon the Secretary. For purposes of subparagraph (A)(i), any payment pursuant to— an agreement entered into within 1 year before the change described in subparagraph (A)(i), or an amendment made within such 1-year period of a previous agreement, shall be presumed to be contingent on such change unless the contrary is established by clear and convincing evidence. The term “base amount” means the individual’s annualized includible compensation for the base period. The portion of the base amount allocated to any parachute payment shall be an amount which bears the same ratio to the base amount as— the present value of such payment, bears to the aggregate present value of all such payments. In the case of any payment described in paragraph (2)(A)— the amount treated as a parachute payment shall not include the portion of such payment which the taxpayer establishes by clear and convincing evidence is reasonable compensation for personal services to be rendered on or after the date of the change described in paragraph (2)(A)(i), and the amount treated as an excess parachute payment shall be reduced by the portion of such payment which the taxpayer establishes by clear and convincing evidence is reasonable compensation for personal services actually rendered before the date of the change described in paragraph (2)(A)(i). For purposes of subparagraph (B), reasonable compensation for services actually rendered before the date of the change described in paragraph (2)(A)(i) shall be first offset against the base amount. Notwithstanding paragraph (2), the term “parachute payment” does not include— any payment to a disqualified individual with respect to a corporation which (immediately before the change described in paragraph (2)(A)(i)) was a small business corporation (as defined in section 1361(b) but without regard to paragraph (1)(C) thereof), and any payment to a disqualified individual with respect to a corporation (other than a corporation described in clause (i)) if— immediately before the change described in paragraph (2)(A)(i), no stock in such corporation was readily tradeable on an established securities market or otherwise, and the shareholder approval requirements of subparagraph (B) are met with respect to such payment. The Secretary may, by regulations, prescribe that the requirements of subclause (I) of clause (ii) are not met where a substantial portion of the assets of any entity consists (directly or indirectly) of stock in such corporation and interests in such other entity are readily tradeable on an established securities market, or otherwise. Stock described in section 1504(a)(4) shall not be taken into account under clause (ii)(I) if the payment does not adversely affect the shareholder’s redemption and liquidation rights. The shareholder approval requirements of this subparagraph are met with respect to any payment if— such payment was approved by a vote of the persons who owned, immediately before the change described in paragraph (2)(A)(i), more than 75 percent of the voting power of all outstanding stock of the corporation, and there was adequate disclosure to shareholders of all material facts concerning all payments which (but for this paragraph) would be parachute payments with respect to a disqualified individual. The regulations prescribed under subsection (e) shall include regulations providing for the application of this subparagraph in the case of shareholders which are not individuals (including the treatment of nonvoting interests in an entity which is a shareholder) and where an entity holds a de minimis amount of stock in the corporation. Notwithstanding paragraph (2), the term “parachute payment” shall not include any payment to or from— a plan described in section 401(a) which includes a trust exempt from tax under section 501(a), an annuity plan described in section 403(a), a simplified employee pension (as defined in section 408(k)), or a simple retirement account described in section 408(p).

(c) Disqualified individuals For purposes of this section, the term “disqualified individual” means any individual who is— an employee, independent contractor, or other person specified in regulations by the Secretary who performs personal services for any corporation, and is an officer, shareholder, or highly-compensated individual. For purposes of this section, a personal service corporation (or similar entity) shall be treated as an individual. For purposes of paragraph (2), the term “highly-compensated individual” only includes an individual who is (or would be if the individual were an employee) a member of the group consisting of the highest paid 1 percent of the employees of the corporation or, if less, the highest paid 250 employees of the corporation.

(d) Other definitions and special rules For purposes of this section— The term “annualized includible compensation for the base period” means the average annual compensation which— was payable by the corporation with respect to which the change in ownership or control described in paragraph (2)(A) of subsection (b) occurs, and was includible in the gross income of the disqualified individual for taxable years in the base period. The term “base period” means the period consisting of the most recent 5 taxable years ending before the date on which the change in ownership or control described in paragraph (2)(A) of subsection (b) occurs (or such portion of such period during which the disqualified individual performed personal services for the corporation). Any transfer of property— shall be treated as a payment, and shall be taken into account as its fair market value. Present value shall be determined by using a discount rate equal to 120 percent of the applicable Federal rate (determined under section 1274(d)), compounded semiannually. Except as otherwise provided in regulations, all members of the same affiliated group (as defined in section 1504, determined without regard to section 1504(b)) shall be treated as 1 corporation for purposes of this section. Any person who is an officer of any member of such group shall be treated as an officer of such 1 corporation.

(e) Special rule for application to employers participating in the Troubled Assets Relief Program In the case of the severance from employment of a covered executive of an applicable employer during the period during which the authorities under section 101(a) of the Emergency Economic Stabilization Act of 2008 are in effect (determined under section 120 of such Act), this section shall be applied to payments to such executive with the following modifications: Any reference to a disqualified individual (other than in subsection (c)) shall be treated as a reference to a covered executive. Any reference to a change described in subsection (b)(2)(A)(i) shall be treated as a reference to an applicable severance from employment of a covered executive, and any reference to a payment contingent on such a change shall be treated as a reference to any payment made during an applicable taxable year of the employer on account of such applicable severance from employment. Any reference to a corporation shall be treated as a reference to an applicable employer. The provisions of subsections (b)(2)(C), (b)(4), (b)(5), and (d)(5) shall not apply. For purposes of this subsection: Any term used in this subsection which is also used in section 162(m)(5) shall have the meaning given such term by such section. The term “applicable severance from employment” means any severance from employment of a covered executive— by reason of an involuntary termination of the executive by the employer, or in connection with any bankruptcy, liquidation, or receivership of the employer. If a payment which is treated as a parachute payment by reason of this subsection is also a parachute payment determined without regard to this subsection, this subsection shall not apply to such payment. The Secretary may prescribe such guidance, rules, or regulations as are necessary— to carry out the purposes of this subsection and the Emergency Economic Stabilization Act of 2008, including the extent to which this subsection applies in the case of any acquisition, merger, or reorganization of an applicable employer, to apply this section and section 4999 in cases where one or more payments with respect to any individual are treated as parachute payments by reason of this subsection, and other payments with respect to such individual are treated as parachute payments under this section without regard to this subsection, and to prevent the avoidance of the application of this section through the mischaracterization of a severance from employment as other than an applicable severance from employment.

(f) Regulations The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section (including regulations for the application of this section in the case of related corporations and in the case of personal service corporations).

§ 280H Limitation on certain amounts paid to employee-owners by personal service corporations electing alternative taxable years

(a) General rule If— an election by a personal service corporation under section 444 is in effect for a taxable year, and such corporation does not meet the minimum distribution requirements of subsection (c) for such taxable year, then the deduction otherwise allowed under this chapter for applicable amounts paid or incurred by such corporation to employee-owners shall not exceed the maximum deductible amount. The preceding sentence shall not apply for purposes of subchapter G (relating to personal holding companies).

(b) Carryover of nondeductible amounts If any amount is not allowed as a deduction for a taxable year under subsection (a), such amount shall be treated as paid or incurred in the succeeding taxable year.

(c) Minimum distribution requirement For purposes of this section— A personal service corporation meets the minimum distribution requirements of this subsection if the applicable amounts paid or incurred during the deferral period of the taxable year (determined without regard to subsection (b)) equal or exceed the lesser of— the product of— the applicable amounts paid during the preceding taxable year, divided by the number of months in such taxable year, multiplied by the number of months in the deferral period of the preceding taxable year, or the applicable percentage of the adjusted taxable income for the deferral period of the taxable year. The term “applicable percentage” means the percentage (not in excess of 95 percent) determined by dividing— the applicable amounts paid or incurred during the 3 taxable years immediately preceding the taxable year, by the adjusted taxable income of such corporation for such 3 taxable years.

(d) Maximum deductible amount For purposes of this section, the term “maximum deductible amount” means the sum of— the applicable amounts paid during the deferral period, plus an amount equal to the product of— the amount determined under paragraph (1), divided by the number of months in the deferral period, multiplied by the number of months in the nondeferral period.

(e) Disallowance of net operating loss carrybacks No net operating loss carryback shall be allowed to (or from) any taxable year of a personal service corporation to which an election under section 444 applies.

(f) Other definitions and special rules For purposes of this section— The term “applicable amount” means any amount paid to an employee-owner which is includible in the gross income of such employee, other than— any gain from the sale or exchange of property between the owner-employee and the corporation, or any dividend paid by the corporation. The term “employee-owner” has the meaning given such term by section 269A(b)(2) (as modified by section 441(i)(2)). The term “deferral period” has the meaning given to such term by section 444(b)(4). The term “nondeferral period” means the portion of the taxable year of the personal service corporation which occurs after the portion of such year constituting the deferral period. The term “adjusted taxable income” means taxable income determined without regard to— any amount paid to an employee-owner which is includible in the gross income of such employee-owner, and any net operating loss carryover to the extent such carryover is attributable to amounts described in subparagraph (A). The term “personal service corporation” has the meaning given to such term by section 441(i)(2).

§ 281 Terminal railroad corporations and their shareholders

(a) Computation of taxable income of terminal railroad corporations In computing the taxable income of a terminal railroad corporation— such corporation shall not be considered to have received or accrued— the portion of any liability of any railroad corporation, with respect to related terminal services provided by such corporation, which is discharged by crediting such liability with an amount of related terminal income, or the portion of any charge which would be made by such corporation for related terminal services provided by it, but which is not made as a result of taking related terminal income into account in computing such charge; and no deduction otherwise allowable under this chapter shall be disallowed as a result of any discharge of liability described in subparagraph (A)(i) or as a result of any computation of charges in the manner described in subparagraph (A)(ii). In the case of any taxable year ending after the date of the enactment of this section, paragraph (1) shall not apply to the extent that it would (but for this paragraph) operate to create (or increase) a net operating loss for the terminal railroad corporation for the taxable year.

(b) Computation of taxable income of shareholders Subject to the limitation in subsection (a)(2), in computing the taxable income of any shareholder of a terminal railroad corporation, no amount shall be considered to have been received or accrued or paid or incurred by such shareholder as a result of any discharge of liability described in subsection (a)(1)(A)(i) or as a result of any computation of charges in the manner described in subsection (a)(1)(A)(ii).

(c) Agreement required In the case of any taxable year, subsections (a) and (b) shall apply with respect to any discharge of liability described in subsection (a)(1)(A)(i), and to any computation of charges in the manner described in subsection (a)(1)(A)(ii), only if such discharge or computation (as the case may be) was provided for in a written agreement, to which all of the shareholders of the terminal railroad corporation were parties, entered into before the beginning of such taxable year.

(d) Definitions For purposes of this section— The term “terminal railroad corporation” means a domestic railroad corporation which is not a member, other than as a common parent corporation, of an affiliated group (as defined in section 1504) and— all of the shareholders of which are rail carriers subject to part A of subtitle IV of title 49; the primary business of which is the providing of railroad terminal and switching facilities and services to rail carriers subject to part A of subtitle IV of title 49 and to the shippers and passengers of such railroad corporations; a substantial part of the services of which for the taxable year is rendered to one or more of its shareholders; and each shareholder of which computes its taxable income on the basis of a taxable year beginning or ending on the same day that the taxable year of the terminal railroad corporation begins or ends. The term “related terminal income” means the income (determined in accordance with regulations prescribed by the Secretary) of a terminal railroad corporation derived— from services or facilities of a character ordinarily and regularly provided by terminal railroad corporations for railroad corporations or for the employees, passengers, or shippers of railroad corporations; from the use by persons other than railroad corporations of portions of a facility, or a service, which is used primarily for railroad purposes; from any railroad corporation for services or facilities provided by such terminal railroad corporation in connection with railroad operations; and from the United States in payment for facilities or services in connection with mail handling. For purposes of subparagraph (B), a substantial addition, constructed after the date of the enactment of this section, to a facility shall be treated as a separate facility. The term “related terminal services” includes only services, and the use of facilities, taken into account in computing related terminal income.

(e) Regulations The Secretary shall prescribe such regulations as may be necessary to carry out the purposes of this section.

§ 291 Special rules relating to corporate preference items

(a) Reduction in certain preference items, etc. For purposes of this subtitle, in the case of a corporation— In the case of section 1250 property which is disposed of during the taxable year, 20 percent of the excess (if any) of— the amount which would be treated as ordinary income if such property was section 1245 property, over the amount treated as ordinary income under section 1250 (determined without regard to this paragraph), shall be treated as gain which is ordinary income under section 1250 and shall be recognized notwithstanding any other provision of this title. Under regulations prescribed by the Secretary, the provisions of this paragraph shall not apply to the disposition of any property to the extent section 1250(a) does not apply to such disposition by reason of section 1250(d). In the case of iron ore and coal (including lignite), the amount allowable as a deduction under section 613 with respect to any property (as defined in section 614) shall be reduced by 20 percent of the amount of the excess (if any) of— the amount of the deduction allowable under section 613 for the taxable year (determined without regard to this paragraph), over the adjusted basis of the property at the close of the taxable year (determined without regard to the depletion deduction for the taxable year). The amount allowable as a deduction under this chapter (determined without regard to this section) with respect to any financial institution preference item shall be reduced by 20 percent. If an election is made under section 169 with respect to any certified pollution control facility, the amortizable basis of such facility for purposes of such section shall be reduced by 20 percent.

(b) Special rules for treatment of intangible drilling costs and mineral exploration and development costs For purposes of this subtitle, in the case of a corporation— The amount allowable as a deduction for any taxable year (determined without regard to this section)— under section 263(c) in the case of an integrated oil company, or under section 616(a) or 617(a), shall be reduced by 30 percent. The amount not allowable as a deduction under section 263(c), 616(a), or 617(a) (as the case may be) for any taxable year by reason of paragraph (1) shall be allowable as a deduction ratably over the 60-month period beginning with the month in which the costs are paid or incurred. For purposes of section 1254, any deduction under paragraph (2) shall be treated as a deduction allowable under section 263(c), 616(a), or 617(a) (whichever is appropriate). For purposes of this subsection, the term “integrated oil company” means, with respect to any taxable year, any producer of crude oil to whom subsection (c) of section 613A does not apply by reason of paragraph (2) or (4) of section 613A(d). The portion of the adjusted basis of any property which is attributable to amounts to which paragraph (1) applied shall not be taken into account for purposes of determining depletion under section 611.

(c) Special rules relating to pollution control facilities For purposes of this subtitle— Section 168 shall apply with respect to that portion of the basis of any property not taken into account under section 169 by reason of subsection (a)(4). Subsection (a)(1) shall not apply to any section 1250 property which is part of a certified pollution control facility (within the meaning of section 169(d)(1)) with respect to which an election under section 169 was made.

(d) Special rule for real estate investment trusts In the case of a real estate investment trust (as defined in section 856), the difference between the amounts described in subparagraphs (A) and (B) of subsection (a)(1) shall be reduced to the extent that a capital gain dividend (as defined in section 857(b)(3)(C), 1 applied without regard to this section) is treated as paid out of such difference. Any capital gain dividend treated as having been paid out of such difference to a shareholder which is an applicable corporation retains its character in the hands of the shareholder as gain from the disposition of section 1250 property for purposes of applying subsection (a)(1) to such shareholder.

(e) Definitions For purposes of this section— The term “financial institution preference item” includes the following: In the case of a financial institution which is a bank (as defined in section 585(a)(2)), the amount of interest on indebtedness incurred or continued to purchase or carry obligations acquired after December 31, 1982 , and before August 8, 1986 , the interest on which is exempt from taxes for the taxable year, to the extent that a deduction would (but for this paragraph or section 265(b)) be allowable with respect to such interest for such taxable year. Unless the taxpayer (under regulations prescribed by the Secretary) establishes otherwise, the amount determined under clause (i) shall be an amount which bears the same ratio to the aggregate amount allowable (determined without regard to this section and section 265(b)) to the taxpayer as a deduction for interest for the taxable year as— the taxpayer’s average adjusted basis (within the meaning of section 1016) of obligations described in clause (i), bears to such average adjusted basis for all assets of the taxpayer. For purposes of this subparagraph, the term “interest” includes amounts (whether or not designated as interest) paid in respect of deposits, investment certificates, or withdrawable or repurchasable shares. For application of this subparagraph to certain obligations issued after August 7, 1986 , see section 265(b)(3). That portion of any obligation not taken into account under paragraph (2)(A) of section 265(b) by reason of paragraph (7) of such section shall be treated for purposes of this section as having been acquired on August 7, 1986 . The terms “section 1245 property” and “section 1250 property” have the meanings given such terms by sections 1245(a)(3) and 1250(c), respectively.

§ 301 Distributions of property

(a) In general Except as otherwise provided in this chapter, a distribution of property (as defined in section 317(a)) made by a corporation to a shareholder with respect to its stock shall be treated in the manner provided in subsection (c).

(b) Amount distributed For purposes of this section, the amount of any distribution shall be the amount of money received, plus the fair market value of the other property received. The amount of any distribution determined under paragraph (1) shall be reduced (but not below zero) by— the amount of any liability of the corporation assumed by the shareholder in connection with the distribution, and the amount of any liability to which the property received by the shareholder is subject immediately before, and immediately after, the distribution. For purposes of this section, fair market value shall be determined as of the date of the distribution.

(c) Amount taxable In the case of a distribution to which subsection (a) applies— That portion of the distribution which is a dividend (as defined in section 316) shall be included in gross income. That portion of the distribution which is not a dividend shall be applied against and reduce the adjusted basis of the stock. Except as provided in subparagraph (B), that portion of the distribution which is not a dividend, to the extent that it exceeds the adjusted basis of the stock, shall be treated as gain from the sale or exchange of property. That portion of the distribution which is not a dividend, to the extent that it exceeds the adjusted basis of the stock and to the extent that it is out of increase in value accrued before March 1, 1913 , shall be exempt from tax.

(d) Basis The basis of property received in a distribution to which subsection (a) applies shall be the fair market value of such property.

(e) Special rule for certain distributions received by 20 percent corporate shareholder Except to the extent otherwise provided in regulations, solely for purposes of determining the taxable income of any 20 percent corporate shareholder (and its adjusted basis in the stock of the distributing corporation), section 312 shall be applied with respect to the distributing corporation as if it did not contain subsections (k) and (n) thereof. For purposes of this subsection, the term “20 percent corporate shareholder” means, with respect to any distribution, any corporation which owns (directly or through the application of section 318)— stock in the corporation making the distribution possessing at least 20 percent of the total combined voting power of all classes of stock entitled to vote, or at least 20 percent of the total value of all stock of the distributing corporation (except nonvoting stock which is limited and preferred as to dividends), but only if, but for this subsection, the distributee corporation would be entitled to a deduction under section 243 or 245 with respect to such distribution. The reference in paragraph (1) to subsection (n) of section 312 shall be treated as not including a reference to paragraph (7) of such subsection. The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this subsection.

(f) Special rules For distributions in redemption of stock, see section 302. For distributions in complete liquidation, see part II (sec. 331 and following). For distributions in corporate organizations and reorganizations, see part III (sec. 351 and following). For taxation of dividends received by individuals at capital gain rates, see section 1(h)(11).

§ 302 Distributions in redemption of stock

(a) General rule If a corporation redeems its stock (within the meaning of section 317(b)), and if paragraph (1), (2), (3), (4), or (5) of subsection (b) applies, such redemption shall be treated as a distribution in part or full payment in exchange for the stock.

(b) Redemptions treated as exchanges Subsection (a) shall apply if the redemption is not essentially equivalent to a dividend. Subsection (a) shall apply if the distribution is substantially disproportionate with respect to the shareholder. This paragraph shall not apply unless immediately after the redemption the shareholder owns less than 50 percent of the total combined voting power of all classes of stock entitled to vote. For purposes of this paragraph, the distribution is substantially disproportionate if— the ratio which the voting stock of the corporation owned by the shareholder immediately after the redemption bears to all of the voting stock of the corporation at such time, is less than 80 percent of— the ratio which the voting stock of the corporation owned by the shareholder immediately before the redemption bears to all of the voting stock of the corporation at such time. For purposes of this paragraph, no distribution shall be treated as substantially disproportionate unless the shareholder’s ownership of the common stock of the corporation (whether voting or nonvoting) after and before redemption also meets the 80 percent requirement of the preceding sentence. For purposes of the preceding sentence, if there is more than one class of common stock, the determinations shall be made by reference to fair market value. This paragraph shall not apply to any redemption made pursuant to a plan the purpose or effect of which is a series of redemptions resulting in a distribution which (in the aggregate) is not substantially disproportionate with respect to the shareholder. Subsection (a) shall apply if the redemption is in complete redemption of all of the stock of the corporation owned by the shareholder. Subsection (a) shall apply to a distribution if such distribution is— in redemption of stock held by a shareholder who is not a corporation, and in partial liquidation of the distributing corporation. Except to the extent provided in regulations prescribed by the Secretary, subsection (a) shall apply to any distribution in redemption of stock of a publicly offered regulated investment company (within the meaning of section 67(c)(2)(B)) if— such redemption is upon the demand of the stockholder, and such company issues only stock which is redeemable upon the demand of the stockholder. In determining whether a redemption meets the requirements of paragraph (1), the fact that such redemption fails to meet the requirements of paragraph (2), (3), or (4) shall not be taken into account. If a redemption meets the requirements of paragraph (3) and also the requirements of paragraph (1), (2), or (4), then so much of subsection (c)(2) as would (but for this sentence) apply in respect of the acquisition of an interest in the corporation within the 10-year period beginning on the date of the distribution shall not apply.

(c) Constructive ownership of stock Except as provided in paragraph (2) of this subsection, section 318(a) shall apply in determining the ownership of stock for purposes of this section. In the case of a distribution described in subsection (b)(3), section 318(a)(1) shall not apply if— immediately after the distribution the distributee has no interest in the corporation (including an interest as officer, director, or employee), other than an interest as a creditor, the distributee does not acquire any such interest (other than stock acquired by bequest or inheritance) within 10 years from the date of such distribution, and the distributee, at such time and in such manner as the Secretary by regulations prescribes, files an agreement to notify the Secretary of any acquisition described in clause (ii) and to retain such records as may be necessary for the application of this paragraph. If the distributee acquires such an interest in the corporation (other than by bequest or inheritance) within 10 years from the date of the distribution, then the periods of limitation provided in sections 6501 and 6502 on the making of an assessment and the collection by levy or a proceeding in court shall, with respect to any deficiency (including interest and additions to the tax) resulting from such acquisition, include one year immediately following the date on which the distributee (in accordance with regulations prescribed by the Secretary) notifies the Secretary of such acquisition; and such assessment and collection may be made notwithstanding any provision of law or rule of law which otherwise would prevent such assessment and collection. Subparagraph (A) of this paragraph shall not apply if— any portion of the stock redeemed was acquired, directly or indirectly, within the 10-year period ending on the date of the distribution by the distributee from a person the ownership of whose stock would (at the time of distribution) be attributable to the distributee under section 318(a), or any person owns (at the time of the distribution) stock the ownership of which is attributable to the distributee under section 318(a) and such person acquired any stock in the corporation, directly or indirectly, from the distributee within the 10-year period ending on the date of the distribution, unless such stock so acquired from the distributee is redeemed in the same transaction. The preceding sentence shall not apply if the acquisition (or, in the case of clause (ii), the disposition) by the distributee did not have as one of its principal purposes the avoidance of Federal income tax. Subparagraph (A) shall not apply to a distribution to any entity unless— such entity and each related person meet the requirements of clauses (i), (ii), and (iii) of subparagraph (A), and each related person agrees to be jointly and severally liable for any deficiency (including interest and additions to tax) resulting from an acquisition described in clause (ii) of subparagraph (A). In any case to which the preceding sentence applies, the second sentence of subparagraph (A) and subparagraph (B)(ii) shall be applied by substituting “distributee or any related person” for “distributee” each place it appears. For purposes of this subparagraph— the term “entity” means a partnership, estate, trust, or corporation; and the term “related person” means any person to whom ownership of stock in the corporation is (at the time of the distribution) attributable under section 318(a)(1) if such stock is further attributable to the entity under section 318(a)(3).

(d) Redemptions treated as distributions of property Except as otherwise provided in this subchapter, if a corporation redeems its stock (within the meaning of section 317(b)), and if subsection (a) of this section does not apply, such redemption shall be treated as a distribution of property to which section 301 applies.

(e) Partial liquidation defined For purposes of subsection (b)(4), a distribution shall be treated as in partial liquidation of a corporation if— the distribution is not essentially equivalent to a dividend (determined at the corporate level rather than at the shareholder level), and the distribution is pursuant to a plan and occurs within the taxable year in which the plan is adopted or within the succeeding taxable year. The distributions which meet the requirements of paragraph (1)(A) shall include (but shall not be limited to) a distribution which meets the requirements of subparagraphs (A) and (B) of this paragraph: The distribution is attributable to the distributing corporation’s ceasing to conduct, or consists of the assets of, a qualified trade or business. Immediately after the distribution, the distributing corporation is actively engaged in the conduct of a qualified trade or business. For purposes of paragraph (2), the term “qualified trade or business” means any trade or business which— was actively conducted throughout the 5-year period ending on the date of the redemption, and was not acquired by the corporation within such period in a transaction in which gain or loss was recognized in whole or in part. Whether or not a redemption meets the requirements of subparagraphs (A) and (B) of paragraph (2) shall be determined without regard to whether or not the redemption is pro rata with respect to all of the shareholders of the corporation. For purposes of determining under subsection (b)(4) whether any stock is held by a shareholder who is not a corporation, any stock held by a partnership, estate, or trust shall be treated as if it were actually held proportionately by its partners or beneficiaries.

(f) Cross references For special rules relating to redemption— Of stock to pay death taxes, see section 303. Of section 306 stock, see section 306. Of stock in complete liquidation, see section 331.

§ 303 Distributions in redemption of stock to pay death taxes

(a) In general A distribution of property to a shareholder by a corporation in redemption of part or all of the stock of such corporation which (for Federal estate tax purposes) is included in determining the gross estate of a decedent, to the extent that the amount of such distribution does not exceed the sum of— the estate, inheritance, legacy, and succession taxes (including any interest collected as a part of such taxes) imposed because of such decedent’s death, and the amount of funeral and administration expenses allowable as deductions to the estate under section 2053 (or under section 2106 in the case of the estate of a decedent nonresident, not a citizen of the United States), shall be treated as a distribution in full payment in exchange for the stock so redeemed.

(b) Limitations on application of subsection (a) Subsection (a) shall apply only to amounts distributed after the death of the decedent and— within the period of limitations provided in section 6501(a) for the assessment of the Federal estate tax (determined without the application of any provision other than section 6501(a)), or within 90 days after the expiration of such period, if a petition for redetermination of a deficiency in such estate tax has been filed with the Tax Court within the time prescribed in section 6213, at any time before the expiration of 60 days after the decision of the Tax Court becomes final, or if an election has been made under section 6166 and if the time prescribed by this subparagraph expires at a later date than the time prescribed by subparagraph (B) of this paragraph, within the time determined under section 6166 for the payment of the installments. Subsection (a) shall apply to a distribution by a corporation only if the value (for Federal estate tax purposes) of all of the stock of such corporation which is included in determining the value of the decedent’s gross estate exceeds 35 percent of the excess of— the value of the gross estate of such decedent, over the sum of the amounts allowable as a deduction under section 2053 or 2054. For purposes of subparagraph (A), stock of 2 or more corporations, with respect to each of which there is included in determining the value of the decedent’s gross estate 20 percent or more in value of the outstanding stock, shall be treated as the stock of a single corporation. For purposes of the 20-percent requirement of the preceding sentence, stock which, at the decedent’s death, represents the surviving spouse’s interest in property held by the decedent and the surviving spouse as community property or as joint tenants, tenants by the entirety, or tenants in common shall be treated as having been included in determining the value of the decedent’s gross estate. Subsection (a) shall apply to a distribution by a corporation only to the extent that the interest of the shareholder is reduced directly (or through a binding obligation to contribute) by any payment of an amount described in paragraph (1) or (2) of subsection (a). In the case of amounts distributed more than 4 years after the date of the decedent’s death, subsection (a) shall apply to a distribution by a corporation only to the extent of the lesser of— the aggregate of the amounts referred to in paragraph (1) or (2) of subsection (a) which remained unpaid immediately before the distribution, or the aggregate of the amounts referred to in paragraph (1) or (2) of subsection (a) which are paid during the 1-year period beginning on the date of such distribution.

(c) Stock with substituted basis If— a shareholder owns stock of a corporation (referred to in this subsection as “new stock”) the basis of which is determined by reference to the basis of stock of a corporation (referred to in this subsection as “old stock”), the old stock was included (for Federal estate tax purposes) in determining the gross estate of a decedent, and subsection (a) would apply to a distribution of property to such shareholder in redemption of the old stock, then, subject to the limitation specified in subsection (b), subsection (a) shall apply in respect of a distribution in redemption of the new stock.

(d) Special rules for generation-skipping transfers Where stock in a corporation is the subject of a generation-skipping transfer (within the meaning of section 2611(a)) occurring at the same time as and as a result of the death of an individual— the stock shall be deemed to be included in the gross estate of such individual; taxes of the kind referred to in subsection (a)(1) which are imposed because of the generation-skipping transfer shall be treated as imposed because of such individual’s death (and for this purpose the tax imposed by section 2601 shall be treated as an estate tax); the period of distribution shall be measured from the date of the generation-skipping transfer; and the relationship of stock to the decedent’s estate shall be measured with reference solely to the amount of the generation-skipping transfer.

(a) Treatment of certain stock purchases For purposes of sections 302 and 303, if— one or more persons are in control of each of two corporations, and in return for property, one of the corporations acquires stock in the other corporation from the person (or persons) so in control, then (unless paragraph (2) applies) such property shall be treated as a distribution in redemption of the stock of the corporation acquiring such stock. To the extent that such distribution is treated as a distribution to which section 301 applies, the transferor and the acquiring corporation shall be treated in the same manner as if the transferor had transferred the stock so acquired to the acquiring corporation in exchange for stock of the acquiring corporation in a transaction to which section 351(a) applies, and then the acquiring corporation had redeemed the stock it was treated as issuing in such transaction. For purposes of sections 302 and 303, if— in return for property, one corporation acquires from a shareholder of another corporation stock in such other corporation, and the issuing corporation controls the acquiring corporation, then such property shall be treated as a distribution in redemption of the stock of the issuing corporation.

(b) Special rules for application of subsection (a) In the case of any acquisition of stock to which subsection (a) of this section applies, determinations as to whether the acquisition is, by reason of section 302(b), to be treated as a distribution in part or full payment in exchange for the stock shall be made by reference to the stock of the issuing corporation. In applying section 318(a) (relating to constructive ownership of stock) with respect to section 302(b) for purposes of this paragraph, sections 318(a)(2)(C) and 318(a)(3)(C) shall be applied without regard to the 50 percent limitation contained therein. In the case of any acquisition of stock to which subsection (a) applies, the determination of the amount which is a dividend (and the source thereof) shall be made as if the property were distributed— by the acquiring corporation to the extent of its earnings and profits, and then by the issuing corporation to the extent of its earnings and profits. Except as otherwise provided in this paragraph, subsection (a) (and not section 351 and not so much of sections 357 and 358 as relates to section 351) shall apply to any property received in a distribution described in subsection (a). In the case of an acquisition described in section 351, subsection (a) shall not apply to any liability— assumed by the acquiring corporation, or to which the stock is subject, if such liability was incurred by the transferor to acquire the stock. For purposes of the preceding sentence, the term “stock” means stock referred to in paragraph (1)(B) or (2)(A) of subsection (a). For purposes of clause (i), an extension, renewal, or refinancing of a liability which meets the requirements of clause (i) shall be treated as meeting such requirements. Clause (i) shall apply only to stock acquired by the transferor from a person— none of whose stock is attributable to the transferor under section 318(a) (other than paragraph (4) thereof), or who satisfies rules similar to the rules of section 302(c)(2) with respect to both the acquiring and the issuing corporations (determined as if such person were a distributee of each such corporation). If— pursuant to a plan, control of a bank is acquired and within 2 years after the date on which such control is acquired, stock constituting control of such bank is transferred to a BHC in connection with its formation, incident to the formation of the BHC there is a distribution of property described in subsection (a), and the shareholders of the BHC who receive distributions of such property do not have control of such BHC, then, subsection (a) shall not apply to any securities received by a qualified minority shareholder incident to the formation of such BHC. For purposes of this subparagraph, any assumption of (or acquisition of stock subject to) a liability under subparagraph (B) shall not be treated as a distribution of property. For purposes of subparagraph (C) and this subparagraph— The term “qualified minority shareholder” means any shareholder who owns less than 10 percent (in value) of the stock of the BHC. For purposes of the preceding sentence, the rules of paragraph (3) of subsection (c) shall apply. The term “BHC” means a bank holding company (within the meaning of section 2(a) of the Bank Holding Company Act of 1956). In the case of any transfer described in subsection (a) of stock from 1 member of an affiliated group to another member of such group, proper adjustments shall be made to— the adjusted basis of any intragroup stock, and the earnings and profits of any member of such group, to the extent necessary to carry out the purposes of this section. For purposes of this paragraph— The term “affiliated group” has the meaning given such term by section 1504(a). The term “intragroup stock” means any stock which— is in a corporation which is a member of an affiliated group, and is held by another member of such group. In the case of any acquisition to which subsection (a) applies in which the acquiring corporation is a foreign corporation, the only earnings and profits taken into account under paragraph (2)(A) shall be those earnings and profits— which are attributable (under regulations prescribed by the Secretary) to stock of the acquiring corporation owned (within the meaning of section 958(a)) by a corporation or individual which is— a United States shareholder (within the meaning of section 951(b)) of the acquiring corporation, and the transferor or a person who bears a relationship to the transferor described in section 267(b) or 707(b), and which were accumulated during the period or periods such stock was owned by such person while the acquiring corporation was a controlled foreign corporation. In the case of any acquisition to which subsection (a) applies in which the acquiring corporation is a foreign corporation, no earnings and profits shall be taken into account under paragraph (2)(A) (and subparagraph (A) shall not apply) if more than 50 percent of the dividends arising from such acquisition (determined without regard to this subparagraph) would neither— be subject to tax under this chapter for the taxable year in which the dividends arise, nor be includible in the earnings and profits of a controlled foreign corporation (as defined in section 957 and without regard to section 953(c)). The Secretary shall prescribe such regulations as are appropriate to carry out the purposes of this paragraph. In the case of any acquisition to which subsection (a) applies in which the acquiring corporation or the issuing corporation is a foreign corporation, the Secretary shall prescribe such regulations as are appropriate in order to eliminate a multiple inclusion of any item in income by reason of this subpart and to provide appropriate basis adjustments (including modifications to the application of sections 959 and 961).

(c) Control For purposes of this section, control means the ownership of stock possessing at least 50 percent of the total combined voting power of all classes of stock entitled to vote, or at least 50 percent of the total value of shares of all classes of stock. If a person (or persons) is in control (within the meaning of the preceding sentence) of a corporation which in turn owns at least 50 percent of the total combined voting power of all stock entitled to vote of another corporation, or owns at least 50 percent of the total value of the shares of all classes of stock of another corporation, then such person (or persons) shall be treated as in control of such other corporation. For purposes of subsection (a)(1)— Where 1 or more persons in control of the issuing corporation transfer stock of such corporation in exchange for stock of the acquiring corporation, the stock of the acquiring corporation received shall be taken into account in determining whether such person or persons are in control of the acquiring corporation. Where 2 or more persons in control of the issuing corporation transfer stock of such corporation to the acquiring corporation and, after the transfer, the transferors are in control of the acquiring corporation, the person or persons in control of each corporation shall include each of the persons who so transfer stock. Section 318(a) (relating to constructive ownership of stock) shall apply for purposes of determining control under this section. For purposes of subparagraph (A)— paragraph (2)(C) of section 318(a) shall be applied by substituting “5 percent” for “50 percent”, and paragraph (3)(C) of section 318(a) shall be applied— by substituting “5 percent” for “50 percent”, and in any case where such paragraph would not apply but for subclause (I), by considering a corporation as owning the stock (other than stock in such corporation) owned by or for any shareholder of such corporation in that proportion which the value of the stock which such shareholder owned in such corporation bears to the value of all stock in such corporation.

§ 305 Distributions of stock and stock rights

(a) General rule Except as otherwise provided in this section, gross income does not include the amount of any distribution of the stock of a corporation made by such corporation to its shareholders with respect to its stock.

(b) Exceptions Subsection (a) shall not apply to a distribution by a corporation of its stock, and the distribution shall be treated as a distribution of property to which section 301 applies— If the distribution is, at the election of any of the shareholders (whether exercised before or after the declaration thereof), payable either— in its stock, or in property. If the distribution (or a series of distributions of which such distribution is one) has the result of— the receipt of property by some shareholders, and an increase in the proportionate interests of other shareholders in the assets or earnings and profits of the corporation. If the distribution (or a series of distributions of which such distribution is one) has the result of— the receipt of preferred stock by some common shareholders, and the receipt of common stock by other common shareholders. If the distribution is with respect to preferred stock, other than an increase in the conversion ratio of convertible preferred stock made solely to take account of a stock dividend or stock split with respect to the stock into which such convertible stock is convertible. If the distribution is of convertible preferred stock, unless it is established to the satisfaction of the Secretary that such distribution will not have the result described in paragraph (2).

(c) Certain transactions treated as distributions For purposes of this section and section 301, the Secretary shall prescribe regulations under which a change in conversion ratio, a change in redemption price, a difference between redemption price and issue price, a redemption which is treated as a distribution to which section 301 applies, or any transaction (including a recapitalization) having a similar effect on the interest of any shareholder shall be treated as a distribution with respect to any shareholder whose proportionate interest in the earnings and profits or assets of the corporation is increased by such change, difference, redemption, or similar transaction. Regulations prescribed under the preceding sentence shall provide that— where the issuer of stock is required to redeem the stock at a specified time or the holder of stock has the option to require the issuer to redeem the stock, a redemption premium resulting from such requirement or option shall be treated as reasonable only if the amount of such premium does not exceed the amount determined under the principles of section 1273(a)(3), a redemption premium shall not fail to be treated as a distribution (or series of distributions) merely because the stock is callable, and in any case in which a redemption premium is treated as a distribution (or series of distributions), such premium shall be taken into account under principles similar to the principles of section 1272(a).

(d) Definitions For purposes of this section, the term “stock” includes rights to acquire such stock. For purposes of subsections (b) and (c), the term “shareholder” includes a holder of rights or of convertible securities.

(e) Treatment of purchaser of stripped preferred stock If any person purchases after April 30, 1993 , any stripped preferred stock, then such person, while holding such stock, shall include in gross income amounts equal to the amounts which would have been so includible if such stripped preferred stock were a bond issued on the purchase date and having original issue discount equal to the excess, if any, of— the redemption price for such stock, over the price at which such person purchased such stock. The preceding sentence shall also apply in the case of any person whose basis in such stock is determined by reference to the basis in the hands of such purchaser. Appropriate adjustments to basis shall be made for amounts includible in gross income under paragraph (1). If any person strips the rights to 1 or more dividends from any stock described in paragraph (5)(B) and after April 30, 1993 , disposes of such dividend rights, for purposes of paragraph (1), such person shall be treated as having purchased the stripped preferred stock on the date of such disposition for a purchase price equal to such person’s adjusted basis in such stripped preferred stock. Any amount included in gross income under paragraph (1) shall be treated as ordinary income. For purposes of this subsection— The term “stripped preferred stock” means any stock described in subparagraph (B) if there has been a separation in ownership between such stock and any dividend on such stock which has not become payable. Stock is described in this subsection if such stock— is limited and preferred as to dividends and does not participate in corporate growth to any significant extent, and has a fixed redemption price. For purposes of this subsection, the term “purchase” means— any acquisition of stock, where the basis of such stock is not determined in whole or in part by the reference to the adjusted basis of such stock in the hands of the person from whom acquired. For treatment of stripped interests in certain accounts or entities holding preferred stock, see section 1286(e).

(f) Cross references For special rules— Relating to the receipt of stock and stock rights in corporate organizations and reorganizations, see part III (sec. 351 and following). In the case of a distribution which results in a gift, see section 2501 and following. In the case of a distribution which has the effect of the payment of compensation, see section 61(a)(1).

§ 306 Dispositions of certain stock

(a) General rule If a shareholder sells or otherwise disposes of section 306 stock (as defined in subsection (c))— If such disposition is not a redemption (within the meaning of section 317(b))— The amount realized shall be treated as ordinary income. This subparagraph shall not apply to the extent that— the amount realized, exceeds such stock’s ratable share of the amount which would have been a dividend at the time of distribution if (in lieu of section 306 stock) the corporation had distributed money in an amount equal to the fair market value of the stock at the time of distribution. Any excess of the amount realized over the sum of— the amount treated under subparagraph (A) as ordinary income, plus the adjusted basis of the stock, shall be treated as gain from the sale of such stock. No loss shall be recognized. For purposes of section 1(h)(11) and such other provisions as the Secretary may specify, any amount treated as ordinary income under this paragraph shall be treated as a dividend received from the corporation. If the disposition is a redemption, the amount realized shall be treated as a distribution of property to which section 301 applies.

(b) Exceptions Subsection (a) shall not apply— If the disposition— is not a redemption; is not, directly or indirectly, to a person the ownership of whose stock would (under section 318(a)) be attributable to the shareholder; and terminates the entire stock interest of the shareholder in the corporation (and for purposes of this clause, section 318(a) shall apply). If the disposition is a redemption and paragraph (3) or (4) of section 302(b) applies. If the section 306 stock is redeemed in a distribution in complete liquidation to which part II (sec. 331 and following) applies. To the extent that, under any provision of this subtitle, gain or loss to the shareholder is not recognized with respect to the disposition of the section 306 stock. If it is established to the satisfaction of the Secretary— that the distribution, and the disposition or redemption, or in the case of a prior or simultaneous disposition (or redemption) of the stock with respect to which the section 306 stock disposed of (or redeemed) was issued, that the disposition (or redemption) of the section 306 stock, was not in pursuance of a plan having as one of its principal purposes the avoidance of Federal income tax.

(c) Section 306 stock defined For purposes of this subchapter, the term “section 306 stock” means stock which meets the requirements of subparagraph (A), (B), or (C) of this paragraph. Stock (other than common stock issued with respect to common stock) which was distributed to the shareholder selling or otherwise disposing of such stock if, by reason of section 305(a), any part of such distribution was not includible in the gross income of the shareholder. Stock which is not common stock and— which was received, by the shareholder selling or otherwise disposing of such stock, in pursuance of a plan of reorganization (within the meaning of section 368(a)), or in a distribution or exchange to which section 355 (or so much of section 356 as relates to section 355) applied, and with respect to the receipt of which gain or loss to the shareholder was to any extent not recognized by reason of part III, but only to the extent that either the effect of the transaction was substantially the same as the receipt of a stock dividend, or the stock was received in exchange for section 306 stock. For purposes of this section, a receipt of stock to which the foregoing provisions of this subparagraph apply shall be treated as a distribution of stock. Except as otherwise provided in subparagraph (B), stock the basis of which (in the hands of the shareholder selling or otherwise disposing of such stock) is determined by reference to the basis (in the hands of such shareholder or any other person) of section 306 stock. For purposes of this section, the term “section 306 stock” does not include any stock no part of the distribution of which would have been a dividend at the time of the distribution if money had been distributed in lieu of the stock. The term “section 306 stock” also includes any stock which is not common stock acquired in an exchange to which section 351 applied if receipt of money (in lieu of the stock) would have been treated as a dividend to any extent. Rules similar to the rules of section 304(b)(2) shall apply— for purposes of the preceding sentence, and for purposes of determining the application of this section to any subsequent disposition of stock which is section 306 stock by reason of an exchange described in the preceding sentence. For purposes of paragraphs (1)(B)(ii) and (3), section 318(a) shall apply. For purposes of applying the preceding sentence to paragraph (3), the rules of section 304(c)(3)(B) shall apply.

(d) Stock rights For purposes of this section— stock rights shall be treated as stock, and stock acquired through the exercise of stock rights shall be treated as stock distributed at the time of the distribution of the stock rights, to the extent of the fair market value of such rights at the time of the distribution.

(e) Convertible stock For purposes of subsection (c)— if section 306 stock was issued with respect to common stock and later such section 306 stock is exchanged for common stock in the same corporation (whether or not such exchange is pursuant to a conversion privilege contained in the section 306 stock), then (except as provided in paragraph (2)) the common stock so received shall not be treated as section 306 stock; and common stock with respect to which there is a privilege of converting into stock other than common stock (or into property), whether or not the conversion privilege is contained in such stock, shall not be treated as common stock.

(f) Source of gain The amount treated under subsection (a)(1)(A) as ordinary income shall, for purposes of part I of subchapter N (sec. 861 and following, relating to determination of sources of income), be treated as derived from the same source as would have been the source if money had been received from the corporation as a dividend at the time of the distribution of such stock. If under the preceding sentence such amount is determined to be derived from sources within the United States, such amount shall be considered to be fixed or determinable annual or periodical gains, profits, and income within the meaning of section 871(a) or section 881(a), as the case may be.

(g) Change in terms and conditions of stock If a substantial change is made in the terms and conditions of any stock, then, for purposes of this section— the fair market value of such stock shall be the fair market value at the time of the distribution or at the time of such change, whichever such value is higher; such stock’s ratable share of the amount which would have been a dividend if money had been distributed in lieu of stock shall be determined as of the time of distribution or as of the time of such change, whichever such ratable share is higher; and subsection (c)(2) shall not apply unless the stock meets the requirements of such subsection both at the time of such distribution and at the time of such change.

§ 307 Basis of stock and stock rights acquired in distributions

(a) General rule If a shareholder in a corporation receives its stock or rights to acquire its stock (referred to in this subsection as “new stock”) in a distribution to which section 305(a) applies, then the basis of such new stock and of the stock with respect to which it is distributed (referred to in this section as “old stock”), respectively, shall, in the shareholder’s hands, be determined by allocating between the old stock and the new stock the adjusted basis of the old stock. Such allocation shall be made under regulations prescribed by the Secretary.

(b) Exception for certain stock rights If— a corporation distributes rights to acquire its stock to a shareholder in a distribution to which section 305(a) applies, and the fair market value of such rights at the time of the distribution is less than 15 percent of the fair market value of the old stock at such time, then subsection (a) shall not apply and the basis of such rights shall be zero, unless the taxpayer elects under paragraph (2) of this subsection to determine the basis of the old stock and of the stock rights under the method of allocation provided in subsection (a). The election referred to in paragraph (1) shall be made in the return filed within the time prescribed by law (including extensions thereof) for the taxable year in which such rights were received. Such election shall be made in such manner as the Secretary may by regulations prescribe, and shall be irrevocable when made.

(c) Cross reference For basis of stock and stock rights distributed before June 22, 1954 , see section 1052.

§ 311 Taxability of corporation on distribution

(a) General rule Except as provided in subsection (b), no gain or loss shall be recognized to a corporation on the distribution (not in complete liquidation) with respect to its stock of— its stock (or rights to acquire its stock), or property.

(b) Distributions of appreciated property If— a corporation distributes property (other than an obligation of such corporation) to a shareholder in a distribution to which subpart A applies, and the fair market value of such property exceeds its adjusted basis (in the hands of the distributing corporation), then gain shall be recognized to the distributing corporation as if such property were sold to the distributee at its fair market value. Rules similar to the rules of section 336(b) shall apply for purposes of this subsection. If the property distributed consists of an interest in a partnership or trust, the Secretary may by regulations provide that the amount of the gain recognized under paragraph (1) shall be computed without regard to any loss attributable to property contributed to the partnership or trust for the principal purpose of recognizing such loss on the distribution.

§ 312 Effect on earnings and profits

(a) General rule Except as otherwise provided in this section, on the distribution of property by a corporation with respect to its stock, the earnings and profits of the corporation (to the extent thereof) shall be decreased by the sum of— the amount of money, the principal amount of the obligations of such corporation (or, in the case of obligations having original issue discount, the aggregate issue price of such obligations), and the adjusted basis of the other property, so distributed.

(b) Distributions of appreciated property On the distribution by a corporation, with respect to its stock, of any property (other than an obligation of such corporation) the fair market value of which exceeds the adjusted basis thereof— the earnings and profits of the corporation shall be increased by the amount of such excess, and subsection (a)(3) shall be applied by substituting “fair market value” for “adjusted basis”. For purposes of this subsection and subsection (a), the adjusted basis of any property is its adjusted basis as determined for purposes of computing earnings and profits.

(c) Adjustments for liabilities In making the adjustments to the earnings and profits of a corporation under subsection (a) or (b), proper adjustment shall be made for— the amount of any liability to which the property distributed is subject, and the amount of any liability of the corporation assumed by a shareholder in connection with the distribution.

(d) Certain distributions of stock and securities The distribution to a distributee by or on behalf of a corporation of its stock or securities, of stock or securities in another corporation, or of property, in a distribution to which this title applies, shall not be considered a distribution of the earnings and profits of any corporation— if no gain to such distributee from the receipt of such stock or securities, or property, was recognized under this title, or if the distribution was not subject to tax in the hands of such distributee by reason of section 305(a). For purposes of this subsection, the term “stock or securities” includes rights to acquire stock or securities.

([(e) Repealed. Pub. L. 98–369, div. A, title I, § 61(a)(2)(B), July 18, 1984, 98 Stat. 581]

(f) Effect on earnings and profits of gain or loss and of receipt of tax-free distributions The gain or loss realized from the sale or other disposition (after February 28, 1913 ) of property by a corporation— for the purpose of the computation of the earnings and profits of the corporation, shall (except as provided in subparagraph (B)) be determined by using as the adjusted basis the adjusted basis (under the law applicable to the year in which the sale or other disposition was made) for determining gain, except that no regard shall be had to the value of the property as of March 1, 1913 ; but for purposes of the computation of the earnings and profits of the corporation for any period beginning after February 28, 1913 , shall be determined by using as the adjusted basis the adjusted basis (under the law applicable to the year in which the sale or other disposition was made) for determining gain. Gain or loss so realized shall increase or decrease the earnings and profits to, but not beyond, the extent to which such a realized gain or loss was recognized in computing taxable income under the law applicable to the year in which such sale or disposition was made. Where, in determining the adjusted basis used in computing such realized gain or loss, the adjustment to the basis differs from the adjustment proper for the purpose of determining earnings and profits, then the latter adjustment shall be used in determining the increase or decrease above provided. For purposes of this subsection, a loss with respect to which a deduction is disallowed under section 1091 (relating to wash sales of stock or securities), or the corresponding provision of prior law, shall not be deemed to be recognized. Where a corporation receives (after February 28, 1913 ) a distribution from a second corporation which (under the law applicable to the year in which the distribution was made) was not a taxable dividend to the shareholders of the second corporation, the amount of such distribution shall not increase the earnings and profits of the first corporation in the following cases: no such increase shall be made in respect of the part of such distribution which (under such law) is directly applied in reduction of the basis of the stock in respect of which the distribution was made; and no such increase shall be made if (under such law) the distribution causes the basis of the stock in respect of which the distribution was made to be allocated between such stock and the property received (or such basis would, but for section 307(b), be so allocated).

(g) Earnings and profits—increase in value accrued before March 1, 1913 If any increase or decrease in the earnings and profits for any period beginning after February 28, 1913 , with respect to any matter would be different had the adjusted basis of the property involved been determined without regard to its March 1, 1913 , value, then, except as provided in paragraph (2), an increase (properly reflecting such difference) shall be made in that part of the earnings and profits consisting of increase in value of property accrued before March 1, 1913 . If the application of subsection (f) to a sale or other disposition after February 28, 1913 , results in a loss which is to be applied in decrease of earnings and profits for any period beginning after February 28, 1913 , then, notwithstanding subsection (f) and in lieu of the rule provided in paragraph (1) of this subsection, the amount of such loss so to be applied shall be reduced by the amount, if any, by which the adjusted basis of the property used in determining the loss exceeds the adjusted basis computed without regard to the value of the property on March 1, 1913 , and if such amount so applied in reduction of the decrease exceeds such loss, the excess over such loss shall increase that part of the earnings and profits consisting of increase in value of property accrued before March 1, 1913 .

(h) Allocation in certain corporate separations and reorganizations In the case of a distribution or exchange to which section 355 (or so much of section 356 as relates to section 355) applies, proper allocation with respect to the earnings and profits of the distributing corporation and the controlled corporation (or corporations) shall be made under regulations prescribed by the Secretary. In the case of a reorganization described in subparagraph (C) or (D) of section 368(a)(1), proper allocation with respect to the earnings and profits of the acquired corporation shall, under regulations prescribed by the Secretary, be made between the acquiring corporation and the acquired corporation (or any corporation which had control of the acquired corporation before the reorganization).

(i) Distribution of proceeds of loan insured by the United States If a corporation distributes property with respect to its stock and if, at the time of distribution— there is outstanding a loan to such corporation which was made, guaranteed, or insured by the United States (or by any agency or instrumentality thereof), and the amount of such loan so outstanding exceeds the adjusted basis of the property constituting security for such loan, then the earnings and profits of the corporation shall be increased by the amount of such excess, and (immediately after the distribution) shall be decreased by the amount of such excess. For purposes of paragraph (2), the adjusted basis of the property at the time of distribution shall be determined without regard to any adjustment under section 1016(a)(2) (relating to adjustment for depreciation, etc.). For purposes of this subsection, a commitment to make, guarantee, or insure a loan shall be treated as the making, guaranteeing, or insuring of a loan.

([(j) Repealed. Pub. L. 108–357, title IV, § 413(c)(4), Oct. 22, 2004, 118 Stat. 1507]

(k) Effect of depreciation on earnings and profits For purposes of computing the earnings and profits of a corporation for any taxable year beginning after June 30, 1972 , the allowance for depreciation (and amortization, if any) shall be deemed to be the amount which would be allowable for such year if the straight line method of depreciation had been used for each taxable year beginning after June 30, 1972 . If for any taxable year a method of depreciation was used by the taxpayer which the Secretary has determined results in a reasonable allowance under section 167(a) and which is the unit-of-production method or other method not expressed in a term of years, then the adjustment to earnings and profits for depreciation for such year shall be determined under the method so used (in lieu of the straight line method). Except as provided in subparagraph (B), in the case of tangible property to which section 168 applies, the adjustment to earnings and profits for depreciation for any taxable year shall be determined under the alternative depreciation system (within the meaning of section 168(g)(2)). For purposes of computing the earnings and profits of a corporation, except as provided in clause (ii), any amount deductible under section 179, 179B, 179C, 179D, or 179E shall be allowed as a deduction ratably over the period of 5 taxable years (beginning with the taxable year for which such amount is deductible under section 179, 179B, 179C, 179D, or 179E, as the case may be). In the case of a corporation that is a real estate investment trust, any amount deductible under section 179D shall be allowed in the year in which the property giving rise to such deduction is placed in service (or, in the case of energy efficient building retrofit property, the year in which the qualifying final certification is made). The provisions of paragraph (1) shall not apply in computing the earnings and profits of a foreign corporation for any taxable year for which less than 20 percent of the gross income from all sources of such corporation is derived from sources within the United States. In computing the earnings and profits of a corporation for any taxable year, the allowance for depreciation (and amortization, if any) shall be computed without regard to any basis adjustment under section 50(c).

(l) Discharge of indebtedness income The earnings and profits of a corporation shall not include income from the discharge of indebtedness to the extent of the amount applied to reduce basis under section 1017. If— the interest of any shareholder of a corporation is terminated or extinguished in a title 11 or similar case (within the meaning of section 368(a)(3)(A)), and there is a deficit in the earnings and profits of the corporation, then such deficit shall be reduced by an amount equal to the paid-in capital which is allocable to the interest of the shareholder which is so terminated or extinguished.

(m) No adjustment for interest paid on certain registration-required obligations not in registered form The earnings and profits of any corporation shall not be decreased by any interest with respect to which a deduction is not or would not be allowable by reason of section 163(f), unless at the time of issuance the issuer is a foreign corporation that is not a controlled foreign corporation (within the meaning of section 957) and the issuance did not have as a purpose the avoidance of section 163(f) of this subsection 1

(n) Adjustments to earnings and profits to more accurately reflect economic gain and loss For purposes of computing the earnings and profits of a corporation, the following adjustments shall be made: In the case of any amount paid or incurred for construction period carrying charges— no deduction shall be allowed with respect to such amount, and the basis of the property with respect to which such charges are allocable shall be increased by such amount. For purposes of this paragraph, the term “construction period carrying charges” means all— interest paid or accrued on indebtedness incurred or continued to acquire, construct, or carry property, property taxes, and similar carrying charges, to the extent such interest, taxes, or charges are attributable to the construction period for such property and would be allowable as a deduction in determining taxable income under this chapter for the taxable year in which paid or incurred. The term “construction period” has the meaning given the term production period under section 263A(f)(4)(B). 2 Any amount allowable as a deduction under section 263(c) in determining taxable income (other than costs incurred in connection with a nonproductive well)— shall be capitalized, and shall be allowed as a deduction ratably over the 60-month period beginning with the month in which such amount was paid or incurred. Any amount allowable as a deduction under section 616(a) or 617 in determining taxable income— shall be capitalized, and shall be allowed as a deduction ratably over the 120-month period beginning with the later of— the month in which production from the deposit begins, or the month in which such amount was paid or incurred. Sections 173 and 248 shall not apply. Earnings and profits shall be increased or decreased by the amount of any increase or decrease in the LIFO recapture amount as of the close of each taxable year; except that any decrease below the LIFO recapture amount as of the close of the taxable year preceding the 1st taxable year to which this paragraph applies to the taxpayer shall be taken into account only to the extent provided in regulations prescribed by the Secretary. For purposes of this paragraph, the term “LIFO recapture amount” means the amount (if any) by which— the inventory amount of the inventory assets under the first-in, first-out method authorized by section 471, exceeds the inventory amount of such assets under the LIFO method. For purposes of this paragraph— The term “LIFO method” means the method authorized by section 472 (relating to last-in, first-out inventories). The term “inventory assets” means stock in trade of the corporation, or other property of a kind which would properly be included in the inventory of the corporation if on hand at the close of the taxable year. The inventory amount of assets under the first-in, first-out method authorized by section 471 shall be determined— if the corporation uses the retail method of valuing inventories under section 472, by using such method, or if subclause (I) does not apply, by using cost or market, whichever is lower. In the case of any installment sale, earnings and profits shall be computed as if the corporation did not use the installment method. In the case of a taxpayer who uses the completed contract method of accounting, earnings and profits shall be computed as if such taxpayer used the percentage of completion method of accounting. If a corporation distributes amounts in a redemption to which section 302(a) or 303 applies, the part of such distribution which is properly chargeable to earnings and profits shall be an amount which is not in excess of the ratable share of the earnings and profits of such corporation accumulated after February 28, 1913 , attributable to the stock so redeemed. In the case of a foreign corporation described in subsection (k)(4)— paragraphs (4) and (6) shall apply only in the case of taxable years beginning after December 31, 1985 , and paragraph (5) shall apply only in the case of taxable years beginning after December 31, 1987 .

(o) Definition of original issue discount and issue price for purposes of subsection (a)(2) For purposes of subsection (a)(2), the terms “original issue discount” and “issue price” have the same respective meanings as when used in subpart A of part V of subchapter P of this chapter.

§ 316 Dividend defined

(a) General rule For purposes of this subtitle, the term “dividend” means any distribution of property made by a corporation to its shareholders— out of its earnings and profits accumulated after February 28, 1913 , or out of its earnings and profits of the taxable year (computed as of the close of the taxable year without diminution by reason of any distributions made during the taxable year), without regard to the amount of the earnings and profits at the time the distribution was made. Except as otherwise provided in this subtitle, every distribution is made out of earnings and profits to the extent thereof, and from the most recently accumulated earnings and profits. To the extent that any distribution is, under any provision of this subchapter, treated as a distribution of property to which section 301 applies, such distribution shall be treated as a distribution of property for purposes of this subsection.

(b) Special rules The definition in subsection (a) shall not apply to the term “dividend” as used in subchapter L in any case where the reference is to dividends of insurance companies paid to policyholders as such. In the case of a corporation which— under the law applicable to the taxable year in which the distribution is made, is a personal holding company (as defined in section 542), or for the taxable year in respect of which the distribution is made under section 563(b) (relating to dividends paid after the close of the taxable year), or section 547 (relating to deficiency dividends), or the corresponding provisions of prior law, is a personal holding company under the law applicable to such taxable year, the term “dividend” also means any distribution of property (whether or not a dividend as defined in subsection (a)) made by the corporation to its shareholders, to the extent of its undistributed personal holding company income (determined under section 545 without regard to distributions under this paragraph) for such year. For purposes of subparagraph (A), the term “distribution of property” includes a distribution in complete liquidation occurring within 24 months after the adoption of a plan of liquidation, but— only to the extent of the amounts distributed to distributees other than corporate shareholders, and only to the extent that the corporation designates such amounts as a dividend distribution and duly notifies such distributees of such designation, under regulations prescribed by the Secretary, but not in excess of the sum of such distributees’ allocable share of the undistributed personal holding company income for such year, computed without regard to this subparagraph or section 562(b). The term “dividend” also means any distribution of property (whether or not a dividend as defined in subsection (a)) which constitutes a “deficiency dividend” as defined in section 860(f). In the case of a regulated investment company that has a taxable year other than a calendar year, if the distributions by the company with respect to any class of stock of such company for the taxable year exceed the company’s current and accumulated earnings and profits which may be used for the payment of dividends on such class of stock, the company’s current earnings and profits shall, for purposes of subsection (a), be allocated first to distributions with respect to such class of stock made during the portion of the taxable year which precedes January 1.

§ 317 Other definitions

(a) Property For purposes of this part, the term “property” means money, securities, and any other property; except that such term does not include stock in the corporation making the distribution (or rights to acquire such stock).

(b) Redemption of stock For purposes of this part, stock shall be treated as redeemed by a corporation if the corporation acquires its stock from a shareholder in exchange for property, whether or not the stock so acquired is cancelled, retired, or held as treasury stock.

§ 318 Constructive ownership of stock

(a) General rule For purposes of those provisions of this subchapter to which the rules contained in this section are expressly made applicable— An individual shall be considered as owning the stock owned, directly or indirectly, by or for— his spouse (other than a spouse who is legally separated from the individual under a decree of divorce or separate maintenance), and his children, grandchildren, and parents. For purposes of subparagraph (A)(ii), a legally adopted child of an individual shall be treated as a child of such individual by blood. Stock owned, directly or indirectly, by or for a partnership or estate shall be considered as owned proportionately by its partners or beneficiaries. Stock owned, directly or indirectly, by or for a trust (other than an employees’ trust described in section 401(a) which is exempt from tax under section 501(a)) shall be considered as owned by its beneficiaries in proportion to the actuarial interest of such beneficiaries in such trust. Stock owned, directly or indirectly, by or for any portion of a trust of which a person is considered the owner under subpart E of part I of subchapter J (relating to grantors and others treated as substantial owners) shall be considered as owned by such person. If 50 percent or more in value of the stock in a corporation is owned, directly or indirectly, by or for any person, such person shall be considered as owning the stock owned, directly or indirectly, by or for such corporation, in that proportion which the value of the stock which such person so owns bears to the value of all the stock in such corporation. Stock owned, directly or indirectly, by or for a partner or a beneficiary of an estate shall be considered as owned by the partnership or estate. Stock owned, directly or indirectly, by or for a beneficiary of a trust (other than an employees’ trust described in section 401(a) which is exempt from tax under section 501(a)) shall be considered as owned by the trust, unless such beneficiary’s interest in the trust is a remote contingent interest. For purposes of this clause, a contingent interest of a beneficiary in a trust shall be considered remote if, under the maximum exercise of discretion by the trustee in favor of such beneficiary, the value of such interest, computed actuarially, is 5 percent or less of the value of the trust property. Stock owned, directly or indirectly, by or for a person who is considered the owner of any portion of a trust under subpart E of part I of subchapter J (relating to grantors and others treated as substantial owners) shall be considered as owned by the trust. If 50 percent or more in value of the stock in a corporation is owned, directly or indirectly, by or for any person, such corporation shall be considered as owning the stock owned, directly or indirectly, by or for such person. If any person has an option to acquire stock, such stock shall be considered as owned by such person. For purposes of this paragraph, an option to acquire such an option, and each one of a series of such options, shall be considered as an option to acquire such stock. Except as provided in subparagraphs (B) and (C), stock constructively owned by a person by reason of the application of paragraph (1), (2), (3), or (4), shall, for purposes of applying paragraphs (1), (2), (3), and (4), be considered as actually owned by such person. Stock constructively owned by an individual by reason of the application of paragraph (1) shall not be considered as owned by him for purposes of again applying paragraph (1) in order to make another the constructive owner of such stock. Stock constructively owned by a partnership, estate, trust, or corporation by reason of the application of paragraph (3) shall not be considered as owned by it for purposes of applying paragraph (2) in order to make another the constructive owner of such stock. For purposes of this paragraph, if stock may be considered as owned by an individual under paragraph (1) or (4), it shall be considered as owned by him under paragraph (4). For purposes of this subsection— an S corporation shall be treated as a partnership, and any shareholder of the S corporation shall be treated as a partner of such partnership. The preceding sentence shall not apply for purposes of determining whether stock in the S corporation is constructively owned by any person.

(b) Cross references For provisions to which the rules contained in subsection (a) apply, see— section 302 (relating to redemption of stock); section 304 (relating to redemption by related corporations); section 306(b)(1)(A) (relating to disposition of section 306 stock); section 338(h)(3) (defining purchase); section 382( l )(3) (relating to special limitations on net operating loss carryovers); section 856(d) (relating to definition of rents from real property in the case of real estate investment trusts); section 958(b) (relating to constructive ownership rules with respect to controlled foreign corporations); and section 6038(e)(2) (relating to information with respect to certain foreign corporations).

§ 331 Gain or loss to shareholder in corporate liquidations

(a) Distributions in complete liquidation treated as exchanges Amounts received by a shareholder in a distribution in complete liquidation of a corporation shall be treated as in full payment in exchange for the stock.

(b) Nonapplication of section 301 Section 301 (relating to effects on shareholder of distributions of property) shall not apply to any distribution of property (other than a distribution referred to in paragraph (2)(B) of section 316(b)) in complete liquidation.

(c) Cross reference For general rule for determination of the amount of gain or loss recognized, see section 1001.

§ 332 Complete liquidations of subsidiaries

(a) General rule No gain or loss shall be recognized on the receipt by a corporation of property distributed in complete liquidation of another corporation.

(b) Liquidations to which section applies For purposes of this section, a distribution shall be considered to be in complete liquidation only if— the corporation receiving such property was, on the date of the adoption of the plan of liquidation, and has continued to be at all times until the receipt of the property, the owner of stock (in such other corporation) meeting the requirements of section 1504(a)(2); and either the distribution is by such other corporation in complete cancellation or redemption of all its stock, and the transfer of all the property occurs within the taxable year; in such case the adoption by the shareholders of the resolution under which is authorized the distribution of all the assets of such corporation in complete cancellation or redemption of all its stock shall be considered an adoption of a plan of liquidation, even though no time for the completion of the transfer of the property is specified in such resolution; or such distribution is one of a series of distributions by such other corporation in complete cancellation or redemption of all its stock in accordance with a plan of liquidation under which the transfer of all the property under the liquidation is to be completed within 3 years from the close of the taxable year during which is made the first of the series of distributions under the plan, except that if such transfer is not completed within such period, or if the taxpayer does not continue qualified under paragraph (1) until the completion of such transfer, no distribution under the plan shall be considered a distribution in complete liquidation. If such transfer of all the property does not occur within the taxable year, the Secretary may require of the taxpayer such bond, or waiver of the statute of limitations on assessment and collection, or both, as he may deem necessary to insure, if the transfer of the property is not completed within such 3-year period, or if the taxpayer does not continue qualified under paragraph (1) until the completion of such transfer, the assessment and collection of all income taxes then imposed by law for such taxable year or subsequent taxable years, to the extent attributable to property so received. A distribution otherwise constituting a distribution in complete liquidation within the meaning of this subsection shall not be considered as not constituting such a distribution merely because it does not constitute a distribution or liquidation within the meaning of the corporate law under which the distribution is made; and for purposes of this subsection a transfer of property of such other corporation to the taxpayer shall not be considered as not constituting a distribution (or one of a series of distributions) in complete cancellation or redemption of all the stock of such other corporation, merely because the carrying out of the plan involves (A) the transfer under the plan to the taxpayer by such other corporation of property, not attributable to shares owned by the taxpayer, on an exchange described in section 361, and (B) the complete cancellation or redemption under the plan, as a result of exchanges described in section 354, of the shares not owned by the taxpayer.

(c) Deductible liquidating distributions of regulated investment companies and real estate investment trusts If a corporation receives a distribution from a regulated investment company or a real estate investment trust which is considered under subsection (b) as being in complete liquidation of such company or trust, then, notwithstanding any other provision of this chapter, such corporation shall recognize and treat as a dividend from such company or trust an amount equal to the deduction for dividends paid allowable to such company or trust by reason of such distribution.

(d) Recognition of gain on liquidation of certain holding companies In the case of any distribution to a foreign corporation in complete liquidation of an applicable holding company— subsection (a) and section 331 shall not apply to such distribution, and such distribution shall be treated as a distribution of property to which section 301 applies. For purposes of this subsection: The term “applicable holding company” means any domestic corporation— which is a common parent of an affiliated group, stock of which is directly owned by the distributee foreign corporation, substantially all of the assets of which consist of stock in other members of such affiliated group, and which has not been in existence at all times during the 5 years immediately preceding the date of the liquidation. For purposes of this subsection, the term “affiliated group” has the meaning given such term by section 1504(a) (without regard to paragraph (2) of section 1504(b)). If the distributee of a distribution described in paragraph (1) is a controlled foreign corporation (as defined in section 957), then notwithstanding paragraph (1) or subsection (a), such distribution shall be treated as a distribution to which section 331 applies. The Secretary shall provide such regulations as appropriate to prevent the abuse of this subsection, including regulations which provide, for the purposes of clause (iv) of paragraph (2)(A), that a corporation is not in existence for any period unless it is engaged in the active conduct of a trade or business or owns a significant ownership interest in another corporation so engaged.

[§ 333 Repealed. Pub. L. 99–514, title VI, § 631(e)(3), Oct. 22, 1986, 100 Stat. 2273]

§ 334 Basis of property received in liquidations

(a) General rule If property is received in a distribution in complete liquidation, and if gain or loss is recognized on receipt of such property, then the basis of the property in the hands of the distributee shall be the fair market value of such property at the time of the distribution.

(b) Liquidation of subsidiary If property is received by a corporate distributee in a distribution in a complete liquidation to which section 332 applies (or in a transfer described in section 337(b)(1)), the basis of such property in the hands of such distributee shall be the same as it would be in the hands of the transferor; except that, in the hands of such distributee— the basis of such property shall be the fair market value of the property at the time of the distribution in any case in which gain or loss is recognized by the liquidating corporation with respect to such property, and the basis of any property described in section 362(e)(1)(B) shall be the fair market value of the property at the time of the distribution in any case in which such distributee’s aggregate adjusted basis of such property would (but for this subparagraph) exceed the fair market value of such property immediately after such liquidation. For purposes of this subsection, the term “corporate distributee” means only the corporation which meets the stock ownership requirements specified in section 332(b).

§ 336 Gain or loss recognized on property distributed in complete liquidation

(a) General rule Except as otherwise provided in this section or section 337, gain or loss shall be recognized to a liquidating corporation on the distribution of property in complete liquidation as if such property were sold to the distributee at its fair market value.

(b) Treatment of liabilities If any property distributed in the liquidation is subject to a liability or the shareholder assumes a liability of the liquidating corporation in connection with the distribution, for purposes of subsection (a) and section 337, the fair market value of such property shall be treated as not less than the amount of such liability.

(c) Exception for liquidations which are part of a reorganization For provision providing that this subpart does not apply to distributions in pursuance of a plan of reorganization, see section 361(c)(4).

(d) Limitations on recognition of loss No loss shall be recognized to a liquidating corporation on the distribution of any property to a related person (within the meaning of section 267) if— such distribution is not pro rata, or such property is disqualified property. For purposes of subparagraph (A), the term “disqualified property” means any property which is acquired by the liquidating corporation in a transaction to which section 351 applied, or as a contribution to capital, during the 5-year period ending on the date of the distribution. Such term includes any property if the adjusted basis of such property is determined (in whole or in part) by reference to the adjusted basis of property described in the preceding sentence. For purposes of determining the amount of loss recognized by any liquidating corporation on any sale, exchange, or distribution of property described in subparagraph (B), the adjusted basis of such property shall be reduced (but not below zero) by the excess (if any) of— the adjusted basis of such property immediately after its acquisition by such corporation, over the fair market value of such property as of such time. For purposes of subparagraph (A), property is described in this subparagraph if— such property is acquired by the liquidating corporation in a transaction to which section 351 applied or as a contribution to capital, and the acquisition of such property by the liquidating corporation was part of a plan a principal purpose of which was to recognize loss by the liquidating corporation with respect to such property in connection with the liquidation. Other property shall be treated as so described if the adjusted basis of such other property is determined (in whole or in part) by reference to the adjusted basis of property described in the preceding sentence. For purposes of clause (i), any property described in clause (i)(I) acquired by the liquidated corporation after the date 2 years before the date of the adoption of the plan of complete liquidation shall, except as provided in regulations, be treated as acquired as part of a plan described in clause (i)(II). The Secretary may prescribe regulations under which, in lieu of disallowing a loss under subparagraph (A) for a prior taxable year, the gross income of the liquidating corporation for the taxable year in which the plan of complete liquidation is adopted shall be increased by the amount of the disallowed loss. In the case of any liquidation to which section 332 applies, no loss shall be recognized to the liquidating corporation on any distribution in such liquidation. The preceding sentence shall apply to any distribution to the 80-percent distributee only if subsection (a) or (b)(1) of section 337 applies to such distribution.

(e) Certain stock sales and distributions may be treated as asset transfers Under regulations prescribed by the Secretary, if— a corporation owns stock in another corporation meeting the requirements of section 1504(a)(2), and such corporation sells, exchanges, or distributes all of such stock, an election may be made to treat such sale, exchange, or distribution as a disposition of all of the assets of such other corporation, and no gain or loss shall be recognized on the sale, exchange, or distribution of such stock.

§ 337 Nonrecognition for property distributed to parent in complete liquidation of subsidiary

(a) In general No gain or loss shall be recognized to the liquidating corporation on the distribution to the 80-percent distributee of any property in a complete liquidation to which section 332 applies.

(b) Treatment of indebtedness of subsidiary, etc. If— a corporation is liquidated in a liquidation to which section 332 applies, and on the date of the adoption of the plan of liquidation, such corporation was indebted to the 80-percent distributee, for purposes of this section and section 336, any transfer of property to the 80-percent distributee in satisfaction of such indebtedness shall be treated as a distribution to such distributee in such liquidation. Except as provided in subparagraph (B), paragraph (1) and subsection (a) shall not apply where the 80-percent distributee is an organization (other than a cooperative described in section 521) which is exempt from the tax imposed by this chapter. Subparagraph (A) shall not apply to any distribution of property to an organization described in section 511(a)(2) if, immediately after such distribution, such organization uses such property in an activity the income from which is subject to tax under section 511(a). If any property to which clause (i) applied is disposed of by the organization acquiring such property, notwithstanding any other provision of law, any gain (not in excess of the amount not recognized by reason of clause (i)) shall be included in such organization’s unrelated business taxable income. For purposes of the preceding sentence, if such property ceases to be used in an activity referred to in clause (i), such organization shall be treated as having disposed of such property on the date of such cessation.

(c) 80-percent distributee For purposes of this section, the term “80-percent distributee” means only the corporation which meets the 80-percent stock ownership requirements specified in section 332(b). For purposes of this section, the determination of whether any corporation is an 80-percent distributee shall be made without regard to any consolidated return regulation.

(d) Regulations The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of the amendments made by subtitle D of title VI of the Tax Reform Act of 1986, including— regulations to ensure that such purposes may not be circumvented through the use of any provision of law or regulations (including the consolidated return regulations and part III of this subchapter) or through the use of a regulated investment company, real estate investment trust, or tax-exempt entity, and regulations providing for appropriate coordination of the provisions of this section with the provisions of this title relating to taxation of foreign corporations and their shareholders.

§ 338 Certain stock purchases treated as asset acquisitions

(a) General rule For purposes of this subtitle, if a purchasing corporation makes an election under this section (or is treated under subsection (e) as having made such an election), then, in the case of any qualified stock purchase, the target corporation— shall be treated as having sold all of its assets at the close of the acquisition date at fair market value in a single transaction, and shall be treated as a new corporation which purchased all of the assets referred to in paragraph (1) as of the beginning of the day after the acquisition date.

(b) Basis of assets after deemed purchase For purposes of subsection (a), the assets of the target corporation shall be treated as purchased for an amount equal to the sum of— the grossed-up basis of the purchasing corporation’s recently purchased stock, and the basis of the purchasing corporation’s nonrecently purchased stock. The amount described in paragraph (1) shall be adjusted under regulations prescribed by the Secretary for liabilities of the target corporation and other relevant items. Under regulations prescribed by the Secretary, the basis of the purchasing corporation’s nonrecently purchased stock shall be the basis amount determined under subparagraph (B) of this paragraph if the purchasing corporation makes an election to recognize gain as if such stock were sold on the acquisition date for an amount equal to the basis amount determined under subparagraph (B). For purposes of subparagraph (A), the basis amount determined under this subparagraph shall be an amount equal to the grossed-up basis determined under subparagraph (A) of paragraph (1) multiplied by a fraction— the numerator of which is the percentage of stock (by value) in the target corporation attributable to the purchasing corporation’s nonrecently purchased stock, and the denominator of which is 100 percent minus the percentage referred to in clause (i). For purposes of paragraph (1), the grossed-up basis shall be an amount equal to the basis of the corporation’s recently purchased stock, multiplied by a fraction— the numerator of which is 100 percent, minus the percentage of stock (by value) in the target corporation attributable to the purchasing corporation’s nonrecently purchased stock, and the denominator of which is the percentage of stock (by value) in the target corporation attributable to the purchasing corporation’s recently purchased stock. The amount determined under paragraphs (1) and (2) shall be allocated among the assets of the target corporation under regulations prescribed by the Secretary. For purposes of this subsection— The term “recently purchased stock” means any stock in the target corporation which is held by the purchasing corporation on the acquisition date and which was purchased by such corporation during the 12-month acquisition period. The term “nonrecently purchased stock” means any stock in the target corporation which is held by the purchasing corporation on the acquisition date and which is not recently purchased stock.

([(c) Repealed. Pub. L. 99–514, title VI, § 631(b)(2), Oct. 22, 1986, 100 Stat. 2272]

(d) Purchasing corporation; target corporation; qualified stock purchase For purposes of this section— The term “purchasing corporation” means any corporation which makes a qualified stock purchase of stock of another corporation. The term “target corporation” means any corporation the stock of which is acquired by another corporation in a qualified stock purchase. The term “qualified stock purchase” means any transaction or series of transactions in which stock (meeting the requirements of section 1504(a)(2)) of 1 corporation is acquired by another corporation by purchase during the 12-month acquisition period.

(e) Deemed election where purchasing corporation acquires asset of target corporation A purchasing corporation shall be treated as having made an election under this section with respect to any target corporation if, at any time during the consistency period, it acquires any asset of the target corporation (or a target affiliate). Paragraph (1) shall not apply with respect to any acquisition by the purchasing corporation if— such acquisition is pursuant to a sale by the target corporation (or the target affiliate) in the ordinary course of its trade or business, the basis of the property acquired is determined wholly by reference to the adjusted basis of such property in the hands of the person from whom acquired, such acquisition was before September 1, 1982 , or such acquisition is described in regulations prescribed by the Secretary and meets such conditions as such regulations may provide. Whenever necessary to carry out the purpose of this subsection and subsection (f), the Secretary may treat stock acquisitions which are pursuant to a plan and which meet the requirements of section 1504(a)(2) as qualified stock purchases.

(f) Consistency required for all stock acquisitions from same affiliated group If a purchasing corporation makes qualified stock purchases with respect to the target corporation and 1 or more target affiliates during any consistency period, then (except as otherwise provided in subsection (e))— any election under this section with respect to the first such purchase shall apply to each other such purchase, and no election may be made under this section with respect to the second or subsequent such purchase if such an election was not made with respect to the first such purchase.

(g) Election Except as otherwise provided in regulations, an election under this section shall be made not later than the 15th day of the 9th month beginning after the month in which the acquisition date occurs. An election by the purchasing corporation under this section shall be made in such manner as the Secretary shall by regulations prescribe. An election by a purchasing corporation under this section, once made, shall be irrevocable.

(h) Definitions and special rules For purposes of this section— The term “12-month acquisition period” means the 12-month period beginning with the date of the first acquisition by purchase of stock included in a qualified stock purchase (or, if any of such stock was acquired in an acquisition which is a purchase by reason of subparagraph (C) of paragraph (3), the date on which the acquiring corporation is first considered under section 318(a) (other than paragraph (4) thereof) as owning stock owned by the corporation from which such acquisition was made). The term “acquisition date” means, with respect to any corporation, the first day on which there is a qualified stock purchase with respect to the stock of such corporation. The term “purchase” means any acquisition of stock, but only if— the basis of the stock in the hands of the purchasing corporation is not determined (I) in whole or in part by reference to the adjusted basis of such stock in the hands of the person from whom acquired, or (II) under section 1014(a) (relating to property acquired from a decedent), the stock is not acquired in an exchange to which section 351, 354, 355, or 356 applies and is not acquired in any other transaction described in regulations in which the transferor does not recognize the entire amount of the gain or loss realized on the transaction, and the stock is not acquired from a person the ownership of whose stock would, under section 318(a) (other than paragraph (4) thereof), be attributed to the person acquiring such stock. The term “purchase” includes any deemed purchase under subsection (a)(2). The acquisition date for a corporation which is deemed purchased under subsection (a)(2) shall be determined under regulations prescribed by the Secretary. Clause (iii) of subparagraph (A) shall not apply to an acquisition of stock from a related corporation if at least 50 percent in value of the stock of such related corporation was acquired by purchase (within the meaning of subparagraphs (A) and (B)). Clause (i) of subparagraph (A) shall not apply to an acquisition of stock described in clause (i) of this subparagraph if the corporation acquiring such stock— made a qualified stock purchase of stock of the related corporation, and made an election under this section (or is treated under subsection (e) as having made such an election) with respect to such qualified stock purchase. For purposes of this subparagraph, a corporation is a related corporation if stock owned by such corporation is treated (under section 318(a) other than paragraph (4) thereof) as owned by the corporation acquiring the stock. Except as provided in subparagraph (B), the term “consistency period” means the period consisting of— the 1-year period before the beginning of the 12-month acquisition period for the target corporation, such acquisition period (up to and including the acquisition date), and the 1-year period beginning on the day after the acquisition date. The period referred to in subparagraph (A) shall also include any period during which the Secretary determines that there was in effect a plan to make a qualified stock purchase plus 1 or more other qualified stock purchases (or asset acquisitions described in subsection (e)) with respect to the target corporation or any target affiliate. The term “affiliated group” has the meaning given to such term by section 1504(a) (determined without regard to the exceptions contained in section 1504(b)). A corporation shall be treated as a target affiliate of the target corporation if each of such corporations was, at any time during so much of the consistency period as ends on the acquisition date of the target corporation, a member of an affiliated group which had the same common parent. Except as otherwise provided in regulations (and subject to such conditions as may be provided in regulations)— the term “target affiliate” does not include a foreign corporation or a DISC, and stock held by a target affiliate in a foreign corporation or a domestic corporation which is a DISC or described in section 1248(e) shall be excluded from the operation of this section. Except as provided in regulations prescribed by the Secretary, stock and asset acquisitions made by members of the same affiliated group shall be treated as made by 1 corporation. Except as otherwise provided in paragraph (10) or in regulations prescribed under this paragraph, the target corporation shall not be treated as a member of an affiliated group with respect to the sale described in subsection (a)(1). Under regulations prescribed by the Secretary, an election may be made under which if— the target corporation was, before the transaction, a member of the selling consolidated group, and the target corporation recognizes gain or loss with respect to the transaction as if it sold all of its assets in a single transaction, then the target corporation shall be treated as a member of the selling consolidated group with respect to such sale, and (to the extent provided in regulations) no gain or loss will be recognized on stock sold or exchanged in the transaction by members of the selling consolidated group. For purposes of subparagraph (A), the term “selling consolidated group” means any group of corporations which (for the taxable period which includes the transaction)— includes the target corporation, and files a consolidated return. To the extent provided in regulations, such term also includes any affiliated group of corporations which includes the target corporation (whether or not such group files a consolidated return). Under regulations, where an election is made under subparagraph (A), the purchasing corporation and the common parent of the selling consolidated group shall, at such times and in such manner as may be provided in regulations, furnish to the Secretary the following information: The amount allocated under subsection (b)(5) to goodwill or going concern value. Any modification of the amount described in clause (i). Any other information as the Secretary deems necessary to carry out the provisions of this paragraph. For purposes of subsection (a)(1), fair market value may be determined on the basis of a formula provided in regulations prescribed by the Secretary which takes into account liabilities and other relevant items. For purposes of section 6655, tax attributable to the sale described in subsection (a)(1) shall not be taken into account. The preceding sentence shall not apply with respect to a qualified stock purchase for which an election is made under paragraph (10). Under regulations prescribed by the Secretary, a combined deemed sale return may be filed by all target corporations acquired by a purchasing corporation on the same acquisition date if such target corporations were members of the same selling consolidated group (as defined in subparagraph (B) of paragraph (10)). Except as provided in regulations, this section shall not apply for purposes of determining the source or character of any item for purposes of subpart A of part III of subchapter N of this chapter (relating to foreign tax credit). The preceding sentence shall not apply to any gain to the extent such gain is includible in gross income as a dividend under section 1248 (determined without regard to any deemed sale under this section by a foreign corporation).

(i) Regulations The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section, including— regulations to ensure that the purpose of this section to require consistency of treatment of stock and asset sales and purchases may not be circumvented through the use of any provision of law or regulations (including the consolidated return regulations) and regulations providing for the coordination of the provisions of this section with the provision of this title relating to foreign corporations and their shareholders.

“In the case of a Rhode Island corporation which was organized on February 22, 1983 , and which on February 25, 1983 — purchased the stock of another corporation, filed an election under section 338(g) of the Internal Revenue Code of 1986 with respect to such purchase, and merged into the acquired corporation, such purchase of stock shall be considered as made by the acquiring corporation, such election shall be valid, and the acquiring corporation shall be considered a purchasing corporation for purposes of section 338 of such Code without regard to the duration of the existence of the acquiring corporation.”

“If— any portion of a qualified stock purchase is pursuant to a binding contract entered into on or after September 1, 1982 , and on or before the date of the enactment of this Act [ Jan. 12, 1983 ], and the purchasing corporation establishes by clear and convincing evidence that such contract was negotiated on the contemplation that, with respect to the deemed sale under section 338 of the Internal Revenue Code of 1986 [formerly I.R.C. 1954], the target corporation would be treated as a member of the affiliated group which includes the selling corporation, then the amendment made by clause (i) [amending subsec. (h)] shall not apply to such qualified stock purchase.”

[§ 341 Repealed. Pub. L. 108–27, title III, § 302(e)(4)(A), May 28, 2003, 117 Stat. 763]

[§ 342 Repealed. Pub. L. 94–455, title XIX, § 1901(a)(47), Oct. 4, 1976, 90 Stat. 1772]

§ 346 Definition and special rule

(a) Complete liquidation For purposes of this subchapter, a distribution shall be treated as in complete liquidation of a corporation if the distribution is one of a series of distributions in redemption of all of the stock of the corporation pursuant to a plan.

(b) Transactions which might reach same result as partial liquidations The Secretary shall prescribe such regulations as may be necessary to ensure that the purposes of subsections (a) and (b) of section 222 of the Tax Equity and Fiscal Responsibility Act of 1982 (which repeal the special tax treatment for partial liquidations) may not be circumvented through the use of section 355, 351, or any other provision of law or regulations (including the consolidated return regulations).

§ 351 Transfer to corporation controlled by transferor

(a) General rule No gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock in such corporation and immediately after the exchange such person or persons are in control (as defined in section 368(c)) of the corporation.

(b) Receipt of property If subsection (a) would apply to an exchange but for the fact that there is received, in addition to the stock permitted to be received under subsection (a), other property or money, then— gain (if any) to such recipient shall be recognized, but not in excess of— the amount of money received, plus the fair market value of such other property received; and no loss to such recipient shall be recognized.

(c) Special rules where distribution to shareholders In determining control for purposes of this section, the fact that any corporate transferor distributes part or all of the stock in the corporation which it receives in the exchange to its shareholders shall not be taken into account. If the requirements of section 355 (or so much of section 356 as relates to section 355) are met with respect to a distribution described in paragraph (1), then, solely for purposes of determining the tax treatment of the transfers of property to the controlled corporation by the distributing corporation, the fact that the shareholders of the distributing corporation dispose of part or all of the distributed stock, or the fact that the corporation whose stock was distributed issues additional stock, shall not be taken into account in determining control for purposes of this section.

(d) Services, certain indebtedness, and accrued interest not treated as property For purposes of this section, stock issued for— services, indebtedness of the transferee corporation which is not evidenced by a security, or interest on indebtedness of the transferee corporation which accrued on or after the beginning of the transferor’s holding period for the debt, shall not be considered as issued in return for property.

(e) Exceptions This section shall not apply to— A transfer of property to an investment company. For purposes of the preceding sentence, the determination of whether a company is an investment company shall be made— by taking into account all stock and securities held by the company, and by treating as stock and securities— money, stocks and other equity interests in a corporation, evidences of indebtedness, options, forward or futures contracts, notional principal contracts and derivatives, any foreign currency, any interest in a real estate investment trust, a common trust fund, a regulated investment company, a publicly-traded partnership (as defined in section 7704(b)) or any other equity interest (other than in a corporation) which pursuant to its terms or any other arrangement is readily convertible into, or exchangeable for, any asset described in any preceding clause, this clause or clause (v) or (viii), except to the extent provided in regulations prescribed by the Secretary, any interest in a precious metal, unless such metal is used or held in the active conduct of a trade or business after the contribution, except as otherwise provided in regulations prescribed by the Secretary, interests in any entity if substantially all of the assets of such entity consist (directly or indirectly) of any assets described in any preceding clause or clause (viii), to the extent provided in regulations prescribed by the Secretary, any interest in any entity not described in clause (vi), but only to the extent of the value of such interest that is attributable to assets listed in clauses (i) through (v) or clause (viii), or any other asset specified in regulations prescribed by the Secretary. The Secretary may prescribe regulations that, under appropriate circumstances, treat any asset described in clauses (i) through (v) as not so listed. A transfer of property of a debtor pursuant to a plan while the debtor is under the jurisdiction of a court in a title 11 or similar case (within the meaning of section 368(a)(3)(A)), to the extent that the stock received in the exchange is used to satisfy the indebtedness of such debtor.

(f) Treatment of controlled corporation If— property is transferred to a corporation (hereinafter in this subsection referred to as the “controlled corporation”) in an exchange with respect to which gain or loss is not recognized (in whole or in part) to the transferor under this section, and such exchange is not in pursuance of a plan of reorganization, section 311 shall apply to any transfer in such exchange by the controlled corporation in the same manner as if such transfer were a distribution to which subpart A of part I applies.

(g) Nonqualified preferred stock not treated as stock In the case of a person who transfers property to a corporation and receives nonqualified preferred stock— subsection (a) shall not apply to such transferor, and if (and only if) the transferor receives stock other than nonqualified preferred stock— subsection (b) shall apply to such transferor; and such nonqualified preferred stock shall be treated as other property for purposes of applying subsection (b). For purposes of paragraph (1)— The term “nonqualified preferred stock” means preferred stock if— the holder of such stock has the right to require the issuer or a related person to redeem or purchase the stock, the issuer or a related person is required to redeem or purchase such stock, the issuer or a related person has the right to redeem or purchase the stock and, as of the issue date, it is more likely than not that such right will be exercised, or the dividend rate on such stock varies in whole or in part (directly or indirectly) with reference to interest rates, commodity prices, or other similar indices. Clauses (i), (ii), and (iii) of subparagraph (A) shall apply only if the right or obligation referred to therein may be exercised within the 20-year period beginning on the issue date of such stock and such right or obligation is not subject to a contingency which, as of the issue date, makes remote the likelihood of the redemption or purchase. A right or obligation shall not be treated as described in clause (i), (ii), or (iii) of subparagraph (A) if— it may be exercised only upon the death, disability, or mental incompetency of the holder, or in the case of a right or obligation to redeem or purchase stock transferred in connection with the performance of services for the issuer or a related person (and which represents reasonable compensation), it may be exercised only upon the holder’s separation from service from the issuer or a related person. Clause (i)(I) shall not apply if the stock relinquished in the exchange, or the stock acquired in the exchange is in— a corporation if any class of stock in such corporation or a related party is readily tradable on an established securities market or otherwise, or any other corporation if such exchange is part of a transaction or series of transactions in which such corporation is to become a corporation described in subclause (I). For purposes of this subsection— The term “preferred stock” means stock which is limited and preferred as to dividends and does not participate in corporate growth to any significant extent. Stock shall not be treated as participating in corporate growth to any significant extent unless there is a real and meaningful likelihood of the shareholder actually participating in the earnings and growth of the corporation. If there is not a real and meaningful likelihood that dividends beyond any limitation or preference will actually be paid, the possibility of such payments will be disregarded in determining whether stock is limited and preferred as to dividends. A person shall be treated as related to another person if they bear a relationship to such other person described in section 267(b) or 707(b). The Secretary may prescribe such regulations as may be necessary or appropriate to carry out the purposes of this subsection and sections 354(a)(2)(C), 355(a)(3)(D), and 356(e). The Secretary may also prescribe regulations, consistent with the treatment under this subsection and such sections, for the treatment of nonqualified preferred stock under other provisions of this title.

(h) Cross references For special rule where another party to the exchange assumes a liability, see section 357. For the basis of stock or property received in an exchange to which this section applies, see sections 358 and 362. For special rule in the case of an exchange described in this section but which results in a gift, see section 2501 and following. For special rule in the case of an exchange described in this section but which has the effect of the payment of compensation by the corporation or by a transferor, see section 61(a)(1). For coordination of this section with section 304, see section 304(b)(3).

§ 354 Exchanges of stock and securities in certain reorganizations

(a) General rule No gain or loss shall be recognized if stock or securities in a corporation a party to a reorganization are, in pursuance of the plan of reorganization, exchanged solely for stock or securities in such corporation or in another corporation a party to the reorganization. Paragraph (1) shall not apply if— the principal amount of any such securities received exceeds the principal amount of any such securities surrendered, or any such securities are received and no such securities are surrendered. Neither paragraph (1) nor so much of section 356 as relates to paragraph (1) shall apply to the extent that any stock (including nonqualified preferred stock, as defined in section 351(g)(2)), securities, or other property received is attributable to interest which has accrued on securities on or after the beginning of the holder’s holding period. Nonqualified preferred stock (as defined in section 351(g)(2)) received in exchange for stock other than nonqualified preferred stock (as so defined) shall not be treated as stock or securities. Clause (i) shall not apply in the case of a recapitalization under section 368(a)(1)(E) of a family-owned corporation. For purposes of this clause, except as provided in regulations, the term “family-owned corporation” means any corporation which is described in clause (i) of section 447(d)(2)(C) 1 throughout the 8-year period beginning on the date which is 5 years before the date of the recapitalization. For purposes of the preceding sentence, stock shall not be treated as owned by a family member during any period described in section 355(d)(6)(B). The statutory period for the assessment of any deficiency attributable to a corporation failing to be a family-owned corporation shall not expire before the expiration of 3 years after the date the Secretary is notified by the corporation (in such manner as the Secretary may prescribe) of such failure, and such deficiency may be assessed before the expiration of such 3-year period notwithstanding the provisions of any other law or rule of law which would otherwise prevent such assessment. For treatment of the exchange if any property is received which is not permitted to be received under this subsection (including nonqualified preferred stock and an excess principal amount of securities received over securities surrendered, but not including property to which paragraph (2)(B) applies), see section 356. For treatment of accrued interest in the case of an exchange described in paragraph (2)(B), see section 61.

(b) Exception Subsection (a) shall not apply to an exchange in pursuance of a plan of reorganization within the meaning of subparagraph (D) or (G) of section 368(a)(1), unless— the corporation to which the assets are transferred acquires substantially all of the assets of the transferor of such assets; and the stock, securities, and other properties received by such transferor, as well as the other properties of such transferor, are distributed in pursuance of the plan of reorganization. For special rules for certain exchanges in pursuance of plans of reorganization within the meaning of subparagraph (D) or (G) of section 368(a)(1), see section 355.

(c) Certain railroad reorganizations Notwithstanding any other provision of this subchapter, subsection (a)(1) (and so much of section 356 as relates to this section) shall apply with respect to a plan of reorganization (whether or not a reorganization within the meaning of section 368(a)) for a railroad confirmed under section 1173 of title 11 of the United States Code, as being in the public interest.

§ 355 Distribution of stock and securities of a controlled corporation

(a) Effect on distributees If— a corporation (referred to in this section as the “distributing corporation”)— distributes to a shareholder, with respect to its stock, or distributes to a security holder, in exchange for its securities, solely stock or securities of a corporation (referred to in this section as “controlled corporation”) which it controls immediately before the distribution, the transaction was not used principally as a device for the distribution of the earnings and profits of the distributing corporation or the controlled corporation or both (but the mere fact that subsequent to the distribution stock or securities in one or more of such corporations are sold or exchanged by all or some of the distributees (other than pursuant to an arrangement negotiated or agreed upon prior to such distribution) shall not be construed to mean that the transaction was used principally as such a device), the requirements of subsection (b) (relating to active businesses) are satisfied, and as part of the distribution, the distributing corporation distributes— all of the stock and securities in the controlled corporation held by it immediately before the distribution, or an amount of stock in the controlled corporation constituting control within the meaning of section 368(c), and it is established to the satisfaction of the Secretary that the retention by the distributing corporation of stock (or stock and securities) in the controlled corporation was not in pursuance of a plan having as one of its principal purposes the avoidance of Federal income tax, then no gain or loss shall be recognized to (and no amount shall be includible in the income of) such shareholder or security holder on the receipt of such stock or securities. Paragraph (1) shall be applied without regard to the following: whether or not the distribution is pro rata with respect to all of the shareholders of the distributing corporation, whether or not the shareholder surrenders stock in the distributing corporation, and whether or not the distribution is in pursuance of a plan of reorganization (within the meaning of section 368(a)(1)(D)). Paragraph (1) shall not apply if— the principal amount of the securities in the controlled corporation which are received exceeds the principal amount of the securities which are surrendered in connection with such distribution, or securities in the controlled corporation are received and no securities are surrendered in connection with such distribution. For purposes of this section (other than paragraph (1)(D) of this subsection) and so much of section 356 as relates to this section, stock of a controlled corporation acquired by the distributing corporation by reason of any transaction— which occurs within 5 years of the distribution of such stock, and in which gain or loss was recognized in whole or in part, shall not be treated as stock of such controlled corporation, but as other property. Neither paragraph (1) nor so much of section 356 as relates to paragraph (1) shall apply to the extent that any stock (including nonqualified preferred stock, as defined in section 351(g)(2)), securities, or other property received is attributable to interest which has accrued on securities on or after the beginning of the holder’s holding period. Nonqualified preferred stock (as defined in section 351(g)(2)) received in a distribution with respect to stock other than nonqualified preferred stock (as so defined) shall not be treated as stock or securities. For treatment of the exchange if any property is received which is not permitted to be received under this subsection (including nonqualified preferred stock and an excess principal amount of securities received over securities surrendered, but not including property to which paragraph (3)(C) applies), see section 356. For treatment of accrued interest in the case of an exchange described in paragraph (3)(C), see section 61.

(b) Requirements as to active business Subsection (a) shall apply only if either— the distributing corporation, and the controlled corporation (or, if stock of more than one controlled corporation is distributed, each of such corporations), is engaged immediately after the distribution in the active conduct of a trade or business, or immediately before the distribution, the distributing corporation had no assets other than stock or securities in the controlled corporations and each of the controlled corporations is engaged immediately after the distribution in the active conduct of a trade or business. For purposes of paragraph (1), a corporation shall be treated as engaged in the active conduct of a trade or business if and only if— it is engaged in the active conduct of a trade or business, such trade or business has been actively conducted throughout the 5-year period ending on the date of the distribution, such trade or business was not acquired within the period described in subparagraph (B) in a transaction in which gain or loss was recognized in whole or in part, and control of a corporation which (at the time of acquisition of control) was conducting such trade or business— was not acquired by any distributee corporation directly (or through 1 or more corporations, whether through the distributing corporation or otherwise) within the period described in subparagraph (B) and was not acquired by the distributing corporation directly (or through 1 or more corporations) within such period, or was so acquired by any such corporation within such period, but, in each case in which such control was so acquired, it was so acquired, only by reason of transactions in which gain or loss was not recognized in whole or in part, or only by reason of such transactions combined with acquisitions before the beginning of such period. For purposes of subparagraph (D), all distributee corporations which are members of the same affiliated group (as defined in section 1504(a) without regard to section 1504(b)) shall be treated as 1 distributee corporation. For purposes of determining whether a corporation meets the requirements of paragraph (2)(A), all members of such corporation’s separate affiliated group shall be treated as one corporation. For purposes of this paragraph, the term “separate affiliated group” means, with respect to any corporation, the affiliated group which would be determined under section 1504(a) if such corporation were the common parent and section 1504(b) did not apply. If a corporation became a member of a separate affiliated group as a result of one or more transactions in which gain or loss was recognized in whole or in part, any trade or business conducted by such corporation (at the time that such corporation became such a member) shall be treated for purposes of paragraph (2) as acquired in a transaction in which gain or loss was recognized in whole or in part. The Secretary shall prescribe such regulations as are necessary or appropriate to carry out the purposes of this paragraph, including regulations which provide for the proper application of subparagraphs (B), (C), and (D) of paragraph (2), and modify the application of subsection (a)(3)(B), in connection with the application of this paragraph.

(c) Taxability of corporation on distribution Except as provided in paragraph (2), no gain or loss shall be recognized to a corporation on any distribution to which this section (or so much of section 356 as relates to this section) applies and which is not in pursuance of a plan of reorganization. If— in a distribution referred to in paragraph (1), the corporation distributes property other than qualified property, and the fair market value of such property exceeds its adjusted basis (in the hands of the distributing corporation), then gain shall be recognized to the distributing corporation as if such property were sold to the distributee at its fair market value. For purposes of subparagraph (A), the term “qualified property” means any stock or securities in the controlled corporation. If any property distributed in the distribution referred to in paragraph (1) is subject to a liability or the shareholder assumes a liability of the distributing corporation in connection with the distribution, then, for purposes of subparagraph (A), the fair market value of such property shall be treated as not less than the amount of such liability. Sections 311 and 336(a) shall not apply to any distribution referred to in paragraph (1).

(d) Recognition of gain on certain distributions of stock or securities in controlled corporation In the case of a disqualified distribution, any stock or securities in the controlled corporation shall not be treated as qualified property for purposes of subsection (c)(2) of this section or section 361(c)(2). For purposes of this subsection, the term “disqualified distribution” means any distribution to which this section (or so much of section 356 as relates to this section) applies if, immediately after the distribution— any person holds disqualified stock in the distributing corporation which constitutes a 50-percent or greater interest in such corporation, or any person holds disqualified stock in the controlled corporation (or, if stock of more than 1 controlled corporation is distributed, in any controlled corporation) which constitutes a 50-percent or greater interest in such corporation. For purposes of this subsection, the term “disqualified stock” means— any stock in the distributing corporation acquired by purchase during the 5-year period ending on the date of the distribution, and any stock in any controlled corporation— acquired by purchase during the 5-year period ending on the date of the distribution, or received in the distribution to the extent attributable to distributions on— stock described in subparagraph (A), or any securities in the distributing corporation acquired by purchase during the 5-year period ending on the date of the distribution. For purposes of this subsection, the term “50-percent or greater interest” means stock possessing at least 50 percent of the total combined voting power of all classes of stock entitled to vote or at least 50 percent of the total value of shares of all classes of stock. For purposes of this subsection— Except as otherwise provided in this paragraph, the term “purchase” means any acquisition but only if— the basis of the property acquired in the hands of the acquirer is not determined (I) in whole or in part by reference to the adjusted basis of such property in the hands of the person from whom acquired, or (II) under section 1014(a), and the property is not acquired in an exchange to which section 351, 354, 355, or 356 applies. The term “purchase” includes any acquisition of property in an exchange to which section 351 applies to the extent such property is acquired in exchange for— any cash or cash item, any marketable stock or security, or any debt of the transferor. If— any person acquires property from another person who acquired such property by purchase (as determined under this paragraph with regard to this subparagraph), and the adjusted basis of such property in the hands of such acquirer is determined in whole or in part by reference to the adjusted basis of such property in the hands of such other person, such acquirer shall be treated as having acquired such property by purchase on the date it was so acquired by such other person. If this paragraph applies to any stock or securities for any period, the running of any 5-year period set forth in subparagraph (A) or (B) of paragraph (3) (whichever applies) shall be suspended during such period. This paragraph applies to any stock or securities for any period during which the holder’s risk of loss with respect to such stock or securities, or with respect to any portion of the activities of the corporation, is (directly or indirectly) substantially diminished by— an option, a short sale, any special class of stock, or any other device or transaction. For purposes of this subsection, a person and all persons related to such person (within the meaning of section 267(b) or 707(b)(1)) shall be treated as one person. If two or more persons act pursuant to a plan or arrangement with respect to acquisitions of stock or securities in the distributing corporation or controlled corporation, such persons shall be treated as one person for purposes of this subsection. Paragraph (2) of section 318(a) shall apply in determining whether a person holds stock or securities in any corporation (determined by substituting “10 percent” for “50 percent” in subparagraph (C) of such paragraph (2) and by treating any reference to stock as including a reference to securities). If— any person acquires by purchase an interest in any entity, and such person is treated under subparagraph (A) as holding any stock or securities by reason of holding such interest, such stock or securities shall be treated as acquired by purchase by such person on the later of the date of the purchase of the interest in such entity or the date such stock or securities are acquired by purchase by such entity. The Secretary shall prescribe such regulations as may be necessary to carry out the purposes of this subsection, including— regulations to prevent the avoidance of the purposes of this subsection through the use of related persons, intermediaries, pass-thru entities, options, or other arrangements, and regulations modifying the definition of the term “purchase”.

(e) Recognition of gain on certain distributions of stock or securities in connection with acquisitions If there is a distribution to which this subsection applies, any stock or securities in the controlled corporation shall not be treated as qualified property for purposes of subsection (c)(2) of this section or section 361(c)(2). This subsection shall apply to any distribution— to which this section (or so much of section 356 as relates to this section) applies, and which is part of a plan (or series of related transactions) pursuant to which 1 or more persons acquire directly or indirectly stock representing a 50-percent or greater interest in the distributing corporation or any controlled corporation. If 1 or more persons acquire directly or indirectly stock representing a 50-percent or greater interest in the distributing corporation or any controlled corporation during the 4-year period beginning on the date which is 2 years before the date of the distribution, such acquisition shall be treated as pursuant to a plan described in subparagraph (A)(ii) unless it is established that the distribution and the acquisition are not pursuant to a plan or series of related transactions. A plan (or series of related transactions) shall not be treated as described in subparagraph (A)(ii) if, immediately after the completion of such plan or transactions, the distributing corporation and all controlled corporations are members of a single affiliated group (as defined in section 1504 without regard to subsection (b) thereof). This subsection shall not apply to any distribution to which subsection (d) applies. Except as provided in regulations, the following acquisitions shall not be taken into account in applying paragraph (2)(A)(ii): The acquisition of stock in any controlled corporation by the distributing corporation. The acquisition by a person of stock in any controlled corporation by reason of holding stock or securities in the distributing corporation. The acquisition by a person of stock in any successor corporation of the distributing corporation or any controlled corporation by reason of holding stock or securities in such distributing or controlled corporation. The acquisition of stock in the distributing corporation or any controlled corporation to the extent that the percentage of stock owned directly or indirectly in such corporation by each person owning stock in such corporation immediately before the acquisition does not decrease. This subparagraph shall not apply to any acquisition if the stock held before the acquisition was acquired pursuant to a plan (or series of related transactions) described in paragraph (2)(A)(ii). Except as provided in regulations, for purposes of this subsection, if the assets of the distributing corporation or any controlled corporation are acquired by a successor corporation in a transaction described in subparagraph (A), (C), or (D) of section 368(a)(1) or any other transaction specified in regulations by the Secretary, the shareholders (immediately before the acquisition) of the corporation acquiring such assets shall be treated as acquiring stock in the corporation from which the assets were acquired. For purposes of this subsection— The term “50-percent or greater interest” has the meaning given such term by subsection (d)(4). Paragraph (1) shall not apply to any distribution made in a title 11 or similar case (as defined in section 368(a)(3)). The rules of paragraph (7)(A) of subsection (d) shall apply. Section 318(a)(2) shall apply in determining whether a person holds stock or securities in any corporation. Except as provided in regulations, section 318(a)(2)(C) shall be applied without regard to the phrase “50 percent or more in value” for purposes of the preceding sentence. For purposes of this subsection, any reference to a controlled corporation or a distributing corporation shall include a reference to any predecessor or successor of such corporation. If there is a distribution to which paragraph (1) applies— the statutory period for the assessment of any deficiency attributable to any part of the gain recognized under this subsection by reason of such distribution shall not expire before the expiration of 3 years from the date the Secretary is notified by the taxpayer (in such manner as the Secretary may by regulations prescribe) that such distribution occurred, and such deficiency may be assessed before the expiration of such 3-year period notwithstanding the provisions of any other law or rule of law which would otherwise prevent such assessment. The Secretary shall prescribe such regulations as may be necessary to carry out the purposes of this subsection, including regulations— providing for the application of this subsection where there is more than 1 controlled corporation, treating 2 or more distributions as 1 distribution where necessary to prevent the avoidance of such purposes, and providing for the application of rules similar to the rules of subsection (d)(6) where appropriate for purposes of paragraph (2)(B).

(f) Section not to apply to certain intragroup distributions Except as provided in regulations, this section (or so much of section 356 as relates to this section) shall not apply to the distribution of stock from 1 member of an affiliated group (as defined in section 1504(a)) to another member of such group if such distribution is part of a plan (or series of related transactions) described in subsection (e)(2)(A)(ii) (determined after the application of subsection (e)).

(g) Section not to apply to distributions involving disqualified investment corporations This section (and so much of section 356 as relates to this section) shall not apply to any distribution which is part of a transaction if— either the distributing corporation or controlled corporation is, immediately after the transaction, a disqualified investment corporation, and any person holds, immediately after the transaction, a 50-percent or greater interest in any disqualified investment corporation, but only if such person did not hold such an interest in such corporation immediately before the transaction. For purposes of this subsection— The term “disqualified investment corporation” means any distributing or controlled corporation if the fair market value of the investment assets of the corporation is— in the case of distributions after the end of the 1-year period beginning on the date of the enactment of this subsection, ⅔ or more of the fair market value of all assets of the corporation, and in the case of distributions during such 1-year period, ¾ or more of the fair market value of all assets of the corporation. Except as otherwise provided in this subparagraph, the term “investment assets” means— cash, any stock or securities in a corporation, any interest in a partnership, any debt instrument or other evidence of indebtedness, any option, forward or futures contract, notional principal contract, or derivative, foreign currency, or any similar asset. Such term shall not include any asset which is held for use in the active and regular conduct of— a lending or finance business (within the meaning of section 954(h)(4)), a banking business through a bank (as defined in section 581), a domestic building and loan association (within the meaning of section 7701(a)(19)), or any similar institution specified by the Secretary, or an insurance business if the conduct of the business is licensed, authorized, or regulated by an applicable insurance regulatory body. This clause shall only apply with respect to any business if substantially all of the income of the business is derived from persons who are not related (within the meaning of section 267(b) or 707(b)(1)) to the person conducting the business. Such term shall not include any security (as defined in section 475(c)(2)) which is held by a dealer in securities and to which section 475(a) applies. Such term shall not include any stock and securities in, or any asset described in subclause (IV) or (V) of clause (i) issued by, a corporation which is a 20-percent controlled entity with respect to the distributing or controlled corporation. The distributing or controlled corporation shall, for purposes of applying this subsection, be treated as owning its ratable share of the assets of any 20-percent controlled entity. For purposes of this clause, the term “20-percent controlled entity” means, with respect to any distributing or controlled corporation, any corporation with respect to which the distributing or controlled corporation owns directly or indirectly stock meeting the requirements of section 1504(a)(2), except that such section shall be applied by substituting “20 percent” for “80 percent” and without regard to stock described in section 1504(a)(4). Such term shall not include any interest in a partnership, or any debt instrument or other evidence of indebtedness, issued by the partnership, if 1 or more of the trades or businesses of the partnership are (or, without regard to the 5-year requirement under subsection (b)(2)(B), would be) taken into account by the distributing or controlled corporation, as the case may be, in determining whether the requirements of subsection (b) are met with respect to the distribution. The distributing or controlled corporation shall, for purposes of applying this subsection, be treated as owning its ratable share of the assets of any partnership described in subclause (I). For purposes of this subsection— The term “50-percent or greater interest” has the meaning given such term by subsection (d)(4). The rules of section 318 shall apply for purposes of determining ownership of stock for purposes of this paragraph. For purposes of this subsection, the term “transaction” includes a series of transactions. The Secretary shall prescribe such regulations as may be necessary to carry out, or prevent the avoidance of, the purposes of this subsection, including regulations— to carry out, or prevent the avoidance of, the purposes of this subsection in cases involving— the use of related persons, intermediaries, pass-thru entities, options, or other arrangements, and the treatment of assets unrelated to the trade or business of a corporation as investment assets if, prior to the distribution, investment assets were used to acquire such unrelated assets, which in appropriate cases exclude from the application of this subsection a distribution which does not have the character of a redemption which would be treated as a sale or exchange under section 302, and which modify the application of the attribution rules applied for purposes of this subsection.

(h) Restriction on distributions involving real estate investment trusts This section (and so much of section 356 as relates to this section) shall not apply to any distribution if either the distributing corporation or controlled corporation is a real estate investment trust. Paragraph (1) shall not apply to any distribution if, immediately after the distribution, the distributing corporation and the controlled corporation are both real estate investment trusts. Paragraph (1) shall not apply to any distribution if— the distributing corporation has been a real estate investment trust at all times during the 3-year period ending on the date of such distribution, the controlled corporation has been a taxable REIT subsidiary (as defined in section 856( l )) of the distributing corporation at all times during such period, and the distributing corporation had control (as defined in section 368(c) applied by taking into account stock owned directly or indirectly, including through one or more corporations or partnerships, by the distributing corporation) of the controlled corporation at all times during such period. A controlled corporation will be treated as meeting the requirements of clauses (ii) and (iii) if the stock of such corporation was distributed by a taxable REIT subsidiary in a transaction to which this section (or so much of section 356 as relates to this section) applies and the assets of such corporation consist solely of the stock or assets held by one or more taxable REIT subsidiaries of the distributing corporation meeting the requirements of clauses (ii) and (iii). For purposes of clause (iii), control of a partnership means ownership of at least 80 percent of the profits interest and at least 80 percent of the capital interests.

§ 356 Receipt of additional consideration

(a) Gain on exchanges If— section 354 or 355 would apply to an exchange but for the fact that the property received in the exchange consists not only of property permitted by section 354 or 355 to be received without the recognition of gain but also of other property or money, then the gain, if any, to the recipient shall be recognized, but in an amount not in excess of the sum of such money and the fair market value of such other property. If an exchange is described in paragraph (1) but has the effect of the distribution of a dividend (determined with the application of section 318(a)), then there shall be treated as a dividend to each distributee such an amount of the gain recognized under paragraph (1) as is not in excess of his ratable share of the undistributed earnings and profits of the corporation accumulated after February 28, 1913 . The remainder, if any, of the gain recognized under paragraph (1) shall be treated as gain from the exchange of property.

(b) Additional consideration received in certain distributions If— section 355 would apply to a distribution but for the fact that the property received in the distribution consists not only of property permitted by section 355 to be received without the recognition of gain, but also of other property or money, then an amount equal to the sum of such money and the fair market value of such other property shall be treated as a distribution of property to which section 301 applies.

(c) Loss If— section 354 would apply to an exchange or section 355 would apply to an exchange or distribution, but for the fact that the property received in the exchange or distribution consists not only of property permitted by section 354 or 355 to be received without the recognition of gain or loss, but also of other property or money, then no loss from the exchange or distribution shall be recognized.

(d) Securities as other property For purposes of this section— Except as provided in paragraph (2), the term “other property” includes securities. The term “other property” does not include securities to the extent that, under section 354 or 355, such securities would be permitted to be received without the recognition of gain. If— in an exchange described in section 354 (other than subsection (c) thereof), securities of a corporation a party to the reorganization are surrendered and securities of any corporation a party to the reorganization are received, and the principal amount of such securities received exceeds the principal amount of such securities surrendered, then, with respect to such securities received, the term “other property” means only the fair market value of such excess. For purposes of this subparagraph and subparagraph (C), if no securities are surrendered, the excess shall be the entire principal amount of the securities received. If, in an exchange or distribution described in section 355, the principal amount of the securities in the controlled corporation which are received exceeds the principal amount of the securities in the distributing corporation which are surrendered, then, with respect to such securities received, the term “other property” means only the fair market value of such excess.

(e) Nonqualified preferred stock treated as other property For purposes of this section— Except as provided in paragraph (2), the term “other property” includes nonqualified preferred stock (as defined in section 351(g)(2)). The term “other property” does not include nonqualified preferred stock (as so defined) to the extent that, under section 354 or 355, such preferred stock would be permitted to be received without the recognition of gain.

(f) Exchanges for section 306 stock Notwithstanding any other provision of this section, to the extent that any of the other property (or money) is received in exchange for section 306 stock, an amount equal to the fair market value of such other property (or the amount of such money) shall be treated as a distribution of property to which section 301 applies.

(g) Transactions involving gift or compensation For special rules for a transaction described in section 354, 355, or this section, but which— results in a gift, see section 2501 and following, or has the effect of the payment of compensation, see section 61(a)(1).

§ 357 Assumption of liability

(a) General rule Except as provided in subsections (b) and (c), if— the taxpayer receives property which would be permitted to be received under section 351 or 361 without the recognition of gain if it were the sole consideration, and as part of the consideration, another party to the exchange assumes a liability of the taxpayer, then such assumption shall not be treated as money or other property, and shall not prevent the exchange from being within the provisions of section 351 or 361, as the case may be.

(b) Tax avoidance purpose If, taking into consideration the nature of the liability and the circumstances in the light of which the arrangement for the assumption was made, it appears that the principal purpose of the taxpayer with respect to the assumption described in subsection (a)— was a purpose to avoid Federal income tax on the exchange, or if not such purpose, was not a bona fide business purpose, then such assumption (in the total amount of the liability assumed pursuant to such exchange) shall, for purposes of section 351 or 361 (as the case may be), be considered as money received by the taxpayer on the exchange. In any suit or proceeding where the burden is on the taxpayer to prove such assumption is not to be treated as money received by the taxpayer, such burden shall not be considered as sustained unless the taxpayer sustains such burden by the clear preponderance of the evidence.

(c) Liabilities in excess of basis In the case of an exchange— to which section 351 applies, or to which section 361 applies by reason of a plan of reorganization within the meaning of section 368(a)(1)(D) with respect to which stock or securities of the corporation to which the assets are transferred are distributed in a transaction which qualifies under section 355, if the sum of the amount of the liabilities assumed exceeds the total of the adjusted basis of the property transferred pursuant to such exchange, then such excess shall be considered as a gain from the sale or exchange of a capital asset or of property which is not a capital asset, as the case may be. Paragraph (1) shall not apply to any exchange— to which subsection (b)(1) of this section applies, or which is pursuant to a plan of reorganization within the meaning of section 368(a)(1)(G) where no former shareholder of the transferor corporation receives any consideration for his stock. If a taxpayer transfers, in an exchange to which section 351 applies, a liability the payment of which either— would give rise to a deduction, or would be described in section 736(a), then, for purposes of paragraph (1), the amount of such liability shall be excluded in determining the amount of liabilities assumed. Subparagraph (A) shall not apply to any liability to the extent that the incurrence of the liability resulted in the creation of, or an increase in, the basis of any property.

(d) Determination of amount of liability assumed For purposes of this section, section 358(d), section 358(h), section 361(b)(3), section 362(d), section 368(a)(1)(C), and section 368(a)(2)(B), except as provided in regulations— a recourse liability (or portion thereof) shall be treated as having been assumed if, as determined on the basis of all facts and circumstances, the transferee has agreed to, and is expected to, satisfy such liability (or portion), whether or not the transferor has been relieved of such liability; and except to the extent provided in paragraph (2), a nonrecourse liability shall be treated as having been assumed by the transferee of any asset subject to such liability. The amount of the nonrecourse liability treated as described in paragraph (1)(B) shall be reduced by the lesser of— the amount of such liability which an owner of other assets not transferred to the transferee and also subject to such liability has agreed with the transferee to, and is expected to, satisfy; or the fair market value of such other assets (determined without regard to section 7701(g)). The Secretary shall prescribe such regulations as may be necessary to carry out the purposes of this subsection and section 362(d). The Secretary may also prescribe regulations which provide that the manner in which a liability is treated as assumed under this subsection is applied, where appropriate, elsewhere in this title.

§ 358 Basis to distributees

(a) General rule In the case of an exchange to which section 351, 354, 355, 356, or 361 applies— The basis of the property permitted to be received under such section without the recognition of gain or loss shall be the same as that of the property exchanged— decreased by— the fair market value of any other property (except money) received by the taxpayer, the amount of any money received by the taxpayer, and the amount of loss to the taxpayer which was recognized on such exchange, and increased by— the amount which was treated as a dividend, and the amount of gain to the taxpayer which was recognized on such exchange (not including any portion of such gain which was treated as a dividend). The basis of any other property (except money) received by the taxpayer shall be its fair market value.

(b) Allocation of basis Under regulations prescribed by the Secretary, the basis determined under subsection (a)(1) shall be allocated among the properties permitted to be received without the recognition of gain or loss. In the case of an exchange to which section 355 (or so much of section 356 as relates to section 355) applies, then in making the allocation under paragraph (1) of this subsection, there shall be taken into account not only the property so permitted to be received without the recognition of gain or loss, but also the stock or securities (if any) of the distributing corporation which are retained, and the allocation of basis shall be made among all such properties.

(c) Section 355 transactions which are not exchanges For purposes of this section, a distribution to which section 355 (or so much of section 356 as relates to section 355) applies shall be treated as an exchange, and for such purposes the stock and securities of the distributing corporation which are retained shall be treated as surrendered, and received back, in the exchange.

(d) Assumption of liability Where, as part of the consideration to the taxpayer, another party to the exchange assumed a liability of the taxpayer, such assumption shall, for purposes of this section, be treated as money received by the taxpayer on the exchange. Paragraph (1) shall not apply to the amount of any liability excluded under section 357(c)(3).

(e) Exception This section shall not apply to property acquired by a corporation by the exchange of its stock or securities (or the stock or securities of a corporation which is in control of the acquiring corporation) as consideration in whole or in part for the transfer of the property to it.

(f) Definition of nonrecognition property in case of section 361 exchange For purposes of this section, the property permitted to be received under section 361 without the recognition of gain or loss shall be treated as consisting only of stock or securities in another corporation a party to the reorganization.

(g) Adjustments in intragroup transactions involving section 355 In the case of a distribution to which section 355 (or so much of section 356 as relates to section 355) applies and which involves the distribution of stock from 1 member of an affiliated group (as defined in section 1504(a) without regard to subsection (b) thereof) to another member of such group, the Secretary may, notwithstanding any other provision of this section, provide adjustments to the adjusted basis of any stock which— is in a corporation which is a member of such group, and is held by another member of such group, to appropriately reflect the proper treatment of such distribution.

(h) Special rules for assumption of liabilities to which subsection (d) does not apply If, after application of the other provisions of this section to an exchange or series of exchanges, the basis of property to which subsection (a)(1) applies exceeds the fair market value of such property, then such basis shall be reduced (but not below such fair market value) by the amount (determined as of the date of the exchange) of any liability— which is assumed by another person as part of the exchange, and with respect to which subsection (d)(1) does not apply to the assumption. Except as provided by the Secretary, paragraph (1) shall not apply to any liability if— the trade or business with which the liability is associated is transferred to the person assuming the liability as part of the exchange, or substantially all of the assets with which the liability is associated are transferred to the person assuming the liability as part of the exchange. For purposes of this subsection, the term “liability” shall include any fixed or contingent obligation to make payment, without regard to whether the obligation is otherwise taken into account for purposes of this title.

§ 361 Nonrecognition of gain or loss to corporations; treatment of distributions

(a) General rule No gain or loss shall be recognized to a corporation if such corporation is a party to a reorganization and exchanges property, in pursuance of the plan of reorganization, solely for stock or securities in another corporation a party to the reorganization.

(b) Exchanges not solely in kind If subsection (a) would apply to an exchange but for the fact that the property received in exchange consists not only of stock or securities permitted by subsection (a) to be received without the recognition of gain, but also of other property or money, then— If the corporation receiving such other property or money distributes it in pursuance of the plan of reorganization, no gain to the corporation shall be recognized from the exchange, but If the corporation receiving such other property or money does not distribute it in pursuance of the plan of reorganization, the gain, if any, to the corporation shall be recognized. The amount of gain recognized under subparagraph (B) shall not exceed the sum of the money and the fair market value of the other property so received which is not so distributed. If subsection (a) would apply to an exchange but for the fact that the property received in exchange consists not only of property permitted by subsection (a) to be received without the recognition of gain or loss, but also of other property or money, then no loss from the exchange shall be recognized. For purposes of paragraph (1), any transfer of the other property or money received in the exchange by the corporation to its creditors in connection with the reorganization shall be treated as a distribution in pursuance of the plan of reorganization. The Secretary may prescribe such regulations as may be necessary to prevent avoidance of tax through abuse of the preceding sentence or subsection (c)(3). In the case of a reorganization described in section 368(a)(1)(D) with respect to which stock or securities of the corporation to which the assets are transferred are distributed in a transaction which qualifies under section 355, this paragraph shall apply only to the extent that the sum of the money and the fair market value of other property transferred to such creditors does not exceed the adjusted bases of such assets transferred (reduced by the amount of the liabilities assumed (within the meaning of section 357(c))).

(c) Treatment of distributions Except as provided in paragraph (2), no gain or loss shall be recognized to a corporation a party to a reorganization on the distribution to its shareholders of property in pursuance of the plan of reorganization. If— in a distribution referred to in paragraph (1), the corporation distributes property other than qualified property, and the fair market value of such property exceeds its adjusted basis (in the hands of the distributing corporation), then gain shall be recognized to the distributing corporation as if such property were sold to the distributee at its fair market value. For purposes of this subsection, the term “qualified property” means— any stock in (or right to acquire stock in) the distributing corporation or obligation of the distributing corporation, or any stock in (or right to acquire stock in) another corporation which is a party to the reorganization or obligation of another corporation which is such a party if such stock (or right) or obligation is received by the distributing corporation in the exchange. If any property distributed in the distribution referred to in paragraph (1) is subject to a liability or the shareholder assumes a liability of the distributing corporation in connection with the distribution, then, for purposes of subparagraph (A), the fair market value of such property shall be treated as not less than the amount of such liability. For purposes of this subsection, any transfer of qualified property by the corporation to its creditors in connection with the reorganization shall be treated as a distribution to its shareholders pursuant to the plan of reorganization. Section 311 and subpart B of part II of this subchapter shall not apply to any distribution referred to in paragraph (1). For provision providing for recognition of gain in certain distributions, see section 355(d).

§ 362 Basis to corporations

(a) Property acquired by issuance of stock or as paid-in surplus If property was acquired by a corporation— in connection with a transaction to which section 351 (relating to transfer of property to corporation controlled by transferor) applies, or as paid-in surplus or as a contribution to capital, then the basis shall be the same as it would be in the hands of the transferor, increased in the amount of gain recognized to the transferor on such transfer.

(b) Transfers to corporations If property was acquired by a corporation in connection with a reorganization to which this part applies, then the basis shall be the same as it would be in the hands of the transferor, increased in the amount of gain recognized to the transferor on such transfer. This subsection shall not apply if the property acquired consists of stock or securities in a corporation a party to the reorganization, unless acquired by the exchange of stock or securities of the transferee (or of a corporation which is in control of the transferee) as the consideration in whole or in part for the transfer.

(c) Special rule for certain contributions to capital Notwithstanding subsection (a)(2), if property other than money— is acquired by a corporation as a contribution to capital, and is not contributed by a shareholder as such, then the basis of such property shall be zero. Notwithstanding subsection (a)(2), if money— is received by a corporation as a contribution to capital, and is not contributed by a shareholder as such, then the basis of any property acquired with such money during the 12-month period beginning on the day the contribution is received shall be reduced by the amount of such contribution. The excess (if any) of the amount of such contribution over the amount of the reduction under the preceding sentence shall be applied to the reduction (as of the last day of the period specified in the preceding sentence) of the basis of any other property held by the taxpayer. The particular properties to which the reductions required by this paragraph shall be allocated shall be determined under regulations prescribed by the Secretary.

(d) Limitation on basis increase attributable to assumption of liability In no event shall the basis of any property be increased under subsection (a) or (b) above the fair market value of such property (determined without regard to section 7701(g)) by reason of any gain recognized to the transferor as a result of the assumption of a liability. Except as provided in regulations, if— gain is recognized to the transferor as a result of an assumption of a nonrecourse liability by a transferee which is also secured by assets not transferred to such transferee; and no person is subject to tax under this title on such gain, then, for purposes of determining basis under subsections (a) and (b), the amount of gain recognized by the transferor as a result of the assumption of the liability shall be determined as if the liability assumed by the transferee equaled such transferee’s ratable portion of such liability determined on the basis of the relative fair market values (determined without regard to section 7701(g)) of all of the assets subject to such liability.

(e) Limitations on built-in losses If in any transaction described in subsection (a) or (b) there would (but for this subsection) be an importation of a net built-in loss, the basis of each property described in subparagraph (B) which is acquired in such transaction shall (notwithstanding subsections (a) and (b)) be its fair market value immediately after such transaction. For purposes of subparagraph (A), property is described in this subparagraph if— gain or loss with respect to such property is not subject to tax under this subtitle in the hands of the transferor immediately before the transfer, and gain or loss with respect to such property is subject to such tax in the hands of the transferee immediately after such transfer. In any case in which the transferor is a partnership, the preceding sentence shall be applied by treating each partner in such partnership as holding such partner’s proportionate share of the property of such partnership. For purposes of subparagraph (A), there is an importation of a net built-in loss in a transaction if the transferee’s aggregate adjusted bases of property described in subparagraph (B) which is transferred in such transaction would (but for this paragraph) exceed the fair market value of such property immediately after such transaction. If— property is transferred by a transferor in any transaction which is described in subsection (a) and which is not described in paragraph (1) of this subsection, and the transferee’s aggregate adjusted bases of such property so transferred would (but for this paragraph) exceed the fair market value of such property immediately after such transaction, then, notwithstanding subsection (a), the transferee’s aggregate adjusted bases of the property so transferred shall not exceed the fair market value of such property immediately after such transaction. The aggregate reduction in basis by reason of subparagraph (A) shall be allocated among the property so transferred in proportion to their respective built-in losses immediately before the transaction. If the transferor and transferee of a transaction described in subparagraph (A) both elect the application of this subparagraph— subparagraph (A) shall not apply, and the transferor’s basis in the stock received for property to which subparagraph (A) does not apply by reason of the election shall not exceed its fair market value immediately after the transfer. Any election under clause (i) shall be made at such time and in such form and manner as the Secretary may prescribe, and, once made, shall be irrevocable.

[§ 363 Repealed. Pub. L. 94–455, title XIX, § 1901(a)(49), Oct. 4, 1976, 90 Stat. 1773]

§ 367 Foreign corporations

(a) Transfers of property from the United States If, in connection with any exchange described in section 332, 351, 354, 356, or 361, a United States person transfers property to a foreign corporation, such foreign corporation shall not, for purposes of determining the extent to which gain shall be recognized on such transfer, be considered to be a corporation. Except to the extent provided in regulations, paragraph (1) shall not apply to the transfer of stock or securities of a foreign corporation which is a party to the exchange or a party to the reorganization. Except as provided in regulations prescribed by the Secretary, a transfer by a United States person of an interest in a partnership to a foreign corporation in an exchange described in paragraph (1) shall, for purposes of this subsection, be treated as a transfer to such corporation of such person’s pro rata share of the assets of the partnership. Paragraph (2) shall not apply in the case of an exchange described in subsection (a) or (b) of section 361. Subject to such basis adjustments and such other conditions as shall be provided in regulations, the preceding sentence shall not apply if the transferor corporation is controlled (within the meaning of section 368(c)) by 5 or fewer domestic corporations. For purposes of the preceding sentence, all members of the same affiliated group (within the meaning of section 1504) shall be treated as 1 corporation. Paragraph (1) shall not apply to the transfer of any property which the Secretary, in order to carry out the purposes of this subsection, designates by regulation.

(b) Other transfers In the case of any exchange described in section 332, 351, 354, 355, 356, or 361 in connection with which there is no transfer of property described in subsection (a)(1), a foreign corporation shall be considered to be a corporation except to the extent provided in regulations prescribed by the Secretary which are necessary or appropriate to prevent the avoidance of Federal income taxes. The regulations prescribed pursuant to paragraph (1) shall include (but shall not be limited to) regulations dealing with the sale or exchange of stock or securities in a foreign corporation by a United States person, including regulations providing— the circumstances under which— gain shall be recognized currently, or amounts included in gross income currently as a dividend, or both, or gain or other amounts may be deferred for inclusion in the gross income of a shareholder (or his successor in interest) at a later date, and the extent to which adjustments shall be made to earnings and profits, basis of stock or securities, and basis of assets.

(c) Transactions to be treated as exchanges For purposes of this section, any distribution described in section 355 (or so much of section 356 as relates to section 355) shall be treated as an exchange whether or not it is an exchange. For purposes of this chapter, any transfer of property to a foreign corporation as a contribution to the capital of such corporation by one or more persons who, immediately after the transfer, own (within the meaning of section 318) stock possessing at least 80 percent of the total combined voting power of all classes of stock of such corporation entitled to vote shall be treated as an exchange of such property for stock of the foreign corporation equal in value to the fair market value of the property transferred.

(d) Special rules relating to transfers of intangibles Except as provided in regulations prescribed by the Secretary, if a United States person transfers any intangible property to a foreign corporation in an exchange described in section 351 or 361— subsection (a) shall not apply to the transfer of such property, and the provisions of this subsection shall apply to such transfer. If paragraph (1) applies to any transfer, the United States person transferring such property shall be treated as— having sold such property in exchange for payments which are contingent upon the productivity, use, or disposition of such property, and receiving amounts which reasonably reflect the amounts which would have been received— annually in the form of such payments over the useful life of such property, or in the case of a disposition following such transfer (whether direct or indirect), at the time of the disposition. The amounts taken into account under clause (ii) shall be commensurate with the income attributable to the intangible. For purposes of this chapter, the earnings and profits of a foreign corporation to which the intangible property was transferred shall be reduced by the amount required to be included in the income of the transferor of the intangible property under subparagraph (A)(ii). For purposes of this chapter, any amount included in gross income by reason of this subsection shall be treated as ordinary income. For purposes of applying section 904(d), any such amount shall be treated in the same manner as if such amount were a royalty. For purposes of the last sentence of subparagraph (A), the Secretary shall require— the valuation of transfers of intangible property, including intangible property transferred with other property or services, on an aggregate basis, or the valuation of such a transfer on the basis of the realistic alternatives to such a transfer, if the Secretary determines that such basis is the most reliable means of valuation of such transfers. The Secretary may provide by regulations that the rules of paragraph (2) also apply to the transfer of intangible property by a United States person to a partnership in circumstances consistent with the purposes of this subsection. For purposes of this subsection, the term “intangible property” means any— patent, invention, formula, process, design, pattern, or know-how, copyright, literary, musical, or artistic composition, trademark, trade name, or brand name, franchise, license, or contract, method, program, system, procedure, campaign, survey, study, forecast, estimate, customer list, or technical data, goodwill, going concern value, or workforce in place (including its composition and terms and conditions (contractual or otherwise) of its employment), or other item the value or potential value of which is not attributable to tangible property or the services of any individual.

(e) Treatment of distributions described in section 355 or liquidations under section 332 In the case of any distribution described in section 355 (or so much of section 356 as relates to section 355) by a domestic corporation to a person who is not a United States person, to the extent provided in regulations, gain shall be recognized under principles similar to the principles of this section. In the case of any liquidation to which section 332 applies, except as provided in regulations, subsections (a) and (b)(1) of section 337 shall not apply where the 80-percent distributee (as defined in section 337(c)) is a foreign corporation.

(f) Other transfers To the extent provided in regulations, if a United States person transfers property to a foreign corporation as paid-in surplus or as a contribution to capital (in a transaction not otherwise described in this section), such transfer shall be treated as a sale or exchange for an amount equal to the fair market value of the property transferred, and the transferor shall recognize as gain the excess of— the fair market value of the property so transferred, over the adjusted basis (for purposes of determining gain) of such property in the hands of the transferor.

§ 368 Definitions relating to corporate reorganizations

(a) Reorganization For purposes of parts I and II and this part, the term “reorganization” means— a statutory merger or consolidation; the acquisition by one corporation, in exchange solely for all or a part of its voting stock (or in exchange solely for all or a part of the voting stock of a corporation which is in control of the acquiring corporation), of stock of another corporation if, immediately after the acquisition, the acquiring corporation has control of such other corporation (whether or not such acquiring corporation had control immediately before the acquisition); the acquisition by one corporation, in exchange solely for all or a part of its voting stock (or in exchange solely for all or a part of the voting stock of a corporation which is in control of the acquiring corporation), of substantially all of the properties of another corporation, but in determining whether the exchange is solely for stock the assumption by the acquiring corporation of a liability of the other shall be disregarded; a transfer by a corporation of all or a part of its assets to another corporation if immediately after the transfer the transferor, or one or more of its shareholders (including persons who were shareholders immediately before the transfer), or any combination thereof, is in control of the corporation to which the assets are transferred; but only if, in pursuance of the plan, stock or securities of the corporation to which the assets are transferred are distributed in a transaction which qualifies under section 354, 355, or 356; a recapitalization; a mere change in identity, form, or place of organization of one corporation, however effected; or a transfer by a corporation of all or part of its assets to another corporation in a title 11 or similar case; but only if, in pursuance of the plan, stock or securities of the corporation to which the assets are transferred are distributed in a transaction which qualifies under section 354, 355, or 356. If a transaction is described in both paragraph (1)(C) and paragraph (1)(D), then, for purposes of this subchapter (other than for purposes of subparagraph (C)), such transaction shall be treated as described only in paragraph (1)(D). If— one corporation acquires substantially all of the properties of another corporation, the acquisition would qualify under paragraph (1)(C) but for the fact that the acquiring corporation exchanges money or other property in addition to voting stock, and the acquiring corporation acquires, solely for voting stock described in paragraph (1)(C), property of the other corporation having a fair market value which is at least 80 percent of the fair market value of all of the property of the other corporation, then such acquisition shall (subject to subparagraph (A) of this paragraph) be treated as qualifying under paragraph (1)(C). Solely for the purpose of determining whether clause (iii) of the preceding sentence applies, the amount of any liability assumed by the acquiring corporation shall be treated as money paid for the property. A transaction otherwise qualifying under paragraph (1)(A), (1)(B), or (1)(C) shall not be disqualified by reason of the fact that part or all of the assets or stock which were acquired in the transaction are transferred to a corporation controlled by the corporation acquiring such assets or stock. A similar rule shall apply to a transaction otherwise qualifying under paragraph (1)(G) where the requirements of subparagraphs (A) and (B) of section 354(b)(1) are met with respect to the acquisition of the assets. The acquisition by one corporation, in exchange for stock of a corporation (referred to in this subparagraph as “controlling corporation”) which is in control of the acquiring corporation, of substantially all of the properties of another corporation shall not disqualify a transaction under paragraph (1)(A) or (1)(G) if— no stock of the acquiring corporation is used in the transaction, and in the case of a transaction under paragraph (1)(A), such transaction would have qualified under paragraph (1)(A) had the merger been into the controlling corporation. A transaction otherwise qualifying under paragraph (1)(A) shall not be disqualified by reason of the fact that stock of a corporation (referred to in this subparagraph as the “controlling corporation”) which before the merger was in control of the merged corporation is used in the transaction, if— after the transaction, the corporation surviving the merger holds substantially all of its properties and of the properties of the merged corporation (other than stock of the controlling corporation distributed in the transaction); and in the transaction, former shareholders of the surviving corporation exchanged, for an amount of voting stock of the controlling corporation, an amount of stock in the surviving corporation which constitutes control of such corporation. If immediately before a transaction described in paragraph (1) (other than subparagraph (E) thereof), 2 or more parties to the transaction were investment companies, then the transaction shall not be considered to be a reorganization with respect to any such investment company (and its shareholders and security holders) unless it was a regulated investment company, a real estate investment trust, or a corporation which meets the requirements of clause (ii). A corporation meets the requirements of this clause if not more than 25 percent of the value of its total assets is invested in the stock and securities of any one issuer, and not more than 50 percent of the value of its total assets is invested in the stock and securities of 5 or fewer issuers. For purposes of this clause, all members of a controlled group of corporations (within the meaning of section 1563(a)) shall be treated as one issuer. For purposes of this clause, a person holding stock in a regulated investment company, a real estate investment trust, or an investment company which meets the requirements of this clause shall, except as provided in regulations, be treated as holding its proportionate share of the assets held by such company or trust. For purposes of this subparagraph the term “investment company” means a regulated investment company, a real estate investment trust, or a corporation 50 percent or more of the value of whose total assets are stock and securities and 80 percent or more of the value of whose total assets are assets held for investment. In making the 50-percent and 80-percent determinations under the preceding sentence, stock and securities in any subsidiary corporation shall be disregarded and the parent corporation shall be deemed to own its ratable share of the subsidiary’s assets, and a corporation shall be considered a subsidiary if the parent owns 50 percent or more of the combined voting power of all classes of stock entitled to vote, or 50 percent or more of the total value of shares of all classes of stock outstanding. For purposes of this subparagraph, in determining total assets there shall be excluded cash and cash items (including receivables). Government securities, and, under regulations prescribed by the Secretary, assets acquired (through incurring indebtedness or otherwise) for purposes of meeting the requirements of clause (ii) or ceasing to be an investment company. This subparagraph shall not apply if the stock of each investment company is owned substantially by the same persons in the same proportions. If an investment company which does not meet the requirements of clause (ii) acquires assets of another corporation, clause (i) shall be applied to such investment company and its shareholders and security holders as though its assets had been acquired by such other corporation. If such investment company acquires stock of another corporation in a reorganization described in section 368(a)(1)(B), clause (i) shall be applied to the shareholders of such investment company as though they had exchanged with such other corporation all of their stock in such company for stock having a fair market value equal to the fair market value of their stock of such investment company immediately after the exchange. For purposes of section 1001, the deemed acquisition or exchange referred to in the two preceding sentences shall be treated as a sale or exchange of property by the corporation and by the shareholders and security holders to which clause (i) is applied. For purposes of clauses (ii) and (iii), the term “securities” includes obligations of State and local governments, commodity futures contracts, shares of regulated investment companies and real estate investment trusts, and other investments constituting a security within the meaning of the Investment Company Act of 1940 ( 15 U.S.C. 80a–2(a)(36) ). Repealed. Pub. L. 98–369, div. A, title I, § 174(b)(5)(D) , July 18, 1984 , 98 Stat. 707 ] A transaction shall fail to meet the requirements of paragraph (1)(C) unless the acquired corporation distributes the stock, securities, and other properties it receives, as well as its other properties, in pursuance of the plan of reorganization. For purposes of the preceding sentence, if the acquired corporation is liquidated pursuant to the plan of reorganization, any distribution to its creditors in connection with such liquidation shall be treated as pursuant to the plan of reorganization. The Secretary may waive the application of clause (i) to any transaction subject to any conditions the Secretary may prescribe. For purposes of determining whether a transaction qualifies under paragraph (1)(D)— in the case of a transaction with respect to which the requirements of subparagraphs (A) and (B) of section 354(b)(1) are met, the term “control” has the meaning given such term by section 304(c), and in the case of a transaction with respect to which the requirements of section 355 (or so much of section 356 as relates to section 355) are met, the fact that the shareholders of the distributing corporation dispose of part or all of the distributed stock, or the fact that the corporation whose stock was distributed issues additional stock, shall not be taken into account. For purposes of this part, the term “title 11 or similar case” means— a case under title 11 of the United States Code, or a receivership, foreclosure, or similar proceeding in a Federal or State court. In applying paragraph (1)(G), a transfer of the assets of a corporation shall be treated as made in a title 11 or similar case if and only if— any party to the reorganization is under the jurisdiction of the court in such case, and the transfer is pursuant to a plan of reorganization approved by the court. If a transaction would (but for this subparagraph) qualify both— under subparagraph (G) of paragraph (1), and under any other subparagraph of paragraph (1) or under section 332 or 351, then, for purposes of this subchapter (other than section 357(c)(1)), such transaction shall be treated as qualifying only under subparagraph (G) of paragraph (1). For purposes of subparagraphs (A) and (B), in the case of a receivership, foreclosure, or similar proceeding before a Federal or State agency involving a financial institution referred to in section 581 or 591, the agency shall be treated as a court. In the case of a title 11 or similar case, the requirement of clause (ii) of paragraph (2)(E) shall be treated as met if— no former shareholder of the surviving corporation received any consideration for his stock, and the former creditors of the surviving corporation exchanged, for an amount of voting stock of the controlling corporation, debt of the surviving corporation which had a fair market value equal to 80 percent or more of the total fair market value of the debt of the surviving corporation.

(b) Party to a reorganization For purposes of this part, the term “a party to a reorganization” includes— a corporation resulting from a reorganization, and both corporations, in the case of a reorganization resulting from the acquisition by one corporation of stock or properties of another. In the case of a reorganization qualifying under paragraph (1)(B) or (1)(C) of subsection (a), if the stock exchanged for the stock or properties is stock of a corporation which is in control of the acquiring corporation, the term “a party to a reorganization” includes the corporation so controlling the acquiring corporation. In the case of a reorganization qualifying under paragraph (1)(A), (1)(B), (1)(C), or (1)(G) of subsection (a) by reason of paragraph (2)(C) of subsection (a), the term “a party to a reorganization” includes the corporation controlling the corporation to which the acquired assets or stock are transferred. In the case of a reorganization qualifying under paragraph (1)(A) or (1)(G) of subsection (a) by reason of paragraph (2)(D) of that subsection, the term “a party to a reorganization” includes the controlling corporation referred to in such paragraph (2)(D). In the case of a reorganization qualifying under subsection (a)(1)(A) by reason of subsection (a)(2)(E), the term “party to a reorganization” includes the controlling corporation referred to in subsection (a)(2)(E).

(c) Control defined For purposes of part I (other than section 304), part II, this part, and part V, the term “control” means the ownership of stock possessing at least 80 percent of the total combined voting power of all classes of stock entitled to vote and at least 80 percent of the total number of shares of all other classes of stock of the corporation.

[§§ 370 to 372 Repealed. Pub. L. 101–508, title XI, § 11801(a)(19), Nov. 5, 1990, 104 Stat. 1388–521]

[§ 373 Repealed. Pub. L. 94–455, title XIX, § 1901(a)(52), Oct. 4, 1976, 90 Stat. 1773]

[§ 374 Repealed. Pub. L. 101–508, title XI, § 11801(a)(19), Nov. 5, 1990, 104 Stat. 1388–521]

§ 381 Carryovers in certain corporate acquisitions

(a) General rule In the case of the acquisition of assets of a corporation by another corporation— in a distribution to such other corporation to which section 332 (relating to liquidations of subsidiaries) applies; or in a transfer to which section 361 (relating to nonrecognition of gain or loss to corporations) applies, but only if the transfer is in connection with a reorganization described in subparagraph (A), (C), (D), (F), or (G) of section 368(a)(1), the acquiring corporation shall succeed to and take into account, as of the close of the day of distribution or transfer, the items described in subsection (c) of the distributor or transferor corporation, subject to the conditions and limitations specified in subsections (b) and (c). For purposes of the preceding sentence, a reorganization shall be treated as meeting the requirements of subparagraph (D) or (G) of section 368(a)(1) only if the requirements of subparagraphs (A) and (B) of section 354(b)(1) are met.

(b) Operating rules Except in the case of an acquisition in connection with a reorganization described in subparagraph (F) of section 368(a)(1)— The taxable year of the distributor or transferor corporation shall end on the date of distribution or transfer. For purposes of this section, the date of distribution or transfer shall be the day on which the distribution or transfer is completed; except that, under regulations prescribed by the Secretary, the date when substantially all of the property has been distributed or transferred may be used if the distributor or transferor corporation ceases all operations, other than liquidating activities, after such date. The corporation acquiring property in a distribution or transfer described in subsection (a) shall not be entitled to carry back a net operating loss or a net capital loss for a taxable year ending after the date of distribution or transfer to a taxable year of the distributor or transferor corporation.

(c) Items of the distributor or transferor corporation The items referred to in subsection (a) are: The net operating loss carryovers determined under section 172, subject to the following conditions and limitations: The taxable year of the acquiring corporation to which the net operating loss carryovers of the distributor or transferor corporation are first carried shall be the first taxable year ending after the date of distribution or transfer. In determining the net operating loss deduction, the portion of such deduction attributable to the net operating loss carryovers of the distributor or transferor corporation to the first taxable year of the acquiring corporation ending after the date of distribution or transfer shall be limited to an amount which bears the same ratio to the taxable income (determined without regard to a net operating loss deduction) of the acquiring corporation in such taxable year as the number of days in the taxable year after the date of distribution or transfer bears to the total number of days in the taxable year. For the purpose of determining the amount of the net operating loss carryovers under section 172(b)(2), a net operating loss for a taxable year (hereinafter in this subparagraph referred to as the “loss year”) of a distributor or transferor corporation which ends on or before the end of a loss year of the acquiring corporation shall be considered to be a net operating loss for a year prior to such loss year of the acquiring corporation. For the same purpose, the taxable income for a “prior taxable year” (as the term is used in section 172(b)(2)) shall be computed as provided in such section; except that, if the date of distribution or transfer is on a day other than the last day of a taxable year of the acquiring corporation— such taxable year shall (for the purpose of this subparagraph only) be considered to be 2 taxable years (hereinafter in this subparagraph referred to as the “pre-acquisition part year” and the “post-acquisition part year”); the pre-acquisition part year shall begin on the same day as such taxable year begins and shall end on the date of distribution or transfer; the post-acquisition part year shall begin on the day following the date of distribution or transfer and shall end on the same day as the end of such taxable year; the taxable income for such taxable year (computed with the modifications specified in section 172(b)(2)(A) but without a net operating loss deduction) shall be divided between the pre-acquisition part year and the post-acquisition part year in proportion to the number of days in each; the net operating loss deduction for the pre-acquisition part year shall be determined as provided in section 172(b)(2)(B), 1 but without regard to a net operating loss year of the distributor or transferor corporation; and the net operating loss deduction for the post-acquisition part year shall be determined as provided in section 172(b)(2)(B). 1 In the case of a distribution or transfer described in subsection (a)— the earnings and profits or deficit in earnings and profits, as the case may be, of the distributor or transferor corporation shall, subject to subparagraph (B), be deemed to have been received or incurred by the acquiring corporation as of the close of the date of the distribution or transfer; and a deficit in earnings and profits of the distributor, transferor, or acquiring corporation shall be used only to offset earnings and profits accumulated after the date of transfer. For this purpose, the earnings and profits for the taxable year of the acquiring corporation in which the distribution or transfer occurs shall be deemed to have been accumulated after such distribution or transfer in an amount which bears the same ratio to the undistributed earnings and profits of the acquiring corporation for such taxable year (computed without regard to any earnings and profits received from the distributor or transferor corporation, as described in subparagraph (A) of this paragraph) as the number of days in the taxable year after the date of distribution or transfer bears to the total number of days in the taxable year. The capital loss carryover determined under section 1212, subject to the following conditions and limitations: The taxable year of the acquiring corporation to which the capital loss carryover of the distributor or transferor corporation is first carried shall be the first taxable year ending after the date of distribution or transfer. The capital loss carryover shall be a short-term capital loss in the taxable year determined under subparagraph (A) but shall be limited to an amount which bears the same ratio to the capital gain net income (determined without regard to a short-term capital loss attributable to capital loss carryover), if any, of the acquiring corporation in such taxable year as the number of days in the taxable year after the date of distribution or transfer bears to the total number of days in the taxable year. For purposes of determining the amount of such capital loss carryover to taxable years following the taxable year determined under subparagraph (A), the capital gain net income in the taxable year determined under subparagraph (A) shall be considered to be an amount equal to the amount determined under subparagraph (B). The acquiring corporation shall use the method of accounting used by the distributor or transferor corporation on the date of distribution or transfer unless different methods were used by several distributor or transferor corporations or by a distributor or transferor corporation and the acquiring corporation. If different methods were used, the acquiring corporation shall use the method or combination of methods of computing taxable income adopted pursuant to regulations prescribed by the Secretary. In any case in which inventories are received by the acquiring corporation, such inventories shall be taken by such corporation (in determining its income) on the same basis on which such inventories were taken by the distributor or transferor corporation, unless different methods were used by several distributor or transferor corporations or by a distributor or transferor corporation and the acquiring corporation. If different methods were used, the acquiring corporation shall use the method or combination of methods of taking inventory adopted pursuant to regulations prescribed by the Secretary. The acquiring corporation shall be treated as the distributor or transferor corporation for purposes of computing the depreciation allowance under sections 167 and 168 on property acquired in a distribution or transfer with respect to so much of the basis in the hands of the acquiring corporation as does not exceed the adjusted basis in the hands of the distributor or transferor corporation. If the acquiring corporation acquires installment obligations (the income from which the distributor or transferor corporation reports on the installment basis under section 453) the acquiring corporation shall, for purposes of section 453, be treated as if it were the distributor or transferor corporation. If the acquiring corporation assumes liability for bonds of the distributor or transferor corporation issued at a discount or premium, the acquiring corporation shall be treated as the distributor or transferor corporation after the date of distribution or transfer for purposes of determining the amount of amortization allowable or includible with respect to such discount or premium. The acquiring corporation shall be entitled to deduct, as if it were the distributor or transferor corporation, expenses deferred under section 616 (relating to certain development expenditures) if the distributor or transferor corporation has so elected. The acquiring corporation shall be considered to be the distributor or transferor corporation after the date of distribution or transfer for the purpose of determining the amounts deductible under section 404 with respect to pension plans, employees’ annuity plans, and stock bonus and profit-sharing plans. If the acquiring corporation is entitled to the recovery of any amounts previously deducted by (or allowable as credits to) the distributor or transferor corporation, the acquiring corporation shall succeed to the treatment under section 111 which would apply to such amounts in the hands of the distributor or transferor corporation. The acquiring corporation shall be treated as the distributor or transferor corporation after the date of distribution or transfer for purposes of applying section 1033. The dividend carryover (described in section 564) to taxable years ending after the date of distribution or transfer. If the acquiring corporation— assumes an obligation of the distributor or transferor corporation which, after the date of the distribution or transfer, gives rise to a liability, and such liability, if paid or accrued by the distributor or transferor corporation, would have been deductible in computing its taxable income, the acquiring corporation shall be entitled to deduct such items when paid or accrued, as the case may be, as if such corporation were the distributor or transferor corporation. This paragraph shall not apply if such obligations are reflected in the amount of stock, securities, or property transferred by the acquiring corporation to the transferor corporation for the property of the transferor corporation. If the acquiring corporation pays a deficiency dividend (as defined in section 547(d)) with respect to the distributor or transferor corporation, such distributor or transferor corporation shall, with respect to such payments, be entitled to the deficiency dividend deduction provided in section 547. The acquiring corporation shall be considered to be the distributor or transferor corporation for the purpose of determining the applicability of section 613(c)(3) (relating to extraction of ores or minerals from the ground). Contributions made in the taxable year ending on the date of distribution or transfer and the 4 prior taxable years by the distributor or transferor corporation in excess of the amount deductible under section 170(b)(2) for such taxable years shall be deductible by the acquiring corporation for its taxable years which begin after the date of distribution or transfer, subject to the limitations imposed in section 170(b)(2). In applying the preceding sentence, each taxable year of the distributor or transferor corporation beginning on or before the date of distribution or transfer shall be treated as a prior taxable year with reference to the acquiring corporation’s taxable years beginning after such date. The carryover of disallowed business interest described in section 163(j)(2) to taxable years ending after the date of distribution or transfer. If the acquiring corporation is an insurance company taxable under subchapter L, there shall be taken into account (to the extent proper to carry out the purposes of this section and of subchapter L, and under such regulations as may be prescribed by the Secretary) the items required to be taken into account for purposes of subchapter L in respect of the distributor or transferor corporation. If the acquiring corporation pays a deficiency dividend (as defined in section 860(f)) with respect to the distributor or transferor corporation, such distributor or transferor corporation shall, with respect to such payments, be entitled to the deficiency dividend deduction provided in section 860. The acquiring corporation shall take into account (to the extent proper to carry out the purposes of this section and section 38, and under such regulations as may be prescribed by the Secretary) the items required to be taken into account for purposes of section 38 in respect of the distributor or transferor corporation. The acquiring corporation shall take into account (to the extent proper to carry out the purposes of this section and section 53, and under such regulations as may be prescribed by the Secretary) the items required to be taken into account for purposes of section 53 in respect of the distributor or transferor corporation. The acquiring corporation shall take into account (to the extent proper to carry out the purposes of this section and subchapter U, and under such regulations as may be prescribed by the Secretary) the items required to be taken into account for purposes of subchapter U in respect of the distributor or transferor corporation.

§ 382 Limitation on net operating loss carryforwards and certain built-in losses following ownership change

(a) General rule The amount of the taxable income of any new loss corporation for any post-change year which may be offset by pre-change losses shall not exceed the section 382 limitation for such year.

(b) Section 382 limitation For purposes of this section— Except as otherwise provided in this section, the section 382 limitation for any post-change year is an amount equal to— the value of the old loss corporation, multiplied by the long-term tax-exempt rate. If the section 382 limitation for any post-change year exceeds the taxable income of the new loss corporation for such year which was offset by pre-change losses, the section 382 limitation for the next post-change year shall be increased by the amount of such excess. In the case of any post-change year which includes the change date— Subsection (a) shall not apply to the portion of the taxable income for such year which is allocable to the period in such year on or before the change date. Except as provided in subsection (h)(5) and in regulations, taxable income shall be allocated ratably to each day in the year. For purposes of applying the limitation of subsection (a) to the remainder of the taxable income for such year, the section 382 limitation shall be an amount which bears the same ratio to such limitation (determined without regard to this paragraph) as— the number of days in such year after the change date, bears to the total number of days in such year.

(c) Carryforwards disallowed if continuity of business requirements not met Except as provided in paragraph (2), if the new loss corporation does not continue the business enterprise of the old loss corporation at all times during the 2-year period beginning on the change date, the section 382 limitation for any post-change year shall be zero. The section 382 limitation for any post-change year shall not be less than the sum of— any increase in such limitation under— subsection (h)(1)(A) for recognized built-in gains for such year, and subsection (h)(1)(C) for gain recognized by reason of an election under section 338, plus any increase in such limitation under subsection (b)(2) for amounts described in subparagraph (A) which are carried forward to such year.

(d) Pre-change loss and post-change year For purposes of this section— The term “pre-change loss” means— any net operating loss carryforward of the old loss corporation to the taxable year ending with the ownership change or in which the change date occurs, and the net operating loss of the old loss corporation for the taxable year in which the ownership change occurs to the extent such loss is allocable to the period in such year on or before the change date. Except as provided in subsection (h)(5) and in regulations, the net operating loss shall, for purposes of subparagraph (B), be allocated ratably to each day in the year. The term “post-change year” means any taxable year ending after the change date. The term “pre-change loss” shall include any carryover of disallowed interest described in section 163(j)(2) under rules similar to the rules of paragraph (1).

(e) Value of old loss corporation For purposes of this section— Except as otherwise provided in this subsection, the value of the old loss corporation is the value of the stock of such corporation (including any stock described in section 1504(a)(4)) immediately before the ownership change. If a redemption or other corporate contraction occurs in connection with an ownership change, the value under paragraph (1) shall be determined after taking such redemption or other corporate contraction into account. Except as otherwise provided in regulations, in determining the value of any old loss corporation which is a foreign corporation, there shall be taken into account only items treated as connected with the conduct of a trade or business in the United States.

(f) Long-term tax-exempt rate For purposes of this section— The long-term tax-exempt rate shall be the highest of the adjusted Federal long-term rates in effect for any month in the 3-calendar-month period ending with the calendar month in which the change date occurs. For purposes of paragraph (1), the term “adjusted Federal long-term rate” means the Federal long-term rate determined under section 1274(d), except that— paragraphs (2) and (3) thereof shall not apply, and such rate shall be properly adjusted for differences between rates on long-term taxable and tax-exempt obligations.

(g) Ownership change For purposes of this section— There is an ownership change if, immediately after any owner shift involving a 5-percent shareholder or any equity structure shift— the percentage of the stock of the loss corporation owned by 1 or more 5-percent shareholders has increased by more than 50 percentage points, over the lowest percentage of stock of the loss corporation (or any predecessor corporation) owned by such shareholders at any time during the testing period. There is an owner shift involving a 5-percent shareholder if— there is any change in the respective ownership of stock of a corporation, and such change affects the percentage of stock of such corporation owned by any person who is a 5-percent shareholder before or after such change. The term “equity structure shift” means any reorganization (within the meaning of section 368). Such term shall not include— any reorganization described in subparagraph (D) or (G) of section 368(a)(1) unless the requirements of section 354(b)(1) are met, and any reorganization described in subparagraph (F) of section 368(a)(1). To the extent provided in regulations, the term “equity structure shift” includes taxable reorganization-type transactions, public offerings, and similar transactions. Except as provided in subparagraphs (B)(i) and (C), in determining whether an ownership change has occurred, all stock owned by shareholders of a corporation who are not 5-percent shareholders of such corporation shall be treated as stock owned by 1 5-percent shareholder of such corporation. For purposes of determining whether an equity structure shift (or subsequent transaction) is an ownership change— Subparagraph (A) shall be applied separately with respect to each group of shareholders (immediately before such equity structure shift) of each corporation which was a party to the reorganization involved in such equity structure shift. Unless a different proportion is established, acquisitions of stock after such equity structure shift shall be treated as being made proportionately from all shareholders immediately before such acquisition. Except as provided in regulations, rules similar to the rules of subparagraph (B) shall apply in determining whether there has been an owner shift involving a 5-percent shareholder and whether such shift (or subsequent transaction) results in an ownership change. If any stock held by a 50-percent shareholder is treated by such shareholder as becoming worthless during any taxable year of such shareholder and such stock is held by such shareholder as of the close of such taxable year, for purposes of determining whether an ownership change occurs after the close of such taxable year, such shareholder— shall be treated as having acquired such stock on the 1st day of his 1st succeeding taxable year, and shall not be treated as having owned such stock during any prior period. For purposes of the preceding sentence, the term “50-percent shareholder” means any person owning 50 percent or more of the stock of the corporation at any time during the 3-year period ending on the last day of the taxable year with respect to which the stock was so treated.

(h) Special rules for built-in gains and losses and section 338 gains For purposes of this section— If the old loss corporation has a net unrealized built-in gain, the section 382 limitation for any recognition period taxable year shall be increased by the recognized built-in gains for such taxable year. The increase under clause (i) for any recognition period taxable year shall not exceed— the net unrealized built-in gain, reduced by recognized built-in gains for prior years ending in the recognition period. If the old loss corporation has a net unrealized built-in loss, the recognized built-in loss for any recognition period taxable year shall be subject to limitation under this section in the same manner as if such loss were a pre-change loss. Clause (i) shall apply to recognized built-in losses for any recognition period taxable year only to the extent such losses do not exceed— the net unrealized built-in loss, reduced by recognized built-in losses for prior taxable years ending in the recognition period. If an election under section 338 is made in connection with an ownership change and the net unrealized built-in gain is zero by reason of paragraph (3)(B), then, with respect to such change, the section 382 limitation for the post-change year in which gain is recognized by reason of such election shall be increased by the lesser of— the recognized built-in gains by reason of such election, or the net unrealized built-in gain (determined without regard to paragraph (3)(B)). The term “recognized built-in gain” means any gain recognized during the recognition period on the disposition of any asset to the extent the new loss corporation establishes that— such asset was held by the old loss corporation immediately before the change date, and such gain does not exceed the excess of— the fair market value of such asset on the change date, over the adjusted basis of such asset on such date. The term “recognized built-in loss” means any loss recognized during the recognition period on the disposition of any asset except to the extent the new loss corporation establishes that— such asset was not held by the old loss corporation immediately before the change date, or such loss exceeds the excess of— the adjusted basis of such asset on the change date, over the fair market value of such asset on such date. Such term includes any amount allowable as depreciation, amortization, or depletion for any period within the recognition period except to the extent the new loss corporation establishes that the amount so allowable is not attributable to the excess described in clause (ii). The terms “net unrealized built-in gain” and “net unrealized built-in loss” mean, with respect to any old loss corporation, the amount by which— the fair market value of the assets of such corporation immediately before an ownership change is more or less, respectively, than the aggregate adjusted basis of such assets at such time. If a redemption or other corporate contraction occurs in connection with an ownership change, to the extent provided in regulations, determinations under clause (i) shall be made after taking such redemption or other corporate contraction into account. If the amount of the net unrealized built-in gain or net unrealized built-in loss (determined without regard to this subparagraph) of any old loss corporation is not greater than the lesser of— 15 percent of the amount determined for purposes of subparagraph (A)(i)(I), or $10,000,000, the net unrealized built-in gain or net unrealized built-in loss shall be zero. In computing any net unrealized built-in gain or net unrealized built-in loss under clause (i), except as provided in regulations, there shall not be taken into account— any cash or cash item, or any marketable security which has a value which does not substantially differ from adjusted basis. If a deduction for any portion of a recognized built-in loss is disallowed for any post-change year, such portion— shall be carried forward to subsequent taxable years under rules similar to the rules for the carrying forward of net operating losses (or to the extent the amount so disallowed is attributable to capital losses, under rules similar to the rules for the carrying forward of net capital losses), but shall be subject to limitation under this section in the same manner as a pre-change loss. For purposes of subsection (b)(3)— in applying subparagraph (A) thereof, taxable income shall be computed without regard to recognized built-in gains to the extent such gains increased the section 382 limitation for the year (or recognized built-in losses to the extent such losses are treated as pre-change losses), and gain described in paragraph (1)(C), for the year, and in applying subparagraph (B) thereof, the section 382 limitation shall be computed without regard to recognized built-in gains, and gain described in paragraph (1)(C), for the year. Any item of income which is properly taken into account during the recognition period but which is attributable to periods before the change date shall be treated as a recognized built-in gain for the taxable year in which it is properly taken into account. Any amount which is allowable as a deduction during the recognition period (determined without regard to any carryover) but which is attributable to periods before the change date shall be treated as a recognized built-in loss for the taxable year for which it is allowable as a deduction. The amount of the net unrealized built-in gain or loss shall be properly adjusted for amounts which would be treated as recognized built-in gains or losses under this paragraph if such amounts were properly taken into account (or allowable as a deduction) during the recognition period. The term “recognition period” means, with respect to any ownership change, the 5-year period beginning on the change date. The term “recognition period taxable year” means any taxable year any portion of which is in the recognition period. If 80 percent or more in value of the stock of a corporation is acquired in 1 transaction (or in a series of related transactions during any 12-month period), for purposes of determining the net unrealized built-in loss, the fair market value of the assets of such corporation shall not exceed the grossed up amount paid for such stock properly adjusted for indebtedness of the corporation and other relevant items. The Secretary shall prescribe such regulations as may be necessary to carry out the purposes of this subsection where property held on the change date was acquired (or is subsequently transferred) in a transaction where gain or loss is not recognized (in whole or in part).

(i) Testing period For purposes of this section— Except as otherwise provided in this section, the testing period is the 3-year period ending on the day of any owner shift involving a 5-percent shareholder or equity structure shift. If there has been an ownership change under this section, the testing period for determining whether a 2nd ownership change has occurred shall not begin before the 1st day following the change date for such earlier ownership change. The testing period shall not begin before the earlier of the 1st day of the 1st taxable year from which there is a carryforward of a loss or of an excess credit to the 1st post-change year or the taxable year in which the transaction being tested occurs. Except as provided in regulations, this paragraph shall not apply to any loss corporation which has a net unrealized built-in loss (determined after application of subsection (h)(3)(B)).

(j) Change date For purposes of this section, the change date is— in the case where the last component of an ownership change is an owner shift involving a 5-percent shareholder, the date on which such shift occurs, and in the case where the last component of an ownership change is an equity structure shift, the date of the reorganization.

(k) Definitions and special rules For purposes of this section— The term “loss corporation” means a corporation entitled to use a net operating loss carryover or having a net operating loss for the taxable year in which the ownership change occurs. Such term shall include any corporation entitled to use a carryforward of disallowed interest described in section 381(c)(20). Except to the extent provided in regulations, such term includes any corporation with a net unrealized built-in loss. The term “old loss corporation” means any corporation— with respect to which there is an ownership change, and which (before the ownership change) was a loss corporation. The term “new loss corporation” means a corporation which (after an ownership change) is a loss corporation. Nothing in this section shall be treated as implying that the same corporation may not be both the old loss corporation and the new loss corporation. Taxable income shall be computed with the modifications set forth in section 172(d). The term “value” means fair market value. Except as provided in regulations and subsection (e), the term “stock” means stock other than stock described in section 1504(a)(4). The Secretary shall prescribe such regulations as may be necessary— to treat warrants, options, contracts to acquire stock, convertible debt interests, and other similar interests as stock, and to treat stock as not stock. Determinations of the percentage of stock of any corporation held by any person shall be made on the basis of value. The term “5-percent shareholder” means any person holding 5 percent or more of the stock of the corporation at any time during the testing period.

(l) Certain additional operating rules For purposes of this section— Any capital contribution received by an old loss corporation as part of a plan a principal purpose of which is to avoid or increase any limitation under this section shall not be taken into account for purposes of this section. For purposes of subparagraph (A), any capital contribution made during the 2-year period ending on the change date shall, except as provided in regulations, be treated as part of a plan described in subparagraph (A). In the case of any pre-change loss for any taxable year (hereinafter in this subparagraph referred to as the “loss year”) subject to limitation under this section, for purposes of determining under the 2nd sentence of section 172(b)(2) the amount of such loss which may be carried to any taxable year, taxable income for any taxable year shall be treated as not greater than— the section 382 limitation for such taxable year, reduced by the unused pre-change losses for taxable years preceding the loss year. Similar rules shall apply in the case of any credit or loss subject to limitation under section 383. In any case in which— a pre-change loss of a loss corporation for any taxable year is subject to a section 382 limitation, and a net operating loss of such corporation from such taxable year is not subject to such limitation, taxable income shall be treated as having been offset first by the loss subject to such limitation. Section 318 (relating to constructive ownership of stock) shall apply in determining ownership of stock, except that— paragraphs (1) and (5)(B) of section 318(a) shall not apply and an individual and all members of his family described in paragraph (1) of section 318(a) shall be treated as 1 individual for purposes of applying this section, paragraph (2) of section 318(a) shall be applied— without regard to the 50-percent limitation contained in subparagraph (C) thereof, and except as provided in regulations, by treating stock attributed thereunder as no longer being held by the entity from which attributed, paragraph (3) of section 318(a) shall be applied only to the extent provided in regulations, except to the extent provided in regulations, an option to acquire stock shall be treated as exercised if such exercise results in an ownership change, and in attributing stock from an entity under paragraph (2) of section 318(a), there shall not be taken into account— in the case of attribution from a corporation, stock which is not treated as stock for purposes of this section, or in the case of attribution from another entity, an interest in such entity similar to stock described in subclause (I). A rule similar to the rule of clause (iv) shall apply in the case of any contingent purchase, warrant, convertible debt, put, stock subject to a risk of forfeiture, contract to acquire stock, or similar interests. If— the basis of any stock in the hands of any person is determined— under section 1014 (relating to property acquired from a decedent), section 1015 (relating to property acquired by a gift or transfer in trust), or section 1041(b)(2) (relating to transfers of property between spouses or incident to divorce), stock is received by any person in satisfaction of a right to receive a pecuniary bequest, or stock is acquired by a person pursuant to any divorce or separation instrument (within the meaning of section 121(d)(3)(C)), such person shall be treated as owning such stock during the period such stock was owned by the person from whom it was acquired. Except as provided in regulations, any change in proportionate ownership which is attributable solely to fluctuations in the relative fair market values of different classes of stock shall not be taken into account. If, immediately after an ownership change, the new loss corporation has substantial nonbusiness assets, the value of the old loss corporation shall be reduced by the excess (if any) of— the fair market value of the nonbusiness assets of the old loss corporation, over the nonbusiness asset share of indebtedness for which such corporation is liable. For purposes of subparagraph (A)— The old loss corporation shall be treated as having substantial nonbusiness assets if at least ⅓ of the value of the total assets of such corporation consists of nonbusiness assets. A regulated investment company to which part I of subchapter M applies, a real estate investment trust to which part II of subchapter M applies, or a REMIC to which part IV of subchapter M applies, shall not be treated as a new loss corporation having substantial nonbusiness assets. For purposes of this paragraph, the term “nonbusiness assets” means assets held for investment. For purposes of this paragraph, the nonbusiness asset share of the indebtedness of the corporation is an amount which bears the same ratio to such indebtedness as— the fair market value of the nonbusiness assets of the corporation, bears to the fair market value of all assets of such corporation. For purposes of this paragraph, stock and securities in any subsidiary corporation shall be disregarded and the parent corporation shall be deemed to own its ratable share of the subsidiary’s assets. For purposes of the preceding sentence, a corporation shall be treated as a subsidiary if the parent owns 50 percent or more of the combined voting power of all classes of stock entitled to vote, and 50 percent or more of the total value of shares of all classes of stock. Subsection (a) shall not apply to any ownership change if— the old loss corporation is (immediately before such ownership change) under the jurisdiction of the court in a title 11 or similar case, and the shareholders and creditors of the old loss corporation (determined immediately before such ownership change) own (after such ownership change and as a result of being shareholders or creditors immediately before such change) stock of the new loss corporation (or stock of a controlling corporation if also in bankruptcy) which meets the requirements of section 1504(a)(2) (determined by substituting “50 percent” for “80 percent” each place it appears). In any case to which subparagraph (A) applies, the pre-change losses and excess credits (within the meaning of section 383(a)(2)) which may be carried to a post-change year shall be computed as if no deduction was allowable under this chapter for the interest paid or accrued by the old loss corporation on indebtedness which was converted into stock pursuant to title 11 or similar case during— any taxable year ending during the 3-year period preceding the taxable year in which the ownership change occurs, and the period of the taxable year in which the ownership change occurs on or before the change date. In applying section 108(e)(8) to any case to which subparagraph (A) applies, there shall not be taken into account any indebtedness for interest described in subparagraph (B). If, during the 2-year period immediately following an ownership change to which this paragraph applies, an ownership change of the new loss corporation occurs, this paragraph shall not apply and the section 382 limitation with respect to the 2nd ownership change for any post-change year ending after the change date of the 2nd ownership change shall be zero. For purposes of subparagraph (A)(ii), stock transferred to a creditor shall be taken into account only to the extent such stock is transferred in satisfaction of indebtedness and only if such indebtedness— was held by the creditor at least 18 months before the date of the filing of the title 11 or similar case, or arose in the ordinary course of the trade or business of the old loss corporation and is held by the person who at all times held the beneficial interest in such indebtedness. For purposes of this paragraph, the term “title 11 or similar case” has the meaning given such term by section 368(a)(3)(A). A new loss corporation may elect, subject to such terms and conditions as the Secretary may prescribe, not to have the provisions of this paragraph apply. If paragraph (5) does not apply to any reorganization described in subparagraph (G) of section 368(a)(1) or any exchange of debt for stock in a title 11 or similar case (as defined in section 368(a)(3)(A)), the value under subsection (e) shall reflect the increase (if any) in value of the old loss corporation resulting from any surrender or cancellation of creditors’ claims in the transaction. The Secretary shall by regulation provide for the application of this section to the alternative tax net operating loss deduction under section 56(d). Except as provided in regulations, any entity and any predecessor or successor entities of such entity shall be treated as 1 entity.

(m) Regulations The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section and section 383, including (but not limited to) regulations— providing for the application of this section and section 383 where an ownership change with respect to the old loss corporation is followed by an ownership change with respect to the new loss corporation, and providing for the application of this section and section 383 in the case of a short taxable year, providing for such adjustments to the application of this section and section 383 as is necessary to prevent the avoidance of the purposes of this section and section 383, including the avoidance of such purposes through the use of related persons, pass-thru entities, or other intermediaries, providing for the application of subsection (g)(4) where there is only 1 corporation involved, and providing, in the case of any group of corporations described in section 1563(a) (determined by substituting “50 percent” for “80 percent” each place it appears and determined without regard to paragraph (4) thereof), appropriate adjustments to value, built-in gain or loss, and other items so that items are not omitted or taken into account more than once.

(n) Special rule for certain ownership changes The limitation contained in subsection (a) shall not apply in the case of an ownership change which is pursuant to a restructuring plan of a taxpayer which— is required under a loan agreement or a commitment for a line of credit entered into with the Department of the Treasury under the Emergency Economic Stabilization Act of 2008, and is intended to result in a rationalization of the costs, capitalization, and capacity with respect to the manufacturing workforce of, and suppliers to, the taxpayer and its subsidiaries. Paragraph (1) shall not apply in the case of any subsequent ownership change unless such ownership change is described in such paragraph. Paragraph (1) shall not apply in the case of any ownership change if, immediately after such ownership change, any person (other than a voluntary employees’ beneficiary association under section 501(c)(9)) owns stock of the new loss corporation possessing 50 percent or more of the total combined voting power of all classes of stock entitled to vote, or of the total value of the stock of such corporation. Related persons shall be treated as a single person for purposes of this paragraph. For purposes of clause (i), a person shall be treated as related to another person if— such person bears a relationship to such other person described in section 267(b) or 707(b), or such persons are members of a group of persons acting in concert.

§ 383 Special limitations on certain excess credits, etc.

(a) Excess credits Under regulations, if an ownership change occurs with respect to a corporation, the amount of any excess credit for any taxable year which may be used in any post-change year shall be limited to an amount determined on the basis of the tax liability which is attributable to so much of the taxable income as does not exceed the section 382 limitation for such post-change year to the extent available after the application of section 382 and subsections (b) and (c) of this section. For purposes of paragraph (1), the term “excess credit” means— any unused general business credit of the corporation under section 39, and any unused minimum tax credit of the corporation under section 53.

(b) Limitation on net capital loss If an ownership change occurs with respect to a corporation, the amount of any net capital loss under section 1212 for any taxable year before the 1st post-change year which may be used in any post-change year shall be limited under regulations which shall be based on the principles applicable under section 382. Such regulations shall provide that any such net capital loss used in a post-change year shall reduce the section 382 limitation which is applied to pre-change losses under section 382 for such year.

(c) Foreign tax credits If an ownership change occurs with respect to a corporation, the amount of any excess foreign taxes under section 904(c) for any taxable year before the 1st post-change taxable year shall be limited under regulations which shall be consistent with purposes of this section and section 382.

(d) Pro ration rules for year which includes change For purposes of this section, rules similar to the rules of subsections (b)(3) and (d)(1)(B) of section 382 shall apply.

(e) Definitions Terms used in this section shall have the same respective meanings as when used in section 382, except that appropriate adjustments shall be made to take into account that the limitations of this section apply to credits and net capital losses.

§ 384 Limitation on use of preacquisition losses to offset built-in gains

(a) General rule If— a corporation acquires directly (or through 1 or more other corporations) control of another corporation, or the assets of a corporation are acquired by another corporation in a reorganization described in subparagraph (A), (C), or (D) of section 368(a)(1), and either of such corporations is a gain corporation, income for any recognition period taxable year (to the extent attributable to recognized built-in gains) shall not be offset by any preacquisition loss (other than a preacquisition loss of the gain corporation).

(b) Exception where corporations under common control Subsection (a) shall not apply to the preacquisition loss of any corporation if such corporation and the gain corporation were members of the same controlled group at all times during the 5-year period ending on the acquisition date. For purposes of this subsection, the term “controlled group” means a controlled group of corporations (as defined in section 1563(a)); except that— “more than 50 percent” shall be substituted for “at least 80 percent” each place it appears, the ownership requirements of section 1563(a) must be met both with respect to voting power and value, and the determination shall be made without regard to subsection (a)(4) of section 1563. If either of the corporations referred to in paragraph (1) was not in existence throughout the 5-year period referred to in paragraph (1), the period during which such corporation was in existence (or if both, the shorter of such periods) shall be substituted for such 5-year period.

(c) Definitions For purposes of this section— The term “recognized built-in gain” means any gain recognized during the recognition period on the disposition of any asset except to the extent the gain corporation (or, in any case described in subsection (a)(1)(B), the acquiring corporation) establishes that— such asset was not held by the gain corporation on the acquisition date, or such gain exceeds the excess (if any) of— the fair market value of such asset on the acquisition date, over the adjusted basis of such asset on such date. Any item of income which is properly taken into account for any recognition period taxable year but which is attributable to periods before the acquisition date shall be treated as a recognized built-in gain for the taxable year in which it is properly taken into account and shall be taken into account in determining the amount of the net unrealized built-in gain. The amount of the recognized built-in gains for any recognition period taxable year shall not exceed— the net unrealized built-in gain, reduced by the recognized built-in gains for prior years ending in the recognition period which (but for this section) would have been offset by preacquisition losses. The term “acquisition date” means— in any case described in subsection (a)(1)(A), the date on which the acquisition of control occurs, or in any case described in subsection (a)(1)(B), the date of the transfer in the reorganization. The term “preacquisition loss” means— any net operating loss carryforward to the taxable year in which the acquisition date occurs, and any net operating loss for the taxable year in which the acquisition date occurs to the extent such loss is allocable to the period in such year on or before the acquisition date. Except as provided in regulations, the net operating loss shall, for purposes of clause (ii), be allocated ratably to each day in the year. In the case of a corporation with a net unrealized built-in loss, the term “preacquisition loss” includes any recognized built-in loss. The term “gain corporation” means any corporation with a net unrealized built-in gain. The term “control” means ownership of stock in a corporation which meets the requirements of section 1504(a)(2). Except as provided in regulations and except for purposes of subsection (b), all corporations which are members of the same affiliated group immediately before the acquisition date shall be treated as 1 corporation. To the extent provided in regulations, section 1504 shall be applied without regard to subsection (b) thereof for purposes of the preceding sentence. Any reference in this section to a corporation shall include a reference to any predecessor or successor thereof. Except as provided in regulations, the terms “net unrealized built-in gain”, “net unrealized built-in loss”, “recognized built-in loss”, “recognition period”, and “recognition period taxable year”, have the same respective meanings as when used in section 382(h), except that the acquisition date shall be taken into account in lieu of the change date.

(d) Limitation also to apply to excess credits or net capital losses Rules similar to the rules of subsection (a) shall also apply in the case of any excess credit (as defined in section 383(a)(2)) or net capital loss.

(e) Ordering rules for net operating losses, etc. If any preacquisition loss may not offset a recognized built-in gain by reason of this section, such gain shall not be taken into account in determining under section 172(b)(2) the amount of such loss which may be carried to other taxable years. A similar rule shall apply in the case of any excess credit or net capital loss limited by reason of subsection (d). In any case in which— a preacquisition loss for any taxable year is subject to limitation under subsection (a), and a net operating loss from such taxable year is not subject to such limitation, taxable income shall be treated as having been offset 1st by the loss subject to such limitation.

(f) Regulations The Secretary shall prescribe such regulations as may be necessary to carry out the purposes of this section, including regulations to ensure that the purposes of this section may not be circumvented through— the use of any provision of law or regulations (including subchapter K of this chapter), or contributions of property to a corporation.

§ 385 Treatment of certain interests in corporations as stock or indebtedness

(a) Authority to prescribe regulations The Secretary is authorized to prescribe such regulations as may be necessary or appropriate to determine whether an interest in a corporation is to be treated for purposes of this title as stock or indebtedness (or as in part stock and in part indebtedness).

(b) Factors The regulations prescribed under this section shall set forth factors which are to be taken into account in determining with respect to a particular factual situation whether a debtor-creditor relationship exists or a corporation-shareholder relationship exists. The factors so set forth in the regulations may include among other factors: whether there is a written unconditional promise to pay on demand or on a specified date a sum certain in money in return for an adequate consideration in money or money’s worth, and to pay a fixed rate of interest, whether there is subordination to or preference over any indebtedness of the corporation, the ratio of debt to equity of the corporation, whether there is convertibility into the stock of the corporation, and the relationship between holdings of stock in the corporation and holdings of the interest in question.

(c) Effect of classification by issuer The characterization (as of the time of issuance) by the issuer as to whether an interest in a corporation is stock or indebtedness shall be binding on such issuer and on all holders of such interest (but shall not be binding on the Secretary). Except as provided in regulations, paragraph (1) shall not apply to any holder of an interest if such holder on his return discloses that he is treating such interest in a manner inconsistent with the characterization referred to in paragraph (1). The Secretary is authorized to require such information as the Secretary determines to be necessary to carry out the provisions of this subsection.

[§ 386 Repealed. Pub. L. 100–647, title I, § 1006(e)(8)(A), Nov. 10, 1988, 102 Stat. 3401]

[§§ 391 to 395 Repealed. Pub. L. 94–455, title XIX, § 1901(a)(55), Oct. 4, 1976, 90 Stat. 1773]

(a) Requirements for qualification A trust created or organized in the United States and forming part of a stock bonus, pension, or profit-sharing plan of an employer for the exclusive benefit of his employees or their beneficiaries shall constitute a qualified trust under this section— if contributions are made to the trust by such employer, or employees, or both, or by another employer who is entitled to deduct his contributions under section 404(a)(3)(B) (relating to deduction for contributions to profit-sharing and stock bonus plans), or by a charitable remainder trust pursuant to a qualified gratuitous transfer (as defined in section 664(g)(1)), for the purpose of distributing to such employees or their beneficiaries the corpus and income of the fund accumulated by the trust in accordance with such plan; if under the trust instrument it is impossible, at any time prior to the satisfaction of all liabilities with respect to employees and their beneficiaries under the trust, for any part of the corpus or income to be (within the taxable year or thereafter) used for, or diverted to, purposes other than for the exclusive benefit of his employees or their beneficiaries (but this paragraph shall not be construed, in the case of a multiemployer plan, to prohibit the return of a contribution within 6 months after the plan administrator determines that the contribution was made by a mistake of fact or law (other than a mistake relating to whether the plan is described in section 401(a) or the trust which is part of such plan is exempt from taxation under section 501(a), or the return of any withdrawal liability payment determined to be an overpayment within 6 months of such determination)); if the plan of which such trust is a part satisfies the requirements of section 410 (relating to minimum participation standards); and if the contributions or benefits provided under the plan do not discriminate in favor of highly compensated employees (within the meaning of section 414(q)). For purposes of this paragraph, there shall be excluded from consideration employees described in section 410(b)(3)(A) and (C). A classification shall not be considered discriminatory within the meaning of paragraph (4) or section 410(b)(2)(A)(i) merely because it is limited to salaried or clerical employees. A plan shall not be considered discriminatory within the meaning of paragraph (4) merely because the contributions or benefits of, or on behalf of, the employees under the plan bear a uniform relationship to the compensation (within the meaning of section 414(s)) of such employees. A plan shall not be considered discriminatory within the meaning of paragraph (4) merely because the contributions or benefits of, or on behalf of, the employees under the plan favor highly compensated employees (as defined in section 414(q)) in the manner permitted under subsection (l). A defined benefit plan shall not be considered discriminatory within the meaning of paragraph (4) merely because the plan provides that the employer-derived accrued retirement benefit for any participant under the plan may not exceed the excess (if any) of— the participant’s final pay with the employer, over the employer-derived retirement benefit created under Federal law attributable to service by the participant with the employer. For purposes of this clause, the employer-derived retirement benefit created under Federal law shall be treated as accruing ratably over 35 years. For purposes of this subparagraph, the participant’s final pay is the compensation (as defined in section 414(q)(4)) paid to the participant by the employer for any year— which ends during the 5-year period ending with the year in which the participant separated from service for the employer, and for which the participant’s total compensation from the employer was highest. For purposes of determining whether 2 or more plans of an employer satisfy the requirements of paragraph (4) when considered as a single plan— If the amount of contributions on behalf of the employees allowed as a deduction under section 404 for the taxable year with respect to such plans, taken together, bears a uniform relationship to the compensation (within the meaning of section 414(s)) of such employees, the plans shall not be considered discriminatory merely because the rights of employees to, or derived from, the employer contributions under the separate plans do not become nonforfeitable at the same rate. If the employees’ rights to benefits under the separate plans do not become nonforfeitable at the same rate, but the levels of benefits provided by the separate plans satisfy the requirements of regulations prescribed by the Secretary to take account of the differences in such rates, the plans shall not be considered discriminatory merely because of the difference in such rates. For purposes of testing for discrimination under paragraph (4)— the social security retirement age (as defined in section 415(b)(8)) shall be treated as a uniform retirement age, and subsidized early retirement benefits and joint and survivor annuities shall not be treated as being unavailable to employees on the same terms merely because such benefits or annuities are based in whole or in part on an employee’s social security retirement age (as so defined). Paragraphs (3) and (4) shall not apply to a governmental plan (within the meaning of section 414(d)). A plan shall be considered as meeting the requirements of paragraph (3) during the whole of any taxable year of the plan if on one day in each quarter it satisfied such requirements. A trust shall not constitute a qualified trust under this section unless the plan of which such trust is a part satisfies the requirements of section 411 (relating to minimum vesting standards). A trust forming part of a defined benefit plan shall not constitute a qualified trust under this section unless the plan provides that forfeitures must not be applied to increase the benefits any employee would otherwise receive under the plan. A trust shall not constitute a qualified trust under this subsection unless the plan provides that the entire interest of each employee— will be distributed to such employee not later than the required beginning date, or will be distributed, beginning not later than the required beginning date, in accordance with regulations, over the life of such employee or over the lives of such employee and a designated beneficiary (or over a period not extending beyond the life expectancy of such employee or the life expectancy of such employee and a designated beneficiary). A trust shall not constitute a qualified trust under this section unless the plan provides that if— the distribution of the employee’s interest has begun in accordance with subparagraph (A)(ii), and the employee dies before his entire interest has been distributed to him, the remaining portion of such interest will be distributed at least as rapidly as under the method of distributions being used under subparagraph (A)(ii) as of the date of his death. A trust shall not constitute a qualified trust under this section unless the plan provides that, if an employee dies before the distribution of the employee’s interest has begun in accordance with subparagraph (A)(ii), the entire interest of the employee will be distributed within 5 years after the death of such employee. If— any portion of the employee’s interest is payable to (or for the benefit of) a designated beneficiary, such portion will be distributed (in accordance with regulations) over the life of such designated beneficiary (or over a period not extending beyond the life expectancy of such beneficiary), and such distributions begin not later than 1 year after the date of the employee’s death or such later date as the Secretary may by regulations prescribe, for purposes of clause (ii), the portion referred to in subclause (I) shall be treated as distributed on the date on which such distributions begin. If the designated beneficiary referred to in clause (iii)(I) is the surviving spouse of the employee and the surviving spouse elects the treatment in this clause— the regulations referred to in clause (iii)(II) shall treat the surviving spouse as if the surviving spouse were the employee, the date on which the distributions are required to begin under clause (iii)(III) shall not be earlier than the date on which the employee would have attained the applicable age, and if the surviving spouse dies before the distributions to such spouse begin, this subparagraph shall be applied as if the surviving spouse is the employee. An election described in this clause shall be made at such time and in such manner as prescribed by the Secretary, shall include a timely notice to the plan administrator, and once made may not be revoked except with the consent of the Secretary. For purposes of this paragraph— The term “required beginning date” means April 1 of the calendar year following the later of— the calendar year in which the employee attains the applicable age, or the calendar year in which the employee retires. Subclause (II) of clause (i) shall not apply— except as provided in section 409(d), in the case of an employee who is a 5-percent owner (as defined in section 416) with respect to the plan year ending in the calendar year in which the employee attains the applicable age, or for purposes of section 408(a)(6) or (b)(3). In the case of an employee to whom clause (i)(II) applies who retires in a calendar year after the calendar year in which the employee attains age 70½, the employee’s accrued benefit shall be actuarially increased to take into account the period after age 70½ in which the employee was not receiving any benefits under the plan. Clauses (ii) and (iii) shall not apply in the case of a governmental plan or church plan. For purposes of this clause, the term “church plan” means a plan maintained by a church for church employees, and the term “church” means any church (as defined in section 3121(w)(3)(A)) or qualified church-controlled organization (as defined in section 3121(w)(3)(B)). In the case of an individual who attains age 72 after December 31, 2022 , and age 73 before January 1, 2033 , the applicable age is 73. In the case of an individual who attains age 74 after December 31, 2032 , the applicable age is 75. For purposes of this paragraph, the life expectancy of an employee and the employee’s spouse (other than in the case of a life annuity) may be redetermined but not more frequently than annually. For purposes of this paragraph— The term “designated beneficiary” means any individual designated as a beneficiary by the employee. The term “eligible designated beneficiary” means, with respect to any employee, any designated beneficiary who is— the surviving spouse of the employee, subject to clause (iii), a child of the employee who has not reached majority (within the meaning of subparagraph (F)), disabled (within the meaning of section 72(m)(7)), a chronically ill individual (within the meaning of section 7702B(c)(2), except that the requirements of subparagraph (A)(i) thereof shall only be treated as met if there is a certification that, as of such date, the period of inability described in such subparagraph with respect to the individual is an indefinite one which is reasonably expected to be lengthy in nature), or an individual not described in any of the preceding subclauses who is not more than 10 years younger than the employee. The determination of whether a designated beneficiary is an eligible designated beneficiary shall be made as of the date of death of the employee. Subject to subparagraph (F), an individual described in clause (ii)(II) shall cease to be an eligible designated beneficiary as of the date the individual reaches majority and any remainder of the portion of the individual’s interest to which subparagraph (H)(ii) applies shall be distributed within 10 years after such date. Under regulations prescribed by the Secretary, for purposes of this paragraph, any amount paid to a child shall be treated as if it had been paid to the surviving spouse if such amount will become payable to the surviving spouse upon such child reaching majority (or other designated event permitted under regulations). For purposes of this title, any distribution required under the incidental death benefit requirements of this subsection shall be treated as a distribution required under this paragraph. In the case of a defined contribution plan, if an employee dies before the distribution of the employee’s entire interest— Except in the case of a beneficiary who is not a designated beneficiary, subparagraph (B)(ii)— shall be applied by substituting “10 years” for “5 years”, and shall apply whether or not distributions of the employee’s interests have begun in accordance with subparagraph (A). Subparagraph (B)(iii) shall apply only in the case of an eligible designated beneficiary. If an eligible designated beneficiary dies before the portion of the employee’s interest to which this subparagraph applies is entirely distributed, the exception under clause (ii) shall not apply to any beneficiary of such eligible designated beneficiary and the remainder of such portion shall be distributed within 10 years after the death of such eligible designated beneficiary. In the case of an applicable multi-beneficiary trust, if under the terms of the trust— it is to be divided immediately upon the death of the employee into separate trusts for each beneficiary, or no beneficiary (other than a 1 eligible designated beneficiary described in subclause (III) or (IV) of subparagraph (E)(ii)) has any right to the employee’s interest in the plan until the death of all such eligible designated beneficiaries with respect to the trust, for purposes of a trust described in subclause (I), clause (ii) shall be applied separately with respect to the portion of the employee’s interest that is payable to any eligible designated beneficiary described in subclause (III) or (IV) of subparagraph (E)(ii); and, for purposes of a trust described in subclause (II), subparagraph (B)(iii) shall apply to the distribution of the employee’s interest and any beneficiary who is not such an eligible designated beneficiary shall be treated as a beneficiary of the eligible designated beneficiary upon the death of such eligible designated beneficiary. For purposes of this subparagraph, the term “applicable multi-beneficiary trust” means a trust— which has more than one beneficiary, all of the beneficiaries of which are treated as designated beneficiaries for purposes of determining the distribution period pursuant to this paragraph, and at least one of the beneficiaries of which is an eligible designated beneficiary described in subclause (III) or (IV) of subparagraph (E)(ii). For purposes of the preceding sentence, in the case of a trust the terms of which are described in clause (iv)(II), any beneficiary which is an organization described in section 408(d)(8)(B)(i) shall be treated as a designated beneficiary described in subclause (II). For purposes of applying the provisions of this subparagraph in determining amounts required to be distributed pursuant to this paragraph, all eligible retirement plans (as defined in section 402(c)(8)(B), other than a defined benefit plan described in clause (iv) or (v) thereof or a qualified trust which is a part of a defined benefit plan) shall be treated as a defined contribution plan. The requirements of this paragraph shall not apply for calendar year 2020 to— a defined contribution plan which is described in this subsection or in section 403(a) or 403(b), a defined contribution plan which is an eligible deferred compensation plan described in section 457(b) but only if such plan is maintained by an employer described in section 457(e)(1)(A), or an individual retirement plan. Clause (i) shall apply to any distribution which is required to be made in calendar year 2020 by reason of— a required beginning date occurring in such calendar year, and such distribution not having been made before January 1, 2020 . For purposes of this paragraph— the required beginning date with respect to any individual shall be determined without regard to this subparagraph for purposes of applying this paragraph for calendar years after 2020, and if clause (ii) of subparagraph (B) applies, the 5-year period described in such clause shall be determined without regard to calendar year 2020. Nothing in this section shall prohibit a commercial annuity (within the meaning of section 3405(e)(6)) that is issued in connection with any eligible retirement plan (within the meaning of section 402(c)(8)(B), other than a defined benefit plan) from providing one or more of the following types of payments on or after the annuity starting date: annuity payments that increase by a constant percentage, applied not less frequently than annually, at a rate that is less than 5 percent per year, a lump sum payment that— results in a shortening of the payment period with respect to an annuity or a full or partial commutation of the future annuity payments, provided that such lump sum is determined using reasonable actuarial methods and assumptions, as determined in good faith by the issuer of the contract, or accelerates the receipt of annuity payments that are scheduled to be received within the ensuing 12 months, regardless of whether such acceleration shortens the payment period with respect to the annuity, reduces the dollar amount of benefits to be paid under the contract, or results in a suspension of annuity payments during the period being accelerated, an amount which is in the nature of a dividend or similar distribution, provided that the issuer of the contract determines such amount using reasonable actuarial methods and assumptions, as determined in good faith by the issuer of the contract, when calculating the initial annuity payments and the issuer’s experience with respect to those factors, or a final payment upon death that does not exceed the excess of the total amount of the consideration paid for the annuity payments, less the aggregate amount of prior distributions or payments from or under the contract. In the case of any plan which provides contributions or benefits for employees some or all of whom are owner-employees (as defined in subsection (c)(3)), a trust forming part of such plan shall constitute a qualified trust under this section only if the requirements of subsection (d) are also met. In the case of any top-heavy plan, a trust forming part of such plan shall constitute a qualified trust under this section only if the requirements of section 416 are met. Except to the extent provided in regulations, a trust forming part of a plan (whether or not a top-heavy plan) shall constitute a qualified trust under this section only if such plan contains provisions— which will take effect if such plan becomes a top-heavy plan, and which meet the requirements of section 416. This subparagraph shall not apply to any governmental plan. In the case of any plan to which this paragraph applies, except as provided in section 417, a trust forming part of such plan shall not constitute a qualified trust under this section unless— in the case of a vested participant who does not die before the annuity starting date, the accrued benefit payable to such participant is provided in the form of a qualified joint and survivor annuity, and in the case of a vested participant who dies before the annuity starting date and who has a surviving spouse, a qualified preretirement survivor annuity is provided to the surviving spouse of such participant. This paragraph shall apply to— any defined benefit plan, any defined contribution plan which is subject to the funding standards of section 412, and any participant under any other defined contribution plan unless— such plan provides that the participant’s nonforfeitable accrued benefit (reduced by any security interest held by the plan by reason of a loan outstanding to such participant) is payable in full, on the death of the participant, to the participant’s surviving spouse (or, if there is no surviving spouse or the surviving spouse consents in the manner required under section 417(a)(2), to a designated beneficiary), such participant does not elect a payment of benefits in the form of a life annuity, and with respect to such participant, such plan is not a direct or indirect transferee (in a transfer after December 31, 1984 ) of a plan which is described in clause (i) or (ii) or to which this clause applied with respect to the participant. Clause (iii)(III) shall apply only with respect to the transferred assets (and income therefrom) if the plan separately accounts for such assets and any income therefrom. In the case of— a tax credit employee stock ownership plan (as defined in section 409(a)), or an employee stock ownership plan (as defined in section 4975(e)(7)), subparagraph (A) shall not apply to that portion of the employee’s accrued benefit to which the requirements of section 409(h) apply. In the case of any participant, clause (i) shall apply only if the requirements of subclauses (I), (II), and (III) of subparagraph (B)(iii) are met with respect to such participant. A plan shall not be treated as failing to meet the requirements of subparagraphs (B)(iii) or (C) merely because the plan provides that benefits will not be payable to the surviving spouse of the participant unless the participant and such spouse had been married throughout the 1-year period ending on the earlier of the participant’s annuity starting date or the date of the participant’s death. This paragraph shall not apply to a plan which the Secretary has determined is a plan described in section 404(c) (or a continuation thereof) in which participation is substantially limited to individuals who, before January 1, 1976 , ceased employment covered by the plan. For— provisions under which participants may elect to waive the requirements of this paragraph, and other definitions and special rules for purposes of this paragraph, see section 417. A trust shall not constitute a qualified trust under this section unless the plan of which such trust is a part provides that in the case of any merger or consolidation with, or transfer of assets or liabilities to, any other plan after September 2, 1974 , each participant in the plan would (if the plan then terminated) receive a benefit immediately after the merger, consolidation, or transfer which is equal to or greater than the benefit he would have been entitled to receive immediately before the merger, consolidation, or transfer (if the plan had then terminated). The preceding sentence does not apply to any multiemployer plan with respect to any transaction to the extent that participants either before or after the transaction are covered under a multiemployer plan to which title IV of the Employee Retirement Income Security Act of 1974 applies. A trust shall not constitute a qualified trust under this section unless the plan of which such trust is a part provides that benefits provided under the plan may not be assigned or alienated. For purposes of the preceding sentence, there shall not be taken into account any voluntary and revocable assignment of not to exceed 10 percent of any benefit payment made by any participant who is receiving benefits under the plan unless the assignment or alienation is made for purposes of defraying plan administration costs. For purposes of this paragraph a loan made to a participant or beneficiary shall not be treated as an assignment or alienation if such loan is secured by the participant’s accrued nonforfeitable benefit and is exempt from the tax imposed by section 4975 (relating to tax on prohibited transactions) by reason of section 4975(d)(1). This paragraph shall take effect on January 1, 1976 and shall not apply to assignments which were irrevocable on September 2, 1974 . Subparagraph (A) shall apply to the creation, assignment, or recognition of a right to any benefit payable with respect to a participant pursuant to a domestic relations order, except that subparagraph (A) shall not apply if the order is determined to be a qualified domestic relations order. Subparagraph (A) shall not apply to any offset of a participant’s benefits provided under a plan against an amount that the participant is ordered or required to pay to the plan if— the order or requirement to pay arises— under a judgment of conviction for a crime involving such plan, under a civil judgment (including a consent order or decree) entered by a court in an action brought in connection with a violation (or alleged violation) of part 4 of subtitle B of title I of the Employee Retirement Income Security Act of 1974, or pursuant to a settlement agreement between the Secretary of Labor and the participant, or a settlement agreement between the Pension Benefit Guaranty Corporation and the participant, in connection with a violation (or alleged violation) of part 4 of such subtitle by a fiduciary or any other person, the judgment, order, decree, or settlement agreement expressly provides for the offset of all or part of the amount ordered or required to be paid to the plan against the participant’s benefits provided under the plan, and in a case in which the survivor annuity requirements of section 401(a)(11) apply with respect to distributions from the plan to the participant, if the participant has a spouse at the time at which the offset is to be made— either such spouse has consented in writing to such offset and such consent is witnessed by a notary public or representative of the plan (or it is established to the satisfaction of a plan representative that such consent may not be obtained by reason of circumstances described in section 417(a)(2)(B)), or an election to waive the right of the spouse to either a qualified joint and survivor annuity or a qualified preretirement survivor annuity is in effect in accordance with the requirements of section 417(a), such spouse is ordered or required in such judgment, order, decree, or settlement to pay an amount to the plan in connection with a violation of part 4 of such subtitle, or in such judgment, order, decree, or settlement, such spouse retains the right to receive the survivor annuity under a qualified joint and survivor annuity provided pursuant to section 401(a)(11)(A)(i) and under a qualified preretirement survivor annuity provided pursuant to section 401(a)(11)(A)(ii), determined in accordance with subparagraph (D). A plan shall not be treated as failing to meet the requirements of this subsection, subsection (k), section 403(b), or section 409(d) solely by reason of an offset described in this subparagraph. The survivor annuity described in subparagraph (C)(iii)(III) shall be determined as if— the participant terminated employment on the date of the offset, there was no offset, the plan permitted commencement of benefits only on or after normal retirement age, the plan provided only the minimum-required qualified joint and survivor annuity, and the amount of the qualified preretirement survivor annuity under the plan is equal to the amount of the survivor annuity payable under the minimum-required qualified joint and survivor annuity. For purposes of this subparagraph, the term “minimum-required qualified joint and survivor annuity” means the qualified joint and survivor annuity which is the actuarial equivalent of the participant’s accrued benefit (within the meaning of section 411(a)(7)) and under which the survivor annuity is 50 percent of the amount of the annuity which is payable during the joint lives of the participant and the spouse. A trust shall not constitute a qualified trust under this section unless the plan of which such trust is a part provides that, unless the participant otherwise elects, the payment of benefits under the plan to the participant will begin not later than the 60th day after the latest of the close of the plan year in which— the date on which the participant attains the earlier of age 65 or the normal retirement age specified under the plan, occurs the 10th anniversary of the year in which the participant commenced participation in the plan, or the participant terminates his service with the employer. In the case of a plan which provides for the payment of an early retirement benefit, a trust forming a part of such plan shall not constitute a qualified trust under this section unless a participant who satisfied the service requirements for such early retirement benefit, but separated from the service (with any nonforfeitable right to an accrued benefit) before satisfying the age requirement for such early retirement benefit, is entitled upon satisfaction of such age requirement to receive a benefit not less than the benefit to which he would be entitled at the normal retirement age, actuarially, reduced under regulations prescribed by the Secretary. A trust shall not constitute a qualified trust under this section unless under the plan of which such trust is a part— in the case of a participant or beneficiary who is receiving benefits under such plan, or in the case of a participant who is separated from the service and who has nonforfeitable rights to benefits, such benefits are not decreased by reason of any increase in the benefit levels payable under title II of the Social Security Act or any increase in the wage base under such title II, if such increase takes place after September 2, 1974 , or (if later) the earlier of the date of first receipt of such benefits or the date of such separation, as the case may be. A trust shall not constitute a qualified trust under this section if the plan of which such trust is a part provides for benefits or contributions which exceed the limitations of section 415. A trust shall not constitute a qualified trust under this section unless, under the plan of which such trust is a part, the annual compensation of each employee taken into account under the plan for any year does not exceed $200, 000. T h e S ecre t a rys ha ll a d j u s t ann u a ll y t h e$ 200,000 amount in subparagraph (A) for increases in the cost-of-living at the same time and in the same manner as adjustments under section 415(d); except that the base period shall be the calendar quarter beginning July 1, 2001 , and any increase which is not a multiple of $5, 000 s ha ll b ero u n d e d t o t h e n e x tl o w es t m u lt i pl eo f$ 5,000. Repealed. Pub. L. 97–248, title II, § 237(b) , Sept. 3, 1982 , 96 Stat. 511 .] A trust shall not constitute a qualified trust under this section if under the plan of which such trust is a part any part of a participant’s accrued benefit derived from employer contributions (whether or not otherwise nonforfeitable), is forfeitable solely because of withdrawal by such participant of any amount attributable to the benefit derived from contributions made by such participant. The preceding sentence shall not apply to the accrued benefit of any participant unless, at the time of such withdrawal, such participant has a nonforfeitable right to at least 50 percent of such accrued benefit (as determined under section 411). The first sentence of this paragraph shall not apply to the extent that an accrued benefit is permitted to be forfeited in accordance with section 411(a)(3)(D)(iii) (relating to proportional forfeitures of benefits accrued before September 2, 1974 , in the event of withdrawal of certain mandatory contributions). A trust forming part of a pension plan shall not be treated as failing to constitute a qualified trust under this section merely because the pension plan of which such trust is a part makes 1 or more distributions within 1 taxable year to a distributee on account of a termination of the plan of which the trust is a part, or in the case of a profit-sharing or stock bonus plan, a complete discontinuance of contributions under such plan. This paragraph shall not apply to a defined benefit plan unless the employer maintaining such plan files a notice with the Pension Benefit Guaranty Corporation (at the time and in the manner prescribed by the Pension Benefit Guaranty Corporation) notifying the Corporation of such payment or distribution and the Corporation has approved such payment or distribution or, within 90 days after the date on which such notice was filed, has failed to disapprove such payment or distribution. For purposes of this paragraph, rules similar to the rules of section 402(a)(6)(B) (as in effect before its repeal by section 521 of the Unemployment Compensation Amendments of 1992) shall apply. Repealed. Pub. L. 99–514, title XI, § 1171(b)(5) , Oct. 22, 1986 , 100 Stat. 2513 .] If a defined contribution plan (other than a profit-sharing plan)— is established by an employer whose stock is not readily tradable on an established market, and after acquiring securities of the employer, more than 10 percent of the total assets of the plan are securities of the employer, any trust forming part of such plan shall not constitute a qualified trust under this section unless the plan meets the requirements of subsection (e) of section 409. The requirements of subsection (e) of section 409 shall not apply to any employees of an employer who are participants in any defined contribution plan established and maintained by such employer if the stock of such employer is not readily tradable on an established market and the trade or business of such employer consists of publishing on a regular basis a newspaper for general circulation. For purposes of the preceding sentence, subsections (b), (c), (m), and ( o ) of section 414 shall not apply except for determining whether stock of the employer is not readily tradable on an established market. A stock bonus plan shall not be treated as meeting the requirements of this section unless such plan meets the requirements of subsections (h) and ( o ) of section 409, except that in applying section 409(h) for purposes of this paragraph, the term “employer securities” shall include any securities of the employer held by the plan. Any group trust which otherwise meets the requirements of this section shall not be treated as not meeting such requirements on account of the participation or inclusion in such trust of the moneys of any plan or governmental unit described in section 818(a)(6). A defined benefit plan shall not be treated as providing definitely determinable benefits unless, whenever the amount of any benefit is to be determined on the basis of actuarial assumptions, such assumptions are specified in the plan in a way which precludes employer discretion. In the case of a trust which is a part of a defined benefit plan, such trust shall not constitute a qualified trust under this subsection unless on each day of the plan year such trust benefits at least the lesser of— 50 employees of the employer, or the greater of— 40 percent of all employees of the employer, or 2 employees (or if there is only 1 employee, such employee). A plan may exclude from consideration under this paragraph employees described in paragraphs (3) and (4)(A) of section 410(b). If employees described in section 410(b)(4)(B) are covered under a plan which meets the requirements of subparagraph (A) separately with respect to such employees, such employees may be excluded from consideration in determining whether any plan of the employer meets such requirements if— the benefits for such employees are provided under the same plan as benefits for other employees, the benefits provided to such employees are not greater than comparable benefits provided to other employees under the plan, and no highly compensated employee (within the meaning of section 414(q)) is included in the group of such employees for more than 1 year. Except to the extent provided in regulations, a plan covering only employees described in section 410(b)(3)(A) may exclude from consideration any employees who are not included in the unit or units in which the covered employees are included. Except to the extent provided in regulations, this paragraph shall not apply to employees in a multiemployer plan (within the meaning of section 414(f)) who are covered by collective bargaining agreements. Rules similar to the rules of section 410(b)(6)(C) shall apply for purposes of this paragraph. At the election of the employer and with the consent of the Secretary, this paragraph may be applied separately with respect to each separate line of business of the employer. For purposes of this paragraph, the term “separate line of business” has the meaning given such term by section 414(r) (without regard to paragraph (2)(A) or (7) thereof). This paragraph shall not apply to a governmental plan (within the meaning of section 414(d)). The Secretary may by regulation provide that any separate benefit structure, any separate trust, or any other separate arrangement is to be treated as a separate plan for purposes of applying this paragraph. A plan shall be deemed to satisfy the requirements of subparagraph (A) if— the plan is amended— to cease all benefit accruals, or to provide future benefit accruals only to a closed class of participants, the plan satisfies subparagraph (A) (without regard to this subparagraph) as of the effective date of the amendment, and the amendment was adopted before April 5, 2017 , or the plan is described in clause (ii). A plan is described in this clause if the plan would be described in subsection ( o )(1)(C), as applied for purposes of subsection ( o )(1)(B)(iii)(IV) and by treating the effective date of the amendment as the date the class was closed for purposes of subsection ( o )(1)(C). For purposes of clause (i)(II), in applying section 410(b)(6)(C), the amendments described in clause (i) shall not be treated as a significant change in coverage under section 410(b)(6)(C)(i)(II). For purposes of this subparagraph, if a portion of a plan described in clause (i) is spun off to another employer, the treatment under clause (i) of the spun-off plan shall continue with respect to the other employer. The determination of whether the plan under which any contributions are made is a profit-sharing plan shall be made without regard to current or accumulated profits of the employer and without regard to whether the employer is a tax-exempt organization. In the case of a plan which is intended to be a money purchase pension plan or a profit-sharing plan, a trust forming part of such plan shall not constitute a qualified trust under this subsection unless the plan designates such intent at such time and in such manner as the Secretary may prescribe. In the case of a trust which is part of an employee stock ownership plan (within the meaning of section 4975(e)(7)) or a plan which meets the requirements of section 409(a), such trust shall not constitute a qualified trust under this section unless such plan meets the requirements of subparagraphs (B) and (C). A plan meets the requirements of this subparagraph if each qualified participant in the plan may elect within 90 days after the close of each plan year in the qualified election period to direct the plan as to the investment of at least 25 percent of the participant’s account in the plan (to the extent such portion exceeds the amount to which a prior election under this subparagraph applies). In the case of the election year in which the participant can make his last election, the preceding sentence shall be applied by substituting “50 percent” for “25 percent”. A plan shall be treated as meeting the requirements of clause (i) if— the portion of the participant’s account covered by the election under clause (i) is distributed within 90 days after the period during which the election may be made, or the plan offers at least 3 investment options (not inconsistent with regulations prescribed by the Secretary) to each participant making an election under clause (i) and within 90 days after the period during which the election may be made, the plan invests the portion of the participant’s account covered by the election in accordance with such election. For purposes of this subparagraph, the term “qualified participant” means any employee who has completed at least 10 years of participation under the plan and has attained age 55. For purposes of this subparagraph, the term “qualified election period” means the 6-plan-year period beginning with the later of— the 1st plan year in which the individual first became a qualified participant, or the 1st plan year beginning after December 31, 1986 . For purposes of the preceding sentence, an employer may elect to treat an individual first becoming a qualified participant in the 1st plan year beginning in 1987 as having become a participant in the 1st plan year beginning in 1988. This subparagraph shall not apply to an applicable defined contribution plan (as defined in paragraph (35)(E)). A plan meets the requirements of this subparagraph if all valuations of employer securities which are not readily tradable on an established securities market with respect to activities carried on by the plan are by an independent appraiser. For purposes of the preceding sentence, the term “independent appraiser” means any appraiser meeting requirements similar to the requirements of the regulations prescribed under section 170(a)(1). In the case of a defined benefit plan (other than a multiemployer plan or a CSEC plan) to which the requirements of section 412 apply, the trust of which the plan is a part shall not constitute a qualified trust under this subsection unless the plan meets the requirements of section 436. In the case of a trust which is part of a plan under which elective deferrals (within the meaning of section 402(g)(3)) may be made with respect to any individual during a calendar year, such trust shall not constitute a qualified trust under this subsection unless the plan provides that the amount of such deferrals under such plan and all other plans, contracts, or arrangements of an employer maintaining such plan may not exceed the amount of the limitation in effect under section 402(g)(1)(A) for taxable years beginning in such calendar year. A trust shall not constitute a qualified trust under this section unless the plan of which such trust is a part provides that if the distributee of any eligible rollover distribution— elects to have such distribution paid directly to an eligible retirement plan, and specifies the eligible retirement plan to which such distribution is to be paid (in such form and at such time as the plan administrator may prescribe), such distribution shall be made in the form of a direct trustee-to-trustee transfer to the eligible retirement plan so specified. In case of a trust which is part of an eligible plan, such trust shall not constitute a qualified trust under this section unless the plan of which such trust is a part provides that if— a distribution described in clause (ii) in excess of $1, 000 i s ma d e, an d t h e d i s t r ib u t ee d oes n o t mak e an e l ec t i o n u n d ers u b p a r a g r a p h (A) an dd oes n o t e l ec tt orece i v e t h e d i s t r ib u t i o n d i rec tl y, t h e pl ana d mini s t r a t ors ha ll mak es u c h t r an s f er t o anin d i v i d u a l re t i re m e n tpl an o f a d es i g na t e d t r u s t eeor i ss u er an d s ha ll n o t i f y t h e d i s t r ib u t ee in w r i t in g (e i t h erse p a r a t e l yor a s p a r t o f t h e n o t i ce u n d ersec t i o n 402 (f)) t ha tt h e d i s t r ib u t i o nma y b e t r an s f erre d t o an o t h er in d i v i d u a l re t i re m e n tpl an . F or p u r p oseso f c l a u se (i), t h e t er m “ e l i g ib l e pl an ” m e an s a pl an w hi c h p ro v i d es t ha t an y n o n f or f e i t ab l e a ccr u e d b e n e f i t f or w hi c h t h e p rese n t v a l u e (a s d e t er min e d u n d ersec t i o n 411 (a) (11)) d oes n o t e x cee d$ 7,000 shall be immediately distributed to the participant. Subparagraphs (A) and (B) shall apply only to the extent that the eligible rollover distribution would be includible in gross income if not transferred as provided in subparagraph (A) (determined without regard to sections 402(c), 403(a)(4), 403(b)(8), and 457(e)(16)). The preceding sentence shall not apply to such distribution if the plan to which such distribution is transferred— is a qualified trust which is part of a plan which is a defined contribution plan and agrees to separately account for amounts so transferred, including separately accounting for the portion of such distribution which is includible in gross income and the portion of such distribution which is not so includible, or is an eligible retirement plan described in clause (i) or (ii) of section 402(c)(8)(B). For purposes of this paragraph, the term “eligible rollover distribution” has the meaning given such term by section 402(f)(2)(A). For purposes of this paragraph, the term “eligible retirement plan” has the meaning given such term by section 402(c)(8)(B), except that a qualified trust shall be considered an eligible retirement plan only if it is a defined contribution plan, the terms of which permit the acceptance of rollover distributions. A trust forming part of a pension plan to which section 430(j)(4) or 433(f)(5) applies shall not be treated as failing to constitute a qualified trust under this section merely because such plan ceases to make any payment described in subparagraph (B) during any period that such plan has a liquidity shortfall (as defined in section 430(j)(4) or 433(f)(5)). A payment is described in this subparagraph if such payment is— any payment, in excess of the monthly amount paid under a single life annuity (plus any social security supplements described in the last sentence of section 411(a)(9)), to a participant or beneficiary whose annuity starting date (as defined in section 417(f)(2)) occurs during the period referred to in subparagraph (A), any payment for the purchase of an irrevocable commitment from an insurer to pay benefits, and any other payment specified by the Secretary by regulations. For purposes of this paragraph, a plan has a liquidity shortfall during the period that there is an underpayment of an installment under section 430(j)(3) or 433(f) by reason of section 430(j)(4)(A) or 433(f)(5), respectively. A trust which is part of a plan to which this paragraph applies shall not constitute a qualified trust under this section if an amendment to such plan is adopted while the employer is a debtor in a case under title 11, United States Code, or similar Federal or State law, if such amendment increases liabilities of the plan by reason of— any increase in benefits, any change in the accrual of benefits, or any change in the rate at which benefits become nonforfeitable under the plan, with respect to employees of the debtor, and such amendment is effective prior to the effective date of such employer’s plan of reorganization. This paragraph shall not apply to any plan amendment if— the plan, were such amendment to take effect, would have a funding target attainment percentage (as defined in section 430(d)(2)) of 100 percent or more, the Secretary determines that such amendment is reasonable and provides for only de minimis increases in the liabilities of the plan with respect to employees of the debtor, such amendment only repeals an amendment described in section 412(d)(2), or such amendment is required as a condition of qualification under this part. This paragraph shall apply only to plans (other than multiemployer plans or CSEC plans) covered under section 4021 of the Employee Retirement Income Security Act of 1974. For purposes of this paragraph, the term “employer” means the employer referred to in section 412(b)(1), without regard to section 412(b)(2). In the case of a plan covered by title IV of the Employee Retirement Income Security Act of 1974, a trust forming part of such plan shall not be treated as failing to constitute a qualified trust under this section merely because the pension plan of which such trust is a part, upon its termination, transfers benefits of missing participants to the Pension Benefit Guaranty Corporation in accordance with section 4050 of such Act. A trust which is part of an applicable defined contribution plan shall not be treated as a qualified trust unless the plan meets the diversification requirements of subparagraphs (B), (C), and (D). In the case of the portion of an applicable individual’s account attributable to employee contributions and elective deferrals which is invested in employer securities, a plan meets the requirements of this subparagraph if the applicable individual may elect to direct the plan to divest any such securities and to reinvest an equivalent amount in other investment options meeting the requirements of subparagraph (D). In the case of the portion of the account attributable to employer contributions other than elective deferrals which is invested in employer securities, a plan meets the requirements of this subparagraph if each applicable individual who— is a participant who has completed at least 3 years of service, or is a beneficiary of a participant described in clause (i) or of a deceased participant, may elect to direct the plan to divest any such securities and to reinvest an equivalent amount in other investment options meeting the requirements of subparagraph (D). The requirements of this subparagraph are met if the plan offers not less than 3 investment options, other than employer securities, to which an applicable individual may direct the proceeds from the divestment of employer securities pursuant to this paragraph, each of which is diversified and has materially different risk and return characteristics. A plan shall not be treated as failing to meet the requirements of this subparagraph merely because the plan limits the time for divestment and reinvestment to periodic, reasonable opportunities occurring no less frequently than quarterly. Except as provided in regulations, a plan shall not meet the requirements of this subparagraph if the plan imposes restrictions or conditions with respect to the investment of employer securities which are not imposed on the investment of other assets of the plan. This subclause shall not apply to any restrictions or conditions imposed by reason of the application of securities laws. For purposes of this paragraph— The term “applicable defined contribution plan” means any defined contribution plan which holds any publicly traded employer securities. Such term does not include an employee stock ownership plan if— there are no contributions to such plan (or earnings thereunder) which are held within such plan and are subject to subsection (k) or (m), and such plan is a separate plan for purposes of section 414( l ) with respect to any other defined benefit plan or defined contribution plan maintained by the same employer or employers. Such term does not include a one-participant retirement plan. For purposes of clause (iii), the term “one-participant retirement plan” means a retirement plan that on the first day of the plan year— covered only one individual (or the individual and the individual’s spouse) and the individual (or the individual and the individual’s spouse) owned 100 percent of the plan sponsor (whether or not incorporated), or covered only one or more partners (or partners and their spouses) in the plan sponsor. Except as provided in regulations or in clause (ii), a plan holding employer securities which are not publicly traded employer securities shall be treated as holding publicly traded employer securities if any employer corporation, or any member of a controlled group of corporations which includes such employer corporation, has issued a class of stock which is a publicly traded employer security. Clause (i) shall not apply to a plan if— no employer corporation, or parent corporation of an employer corporation, has issued any publicly traded employer security, and no employer corporation, or parent corporation of an employer corporation, has issued any special class of stock which grants particular rights to, or bears particular risks for, the holder or issuer with respect to any corporation described in clause (i) which has issued any publicly traded employer security. For purposes of this subparagraph, the term— “controlled group of corporations” has the meaning given such term by section 1563(a), except that “50 percent” shall be substituted for “80 percent” each place it appears, “employer corporation” means a corporation which is an employer maintaining the plan, and “parent corporation” has the meaning given such term by section 424(e). For purposes of this paragraph— The term “applicable individual” means— any participant in the plan, and any beneficiary who has an account under the plan with respect to which the beneficiary is entitled to exercise the rights of a participant. The term “elective deferral” means an employer contribution described in section 402(g)(3)(A). The term “employer security” has the meaning given such term by section 407(d)(1) of the Employee Retirement Income Security Act of 1974. The term “employee stock ownership plan” has the meaning given such term by section 4975(e)(7). The term “publicly traded employer securities” means employer securities which are readily tradable on an established securities market. The term “year of service” has the meaning given such term by section 411(a)(5). In the case of the portion of an account to which subparagraph (C) applies and which consists of employer securities acquired in a plan year beginning before January 1, 2007 , subparagraph (C) shall only apply to the applicable percentage of such securities. This subparagraph shall be applied separately with respect to each class of securities. Subclause (I) shall not apply to an applicable individual who is a participant who has attained age 55 and completed at least 3 years of service before the first plan year beginning after December 31, 2005 . For purposes of clause (i), the applicable percentage shall be determined as follows: Plan year to which subparagraph (C) applies: The applicable percentage is: 1st 33 2d 66 3d and following 100. A trust forming part of a pension plan shall not be treated as failing to constitute a qualified trust under this section solely because the plan provides that a distribution may be made from such trust to an employee who has attained age 59½ and who is not separated from employment at the time of such distribution. Subparagraph (A) shall be applied by substituting “age 55” for “age 59½” in the case of a multiemployer plan described in section 4203(b)(1)(B)(i) of the Employee Retirement Income Security Act of 1974, with respect to individuals who were participants in such plan on or before April 30, 2013 , if— the trust to which subparagraph (A) applies was in existence before January 1, 1970 , and before December 31, 2011 , at a time when the plan provided that distributions may be made to an employee who has attained age 55 and who is not separated from employment at the time of such distribution, the plan received at least 1 written determination from the Internal Revenue Service that the trust to which subparagraph (A) applies constituted a qualified trust under this section. A trust shall not constitute a qualified trust unless the plan provides that, in the case of a participant who dies while performing qualified military service (as defined in section 414(u)), the survivors of the participant are entitled to any additional benefits (other than benefit accruals relating to the period of qualified military service) provided under the plan had the participant resumed and then terminated employment on account of death. Except as may be otherwise provided by regulations, a trust forming part of a defined contribution plan shall not be treated as failing to constitute a qualified trust under this section solely by reason of allowing— qualified distributions of a lifetime income investment, or distributions of a lifetime income investment in the form of a qualified plan distribution annuity contract, on or after the date that is 90 days prior to the date on which such lifetime income investment is no longer authorized to be held as an investment option under the plan. For purposes of this subsection— the term “qualified distribution” means a direct trustee-to-trustee transfer described in paragraph (31)(A) to an eligible retirement plan (as defined in section 402(c)(8)(B)), the term “lifetime income investment” means an investment option which is designed to provide an employee with election rights— which are not uniformly available with respect to other investment options under the plan, and which are to a lifetime income feature available through a contract or other arrangement offered under the plan (or under another eligible retirement plan (as so defined), if paid by means of a direct trustee-to-trustee transfer described in paragraph (31)(A) to such other eligible retirement plan), the term “lifetime income feature” means— a feature which guarantees a minimum level of income annually (or more frequently) for at least the remainder of the life of the employee or the joint lives of the employee and the employee’s designated beneficiary, or an annuity payable on behalf of the employee under which payments are made in substantially equal periodic payments (not less frequently than annually) over the life of the employee or the joint lives of the employee and the employee’s designated beneficiary, and the term “qualified plan distribution annuity contract” means an annuity contract purchased for a participant and distributed to the participant by a plan or contract described in subparagraph (B) of section 402(c)(8) (without regard to clauses (i) and (ii) thereof). A trust forming part of a defined contribution plan shall not be treated as failing to constitute a qualified trust under this section solely by reason of allowing qualified long-term care distributions. For purposes of this paragraph— The term “qualified long-term care distribution” means so much of the distributions made during the taxable year as does not exceed, in the aggregate, the least of the following: The amount paid by or assessed to the employee during the taxable year for or with respect to certified long-term care insurance for the employee or the employee’s spouse (or other family member of the employee as provided by the Secretary by regulation). An amount equal to 10 percent of the present value of the nonforfeitable accrued benefit of the employee under the plan. $2, 500. I n t h ec a seo f t a x ab l eye a rs b e g innin g a f t erDece mb er 31, 2024, t h e$ 2,500 amount in clause (i)(II) shall be increased by an amount equal to— such dollar amount, multiplied by the cost-of-living adjustment determined under section 1(f)(3) for the calendar year in which the taxable year begins, determined by substituting “calendar year 2023” for “calendar year 2016” in subparagraph (A)(ii) thereof. If any increase under the preceding sentence is not a multiple of $100, s u c ham o u n t s ha ll b ero u n d e d t o t h e n e a res t m u lt i pl eo f$ 100. The term “certified long-term care insurance” means— a qualified long-term care insurance contract (as defined in section 7702B(b)) covering qualified long-term care services (as defined in section 7702B(c)), coverage of the risk that an insured individual would become a chronically ill individual (within the meaning of section 101(g)(4)(B)) under a rider or other provision of a life insurance contract which satisfies the requirements of section 101(g)(3) (determined without regard to subparagraph (D) thereof), or coverage of qualified long-term care services (as so defined) under a rider or other provision of an insurance or annuity contract which is treated as a separate contract under section 7702B(e) and satisfies the requirements of section 7702B(g), if such coverage provides meaningful financial assistance in the event the insured needs home-based or nursing home care. For purposes of the preceding sentence, coverage shall not be deemed to provide meaningful financial assistance unless benefits are adjusted for inflation and consumer protections are provided, including protection in the event the coverage is terminated. Rules similar to the rules of section 402(l)(3) shall apply for purposes of this paragraph. No distribution shall be treated as a qualified long-term care distribution unless a long-term care premium statement with respect to the employee has been filed with the plan. For purposes of this paragraph, a long-term care premium statement is a statement provided by the issuer of long-term care coverage, upon request by the owner of such coverage, which includes— the name and taxpayer identification number of such issuer, a statement that the coverage is certified long-term care insurance, identification of the employee as the owner of such coverage, identification of the individual covered and such individual’s relationship to the employee, the premiums owed for the coverage for the calendar year, and such other information as the Secretary may require. A long-term care premium statement will be accepted only if the issuer has completed a disclosure to the Secretary for the specific coverage product to which the statement relates. Such disclosure shall identify the issuer, type of coverage, and such other information as the Secretary may require which is included in the filing of the product with the applicable State authority. Paragraphs (11), (12), (13), (14), (15), (19), and (20) shall apply only in the case of a plan to which section 411 (relating to minimum vesting standards) applies without regard to subsection (e)(2) of such section.

(b) Certain plan amendments A stock bonus, pension, profit-sharing, or annuity plan shall be considered as satisfying the requirements of subsection (a) for the period beginning with the date on which it was put into effect, or for the period beginning with the earlier of the date on which there was adopted or put into effect any amendment which caused the plan to fail to satisfy such requirements, and ending with the time prescribed by law for filing the return of the employer for his taxable year in which such plan or amendment was adopted (including extensions thereof) or such later time as the Secretary may designate, if all provisions of the plan which are necessary to satisfy such requirements are in effect by the end of such period and have been made effective for all purposes for the whole of such period. If an employer adopts a stock bonus, pension, profit-sharing, or annuity plan after the close of a taxable year but before the time prescribed by law for filing the return of the employer for the taxable year (including extensions thereof), the employer may elect to treat the plan as having been adopted as of the last day of the taxable year. In the case of an individual who owns the entire interest in an unincorporated trade or business, and who is the only employee of such trade or business, any elective deferrals (as defined in section 402(g)(3)) under a qualified cash or deferred arrangement to which the preceding sentence applies, which are made by such individual before the time for filing the return of such individual for the taxable year (determined without regard to any extensions) ending after or with the end of the plan’s first plan year, shall be treated as having been made before the end of such first plan year. If— an employer amends a stock bonus, pension, profit-sharing, or annuity plan to increase benefits accrued under the plan effective as of any date during the immediately preceding plan year (other than increasing the amount of matching contributions (as defined in subsection (m)(4)(A))), such amendment would not otherwise cause the plan to fail to meet any of the requirements of this subchapter, and such amendment is adopted before the time prescribed by law for filing the return of the employer for the taxable year (including extensions thereof) which includes the date described in subparagraph (A), the employer may elect to treat such amendment as having been adopted as of the last day of the plan year in which the amendment is effective.

(c) Definitions and rules relating to self-employed individuals and owner-employees For purposes of this section— The term “employee” includes, for any taxable year, an individual who is a self-employed individual for such taxable year. The term “self-employed individual” means, with respect to any taxable year, an individual who has earned income (as defined in paragraph (2)) for such taxable year. To the extent provided in regulations prescribed by the Secretary, such term also includes, for any taxable year— an individual who would be a self-employed individual within the meaning of the preceding sentence but for the fact that the trade or business carried on by such individual did not have net profits for the taxable year, and an individual who has been a self-employed individual within the meaning of the preceding sentence for any prior taxable year. The term “earned income” means the net earnings from self-employment (as defined in section 1402(a)), but such net earnings shall be determined— only with respect to a trade or business in which personal services of the taxpayer are a material income-producing factor, without regard to paragraphs (4) and (5) of section 1402(c), in the case of any individual who is treated as an employee under subparagraph (A), (C), or (D) of section 3121(d)(3), without regard to section 1402(c)(2), without regard to items which are not included in gross income for purposes of this chapter, and the deductions properly allocable to or chargeable against such items, with regard to the deductions allowed by section 404 to the taxpayer, and with regard to the deduction allowed to the taxpayer by section 164(f). For purposes of this subparagraph, section 1402, as in effect for a taxable year ending on December 31, 1962 , shall be treated as having been in effect for all taxable years ending before such date. For purposes of this part only (other than sections 419 and 419A), this subparagraph shall be applied as if the term “trade or business” for purposes of section 1402 included service described in section 1402(c)(6). For purposes of this section, the term “earned income” includes gains (other than any gain which is treated under any provision of this chapter as gain from the sale or exchange of a capital asset) and net earnings derived from the sale or other disposition of, the transfer of any interest in, or the licensing of the use of property (other than good will) by an individual whose personal efforts created such property. The term “owner-employee” means an employee who— owns the entire interest in an unincorporated trade or business, or in the case of a partnership, is a partner who owns more than 10 percent of either the capital interest or the profits interest in such partnership. To the extent provided in regulations prescribed by the Secretary, such term also means an individual who has been an owner-employee within the meaning of the preceding sentence. An individual who owns the entire interest in an unincorporated trade or business shall be treated as his own employer. A partnership shall be treated as the employer of each partner who is an employee within the meaning of paragraph (1). The term “contribution on behalf of an owner-employee” includes, except as the context otherwise requires, a contribution under a plan— by the employer for an owner-employee, and by an owner-employee as an employee. For purposes of this subsection, the term “self-employed individual” includes an individual described in section 3121(b)(20) (relating to certain fishermen).

(d) Contribution limit on owner-employees A trust forming part of a pension or profit-sharing plan which provides contributions or benefits for employees some or all of whom are owner-employees shall constitute a qualified trust under this section only if, in addition to meeting the requirements of subsection (a), the plan provides that contributions on behalf of any owner-employee may be made only with respect to the earned income of such owner-employee which is derived from the trade or business with respect to which such plan is established.

([(e) Repealed. Pub. L. 98–369, div. A, title VII, § 713(d)(3), July 18, 1984, 98 Stat. 958]

(f) Certain custodial accounts and contracts For purposes of this title, a custodial account, an annuity contract, or a contract (other than a life, health or accident, property, casualty, or liability insurance contract) issued by an insurance company qualified to do business in a State shall be treated as a qualified trust under this section if— the custodial account or contract would, except for the fact that it is not a trust, constitute a qualified trust under this section, and in the case of a custodial account the assets thereof are held by a bank (as defined in section 408(n)) or another person who demonstrates, to the satisfaction of the Secretary, that the manner in which he will hold the assets will be consistent with the requirements of this section. For purposes of this title, in the case of a custodial account or contract treated as a qualified trust under this section by reason of this subsection, the person holding the assets of such account or holding such contract shall be treated as the trustee thereof.

(g) Annuity defined For purposes of this section and sections 402, 403, and 404, the term “annuity” includes a face-amount certificate, as defined in section 2(a)(15) of the Investment Company Act of 1940 (15 U.S.C., sec. 80a–2); but does not include any contract or certificate issued after December 31, 1962 , which is transferable, if any person other than the trustee of a trust described in section 401(a) which is exempt from tax under section 501(a) is the owner of such contract or certificate.

(h) Medical, etc., benefits for retired employees and their spouses and dependents Under regulations prescribed by the Secretary, and subject to the provisions of section 420, a pension or annuity plan may provide for the payment of benefits for sickness, accident, hospitalization, and medical expenses of retired employees, their spouses and their dependents, but only if— such benefits are subordinate to the retirement benefits provided by the plan, a separate account is established and maintained for such benefits, the employer’s contributions to such separate account are reasonable and ascertainable, it is impossible, at any time prior to the satisfaction of all liabilities under the plan to provide such benefits, for any part of the corpus or income of such separate account to be (within the taxable year or thereafter) used for, or diverted to, any purpose other than the providing of such benefits, notwithstanding the provisions of subsection (a)(2), upon the satisfaction of all liabilities under the plan to provide such benefits, any amount remaining in such separate account must, under the terms of the plan, be returned to the employer, and in the case of an employee who is a key employee, a separate account is established and maintained for such benefits payable to such employee (and his spouse and dependents) and such benefits (to the extent attributable to plan years beginning after March 31, 1984 , for which the employee is a key employee) are only payable to such employee (and his spouse and dependents) from such separate account. For purposes of paragraph (6), the term “key employee” means any employee, who at any time during the plan year or any preceding plan year during which contributions were made on behalf of such employee, is or was a key employee as defined in section 416(i). In no event shall the requirements of paragraph (1) be treated as met if the aggregate actual contributions for medical benefits, when added to actual contributions for life insurance protection under the plan, exceed 25 percent of the total actual contributions to the plan (other than contributions to fund past service credits) after the date on which the account is established. For purposes of this subsection, the term “dependent” shall include any individual who is a child (as defined in section 152(f)(1)) of a retired employee who as of the end of the calendar year has not attained age 27.

(i) Certain union-negotiated pension plans In the case of a trust forming part of a pension plan which has been determined by the Secretary to constitute a qualified trust under subsection (a) and to be exempt from taxation under section 501(a) for a period beginning after contributions were first made to or for such trust, if it is shown to the satisfaction of the Secretary that— such trust was created pursuant to a collective bargaining agreement between employee representatives and one or more employers, any disbursements of contributions, made to or for such trust before the time as of which the Secretary determined that the trust constituted a qualified trust, substantially complied with the terms of the trust, and the plan of which the trust is a part, as subsequently qualified, and before the time as of which the Secretary determined that the trust constitutes a qualified trust, the contributions to or for such trust were not used in a manner which would jeopardize the interests of its beneficiaries, then such trust shall be considered as having constituted a qualified trust under subsection (a) and as having been exempt from taxation under section 501(a) for the period beginning on the date on which contributions were first made to or for such trust and ending on the date such trust first constituted (without regard to this subsection) a qualified trust under subsection (a).

([(j) Repealed. Pub. L. 97–248, title II, § 238(b), Sept. 3, 1982, 96 Stat. 512]

(k) Cash or deferred arrangements A profit-sharing or stock bonus plan, a pre-ERISA money purchase plan, or a rural cooperative plan shall not be considered as not satisfying the requirements of subsection (a) merely because the plan includes a qualified cash or deferred arrangement. A qualified cash or deferred arrangement is any arrangement which is part of a profit-sharing or stock bonus plan, a pre-ERISA money purchase plan, or a rural cooperative plan which meets the requirements of subsection (a)— under which a covered employee may elect to have the employer make payments as contributions to a trust under the plan on behalf of the employee, or to the employee directly in cash; under which amounts held by the trust which are attributable to employer contributions made pursuant to the employee’s election— may not be distributable to participants or other beneficiaries earlier than— severance from employment, death, or disability, an event described in paragraph (10), in the case of a profit-sharing or stock bonus plan, the attainment of age 59½, subject to the provisions of paragraph (14), upon hardship of the employee, in the case of a qualified reservist distribution (as defined in section 72(t)(2)(G)(iii)), the date on which a period referred to in subclause (III) of such section begins, except as may be otherwise provided by regulations, with respect to amounts invested in a lifetime income investment (as defined in subsection (a)(38)(B)(ii)), the date that is 90 days prior to the date that such lifetime income investment may no longer be held as an investment option under the arrangement, or as provided in section 401(a)(39), will not be distributable merely by reason of the completion of a stated period of participation or the lapse of a fixed number of years, and except as may be otherwise provided by regulations, in the case of amounts described in clause (i)(VI), will be distributed only in the form of a qualified distribution (as defined in subsection (a)(38)(B)(i)) or a qualified plan distribution annuity contract (as defined in subsection (a)(38)(B)(iv)), which provides that an employee’s right to his accrued benefit derived from employer contributions made to the trust pursuant to his election is nonforfeitable, and which does not require, as a condition of participation in the arrangement, that an employee complete a period of service with the employer (or employers) maintaining the plan extending beyond the close of the earlier of— the period permitted under section 410(a)(1) (determined without regard to subparagraph (B)(i) thereof), or subject to the provisions of paragraph (15), the first period of 2 consecutive 12-month periods during each of which the employee has at least 500 hours of service. A cash or deferred arrangement shall not be treated as a qualified cash or deferred arrangement unless— those employees eligible to benefit under the arrangement satisfy the provisions of section 410(b)(1), and the actual deferral percentage for eligible highly compensated employees (as defined in paragraph (5)) for the plan year bears a relationship to the actual deferral percentage for all other eligible employees for the preceding plan year which meets either of the following tests: The actual deferral percentage for the group of eligible highly compensated employees is not more than the actual deferral percentage of all other eligible employees multiplied by 1.25. The excess of the actual deferral percentage for the group of eligible highly compensated employees over that of all other eligible employees is not more than 2 percentage points, and the actual deferral percentage for the group of eligible highly compensated employees is not more than the actual deferral percentage of all other eligible employees multiplied by 2. If 2 or more plans which include cash or deferred arrangements are considered as 1 plan for purposes of section 401(a)(4) or 410(b), the cash or deferred arrangements included in such plans shall be treated as 1 arrangement for purposes of this subparagraph. If any highly compensated employee is a participant under 2 or more cash or deferred arrangements of the employer, for purposes of determining the deferral percentage with respect to such employee, all such cash or deferred arrangements shall be treated as 1 cash or deferred arrangement. An arrangement may apply clause (ii) by using the plan year rather than the preceding plan year if the employer so elects, except that if such an election is made, it may not be changed except as provided by the Secretary. For purposes of subparagraph (A), the actual deferral percentage for a specified group of employees for a plan year shall be the average of the ratios (calculated separately for each employee in such group) of— the amount of employer contributions actually paid over to the trust on behalf of each such employee for such plan year, to the employee’s compensation for such plan year. A cash or deferred arrangement shall be treated as meeting the requirements of subsection (a)(4) with respect to contributions if the requirements of subparagraph (A)(ii) are met. For purposes of subparagraph (B), the employer contributions on behalf of any employee— shall include any employer contributions made pursuant to the employee’s election under paragraph (2), and under such rules as the Secretary may prescribe, may, at the election of the employer, include— matching contributions (as defined in 401(m)(4)(A)) which meet the requirements of paragraph (2)(B) and (C), and qualified nonelective contributions (within the meaning of section 401(m)(4)(C)). For purposes of this paragraph, in the case of the first plan year of any plan (other than a successor plan), the amount taken into account as the actual deferral percentage of nonhighly compensated employees for the preceding plan year shall be— 3 percent, or if the employer makes an election under this subclause, the actual deferral percentage of nonhighly compensated employees determined for such first plan year. If an employer elects to apply section 410(b)(4)(B) in determining whether a cash or deferred arrangement meets the requirements of subparagraph (A)(i), the employer may, in determining whether the arrangement meets the requirements of subparagraph (A)(ii), exclude from consideration all eligible employees (other than highly compensated employees) who have not met the minimum age and service requirements of section 410(a)(1)(A). A governmental plan (within the meaning of section 414(d)) shall be treated as meeting the requirements of this paragraph. A cash or deferred arrangement of any employer shall not be treated as a qualified cash or deferred arrangement if any other benefit (other than a de minimis financial incentive (not paid for with plan assets) provided to employees who elect to have the employer make contributions under the arrangement in lieu of receiving cash) is conditioned (directly or indirectly) on the employee electing to have the employer make or not make contributions under the arrangement in lieu of receiving cash. The preceding sentence shall not apply to any matching contribution (as defined in section 401(m)) made by reason of such an election. Except as provided in clause (ii), any organization exempt from tax under this subtitle may include a qualified cash or deferred arrangement as part of a plan maintained by it. A cash or deferred arrangement shall not be treated as a qualified cash or deferred arrangement if it is part of a plan maintained by a State or local government or political subdivision thereof, or any agency or instrumentality thereof. This clause shall not apply to a rural cooperative plan or to a plan of an employer described in clause (iii). An employer which is an Indian tribal government (as defined in section 7701(a)(40)), a subdivision of an Indian tribal government (determined in accordance with section 7871(d)), an agency or instrumentality of an Indian tribal government or subdivision thereof, or a corporation chartered under Federal, State, or tribal law which is owned in whole or in part by any of the foregoing may include a qualified cash or deferred arrangement as part of a plan maintained by the employer. Except as provided in section 401(m), any employer contribution made pursuant to an employee’s election under a qualified cash or deferred arrangement shall not be taken into account for purposes of determining whether any other plan meets the requirements of section 401(a) or 410(b). This subparagraph shall not apply for purposes of determining whether a plan meets the average benefit requirement of section 410(b)(2)(A)(ii). For purposes of this subsection, the term “highly compensated employee” has the meaning given such term by section 414(q). For purposes of this subsection, the term “pre-ERISA money purchase plan” means a pension plan— which is a defined contribution plan (as defined in section 414(i)), which was in existence on June 27, 1974 , and which, on such date, included a salary reduction arrangement, and under which neither the employee contributions nor the employer contributions may exceed the levels provided for by the contribution formula in effect under the plan on such date. For purposes of this subsection— The term “rural cooperative plan” means any pension plan— which is a defined contribution plan (as defined in section 414(i)), and which is established and maintained by a rural cooperative. For purposes of subparagraph (A), the term “rural cooperative” means— any organization which— is engaged primarily in providing electric service on a mutual or cooperative basis, or is engaged primarily in providing electric service to the public in its area of service and which is exempt from tax under this subtitle or which is a State or local government (or an agency or instrumentality thereof), other than a municipality (or an agency or instrumentality thereof), any organization described in paragraph (4) or (6) of section 501(c) and at least 80 percent of the members of which are organizations described in clause (i), a cooperative telephone company described in section 501(c)(12), any organization which— is a mutual irrigation or ditch company described in section 501(c)(12) (without regard to the 85 percent requirement thereof), or is a district organized under the laws of a State as a municipal corporation for the purpose of irrigation, water conservation, or drainage, and an organization which is a national association of organizations described in clause (i), (ii),, 2 (iii), or (iv). A rural cooperative plan which includes a qualified cash or deferred arrangement shall not be treated as violating the requirements of section 401(a) or of paragraph (2) merely by reason of a hardship distribution or a distribution to a participant after attainment of age 59½. For purposes of this section, the term “hardship distribution” means a distribution described in paragraph (2)(B)(i)(IV) (without regard to the limitation of its application to profit-sharing or stock bonus plans). A cash or deferred arrangement shall not be treated as failing to meet the requirements of clause (ii) of paragraph (3)(A) for any plan year if, before the close of the following plan year— the amount of the excess contributions for such plan year (and any income allocable to such contributions through the end of such year) is distributed, or to the extent provided in regulations, the employee elects to treat the amount of the excess contributions as an amount distributed to the employee and then contributed by the employee to the plan. Any distribution of excess contributions (and income) may be made without regard to any other provision of law. For purposes of subparagraph (A), the term “excess contributions” means, with respect to any plan year, the excess of— the aggregate amount of employer contributions actually paid over to the trust on behalf of highly compensated employees for such plan year, over the maximum amount of such contributions permitted under the limitations of clause (ii) of paragraph (3)(A) (determined by reducing contributions made on behalf of highly compensated employees in order of the actual deferral percentages beginning with the highest of such percentages). Any distribution of the excess contributions for any plan year shall be made to highly compensated employees on the basis of the amount of contributions by, or on behalf of, each of such employees. No tax shall be imposed under section 72(t) on any amount required to be distributed under this paragraph. For purposes of paragraph (2)(C), a matching contribution (within the meaning of subsection (m)) shall not be treated as forfeitable merely because such contribution is forfeitable if the contribution to which the matching contribution relates is treated as an excess contribution under subparagraph (B), an excess deferral under section 402(g)(2)(A), a permissible withdrawal under section 414(w), or an excess aggregate contribution under section 401(m)(6)(B). For excise tax on certain excess contributions, see section 4979. For purposes of this subsection, the term “compensation” has the meaning given such term by section 414(s). An event described in this subparagraph is the termination of the plan without establishment or maintenance of another defined contribution plan (other than an employee stock ownership plan as defined in section 4975(e)(7)). A termination shall not be treated as described in subparagraph (A) with respect to any employee unless the employee receives a lump sum distribution by reason of the termination. For purposes of this subparagraph, the term “lump-sum distribution” has the meaning given such term by section 402(e)(4)(D) (without regard to subclauses (I), (II), (III), and (IV) of clause (i) thereof). Such term includes a distribution of an annuity contract from— a trust which forms a part of a plan described in section 401(a) and which is exempt from tax under section 501(a), or an annuity plan described in section 403(a). A cash or deferred arrangement maintained by an eligible employer shall be treated as meeting the requirements of paragraph (3)(A)(ii) if such arrangement meets— the contribution requirements of subparagraph (B), the exclusive plan requirements of subparagraph (C), and the vesting requirements of section 408(p)(3). The requirements of this subparagraph are met if, under the arrangement— an employee may elect to have the employer make elective contributions for the year on behalf of the employee to a trust under the plan in an amount which is expressed as a percentage of compensation of the employee but which in no event exceeds the amount in effect under section 408(p)(2)(A)(ii) (after the application of any election under section 408(p)(2)(E)(i)(II)), the employer is required to make a matching contribution to the trust for the year in an amount equal to so much of the amount the employee elects under subclause (I) as does not exceed 3 percent of compensation for the year, the employer may make nonelective contributions of a uniform percentage (up to 10 percent) of compensation, but not to exceed the amount in effect under section 408(p)(2)(A)(iv) in any year, for each employee who is eligible to participate in the arrangement and who has at least $5, 000 o f co m p e n s a t i o n f ro m t h ee m pl oyer f or t h eye a r, an d n oo t h erco n t r ib u t i o n s ma y b e ma d eo t h er t han co n t r ib u t i o n s d escr ib e d in s u b c l a u se (I), (II), or (III) . A n e m pl oyers ha ll b e t re a t e d a s m ee t in g t h ere q u i re m e n t so f c l a u se (i) (II) f or an yye a r i f, in l i e u o f t h eco n t r ib u t i o n s d escr ib e d in s u c h c l a u se, t h ee m pl oyere l ec t s (p u rs u an tt o t h e t er m so f t h e a rr an g e m e n t) t o mak e n o n e l ec t i v eco n t r ib u t i o n so f 2 p erce n t o f co m p e n s a t i o n f ore a c h e m pl oyee w h o i se l i g ib l e t o p a r t i c i p a t e in t h e a rr an g e m e n t an d w h o ha s a tl e a s t$ 5,000 of compensation from the employer for the year. If an employer makes an election under this subparagraph for any year, the employer shall notify employees of such election within a reasonable period of time before the 60th day before the beginning of such year. Rules similar to the rules of subparagraphs (B) and (C) of section 408(p)(5) shall apply for purposes of this subparagraph. The requirements of this subparagraph shall not be treated as met with respect to any year unless the employer notifies each employee eligible to participate, within a reasonable period of time before the 60th day before the beginning of such year (and, for the first year the employee is so eligible, the 60th day before the first day such employee is so eligible), of the rules similar to the rules of section 408(p)(5)(C) which apply by reason of subclause (I). The requirements of this subparagraph are met for any year to which this paragraph applies if no contributions were made, or benefits were accrued, for services during such year under any qualified plan of the employer on behalf of any employee eligible to participate in the cash or deferred arrangement, other than contributions described in subparagraph (B). For purposes of this paragraph, any term used in this paragraph which is also used in section 408(p) shall have the meaning given such term by such section. A plan meeting the requirements of this paragraph for any year shall not be treated as a top-heavy plan under section 416 for such year if such plan allows only contributions required under this paragraph. In the case of an employer which applies an election under section 408(p)(2)(E)(i)(II) for purposes of the contribution requirements of this paragraph under subparagraph (B)(i)(I), rules similar to the rules of subparagraphs (B)(iii), (C)(ii)(IV), and (G) of section 408(p)(2) shall apply for purposes of subparagraphs (B)(i)(II) and (B)(ii) of this paragraph. A cash or deferred arrangement shall be treated as meeting the requirements of paragraph (3)(A)(ii) if such arrangement— meets the contribution requirements of subparagraph (B) and the notice requirements of subparagraph (D), or meets the contribution requirements of subparagraph (C). The requirements of this subparagraph are met if, under the arrangement, the employer makes matching contributions on behalf of each employee who is not a highly compensated employee in an amount equal to— 100 percent of the elective contributions of the employee to the extent such elective contributions do not exceed 3 percent of the employee’s compensation, and 50 percent of the elective contributions of the employee to the extent that such elective contributions exceed 3 percent but do not exceed 5 percent of the employee’s compensation. The requirements of this subparagraph are not met if, under the arrangement, the rate of matching contribution with respect to any elective contribution of a highly compensated employee at any rate of elective contribution is greater than that with respect to an employee who is not a highly compensated employee. If the rate of any matching contribution with respect to any rate of elective contribution is not equal to the percentage required under clause (i), an arrangement shall not be treated as failing to meet the requirements of clause (i) if— the rate of an employer’s matching contribution does not increase as an employee’s rate of elective contributions increase, and the aggregate amount of matching contributions at such rate of elective contribution is at least equal to the aggregate amount of matching contributions which would be made if matching contributions were made on the basis of the percentages described in clause (i). The requirements of this subparagraph are met if, under the arrangement, the employer is required, without regard to whether the employee makes an elective contribution or employee contribution, to make a contribution to a defined contribution plan on behalf of each employee who is not a highly compensated employee and who is eligible to participate in the arrangement in an amount equal to at least 3 percent of the employee’s compensation. An arrangement meets the requirements of this paragraph if, under the arrangement, each employee eligible to participate is, within a reasonable period before any year, given written notice of the employee’s rights and obligations under the arrangement which— is sufficiently accurate and comprehensive to apprise the employee of such rights and obligations, and is written in a manner calculated to be understood by the average employee eligible to participate. An arrangement shall not be treated as meeting the requirements of subparagraph (B) or (C) of this paragraph unless the requirements of subparagraphs (B) and (C) of paragraph (2) are met with respect to all employer contributions (including matching contributions) taken into account in determining whether the requirements of subparagraphs (B) and (C) of this paragraph are met. An arrangement shall not be treated as meeting the requirements of subparagraph (B) or (C) unless such requirements are met without regard to subsection ( l ), and, for purposes of subsection ( l ), employer contributions under subparagraph (B) or (C) shall not be taken into account. Except as provided in clause (ii), a plan may be amended after the beginning of a plan year to provide that the requirements of subparagraph (C) shall apply to the arrangement for the plan year, but only if the amendment is adopted— at any time before the 30th day before the close of the plan year, or at any time before the last day under paragraph (8)(A) for distributing excess contributions for the plan year. Clause (i) shall not apply to any plan year if the plan provided at any time during the plan year that the requirements of subparagraph (B) or paragraph (13)(D)(i)(I) applied to the plan year. Clause (i)(II) shall not apply to an arrangement unless the amount of the contributions described in subparagraph (C) which the employer is required to make under the arrangement for the plan year with respect to any employee is an amount equal to at least 4 percent of the employee’s compensation. An arrangement shall be treated as meeting the contribution requirements under subparagraph (B) or (C) if any other plan maintained by the employer meets such requirements with respect to employees eligible under the arrangement. A qualified automatic contribution arrangement shall be treated as meeting the requirements of paragraph (3)(A)(ii). For purposes of this paragraph, the term “qualified automatic contribution arrangement” means a cash or deferred arrangement— which is described in subparagraph (D)(i)(I) and meets the applicable requirements of subparagraphs (C) through (E), or which is described in subparagraph (D)(i)(II) and meets the applicable requirements of subparagraphs (C) and (D). The requirements of this subparagraph are met if, under the arrangement, each employee eligible to participate in the arrangement is treated as having elected to have the employer make elective contributions in an amount equal to a qualified percentage of compensation. The election treated as having been made under clause (i) shall cease to apply with respect to any employee if such employee makes an affirmative election— to not have such contributions made, or to make elective contributions at a level specified in such affirmative election. For purposes of this subparagraph, the term “qualified percentage” means, with respect to any employee, any percentage determined under the arrangement if such percentage is applied uniformly, does not exceed 15 percent (10 percent during the period described in subclause (I)), and is at least— 3 percent during the period ending on the last day of the first plan year which begins after the date on which the first elective contribution described in clause (i) is made with respect to such employee, 4 percent during the first plan year following the plan year described in subclause (I), 5 percent during the second plan year following the plan year described in subclause (I), and 6 percent during any subsequent plan year. Clause (i) may be applied without taking into account any employee who— was eligible to participate in the arrangement (or a predecessor arrangement) immediately before the date on which such arrangement becomes a qualified automatic contribution arrangement (determined after application of this clause), and had an election in effect on such date either to participate in the arrangement or to not participate in the arrangement. The requirements of this subparagraph are met if, under the arrangement, the employer— makes matching contributions on behalf of each employee who is not a highly compensated employee in an amount equal to the sum of 100 percent of the elective contributions of the employee to the extent that such contributions do not exceed 1 percent of compensation plus 50 percent of so much of such contributions as exceed 1 percent but do not exceed 6 percent of compensation, or is required, without regard to whether the employee makes an elective contribution or employee contribution, to make a contribution to a defined contribution plan on behalf of each employee who is not a highly compensated employee and who is eligible to participate in the arrangement in an amount equal to at least 3 percent of the employee’s compensation. The rules of clauses (ii) and (iii) of paragraph (12)(B) shall apply for purposes of clause (i)(I). An arrangement shall not be treated as meeting the requirements of clause (i) unless, with respect to employer contributions (including matching contributions) taken into account in determining whether the requirements of clause (i) are met— any employee who has completed at least 2 years of service (within the meaning of section 411(a)) has a nonforfeitable right to 100 percent of the employee’s accrued benefit derived from such employer contributions, and the requirements of subparagraph (B) of paragraph (2) are met with respect to all such employer contributions. The rules of subparagraphs (E)(ii) and (G) of paragraph (12) shall apply for purposes of subclauses (I) and (II) of clause (i). The requirements of this subparagraph are met if, within a reasonable period before each plan year, each employee eligible to participate in the arrangement for such year receives written notice of the employee’s rights and obligations under the arrangement which— is sufficiently accurate and comprehensive to apprise the employee of such rights and obligations, and is written in a manner calculated to be understood by the average employee to whom the arrangement applies. A notice shall not be treated as meeting the requirements of clause (i) with respect to an employee unless— the notice explains the employee’s right under the arrangement to elect not to have elective contributions made on the employee’s behalf (or to elect to have such contributions made at a different percentage), in the case of an arrangement under which the employee may elect among 2 or more investment options, the notice explains how contributions made under the arrangement will be invested in the absence of any investment election by the employee, and the employee has a reasonable period of time after receipt of the notice described in subclauses (I) and (II) and before the first elective contribution is made to make either such election. Except as provided in clause (ii), a plan may be amended after the beginning of a plan year to provide that the requirements of subparagraph (D)(i)(II) shall apply to the arrangement for the plan year, but only if the amendment is adopted— at any time before the 30th day before the close of the plan year, or at any time before the last day under paragraph (8)(A) for distributing excess contributions for the plan year. Clause (i) shall not apply to any plan year if the plan provided at any time during the plan year that the requirements of subparagraph (D)(i)(I) or paragraph (12)(B) applied to the plan year. Clause (i)(II) shall not apply to an arrangement unless the amount of the contributions described in subparagraph (D)(i)(II) which the employer is required to make under the arrangement for the plan year with respect to any employee is an amount equal to at least 4 percent of the employee’s compensation. For purposes of paragraph (2)(B)(i)(IV)— The following amounts may be distributed upon hardship of the employee: Contributions to a profit-sharing or stock bonus plan to which section 402(e)(3) applies. Qualified nonelective contributions (as defined in subsection (m)(4)(C)). Qualified matching contributions described in paragraph (3)(D)(ii)(I). Earnings on any contributions described in clause (i), (ii), or (iii). A distribution shall not be treated as failing to be made upon the hardship of an employee solely because the employee does not take any available loan under the plan. In determining whether a distribution is upon the hardship of an employee, the administrator of the plan may rely on a written certification by the employee that the distribution is— on account of a financial need of a type which is deemed in regulations prescribed by the Secretary to be an immediate and heavy financial need, and not in excess of the amount required to satisfy such financial need, and that the employee has no alternative means reasonably available to satisfy such financial need. The Secretary may provide by regulations for exceptions to the rule of the preceding sentence in cases where the plan administrator has actual knowledge to the contrary of the employee’s certification, and for procedures for addressing cases of employee misrepresentation. For purposes of paragraph (2)(D)(ii)— Paragraph (2)(D)(ii) shall not apply to an employee unless the employee has met the requirement of section 410(a)(1)(A)(i) by the close of the last of the 12-month periods described in such paragraph. In the case of employees who are eligible to participate in the arrangement solely by reason of paragraph (2)(D)(ii), or by reason of such paragraph and section 202(c)(1)(B) of the Employee Retirement Income Security Act of 1974— notwithstanding subsection (a)(4), an employer shall not be required to make nonelective or matching contributions on behalf of such employees even if such contributions are made on behalf of other employees eligible to participate in the arrangement, and an employer may elect to exclude such employees from the application of subsection (a)(4), paragraphs (3), (12), and (13), paragraphs (2), (11), and (12) of subsection (m), and section 410(b). An employer may elect to exclude all employees who are eligible to participate in a plan maintained by the employer solely by reason of paragraph (2)(D)(ii) from the application of the vesting and benefit requirements under subsections (b) and (c) of section 416. For purposes of determining whether an employee described in clause (i) has a nonforfeitable right to employer contributions (other than contributions described in paragraph (3)(D)(i)) under the plan, each 12-month period for which the employee has at least 500 hours of service shall be treated as a year of service, and section 411(a)(6) shall be applied by substituting “at least 500 hours of service” for “more than 500 hours of service” in subparagraph (A) thereof. This subparagraph (other than clause (iii)) shall cease to apply to any employee as of the first plan year beginning after the plan year in which the employee meets the requirements of paragraph (2)(D) without regard to paragraph (2)(D)(ii). Paragraph (2)(D)(ii) shall not apply to employees described in section 410(b)(3). The rules of section 410(a)(4) shall apply to an employee eligible to participate in an arrangement solely by reason of paragraph (2)(D)(ii). 12-month periods shall be determined in the same manner as under the last sentence of section 410(a)(3)(A). A starter 401(k) deferral-only arrangement maintained by an eligible employer shall be treated as meeting the requirements of paragraph (3)(A)(ii). For purposes of this paragraph, the term “starter 401(k) deferral-only arrangement” means any cash or deferred arrangement which meets— the automatic deferral requirements of subparagraph (C), the contribution limitations of subparagraph (D), and the requirements of subparagraph (E) of paragraph (13). The requirements of this subparagraph are met if, under the arrangement, each eligible employee is treated as having elected to have the employer make elective contributions in an amount equal to a qualified percentage of compensation. The election treated as having been made under clause (i) shall cease to apply with respect to any employee if such employee makes an affirmative election— to not have such contributions made, or to make elective contributions at a level specified in such affirmative election. For purposes of this subparagraph, the term “qualified percentage” means, with respect to any employee, any percentage determined under the arrangement if such percentage is applied uniformly and is not less than 3 or more than 15 percent. The requirements of this subparagraph are met if, under the arrangement— the only contributions which may be made are elective contributions of employees described in subparagraph (C), and the aggregate amount of such elective contributions which may be made with respect to any employee for any calendar year shall not exceed $6, 000. I n t h ec a seo f an yc a l e n d a rye a r b e g innin g a f t erDece mb er 31, 2024, t h e$ 6,000 amount under clause (i) shall be adjusted in the same manner as under section 402(g)(4), except that “2023” shall be substituted for “2005”. In the case of an individual who has attained the age of 50 before the close of the taxable year, the limitation under clause (i)(II) shall be increased by the applicable amount determined under section 219(b)(5)(B)(ii) (after the application of section 219(b)(5)(C)(iii)). For purposes of this paragraph— The term “eligible employer” means any employer if the employer does not maintain a qualified plan with respect to which contributions are made, or benefits are accrued, for service in the year for which the determination is being made. If only individuals other than employees described in subparagraph (A) of section 410(b)(3) are eligible to participate in such arrangement, then the preceding sentence shall be applied without regard to any qualified plan in which only employees described in such subparagraph are eligible to participate. Rules similar to the rules of section 408(p)(10) shall apply for purposes of clause (i). The term “qualified plan” means a plan, contract, pension, account, or trust described in subparagraph (A) or (B) of paragraph (5) of section 219(g) (determined without regard to the last sentence of such paragraph (5)). For purposes of this paragraph— The term “eligible employee” means any employee of the employer who meets the minimum age and service conditions described in section 410(a)(1). The employer may elect to exclude from such definition any employee described in paragraph (3) or (4) of section 410(b).

(l) Permitted disparity in plan contributions or benefits The requirements of this subsection are met with respect to a plan if— in the case of a defined contribution plan, the requirements of paragraph (2) are met, and in the case of a defined benefit plan, the requirements of paragraph (3) are met. A defined contribution plan meets the requirements of this paragraph if the excess contribution percentage does not exceed the base contribution percentage by more than the lesser of— the base contribution percentage, or the greater of— 5.7 percentage points, or the percentage equal to the portion of the rate of tax under section 3111(a) (in effect as of the beginning of the year) which is attributable to old-age insurance. For purposes of this paragraph— The term “excess contribution percentage” means the percentage of compensation which is contributed by the employer under the plan with respect to that portion of each participant’s compensation in excess of the integration level. The term “base contribution percentage” means the percentage of compensation contributed by the employer under the plan with respect to that portion of each participant’s compensation not in excess of the integration level. A defined benefit plan meets the requirements of this paragraph if— In the case of a plan other than an offset plan— the excess benefit percentage does not exceed the base benefit percentage by more than the maximum excess allowance, any optional form of benefit, preretirement benefit, actuarial factor, or other benefit or feature provided with respect to compensation in excess of the integration level is provided with respect to compensation not in excess of such level, and benefits are based on average annual compensation. For purposes of this subparagraph, the excess and base benefit percentages shall be computed in the same manner as the excess and base contribution percentages under paragraph (2)(B), except that such determination shall be made on the basis of benefits attributable to employer contributions rather than contributions. In the case of an offset plan, the plan provides that— a participant’s accrued benefit attributable to employer contributions (within the meaning of section 411(c)(1)) may not be reduced (by reason of the offset) by more than the maximum offset allowance, and benefits are based on average annual compensation. For purposes of paragraph (3)— The maximum excess allowance is equal to— in the case of benefits attributable to any year of service with the employer taken into account under the plan, ¾ of a percentage point, and in the case of total benefits, ¾ of a percentage point, multiplied by the participant’s years of service (not in excess of 35) with the employer taken into account under the plan. In no event shall the maximum excess allowance exceed the base benefit percentage. The maximum offset allowance is equal to— in the case of benefits attributable to any year of service with the employer taken into account under the plan, ¾ percent of the participant’s final average compensation, and in the case of total benefits, ¾ percent of the participant’s final average compensation, multiplied by the participant’s years of service (not in excess of 35) with the employer taken into account under the plan. In no event shall the maximum offset allowance exceed 50 percent of the benefit which would have accrued without regard to the offset reduction. The Secretary shall prescribe regulations requiring the reduction of the ¾ percentage factor under subparagraph (A) or (B)— in the case of a plan other than an offset plan which has an integration level in excess of covered compensation, or with respect to any participant in an offset plan who has final average compensation in excess of covered compensation. Any reductions under clause (i) shall be based on the percentages of compensation replaced by the employer-derived portions of primary insurance amounts under the Social Security Act for participants with compensation in excess of covered compensation. The term “offset plan” means any plan with respect to which the benefit attributable to employer contributions for each participant is reduced by an amount specified in the plan. For purposes of this subsection— The term “integration level” means the amount of compensation specified under the plan (by dollar amount or formula) at or below which the rate at which contributions or benefits are provided (expressed as a percentage) is less than such rate above such amount. The integration level for any year may not exceed the contribution and benefit base in effect under section 230 of the Social Security Act for such year. A plan’s integration level shall apply with respect to all participants in the plan. Under rules prescribed by the Secretary, a defined benefit plan may specify multiple integration levels. The term “compensation” has the meaning given such term by section 414(s). The term “average annual compensation” means the participant’s highest average annual compensation for— any period of at least 3 consecutive years, or if shorter, the participant’s full period of service. The term “final average compensation” means the participant’s average annual compensation for— the 3-consecutive year period ending with the current year, or if shorter, the participant’s full period of service. A participant’s final average compensation shall be determined by not taking into account in any year compensation in excess of the contribution and benefit base in effect under section 230 of the Social Security Act for such year. The term “covered compensation” means, with respect to an employee, the average of the contribution and benefit bases in effect under section 230 of the Social Security Act for each year in the 35-year period ending with the year in which the employee attains the social security retirement age. For purposes of clause (i), the determination for any year preceding the year in which the employee attains the social security retirement age shall be made by assuming that there is no increase in the bases described in clause (i) after the determination year and before the employee attains the social security retirement age. For purposes of this subparagraph, the term “social security retirement age” has the meaning given such term by section 415(b)(8). The Secretary shall prescribe such regulations as are necessary or appropriate to carry out the purposes of this subsection, including— in the case of a defined benefit plan which provides for unreduced benefits commencing before the social security retirement age (as defined in section 415(b)(8)), rules providing for the reduction of the maximum excess allowance and the maximum offset allowance, and in the case of an employee covered by 2 or more plans of the employer which fail to meet the requirements of subsection (a)(4) (without regard to this subsection), rules preventing the multiple use of the disparity permitted under this subsection with respect to any employee. For purposes of clause (i), unreduced benefits shall not include benefits for disability (within the meaning of section 223(d) of the Social Security Act). In determining whether a plan which includes employees of a railroad employer who are entitled to benefits under the Railroad Retirement Act of 1974 meets the requirements of this subsection, rules similar to the rules set forth in this subsection shall apply. Such rules shall take into account the employer-derived portion of the employees’ tier 2 railroad retirement benefits and any supplemental annuity under the Railroad Retirement Act of 1974.

(m) Nondiscrimination test for matching contributions and employee contributions A defined contribution plan shall be treated as meeting the requirements of subsection (a)(4) with respect to the amount of any matching contribution or employee contribution for any plan year only if the contribution percentage requirement of paragraph (2) of this subsection is met for such plan year. A plan meets the contribution percentage requirement of this paragraph for any plan year only if the contribution percentage for eligible highly compensated employees for such plan year does not exceed the greater of— 125 percent of such percentage for all other eligible employees for the preceding plan year, or the lesser of 200 percent of such percentage for all other eligible employees for the preceding plan year, or such percentage for all other eligible employees for the preceding plan year plus 2 percentage points. This subparagraph may be applied by using the plan year rather than the preceding plan year if the employer so elects, except that if such an election is made, it may not be changed except as provided by the Secretary. If two or more plans of an employer to which matching contributions, employee contributions, or elective deferrals are made are treated as one plan for purposes of section 410(b), such plans shall be treated as one plan for purposes of this subsection. If a highly compensated employee participates in two or more plans of an employer to which contributions to which this subsection applies are made, all such contributions shall be aggregated for purposes of this subsection. For purposes of paragraph (2), the contribution percentage for a specified group of employees for a plan year shall be the average of the ratios (calculated separately for each employee in such group) of— the sum of the matching contributions and employee contributions paid under the plan on behalf of each such employee for such plan year, to the employee’s compensation (within the meaning of section 414(s)) for such plan year. Under regulations, an employer may elect to take into account (in computing the contribution percentage) elective deferrals and qualified nonelective contributions under the plan or any other plan of the employer. If matching contributions are taken into account for purposes of subsection (k)(3)(A)(ii) for any plan year, such contributions shall not be taken into account under subparagraph (A) for such year. Rules similar to the rules of subsection (k)(3)(E) shall apply for purposes of this subsection. For purposes of this subsection— The term “matching contribution” means— any employer contribution made to a defined contribution plan on behalf of an employee on account of an employee contribution made by such employee, any employer contribution made to a defined contribution plan on behalf of an employee on account of an employee’s elective deferral, and subject to the requirements of paragraph (14), any employer contribution made to a defined contribution plan on behalf of an employee on account of a qualified student loan payment. The term “elective deferral” means any employer contribution described in section 402(g)(3). The term “qualified nonelective contribution” means any employer contribution (other than a matching contribution) with respect to which— the employee may not elect to have the contribution paid to the employee in cash instead of being contributed to the plan, and the requirements of subparagraphs (B) and (C) of subsection (k)(2) are met. The term “qualified student loan payment” means a payment made by an employee in repayment of a qualified education loan (as defined in section 221(d)(1)) incurred by the employee to pay qualified higher education expenses, but only— to the extent such payments in the aggregate for the year do not exceed an amount equal to— the limitation applicable under section 402(g) for the year (or, if lesser, the employee’s compensation (as defined in section 415(c)(3)) for the year), reduced by the elective deferrals made by the employee for such year, and if the employee certifies annually to the employer making the matching contribution under this paragraph that such payment has been made on such loan. For purposes of this subparagraph, the term “qualified higher education expenses” means the cost of attendance (as defined in section 472 of the Higher Education Act of 1965, as in effect on the day before the date of the enactment of the Taxpayer Relief Act of 1997) at an eligible educational institution (as defined in section 221(d)(2)). Any employee who is eligible to make an employee contribution (or, if the employer takes elective contributions into account, elective contributions) or to receive a matching contribution under the plan being tested under paragraph (1) shall be considered an eligible employee for purposes of this subsection. If an employee contribution is required as a condition of participation in the plan, any employee who would be a participant in the plan if such employee made such a contribution shall be treated as an eligible employee on behalf of whom no employer contributions are made. If an employer elects to apply section 410(b)(4)(B) in determining whether a plan meets the requirements of section 410(b), the employer may, in determining whether the plan meets the requirements of paragraph (2), exclude from consideration all eligible employees (other than highly compensated employees) who have not met the minimum age and service requirements of section 410(a)(1)(A). A plan shall not be treated as failing to meet the requirements of paragraph (1) for any plan year if, before the close of the following plan year, the amount of the excess aggregate contributions for such plan year (and any income allocable to such contributions through the end of such year) is distributed (or, if forfeitable, is forfeited). Such contributions (and such income) may be distributed without regard to any other provision of law. For purposes of subparagraph (A), the term “excess aggregate contributions” means, with respect to any plan year, the excess of— the aggregate amount of the matching contributions and employee contributions (and any qualified nonelective contribution or elective contribution taken into account in computing the contribution percentage) actually made on behalf of highly compensated employees for such plan year, over the maximum amount of such contributions permitted under the limitations of paragraph (2)(A) (determined by reducing contributions made on behalf of highly compensated employees in order of their contribution percentages beginning with the highest of such percentages). Any distribution of the excess aggregate contributions for any plan year shall be made to highly compensated employees on the basis of the amount of contributions on behalf of, or by, each such employee. Forfeitures of excess aggregate contributions may not be allocated to participants whose contributions are reduced under this paragraph. The determination of the amount of excess aggregate contributions with respect to a plan shall be made after— first determining the excess deferrals (within the meaning of section 402(g)), and then determining the excess contributions under subsection (k). No tax shall be imposed under section 72(t) on any amount required to be distributed under paragraph (6). Any distribution attributable to employee contributions shall not be included in gross income except to the extent attributable to income on such contributions. For purposes of this subsection, the term “highly compensated employee” has the meaning given to such term by section 414(q). The Secretary shall prescribe such regulations as may be necessary to carry out the purposes of this subsection and subsection (k), including regulations permitting appropriate aggregation of plans and contributions. A defined contribution plan shall be treated as meeting the requirements of paragraph (2) with respect to matching contributions if the plan— meets the contribution requirements of subparagraph (B) of subsection (k)(11), meets the exclusive plan requirements of subsection (k)(11)(C), and meets the vesting requirements of section 408(p)(3). A defined contribution plan shall be treated as meeting the requirements of paragraph (2) with respect to matching contributions if the plan— meets the contribution requirements of subparagraph (B) or (C) of subsection (k)(12), meets the notice requirements of subsection (k)(12)(D), and meets the requirements of subparagraph (B). The requirements of this subparagraph are met if— matching contributions on behalf of any employee may not be made with respect to an employee’s contributions or elective deferrals in excess of 6 percent of the employee’s compensation, the rate of an employer’s matching contribution does not increase as the rate of an employee’s contributions or elective deferrals increase, and the matching contribution with respect to any highly compensated employee at any rate of an employee contribution or rate of elective deferral is not greater than that with respect to an employee who is not a highly compensated employee. A defined contribution plan shall be treated as meeting the requirements of paragraph (2) with respect to matching contributions if the plan— is a qualified automatic contribution arrangement (as defined in subsection (k)(13)), meets the notice requirements of subsection (k)(13)(E), and meets the requirements of paragraph (11)(B). For purposes of paragraph (4)(A)(iii), an employer contribution made to a defined contribution plan on account of a qualified student loan payment shall be treated as a matching contribution for purposes of this title if— the plan provides matching contributions on account of elective deferrals at the same rate as contributions on account of qualified student loan payments, the plan provides matching contributions on account of qualified student loan payments only on behalf of employees otherwise eligible to receive matching contributions on account of elective deferrals, under the plan, all employees eligible to receive matching contributions on account of elective deferrals are eligible to receive matching contributions on account of qualified student loan payments, and the plan provides that matching contributions on account of qualified student loan payments vest in the same manner as matching contributions on account of elective deferrals. For purposes of subparagraph (A)(iii), subsection (a)(4), and section 410(b), matching contributions described in paragraph (4)(A)(iii) shall not fail to be treated as available to an employee solely because such employee does not have debt incurred under a qualified education loan (as defined in section 221(d)(1)). Except as provided in clause (iii), a qualified student loan payment shall not be treated as a contribution to a plan under this title. Solely for purposes of meeting the requirements of paragraph (11)(B), (12), or (13) of this subsection, or paragraph (11)(B)(i)(II), (12)(B), (13)(D), or (16)(D) of subsection (k), a plan may treat a qualified student loan payment as an elective deferral or an elective contribution, whichever is applicable. In determining whether a plan meets the requirements of subsection (k)(3)(A)(ii) for a plan year, the plan may apply the requirements of such subsection separately with respect to all employees who receive matching contributions described in paragraph (4)(A)(iii) for the plan year. The employer may rely on an employee certification of payment under paragraph (4)(D)(ii). For excise tax on certain excess contributions, see section 4979.

(n) Coordination with qualified domestic relations orders The Secretary shall prescribe such rules or regulations as may be necessary to coordinate the requirements of subsection (a)(13)(B) and section 414(p) (and the regulations issued by the Secretary of Labor thereunder) with the other provisions of this chapter.

(o) Special rules for applying nondiscrimination rules to protect older, longer service and grandfathered participants A defined benefit plan which provides benefits, rights, or features to a closed class of participants shall not fail to satisfy the requirements of subsection (a)(4) by reason of the composition of such closed class or the benefits, rights, or features provided to such closed class, if— for the plan year as of which the class closes and the 2 succeeding plan years, such benefits, rights, and features satisfy the requirements of subsection (a)(4) (without regard to this subparagraph but taking into account the rules of subparagraph (I)), after the date as of which the class was closed, any plan amendment which modifies the closed class or the benefits, rights, and features provided to such closed class does not discriminate significantly in favor of highly compensated employees, and the class was closed before April 5, 2017 , or the plan is described in subparagraph (C). For purposes of determining compliance with subsection (a)(4) and section 410(b), a defined benefit plan described in clause (iii) may be aggregated and tested on a benefits basis with 1 or more defined contribution plans, including with the portion of 1 or more defined contribution plans which— provides matching contributions (as defined in subsection (m)(4)(A)), provides annuity contracts described in section 403(b) which are purchased with matching contributions or nonelective contributions, or consists of an employee stock ownership plan (within the meaning of section 4975(e)(7)) or a tax credit employee stock ownership plan (within the meaning of section 409(a)). For purposes of clause (i), if a defined benefit plan is aggregated with a portion of a defined contribution plan providing matching contributions— such defined benefit plan must also be aggregated with any portion of such defined contribution plan which provides elective deferrals described in subparagraph (A) or (C) of section 402(g)(3), and such matching contributions shall be treated in the same manner as nonelective contributions, including for purposes of applying the rules of subsection ( l ). A defined benefit plan is described in this clause if— the plan provides benefits to a closed class of participants, for the plan year as of which the class closes and the 2 succeeding plan years, the plan satisfies the requirements of section 410(b) and subsection (a)(4) (without regard to this subparagraph but taking into account the rules of subparagraph (I)), after the date as of which the class was closed, any plan amendment which modifies the closed class or the benefits provided to such closed class does not discriminate significantly in favor of highly compensated employees, and the class was closed before April 5, 2017 , or the plan is described in subparagraph (C). A plan is described in this subparagraph if, taking into account any predecessor plan— such plan has been in effect for at least 5 years as of the date the class is closed, and during the 5-year period preceding the date the class is closed, there has not been a substantial increase in the coverage or value of the benefits, rights, or features described in subparagraph (A) or in the coverage or benefits under the plan described in subparagraph (B)(iii) (whichever is applicable). In applying subparagraph (C)(ii) for purposes of subparagraph (A)(iii), a plan shall be treated as having had a substantial increase in coverage or value of the benefits, rights, or features described in subparagraph (A) during the applicable 5-year period only if, during such period— the number of participants covered by such benefits, rights, or features on the date such period ends is more than 50 percent greater than the number of such participants on the first day of the plan year in which such period began, or such benefits, rights, and features have been modified by 1 or more plan amendments in such a way that, as of the date the class is closed, the value of such benefits, rights, and features to the closed class as a whole is substantially greater than the value as of the first day of such 5-year period, solely as a result of such amendments. In applying subparagraph (C)(ii) for purposes of subparagraph (B)(iii)(IV), a plan shall be treated as having had a substantial increase in coverage or benefits during the applicable 5-year period only if, during such period— the number of participants benefitting under the plan on the date such period ends is more than 50 percent greater than the number of such participants on the first day of the plan year in which such period began, or the average benefit provided to such participants on the date such period ends is more than 50 percent greater than the average benefit provided on the first day of the plan year in which such period began. For purposes of subparagraphs (D) and (E), any increase in coverage or value or in coverage or benefits, whichever is applicable, which is attributable to such coverage and value or coverage and benefits provided to employees— who became participants as a result of a merger, acquisition, or similar event which occurred during the 7-year period preceding the date the class is closed, or who became participants by reason of a merger of the plan with another plan which had been in effect for at least 5 years as of the date of the merger, shall be disregarded, except that clause (ii) shall apply for purposes of subparagraph (D) only if, under the merger, the benefits, rights, or features under 1 plan are conformed to the benefits, rights, or features of the other plan prospectively. For purposes of subparagraph (E)— the average benefit provided to participants under the plan will be treated as having remained the same between the 2 dates described in subparagraph (E)(ii) if the benefit formula applicable to such participants has not changed between such dates, and if the benefit formula applicable to 1 or more participants under the plan has changed between such 2 dates, then the average benefit under the plan shall be considered to have increased by more than 50 percent only if— the total amount determined under section 430(b)(1)(A)(i) for all participants benefitting under the plan for the plan year in which the 5-year period described in subparagraph (E) ends, exceeds the total amount determined under section 430(b)(1)(A)(i) for all such participants for such plan year, by using the benefit formula in effect for each such participant for the first plan year in such 5-year period, by more than 50 percent. In the case of a CSEC plan (as defined in section 414(y)), the normal cost of the plan (as determined under section 433(j)(1)(B)) shall be used in lieu of the amount determined under section 430(b)(1)(A)(i). For purposes of subparagraphs (E) and (G), a plan described in section 413(c) shall be treated as a single plan rather than as separate plans maintained by each employer in the plan. For purposes of subparagraphs (A)(i) and (B)(iii)(II), the following rules shall apply: In applying section 410(b)(6)(C), the closing of the class of participants shall not be treated as a significant change in coverage under section 410(b)(6)(C)(i)(II). 2 or more plans shall not fail to be eligible to be aggregated and treated as a single plan solely by reason of having different plan years. Changes in the employee population shall be disregarded to the extent attributable to individuals who become employees or cease to be employees, after the date the class is closed, by reason of a merger, acquisition, divestiture, or similar event. Aggregation and all other testing methodologies otherwise applicable under subsection (a)(4) and section 410(b) may be taken into account. The rule of clause (ii) shall also apply for purposes of determining whether plans to which subparagraph (B)(i) applies may be aggregated and treated as 1 plan for purposes of determining whether such plans meet the requirements of subsection (a)(4) and section 410(b). For purposes of this paragraph, if a portion of a defined benefit plan described in subparagraph (A) or (B)(iii) is spun off to another employer and the spun-off plan continues to satisfy the requirements of— subparagraph (A)(i) or (B)(iii)(II), whichever is applicable, if the original plan was still within the 3-year period described in such subparagraph at the time of the spin off, and subparagraph (A)(ii) or (B)(iii)(III), whichever is applicable, the treatment under subparagraph (A) or (B) of the spun-off plan shall continue with respect to such other employer. A defined contribution plan shall be permitted to be tested on a benefits basis if— such defined contribution plan provides make-whole contributions to a closed class of participants whose accruals under a defined benefit plan have been reduced or eliminated, for the plan year of the defined contribution plan as of which the class eligible to receive such make-whole contributions closes and the 2 succeeding plan years, such closed class of participants satisfies the requirements of section 410(b)(2)(A)(i) (determined by applying the rules of paragraph (1)(I)), after the date as of which the class was closed, any plan amendment to the defined contribution plan which modifies the closed class or the allocations, benefits, rights, and features provided to such closed class does not discriminate significantly in favor of highly compensated employees, and the class was closed before April 5, 2017 , or the defined benefit plan under clause (i) is described in paragraph (1)(C) (as applied for purposes of paragraph (1)(B)(iii)(IV)). With respect to 1 or more defined contribution plans described in subparagraph (A), for purposes of determining compliance with subsection (a)(4) and section 410(b), the portion of such plans which provides make-whole contributions or other nonelective contributions may be aggregated and tested on a benefits basis with the portion of 1 or more other defined contribution plans which— provides matching contributions (as defined in subsection (m)(4)(A)), provides annuity contracts described in section 403(b) which are purchased with matching contributions or nonelective contributions, or consists of an employee stock ownership plan (within the meaning of section 4975(e)(7)) or a tax credit employee stock ownership plan (within the meaning of section 409(a)). Rules similar to the rules of paragraph (1)(B)(ii) shall apply for purposes of clause (i). In the case of a defined contribution plan which provides benefits, rights, or features to a closed class of participants whose accruals under a defined benefit plan have been reduced or eliminated, the plan shall not fail to satisfy the requirements of subsection (a)(4) solely by reason of the composition of the closed class or the benefits, rights, or features provided to such closed class if the defined contribution plan and defined benefit plan otherwise meet the requirements of subparagraph (A) but for the fact that the make-whole contributions under the defined contribution plan are made in whole or in part through matching contributions. For purposes of this paragraph, if a portion of a defined contribution plan described in subparagraph (A) or (C) is spun off to another employer, the treatment under subparagraph (A) or (C) of the spun-off plan shall continue with respect to the other employer if such plan continues to comply with the requirements of clauses (ii) (if the original plan was still within the 3-year period described in such clause at the time of the spin off) and (iii) of subparagraph (A), as determined for purposes of subparagraph (A) or (C), whichever is applicable. For purposes of this subsection— Except as otherwise provided in paragraph (2)(C), the term “make-whole contributions” means nonelective allocations for each employee in the class which are reasonably calculated, in a consistent manner, to replace some or all of the retirement benefits which the employee would have received under the defined benefit plan and any other plan or qualified cash or deferred arrangement under subsection (k)(2) if no change had been made to such defined benefit plan and such other plan or arrangement. For purposes of the preceding sentence, consistency shall not be required with respect to employees who were subject to different benefit formulas under the defined benefit plan. References to a closed class of participants and similar references to a closed class shall include arrangements under which 1 or more classes of participants are closed, except that 1 or more classes of participants closed on different dates shall not be aggregated for purposes of determining the date any such class was closed. The term “highly compensated employee” has the meaning given such term in section 414(q).

(p) Cross reference For exemption from tax of a trust qualified under this section, see section 501(a).

“Not later than 2 years after the date of enactment of this Act [ Dec. 29, 2022 ], the Secretary of Labor and the Secretary of the Treasury (or such Secretaries’ delegates) shall adopt regulations providing that a plan (as defined in section 3 of the Employee Retirement Income Security Act of 1974 ( 29 U.S.C. 1002 )) may, but is not required to, consolidate 2 or more of the notices required under sections 404(c)(5)(B) and 514(e)(3) of the Employee Retirement Income Security Act of 1974 ( 29 U.S.C. 1104(c)(5)(B) and 29 U.S.C. 1144(e)(3) ) and sections 401(k)(12)(D), 401(k)(13)(E), and 414(w)(4) of the Internal Revenue Code of 1986 into a single notice so long as the combined notice— includes the required content; clearly identifies the issues addressed therein; is furnished at the time and with the frequency required for each such notice; and is presented in a manner that is reasonably calculated to be understood by the average plan participant and that does not obscure or fail to highlight the primary information required for each notice. This section shall not be interpreted as preventing the consolidation of any other notices required under the Employee Retirement Income Security Act of 1974 [ 29 U.S.C. 1001 et seq.], or Internal Revenue Code of 1986, to the extent otherwise permitted by the Secretary of Labor or the Secretary of the Treasury (or either such Secretary’s delegate), as applicable.”

“If any amendment made by this subtitle [subtitle D (§§ 1401–1465) of title I of Pub. L. 104–188 , see Tables for classification] requires an amendment to any plan or annuity contract, such amendment shall not be required to be made before the first day of the first plan year beginning on or after January 1, 1998 , if— during the period after such amendment takes effect and before such first plan year, the plan or contract is operated in accordance with the requirements of such amendment, and such amendment applies retroactively to such period. In the case of a governmental plan (as defined in section 414(d) of the Internal Revenue Code of 1986), this section shall be applied by substituting ‘2000’ for ‘1998’.”

“In the case of cash or deferred arrangements in existence on June 27, 1974 — the qualification of the plan and the trust under section 401 of the Internal Revenue Code of 1986 [formerly I.R.C. 1954]; the exemption of the trust under section 501(a) of such Code; the taxable year of inclusion in gross income of the employee of any amount so contributed by the employer to the trust; and the excludability of the interest of the employee in the trust under sections 2039 and 2517 of such Code, shall be determined for plan years beginning before January 1, 1980 in a manner consistent with Revenue Ruling 56–497 (1956–2 C.B. 284), Revenue Ruling 63–180 (1963–2 C.B. 189), and Revenue Ruling 68–89 (1968–1 C.B. 402).”

§ 402 Taxability of beneficiary of employees’ trust

(a) Taxability of beneficiary of exempt trust Except as otherwise provided in this section, any amount actually distributed to any distributee by any employees’ trust described in section 401(a) which is exempt from tax under section 501(a) shall be taxable to the distributee, in the taxable year of the distributee in which distributed, under section 72 (relating to annuities).

(b) Taxability of beneficiary of nonexempt trust Contributions to an employees’ trust made by an employer during a taxable year of the employer which ends with or within a taxable year of the trust for which the trust is not exempt from tax under section 501(a) shall be included in the gross income of the employee in accordance with section 83 (relating to property transferred in connection with performance of services), except that the value of the employee’s interest in the trust shall be substituted for the fair market value of the property for purposes of applying such section. The amount actually distributed or made available to any distributee by any trust described in paragraph (1) shall be taxable to the distributee, in the taxable year in which so distributed or made available, under section 72 (relating to annuities), except that distributions of income of such trust before the annuity starting date (as defined in section 72(c)(4)) shall be included in the gross income of the employee without regard to section 72(e)(5) (relating to amounts not received as annuities). A beneficiary of any trust described in paragraph (1) shall not be considered the owner of any portion of such trust under subpart E of part I of subchapter J (relating to grantors and others treated as substantial owners). If 1 of the reasons a trust is not exempt from tax under section 501(a) is the failure of the plan of which it is a part to meet the requirements of section 401(a)(26) or 410(b), then a highly compensated employee shall, in lieu of the amount determined under paragraph (1) or (2) include in gross income for the taxable year with or within which the taxable year of the trust ends an amount equal to the vested accrued benefit of such employee (other than the employee’s investment in the contract) as of the close of such taxable year of the trust. If a trust is not exempt from tax under section 501(a) for any taxable year solely because such trust is part of a plan which fails to meet the requirements of section 401(a)(26) or 410(b), paragraphs (1) and (2) shall not apply by reason of such failure to any employee who was not a highly compensated employee during— such taxable year, or any preceding period for which service was creditable to such employee under the plan. For purposes of this paragraph, the term “highly compensated employee” has the meaning given such term by section 414(q).

(c) Rules applicable to rollovers from exempt trusts If— any portion of the balance to the credit of an employee in a qualified trust is paid to the employee in an eligible rollover distribution, the distributee transfers any portion of the property received in such distribution to an eligible retirement plan, and in the case of a distribution of property other than money, the amount so transferred consists of the property distributed, then such distribution (to the extent so transferred) shall not be includible in gross income for the taxable year in which paid. In the case of any eligible rollover distribution, the maximum amount transferred to which paragraph (1) applies shall not exceed the portion of such distribution which is includible in gross income (determined without regard to paragraph (1)). The preceding sentence shall not apply to such distribution to the extent— such portion is transferred in a direct trustee-to-trustee transfer to a qualified trust or to an annuity contract described in section 403(b) and such trust or contract provides for separate accounting for amounts so transferred (and earnings thereon), including separately accounting for the portion of such distribution which is includible in gross income and the portion of such distribution which is not so includible, or such portion is transferred to an eligible retirement plan described in clause (i) or (ii) of paragraph (8)(B). In the case of a transfer described in subparagraph (A) or (B), the amount transferred shall be treated as consisting first of the portion of such distribution that is includible in gross income (determined without regard to paragraph (1)). Except as provided in subparagraphs (B) and (C), paragraph (1) shall not apply to any transfer of a distribution made after the 60th day following the day on which the distributee received the property distributed. The Secretary may waive the 60-day requirement under subparagraph (A) where the failure to waive such requirement would be against equity or good conscience, including casualty, disaster, or other events beyond the reasonable control of the individual subject to such requirement. In the case of a qualified plan loan offset amount, paragraph (1) shall not apply to any transfer of such amount made after the due date (including extensions) for filing the return of tax for the taxable year in which such amount is treated as distributed from a qualified employer plan. For purposes of this subparagraph, the term “qualified plan loan offset amount” means a plan loan offset amount which is treated as distributed from a qualified employer plan to a participant or beneficiary solely by reason of— the termination of the qualified employer plan, or the failure to meet the repayment terms of the loan from such plan because of the severance from employment of the participant. For purposes of clause (ii), the term “plan loan offset amount” means the amount by which the participant’s accrued benefit under the plan is reduced in order to repay a loan from the plan. This subparagraph shall not apply to any plan loan offset amount unless such plan loan offset amount relates to a loan to which section 72(p)(1) does not apply by reason of section 72(p)(2). For purposes of this subsection, the term “qualified employer plan” has the meaning given such term by section 72(p)(4). For purposes of this subsection, the term “eligible rollover distribution” means any distribution to an employee of all or any portion of the balance to the credit of the employee in a qualified trust; except that such term shall not include— any distribution which is one of a series of substantially equal periodic payments (not less frequently than annually) made— for the life (or life expectancy) of the employee or the joint lives (or joint life expectancies) of the employee and the employee’s designated beneficiary, or for a specified period of 10 years or more, any distribution to the extent such distribution is required under section 401(a)(9), and any distribution which is made upon hardship of the employee. If all or any portion of a distribution during 2020 is treated as an eligible rollover distribution but would not be so treated if the minimum distribution requirements under section 401(a)(9) had applied during 2020, such distribution shall not be treated as an eligible rollover distribution for purposes of section 401(a)(31) or 3405(c) or subsection (f) of this section. For purposes of this title, a transfer to an eligible retirement plan described in clause (i) or (ii) of paragraph (8)(B) resulting in any portion of a distribution being excluded from gross income under paragraph (1) shall be treated as a rollover contribution described in section 408(d)(3). For purposes of this subsection— The transfer of an amount equal to any portion of the proceeds from the sale of property received in the distribution shall be treated as the transfer of property received in the distribution. The excess of fair market value of property on sale over its fair market value on distribution shall be treated as property received in the distribution. In any case where part or all of the distribution consists of property other than money— the portion of the money or other property which is to be treated as attributable to amounts not included in gross income, and the portion of the money or other property which is to be treated as included in the rollover contribution, shall be determined on a ratable basis unless the taxpayer designates otherwise. Any designation under this subparagraph for a taxable year shall be made not later than the time prescribed by law for filing the return for such taxable year (including extensions thereof). Any such designation, once made, shall be irrevocable. No gain or loss shall be recognized on any sale described in subparagraph (A) to the extent that an amount equal to the proceeds is transferred pursuant to paragraph (1). The 60-day period described in paragraph (3) shall not— include any period during which the amount transferred to the employee is a frozen deposit, or end earlier than 10 days after such amount ceases to be a frozen deposit. For purposes of this subparagraph, the term “frozen deposit” means any deposit which may not be withdrawn because of— the bankruptcy or insolvency of any financial institution, or any requirement imposed by the State in which such institution is located by reason of the bankruptcy or insolvency (or threat thereof) of 1 or more financial institutions in such State. A deposit shall not be treated as a frozen deposit unless on at least 1 day during the 60-day period described in paragraph (3) (without regard to this paragraph) such deposit is described in the preceding sentence. For purposes of this subsection— The term “qualified trust” means an employees’ trust described in section 401(a) which is exempt from tax under section 501(a). The term “eligible retirement plan” means— an individual retirement account described in section 408(a), an individual retirement annuity described in section 408(b) (other than an endowment contract), a qualified trust, an annuity plan described in section 403(a), an eligible deferred compensation plan described in section 457(b) which is maintained by an eligible employer described in section 457(e)(1)(A), and an annuity contract described in section 403(b). If any portion of an eligible rollover distribution is attributable to payments or distributions from a designated Roth account (as defined in section 402A), an eligible retirement plan with respect to such portion shall include only another designated Roth account and a Roth IRA. If any distribution attributable to an employee is paid to the spouse of the employee after the employee’s death, the preceding provisions of this subsection shall apply to such distribution in the same manner as if the spouse were the employee. Unless a plan described in clause (v) of paragraph (8)(B) agrees to separately account for amounts rolled into such plan from eligible retirement plans not described in such clause, the plan described in such clause may not accept transfers or rollovers from such retirement plans. If, with respect to any portion of a distribution from an eligible retirement plan described in paragraph (8)(B)(iii) of a deceased employee, a direct trustee-to-trustee transfer is made to an individual retirement plan described in clause (i) or (ii) of paragraph (8)(B) established for the purposes of receiving the distribution on behalf of an individual who is a designated beneficiary (as defined by section 401(a)(9)(E)) of the employee and who is not the surviving spouse of the employee— the transfer shall be treated as an eligible rollover distribution, the individual retirement plan shall be treated as an inherited individual retirement account or individual retirement annuity (within the meaning of section 408(d)(3)(C)) for purposes of this title, and section 401(a)(9)(B) (other than clause (iv) thereof) shall apply to such plan. For purposes of this paragraph, to the extent provided in rules prescribed by the Secretary, a trust maintained for the benefit of one or more designated beneficiaries shall be treated in the same manner as a designated beneficiary. In the case of an inadvertent benefit overpayment from a plan to which section 414(aa)(1) applies that is transferred to an eligible retirement plan by or on behalf of a participant or beneficiary— the portion of such overpayment with respect to which recoupment is not sought on behalf of the plan shall be treated as having been paid in an eligible rollover distribution if the payment would have been an eligible rollover distribution but for being an overpayment, and the portion of such overpayment with respect to which recoupment is sought on behalf of the plan shall be permitted to be returned to such plan and in such case shall be treated as an eligible rollover distribution transferred to such plan by the participant or beneficiary who received such overpayment (and the plans making and receiving such transfer shall be treated as permitting such transfer). Any individual who received a qualified distribution may, during the applicable period, make one or more contributions in an aggregate amount not to exceed the amount of such qualified distribution to an eligible retirement plan (as defined in paragraph (8)(B)) of which such individual is a beneficiary and to which a rollover contribution of such distribution could be made under subsection (c) or section 403(a)(4), 403(b)(8), or 408(d)(3), as the case may be. Rules similar to the rules of clauses (ii) and (iii) of section 72(t)(11)(C) shall apply for purposes of this subsection. For purposes of this paragraph, the term “qualified distribution” means any distribution— described in section 401(k)(2)(B)(i)(IV), 403(b)(7)(A)(i)(V), or 403(b)(11)(B), which was to be used to purchase or construct a principal residence in a qualified disaster area, but which was not so used on account of the qualified disaster with respect to such area, and which was received during the period beginning on the date which is 180 days before the first day of the incident period of such qualified disaster and ending on the date which is 30 days after the last day of such incident period. For purposes of this paragraph— the terms “qualified disaster”, “qualified disaster area”, and “incident period” have the meaning given such terms under section 72(t)(11), and the term “applicable period” has the meaning given such term under section 72(t)(8)(F).

(d) Taxability of beneficiary of certain foreign situs trusts For purposes of subsections (a), (b), and (c), a stock bonus, pension, or profit-sharing trust which would qualify for exemption from tax under section 501(a) except for the fact that it is a trust created or organized outside the United States shall be treated as if it were a trust exempt from tax under section 501(a).

(e) Other rules applicable to exempt trusts For purposes of subsection (a) and section 72, an alternate payee who is the spouse or former spouse of the participant shall be treated as the distributee of any distribution or payment made to the alternate payee under a qualified domestic relations order (as defined in section 414(p)). If any amount is paid or distributed to an alternate payee who is the spouse or former spouse of the participant by reason of any qualified domestic relations order (within the meaning of section 414(p)), subsection (c) shall apply to such distribution in the same manner as if such alternate payee were the employee. The amount includible under subsection (a) in the gross income of a nonresident alien with respect to a distribution made by the United States in respect of services performed by an employee of the United States shall not exceed an amount which bears the same ratio to the amount includible in gross income without regard to this paragraph as— the aggregate basic pay paid by the United States to such employee for such services, reduced by the amount of such basic pay which was not includible in gross income by reason of being from sources without the United States, bears to the aggregate basic pay paid by the United States to such employee for such services. In the case of distributions under the civil service retirement laws, the term “basic pay” shall have the meaning provided in section 8331(3) of title 5 , United States Code. For purposes of this title, contributions made by an employer on behalf of an employee to a trust which is a part of a qualified cash or deferred arrangement (as defined in section 401(k)(2)) or which is part of a salary reduction agreement under section 403(b) shall not be treated as distributed or made available to the employee nor as contributions made to the trust by the employee merely because the arrangement includes provisions under which the employee has an election whether the contribution will be made to the trust or received by the employee in cash. For purposes of subsection (a) and section 72, in the case of a distribution other than a lump sum distribution, the amount actually distributed to any distributee from a trust described in subsection (a) shall not include any net unrealized appreciation in securities of the employer corporation attributable to amounts contributed by the employee (other than deductible employee contributions within the meaning of section 72( o )(5)). This subparagraph shall not apply to a distribution to which subsection (c) applies. For purposes of subsection (a) and section 72, in the case of any lump sum distribution which includes securities of the employer corporation, there shall be excluded from gross income the net unrealized appreciation attributable to that part of the distribution which consists of securities of the employer corporation. In accordance with rules prescribed by the Secretary, a taxpayer may elect, on the return of tax on which a lump sum distribution is required to be included, not to have this subparagraph apply to such distribution. For purposes of subparagraphs (A) and (B), net unrealized appreciation and the resulting adjustments to basis shall be determined in accordance with regulations prescribed by the Secretary. For purposes of this paragraph— The term “lump-sum distribution” means the distribution or payment within one taxable year of the recipient of the balance to the credit of an employee which becomes payable to the recipient— on account of the employee’s death, after the employee attains age 59½, on account of the employee’s separation from service, or after the employee has become disabled (within the meaning of section 72(m)(7)), from a trust which forms a part of a plan described in section 401(a) and which is exempt from tax under section 501 or from a plan described in section 403(a). Subclause (III) of this clause shall be applied only with respect to an individual who is an employee without regard to section 401(c)(1), and subclause (IV) shall be applied only with respect to an employee within the meaning of section 401(c)(1). For purposes of this clause, a distribution to two or more trusts shall be treated as a distribution to one recipient. For purposes of this paragraph, the balance to the credit of the employee does not include the accumulated deductible employee contributions under the plan (within the meaning of section 72( o )(5)). For purposes of determining the balance to the credit of an employee under clause (i)— all trusts which are part of a plan shall be treated as a single trust, all pension plans maintained by the employer shall be treated as a single plan, all profit-sharing plans maintained by the employer shall be treated as a single plan, and all stock bonus plans maintained by the employer shall be treated as a single plan, and trusts which are not qualified trusts under section 401(a) and annuity contracts which do not satisfy the requirements of section 404(a)(2) shall not be taken into account. The provisions of this paragraph shall be applied without regard to community property laws. This paragraph shall not apply to amounts described in subparagraph (A) of section 72(m)(5) to the extent that section 72(m)(5) applies to such amounts. For purposes of this paragraph, the balance to the credit of an employee shall not include any amount payable to an alternate payee under a qualified domestic relations order (within the meaning of section 414(p)). For purposes of this paragraph, the balance to the credit of an employee under a defined contribution plan shall not include any amount transferred from such defined contribution plan to a qualified cost-of-living arrangement (within the meaning of section 415(k)(2)) under a defined benefit plan. If any distribution or payment of the balance to the credit of an employee would be treated as a lump-sum distribution, then, for purposes of this paragraph, the payment under a qualified domestic relations order (within the meaning of section 414(p)) of the balance to the credit of an alternate payee who is the spouse or former spouse of the employee shall be treated as a lump-sum distribution. For purposes of this clause, the balance to the credit of the alternate payee shall not include any amount payable to the employee. For purposes of this paragraph— The term “securities” means only shares of stock and bonds or debentures issued by a corporation with interest coupons or in registered form. The term “securities of the employer corporation” includes securities of a parent or subsidiary corporation (as defined in subsections (e) and (f) of section 424) of the employer corporation. Any amount transferred in a direct trustee-to-trustee transfer in accordance with section 401(a)(31) shall not be includible in gross income for the taxable year of such transfer.

(f) Written explanation to recipients of distributions eligible for rollover treatment The plan administrator of any plan shall, within a reasonable period of time before making an eligible rollover distribution, provide a written explanation to the recipient— of the provisions under which the recipient may have the distribution directly transferred to an eligible retirement plan and that the automatic distribution by direct transfer applies to certain distributions in accordance with section 401(a)(31)(B), of the provision which requires the withholding of tax on the distribution if it is not directly transferred to an eligible retirement plan, of the provisions under which the distribution will not be subject to tax if transferred to an eligible retirement plan within 60 days after the date on which the recipient received the distribution, if applicable, of the provisions of subsections (d) and (e) of this section, and of the provisions under which distributions from the eligible retirement plan receiving the distribution may be subject to restrictions and tax consequences which are different from those applicable to distributions from the plan making such distribution. For purposes of this subsection— The term “eligible rollover distribution” has the same meaning as when used in subsection (c) of this section, paragraph (4) of section 403(a), subparagraph (A) of section 403(b)(8), or subparagraph (A) of section 457(e)(16). Such term shall include any distribution to a designated beneficiary which would be treated as an eligible rollover distribution by reason of subsection (c)(11), or section 403(a)(4)(B), 403(b)(8)(B), or 457(e)(16)(B), if the requirements of subsection (c)(11) were satisfied. The term “eligible retirement plan” has the meaning given such term by subsection (c)(8)(B).

(g) Limitation on exclusion for elective deferrals Notwithstanding subsections (e)(3) and (h)(1)(B), the elective deferrals of any individual for any taxable year shall be included in such individual’s gross income to the extent the amount of such deferrals for the taxable year exceeds the applicable dollar amount. The preceding sentence shall not apply to the portion of such excess as does not exceed the designated Roth contributions of the individual for the taxable year. For purposes of subparagraph (A), the applicable dollar amount is 15,000 amount under paragraph (1)(B) at the same time and in the same manner as under section 415(d), except that the base period shall be the calendar quarter beginning July 1, 2005 , and any increase under this paragraph which is not a multiple of $500 s ha ll b ero u n d e d t o t h e n e x tl o w es t m u lt i pl eo f$ 500. This subsection shall be applied without regard to community property laws. For purposes of applying section 72, any amount includible in gross income for any taxable year under this subsection but which is not distributed from the plan during such taxable year shall not be treated as investment in the contract. In the case of a qualified employee of a qualified organization, with respect to employer contributions described in paragraph (3)(C) made by such organization, the limitation of paragraph (1) for any taxable year shall be increased by whichever of the following is the least: $3, 000,$ 15,000 reduced by the sum of— the amounts not included in gross income for prior taxable years by reason of this paragraph, plus the aggregate amount of designated Roth contributions (as defined in section 402A(c)) permitted for prior taxable years by reason of this paragraph, or the excess of $5,000 multiplied by the number of years of service of the employee with the qualified organization over the employer contributions described in paragraph (3) made by the organization on behalf of such employee for prior taxable years (determined in the manner prescribed by the Secretary). For purposes of this paragraph, the term “qualified organization” means any educational organization, hospital, home health service agency, health and welfare service agency, church, or convention or association of churches. Such term includes any organization described in section 414(e)(3)(B)(ii). Terms used in this subparagraph shall have the same meaning as when used in section 415(c)(4) (as in effect before the enactment of the Economic Growth and Tax Relief Reconciliation Act of 2001). For purposes of this paragraph, the term “qualified employee” means any employee who has completed 15 years of service with the qualified organization. For purposes of this paragraph, the term “years of service” has the meaning given such term by section 403(b). Except as provided in section 401(k)(3)(D)(ii), any matching contribution described in section 401(m)(4)(A) which is made on behalf of a self-employed individual (as defined in section 401(c)) shall not be treated as an elective employer contribution under a qualified cash or deferred arrangement (as defined in section 401(k)) for purposes of this title.

(h) Special rules for simplified employee pensions For purposes of this chapter— Except as provided in paragraph (2), contributions made by an employer on behalf of an employee to an individual retirement plan pursuant to a simplified employee pension (as defined in section 408(k))— shall not be treated as distributed or made available to the employee or as contributions made by the employee, if such contributions are made pursuant to an arrangement under section 408(k)(6) under which an employee may elect to have the employer make contributions to the simplified employee pension on behalf of the employee, shall not be treated as distributed or made available or as contributions made by the employee merely because the simplified employee pension includes provisions for such election, and in the case of any contributions pursuant to a simplified employer pension which are made to an individual retirement plan designated as a Roth IRA, such contribution shall not be excludable from gross income. Contributions made by an employer to a simplified employee pension with respect to an employee for any year shall be treated as distributed or made available to such employee and as contributions made by the employee to the extent such contributions exceed the lesser of— 25 percent of the compensation (within the meaning of section 414(s)) from such employer includible in the employee’s gross income for the year (determined without regard to the employer contributions to the simplified employee pension), or the limitation in effect under section 415(c)(1)(A), reduced in the case of any highly compensated employee (within the meaning of section 414(q)) by the amount taken into account with respect to such employee under section 408(k)(3)(D). Any amount paid or distributed out of an individual retirement plan pursuant to a simplified employee pension shall be included in gross income by the payee or distributee, as the case may be, in accordance with the provisions of section 408(d) (or section 408A(d) in the case of an individual retirement plan designated as a Roth IRA).

(i) Treatment of self-employed individuals For purposes of this section, except as otherwise provided in subsection (e)(4)(D)(i), the term “employee” includes a self-employed individual (as defined in section 401(c)(1)(B)) and the employer of such individual shall be the person treated as his employer under section 401(c)(4).

(j) Effect of disposition of stock by plan on net unrealized appreciation For purposes of subsection (e)(4), in the case of any transaction to which this subsection applies, the determination of net unrealized appreciation shall be made without regard to such transaction. This subsection shall apply to any transaction in which— the plan trustee exchanges the plan’s securities of the employer corporation for other such securities, or the plan trustee disposes of securities of the employer corporation and uses the proceeds of such disposition to acquire securities of the employer corporation within 90 days (or such longer period as the Secretary may prescribe), except that this subparagraph shall not apply to any employee with respect to whom a distribution of money was made during the period after such disposition and before such acquisition.

(k) Treatment of simple retirement accounts Rules similar to the rules of paragraphs (1) and (3) of subsection (h) shall apply to contributions and distributions with respect to a simple retirement account under section 408(p).

(l) Distributions from governmental plans for health and long-term care insurance In the case of an employee who is an eligible retired public safety officer who makes the election described in paragraph (6) with respect to any taxable year of such employee, gross income of such employee for such taxable year does not include any distribution from an eligible retirement plan maintained by the employer described in paragraph (4)(B) to the extent that the aggregate amount of such distributions does not exceed the amount paid by such employee for qualified health insurance premiums for such taxable year. The amount which may be excluded from gross income for the taxable year by reason of paragraph (1) shall not exceed $3,000. An amount shall be treated as a distribution for purposes of paragraph (1) only to the extent that such amount would be includible in gross income without regard to paragraph (1). Notwithstanding section 72, in determining the extent to which an amount is treated as a distribution for purposes of subparagraph (A), the aggregate amounts distributed from an eligible retirement plan in a taxable year (up to the amount excluded under paragraph (1)) shall be treated as includible in gross income (without regard to subparagraph (A)) to the extent that such amount does not exceed the aggregate amount which would have been so includible if all amounts to the credit of the eligible public safety officer in all eligible retirement plans maintained by the employer described in paragraph (4)(B) were distributed during such taxable year and all such plans were treated as 1 contract for purposes of determining under section 72 the aggregate amount which would have been so includible. Proper adjustments shall be made in applying section 72 to other distributions in such taxable year and subsequent taxable years. For purposes of this subsection— For purposes of paragraph (1), the term “eligible retirement plan” means a governmental plan (within the meaning of section 414(d)) which is described in clause (iii), (iv), (v), or (vi) of subsection (c)(8)(B). The term “eligible retired public safety officer” means an individual who, by reason of disability or attainment of normal retirement age, is separated from service as a public safety officer with the employer who maintains the eligible retirement plan from which distributions subject to paragraph (1) are made. The term “public safety officer” shall have the same meaning given such term by section 1204(9)(A) of the Omnibus Crime Control and Safe Streets Act of 1968 ( 42 U.S.C. 3796b(9)(A) ), 1 as in effect immediately before the enactment of the National Defense Authorization Act for Fiscal Year 2013. The term “qualified health insurance premiums” means premiums for coverage for the eligible retired public safety officer, his spouse, and dependents (as defined in section 152), by an accident or health plan or qualified long-term care insurance contract (as defined in section 7702B(b)). For purposes of this subsection— Paragraph (1) shall apply to a distribution without regard to whether payment of the premiums is made directly to the provider of the accident or health plan or qualified long-term care insurance contract by deduction from a distribution from the eligible retirement plan, or is made to the employee. In the case of a payment made to the employee as described in clause (i), the employee shall include with the return of tax for the taxable year in which the distribution is made an attestation that the distribution does not exceed the amount paid by the employee for qualified health insurance premiums for such taxable year. All eligible retirement plans of an employer shall be treated as a single plan. For purposes of paragraph (1), an election is described in this paragraph if the election is made by an employee after separation from service with respect to amounts not distributed from an eligible retirement plan to have amounts from such plan distributed in order to pay for qualified health insurance premiums. A plan shall not be treated as violating the requirements of section 401, or as engaging in a prohibited transaction for purposes of section 503(b), merely because it provides for an election with respect to amounts that are otherwise distributable under the plan or merely because of a distribution made pursuant to an election described in subparagraph (A). The amounts excluded from gross income under paragraph (1) shall not be taken into account under section 213. The amounts excluded from gross income under paragraph (1) shall not be taken into account under section 162( l ).

“Plans, fiduciaries, employers, and plan sponsors are entitled to rely on— a reasonable good faith interpretation of then existing administrative guidance for inadvertent benefit overpayment recoupments and recoveries that commenced before the date of enactment of this Act [ Dec. 29, 2022 ], and determinations made before the date of enactment of this Act by the responsible plan fiduciary, in the exercise of its fiduciary discretion, not to seek recoupment or recovery of all or part of an inadvertent benefit overpayment. In the case of a benefit overpayment that occurred prior to the date of enactment of this Act, any installment payments by the participant or beneficiary to the plan or any reduction in periodic benefit payments to the participant or beneficiary, which were made in recoupment of such overpayment and which commenced prior to such date, may continue after such date. Nothing in this subsection shall relieve a fiduciary from responsibility for an overpayment that resulted from a breach of its fiduciary duties.”

§ 402A Optional treatment of elective deferrals as Roth contributions

(a) General rule If an applicable retirement plan includes a qualified Roth contribution program— any designated Roth contribution made by an employee pursuant to the program shall be treated as an elective deferral for purposes of this chapter, except that such contribution shall not be excludable from gross income, any designated Roth contribution which pursuant to the program is made by the employer on the employee’s behalf on account of the employee’s contribution, elective deferral, or (subject to the requirements of section 401(m)(13)) qualified student loan payment shall be treated as a matching contribution for purposes of this chapter, except that such contribution shall not be excludable from gross income, any designated Roth contribution which pursuant to the program is made by the employer on the employee’s behalf and which is a nonelective contribution shall be nonforfeitable and shall not be excludable from gross income, and such plan (and any arrangement which is part of such plan) shall not be treated as failing to meet any requirement of this chapter solely by reason of including such program.

(b) Qualified Roth contribution program For purposes of this section— The term “qualified Roth contribution program” means a program under which an employee may elect to make, or to have made on the employee’s behalf, designated Roth contributions in lieu of all or a portion of elective deferrals the employee is otherwise eligible to make, or of matching contributions or nonelective contributions which may otherwise be made on the employee’s behalf, under the applicable retirement plan. A program shall not be treated as a qualified Roth contribution program unless the applicable retirement plan— establishes separate accounts (“designated Roth accounts”) for the designated Roth contributions of each employee and any earnings properly allocable to the contributions, and maintains separate recordkeeping with respect to each account.

(c) Definitions and rules relating to designated Roth contributions For purposes of this section— The term “designated Roth contribution” means any elective deferral, matching contribution, or nonelective contribution which— is excludable from gross income of an employee without regard to this section, and the employee designates (at such time and in such manner as the Secretary may prescribe) as not being so excludable. The amount of elective deferrals which an employee may designate under paragraph (1) shall not exceed the excess (if any) of— the maximum amount of elective deferrals excludable from gross income of the employee for the taxable year (without regard to this section), over the aggregate amount of elective deferrals of the employee for the taxable year which the employee does not designate under paragraph (1). A rollover contribution of any payment or distribution from a designated Roth account which is otherwise allowable under this chapter may be made only if the contribution is to— another designated Roth account of the individual from whose account the payment or distribution was made, or a Roth IRA of such individual. Any rollover contribution to a designated Roth account under subparagraph (A) shall not be taken into account for purposes of paragraph (1). Notwithstanding sections 402(c), 403(b)(8), and 457(e)(16), in the case of any distribution to which this paragraph applies— there shall be included in gross income any amount which would be includible were it not part of a qualified rollover contribution, section 72(t) shall not apply, and unless the taxpayer elects not to have this clause apply, any amount required to be included in gross income for any taxable year beginning in 2010 by reason of this paragraph shall be so included ratably over the 2-taxable-year period beginning with the first taxable year beginning in 2011. Any election under clause (iii) for any distributions during a taxable year may not be changed after the due date for such taxable year. In the case of an applicable retirement plan which includes a qualified Roth contribution program, this paragraph shall apply to a distribution from such plan other than from a designated Roth account which is contributed in a qualified rollover contribution (within the meaning of section 408A(e)) to the designated Roth account maintained under such plan for the benefit of the individual to whom the distribution is made. Any distribution to which this paragraph applies shall not be taken into account for purposes of paragraph (1). The rules of subparagraphs (D), (E), and (F) of section 408A(d)(3) (as in effect for taxable years beginning after 2009) shall apply for purposes of this paragraph. In the case of an applicable retirement plan which includes a qualified Roth contribution program— the plan may allow an individual to elect to have the plan transfer any amount not otherwise distributable under the plan to a designated Roth account maintained for the benefit of the individual, such transfer shall be treated as a distribution to which this paragraph applies which was contributed in a qualified rollover contribution (within the meaning of section 408A(e)) to such account, and the plan shall not be treated as violating the provisions of section 401(k)(2)(B)(i), 403(b)(7)(A)(ii), 1 403(b)(11), or 457(d)(1)(A), or of section 8433 of title 5 , United States Code, solely by reason of such transfer.

(d) Distribution rules For purposes of this title— Any qualified distribution from a designated Roth account shall not be includible in gross income. For purposes of this subsection— The term “qualified distribution” has the meaning given such term by section 408A(d)(2)(A) (without regard to clause (iv) thereof). A payment or distribution from a designated Roth account shall not be treated as a qualified distribution if such payment or distribution is made within the 5-taxable-year period beginning with the earlier of— the first taxable year for which the individual made a designated Roth contribution to any designated Roth account established for such individual under the same applicable retirement plan, or if a rollover contribution was made to such designated Roth account from a designated Roth account previously established for such individual under another applicable retirement plan, the first taxable year for which the individual made a designated Roth contribution to such previously established account. The term “qualified distribution” shall not include any distribution of any excess deferral under section 402(g)(2) or any excess contribution under section 401(k)(8), and any income on the excess deferral or contribution. Notwithstanding section 72, if any excess deferral under section 402(g)(2) attributable to a designated Roth contribution is not distributed on or before the 1st April 15 following the close of the taxable year in which such excess deferral is made, the amount of such excess deferral shall— not be treated as investment in the contract, and be included in gross income for the taxable year in which such excess is distributed. Section 72 shall be applied separately with respect to distributions and payments from a designated Roth account and other distributions and payments from the plan. Notwithstanding sections 403(b)(10) and 457(d)(2), the following provisions shall not apply to any designated Roth account: Section 401(a)(9)(A). The incidental death benefit requirements of section 401(a).

(e) Pension-linked emergency savings accounts An applicable retirement plan— may— include a pension-linked emergency savings account established pursuant to section 801 of the Employee Retirement Income Security Act of 1974, which, except as otherwise provided in this subsection, shall be treated for purposes of this title as a designated Roth account, and either— offer to enroll an eligible participant in such pension-linked emergency savings account, or automatically enroll an eligible participant in such account pursuant to an automatic contribution arrangement described in paragraph (4), and shall— separately account for contributions to such account and any earnings properly allocable to the contributions, maintain separate recordkeeping with respect to each such account, and allow withdrawals from such account in accordance with paragraph (7). For purposes of this subsection, the term “eligible participant”, with regard to a defined contribution plan, means an individual, without regard to whether the individual is otherwise a participant in such plan, who— meets any age, service, and other eligibility requirements of the plan, and is not a highly compensated employee (as defined in section 414(q)). Notwithstanding subparagraph (A)(ii), an individual on whose behalf a pension-linked emergency savings account is established who thereafter becomes a highly compensated employee (as so defined) may not make further contributions to such account, but retains the right to withdraw any account balance of such account in accordance with paragraphs (7) and (8). Subject to subparagraph (B), no contribution shall be accepted to a pension-linked emergency savings account to the extent such contribution would cause the portion of the account balance attributable to participant contributions to exceed the lesser of— $2, 500; or anam o u n t d e t er min e d b y t h e pl an s p o n soro f t h e p e n s i o n - l ink e d e m er g e n cys a v in g s a cco u n t . I n t h ec a seo f co n t r ib u t i o n s ma d e in t a x ab l eye a rs b e g innin g a f t erDece mb er 31, 2024, t h e S ecre t a rys ha ll a d j u s tt h e am o u n t u n d erc l a u se (i) a tt h es am e t im e an d in t h es am e mann er a s t h e a d j u s t m e n t ma d e u n d ersec t i o n 415 (d), e x ce ptt ha tt h e ba se p er i o d s ha ll b e t h ec a l e n d a r q u a r t er b e g innin g J u l y 1, 2023. A n y in cre a se u n d er t h e p rece d in g se n t e n ce w hi c hi s n o t am u lt i pl eo f$ 100 shall be rounded to the next lowest multiple of $100. To the extent any contribution to the pension-linked emergency savings account of a participant for a taxable year would exceed the limitation of subparagraph (A)— in the case of an eligible participant with another designated Roth account under the defined contribution plan, the plan may provide that— the participant may elect to increase the participant’s contribution to such other account, and in the absence of such a participant election, the participant is deemed to have elected to increase the participant’s contributions to such account at the rate at which contributions were being made to the pension-linked emergency savings account, and in any other case, such plan shall provide that such excess contributions will not be accepted. For purposes of this section— An automatic contribution arrangement described in this paragraph is an arrangement under which an eligible participant is treated as having elected to have the plan sponsor make elective contributions to a pension-linked emergency savings account at a participant contribution rate that is not more than 3 percent of the compensation of the eligible participant, unless the eligible participant, at any time (subject to such reasonable advance notice as is required by the plan administrator), affirmatively elects to— make contributions at a different rate, or opt out of such contributions. For purposes of an automatic contribution arrangement described in subparagraph (A), the plan sponsor— shall select a participant contribution rate under such automatic contribution arrangement which meets the requirements of subparagraph (A), and may amend such rate (prior to the plan year for which such amendment would take effect) not more than once annually. With respect to a defined contribution plan which includes a pension-linked emergency savings account, the administrator of the plan shall, not less than 30 days and not more than 90 days prior to the date of the first contribution to the pension-linked emergency savings account, including any contribution under an automatic contribution arrangement described in section 801(d)(2) of the Employee Retirement Income Security Act of 1974, or the date of any adjustment to the participant contribution rate under section 801(d)(2)(B)(ii) of such Act, and not less than annually thereafter, shall furnish to the participant a notice describing— the purpose of the account, which is for short-term, emergency savings; the limits on, and tax treatment of, contributions to the pension-linked emergency savings account of the participant; any fees, expenses, restrictions, or charges associated with such pension-linked emergency savings account; procedures for electing to make contributions or opting out of the pension-linked emergency savings account, changing participant contribution rates for such account, and making participant withdrawals from such pension-linked emergency savings account, including any limits on frequency; the amount of the intended contribution or the change in the percentage of the compensation of the participant of such contribution, if applicable; the amount in the pension-linked emergency savings account and the amount or percentage of compensation that a participant has contributed to such account; the designated investment option under section 801(c)(1)(A)(iii) of the Employee Retirement Income Security Act of 1974 for amounts contributed to the pension-linked emergency savings account; the options under section 801(e) of such Act for the account balance of the pension-linked emergency savings account after termination of the employment of the participant; and the ability of a participant who becomes a highly compensated employee (as such term is defined in section 414(q)) to, as described in section 801(b)(2) of the Employee Retirement Income Security Act of 1974, withdraw any account balance from a pension-linked emergency savings account and the restriction on the ability of such a participant to make further contributions to the pension-linked emergency savings account. A notice furnished to a participant under subparagraph (A) shall be— sufficiently accurate and comprehensive to apprise the participant of the rights and obligations of the participant with regard to the pension-linked emergency savings account of the participant; and written in a manner calculated to be understood by the average participant. The required notices under subparagraph (A) may be included with any other notice under the Employee Retirement Income Security Act of 1974, including under section 404(c)(5)(B) or 514(e)(3) of such Act, or under section 401(k)(13)(E) or 414(w)(4), if such other notice is provided to the participant at the time required for such notice. If an employer makes any matching contributions to a defined contribution plan of which a pension-linked emergency savings account is part, subject to the limitations of paragraph (3), the employer shall make matching contributions on behalf of an eligible participant on account of the participant’s contributions to the pension-linked emergency savings account at the same rate as any other matching contribution on account of an elective contribution by such participant. The matching contributions shall be made to the participant’s account under the defined contribution plan which is not the pension-linked emergency savings account. Such matching contributions on account of contributions to the pension-linked emergency savings account shall not exceed the maximum account balance under paragraph (3)(A) for such plan year. For purposes of any applicable limitation on matching contributions, any matching contributions made under the plan shall be treated first as attributable to the elective deferrals of the participant other than contributions to a pension-linked emergency savings account. For purposes of subparagraph (A), the term “matching contribution” has the meaning given such term in section 401(m)(4). A pension-linked emergency savings account shall allow for withdrawal by the participant on whose behalf the account is established of the account balance, in whole or in part at the discretion of the participant, at least once per calendar month and for distribution of such withdrawal to the participant as soon as practicable after the date on which the participant elects to make such withdrawal. Any distribution from a pension-linked emergency savings account in accordance with subparagraph (A)— shall be treated as a qualified distribution for purposes of subsection (d), and shall be treated as meeting the requirements of sections 401(k)(2)(B)(i), 403(b)(7)(A)(i), 403(b)(11), and 457(d)(1)(A). Upon termination of employment of the participant, or termination by the plan sponsor of the pension-linked emergency savings account, the pension-linked emergency savings account of such participant in a defined contribution plan shall— allow, at the election of the participant, for transfer by the participant of the account balance of such account, in whole or in part, into another designated Roth account of the participant under the defined contribution plan; and for any amounts in such account not transferred under paragraph (1), make such amounts available within a reasonable time to the participant. No amounts shall be transferred by the participant from another account of the participant under any plan of the employer into the pension-linked emergency savings account of the participant. Subparagraph (F) of section 408A(d)(3) shall not apply (including by reason of subsection (c)(4)(D) of this section) to any rollover contribution of amounts in a pension-linked emergency savings account under subparagraph (A). If any excess deferrals are distributed under section 402(g)(2)(A) to a participant, such amounts shall be distributed first from any pension-linked emergency savings account of the participant to the extent contributions were made to such account for the taxable year. Except as provided in subparagraph (B), a distribution from a pension-linked emergency savings account shall not be treated as an eligible rollover distribution for purposes of sections 401(a)(31), 402(f), and 3405. In the case of termination of employment of the participant, or termination by the plan sponsor of the pension-linked emergency savings account, except for purposes of 401(a)(31)(B), a distribution from a pension-linked emergency savings account which is contributed as provided in paragraph (8)(A)(i) shall be treated as an eligible rollover distribution. Notwithstanding section 411(d)(6), a plan which includes a pension-linked emergency savings account may cease to offer such accounts at any time. A plan of which a pension-linked emergency savings account is part— may employ reasonable procedures to limit the frequency or amount of matching contributions with respect to contributions to such account, solely to the extent necessary to prevent manipulation of the rules of the plan to cause matching contributions to exceed the intended amounts or frequency, and shall not be required to suspend matching contributions following any participant withdrawal of contributions, including elective deferrals and employee contributions, whether or not matched and whether or not made pursuant to an automatic contribution arrangement described in paragraph (4). The Secretary, in consultation with the Secretary of Labor, shall issue regulations or other guidance not later than 12 months after the date of the enactment of the SECURE 2.0 Act of 2022 with respect to the anti-abuse rules described in the preceding sentence.

(f) Other definitions For purposes of this section— The term “applicable retirement plan” means— an employees’ trust described in section 401(a) which is exempt from tax under section 501(a), a plan under which amounts are contributed by an individual’s employer for an annuity contract described in section 403(b), and an eligible deferred compensation plan (as defined in section 457(b)) of an eligible employer described in section 457(e)(1)(A). The term “elective deferral” means— any elective deferral described in subparagraph (A) or (C) of section 402(g)(3), and any elective deferral of compensation by an individual under an eligible deferred compensation plan (as defined in section 457(b)) of an eligible employer described in section 457(e)(1)(A). The term “matching contribution” means— any matching contribution described in section 401(m)(4)(A), and any contribution to an eligible deferred compensation plan (as defined in section 457(b)) by an eligible employer described in section 457(e)(1)(A) on behalf of an employee and on account of such employee’s elective deferral under such plan, but only if such contribution is nonforfeitable at the time received.

§ 403 Taxation of employee annuities

(a) Taxability of beneficiary under a qualified annuity plan If an annuity contract is purchased by an employer for an employee under a plan which meets the requirements of section 404(a)(2) (whether or not the employer deducts the amounts paid for the contract under such section), the amount actually distributed to any distributee under the contract shall be taxable to the distributee (in the year in which so distributed) under section 72 (relating to annuities). To the extent provided in section 402( l ), paragraph (1) shall not apply to the amount distributed under the contract which is otherwise includible in gross income under this subsection. For purposes of this subsection, the term “employee” includes an individual who is an employee within the meaning of section 401(c)(1), and the employer of such individual is the person treated as his employer under section 401(c)(4). If— any portion of the balance to the credit of an employee in an employee annuity described in paragraph (1) is paid to him in an eligible rollover distribution (within the meaning of section 402(c)(4)), the employee transfers any portion of the property he receives in such distribution to an eligible retirement plan, and in the case of a distribution of property other than money, the amount so transferred consists of the property distributed, then such distribution (to the extent so transferred) shall not be includible in gross income for the taxable year in which paid. The rules of paragraphs (2) through (7) and (11) and (9) of section 402(c) and section 402(f) shall apply for purposes of subparagraph (A). Any amount transferred in a direct trustee-to-trustee transfer in accordance with section 401(a)(31) shall not be includible in gross income for the taxable year of such transfer. An annuity contract shall not fail to be subject to this subsection solely by reason of allowing distributions to which section 401(a)(39) applies.

(b) Taxability of beneficiary under annuity purchased by section 501(c)(3) organization or public school If— an annuity contract is purchased— for an employee by an employer described in section 501(c)(3) which is exempt from tax under section 501(a), for an employee (other than an employee described in clause (i)), who performs services for an educational organization described in section 170(b)(1) (A)(ii), by an employer which is a State, a political subdivision of a State, or an agency or instrumentality of any one or more of the foregoing, or for the minister described in section 414(e)(5)(A) by the minister or by an employer, such annuity contract is not subject to subsection (a), the employee’s rights under the contract are nonforfeitable, except for failure to pay future premiums, except in the case of a contract purchased by a church, such contract is purchased under a plan which meets the nondiscrimination requirements of paragraph (12), and in the case of a contract purchased under a salary reduction agreement, the contract meets the requirements of section 401(a)(30), then contributions and other additions by such employer for such annuity contract shall be excluded from the gross income of the employee for the taxable year to the extent that the aggregate of such contributions and additions (when expressed as an annual addition (within the meaning of section 415(c)(2))) does not exceed the applicable limit under section 415. The amount actually distributed to any distributee under such contract shall be taxable to the distributee (in the year in which so distributed) under section 72 (relating to annuities). For purposes of applying the rules of this subsection to contributions and other additions by an employer for a taxable year, amounts transferred to a contract described in this paragraph by reason of a rollover contribution described in paragraph (8) of this subsection or section 408(d)(3)(A)(ii) shall not be considered contributed by such employer. To the extent provided in section 402( l ), paragraph (1) shall not apply to the amount distributed under the contract which is otherwise includible in gross income under this subsection. For purposes of this subsection, the term “includible compensation” means, in the case of any employee, the amount of compensation which is received from the employer described in paragraph (1)(A), and which is includible in gross income (computed without regard to section 911) for the most recent period (ending not later than the close of the taxable year) which under paragraph (4) may be counted as one year of service, and which precedes the taxable year by no more than five years. Such term does not include any amount contributed by the employer for any annuity contract to which this subsection applies. Such term includes— any elective deferral (as defined in section 402(g)(3)), and any amount which is contributed or deferred by the employer at the election of the employee and which is not includible in the gross income of the employee by reason of section 125, 132(f)(4), or 457. In determining the number of years of service for purposes of this subsection, there shall be included— one year for each full year during which the individual was a full-time employee of the organization purchasing the annuity for him, and a fraction of a year (determined in accordance with regulations prescribed by the Secretary) for each full year during which such individual was a part-time employee of such organization and for each part of a year during which such individual was a full-time or part-time employee of such organization. In no case shall the number of years of service be less than one. If for any taxable year of the employee this subsection applies to 2 or more annuity contracts purchased by the employer, such contracts shall be treated as one contract. For purposes of this title, amounts paid by an employer described in paragraph (1)(A) to a custodial account which satisfies the requirements of section 401(f)(2) shall be treated as amounts contributed by him for an annuity contract for his employee if the amounts are to be held in that custodial account and are invested in regulated investment company stock or a group trust intended to satisfy the requirements of Internal Revenue Service Revenue Ruling 81–100 (or any successor guidance), and under the custodial account— no such amounts may be paid or made available to any distributee (unless such amount is a distribution to which section 72(t)(2)(G) applies) before— the employee dies, the employee attains age 59½, the employee has a severance from employment, the employee becomes disabled (within the meaning of section 72(m)(7)), subject to the provisions of paragraph (17), the employee encounters financial hardship, except as may be otherwise provided by regulations, with respect to amounts invested in a lifetime income investment (as defined in section 401(a)(38)(B)(ii)), the date that is 90 days prior to the date that such lifetime income investment may no longer be held as an investment option under the contract, or as provided for distributions to which section 401(a)(39) applies, and in the case of amounts described in clause (i)(VI), such amounts will be distributed only in the form of a qualified distribution (as defined in section 401(a)(38)(B)(i)) or a qualified plan distribution annuity contract (as defined in section 401(a)(38)(B)(iv)). For purposes of this title, a custodial account which satisfies the requirements of section 401(f)(2) shall be treated as an organization described in section 401(a) solely for purposes of subchapter F and subtitle F with respect to amounts received by it (and income from investment thereof). For purposes of this paragraph, the term “regulated investment company” means a domestic corporation which is a regulated investment company within the meaning of section 851(a). In determining whether a distribution is upon the financial hardship of an employee, the administrator of the plan may rely on a written certification by the employee that the distribution is— on account of a financial need of a type which is deemed in regulations prescribed by the Secretary to be an immediate and heavy financial need, and not in excess of the amount required to satisfy such financial need, and that the employee has no alternative means reasonably available to satisfy such financial need. The Secretary may provide by regulations for exceptions to the rule of the preceding sentence in cases where the plan administrator has actual knowledge to the contrary of the employee’s certification, and for procedures for addressing cases of employee misrepresentation. If— any portion of the balance to the credit of an employee in an annuity contract described in paragraph (1) is paid to him in an eligible rollover distribution (within the meaning of section 402(c)(4)), the employee transfers any portion of the property he receives in such distribution to an eligible retirement plan described in section 402(c)(8)(B), and in the case of a distribution of property other than money, the property so transferred consists of the property distributed, then such distribution (to the extent so transferred) shall not be includible in gross income for the taxable year in which paid. The rules of paragraphs (2) through (7), (9), and (11) of section 402(c) and section 402(f) shall apply for purposes of subparagraph (A), except that section 402(f) shall be applied to the payor in lieu of the plan administrator. For purposes of this title— a retirement income account shall be treated as an annuity contract described in this subsection, and amounts paid by an employer described in paragraph (1)(A) to a retirement income account shall be treated as amounts contributed by the employer for an annuity contract for the employee on whose behalf such account is maintained. For purposes of this paragraph, the term “retirement income account” means a defined contribution program established or maintained by a church, or a convention or association of churches, including an organization described in section 414(e)(3)(A), to provide benefits under section 403(b) for an employee described in paragraph (1) (including an employee described in section 414(e)(3)(B)) or his beneficiaries. Under regulations prescribed by the Secretary, this subsection shall not apply to any annuity contract (or to any custodial account described in paragraph (7) or retirement income account described in paragraph (9)) unless requirements similar to the requirements of sections 401(a)(9) and 401(a)(31) are met (and requirements similar to the incidental death benefit requirements of section 401(a) are met) with respect to such annuity contract (or custodial account or retirement income account). Any amount transferred in a direct trustee-to-trustee transfer in accordance with section 401(a)(31) shall not be includible in gross income for the taxable year of the transfer. This subsection shall not apply to any annuity contract unless under such contract distributions attributable to contributions made pursuant to a salary reduction agreement (within the meaning of section 402(g)(3)(C)) may be paid only— when the employee attains age 59½, has a severance from employment, dies, or becomes disabled (within the meaning of section 72(m)(7)), subject to the provisions of paragraph (17), in the case of hardship, for distributions to which section 72(t)(2)(G) applies, except as may be otherwise provided by regulations, with respect to amounts invested in a lifetime income investment (as defined in section 401(a)(38)(B)(ii))— on or after the date that is 90 days prior to the date that such lifetime income investment may no longer be held as an investment option under the contract, and in the form of a qualified distribution (as defined in section 401(a)(38)(B)(i)) or a qualified plan distribution annuity contract (as defined in section 401(a)(38)(B)(iv)), or for distributions to which section 401(a)(39) applies. In determining whether a distribution is upon hardship of an employee, the administrator of the plan may rely on a written certification by the employee that the distribution is on account of a financial need of a type which is deemed in regulations prescribed by the Secretary to be an immediate and heavy financial need and is not in excess of the amount required to satisfy such financial need, and that the employee has no alternative means reasonably available to satisfy such financial need. The Secretary may provide by regulations for exceptions to the rule of the preceding sentence in cases where the plan administrator has actual knowledge to the contrary of the employee’s certification, and for procedures for addressing cases of employee misrepresentation. For purposes of paragraph (1)(D), a plan meets the nondiscrimination requirements of this paragraph if— with respect to contributions not made pursuant to a salary reduction agreement, such plan meets the requirements of paragraphs (4), (5), (17), and (26) of section 401(a), section 401(m), and section 410(b) in the same manner as if such plan were described in section 401(a), and all employees of the organization may elect to have the employer make contributions of more than 6,000. In the case of any calendar year beginning after December 31, 2024 , the $6,000 amount under clause (i) shall be adjusted in the same manner as under section 402(g)(4), except that “2023” shall be substituted for “2005”. In the case of an individual who has attained the age of 50 before the close of the taxable year, the limitation under clause (i)(II) shall be increased by the applicable amount determined under section 219(b)(5)(B)(ii) (after the application of section 219(b)(5)(C)(iii)). For purposes of this paragraph— The term “eligible employer” means any employer if the employer does not maintain a qualified plan with respect to which contributions are made, or benefits are accrued, for service in the year for which the determination is being made. If only individuals other than employees described in subparagraph (A) of section 410(b)(3) are eligible to participate in such arrangement, then the preceding sentence shall be applied without regard to any qualified plan in which only employees described in such subparagraph are eligible to participate. Rules similar to the rules of section 408(p)(10) shall apply for purposes of clause (i). The term “qualified plan” means a plan, contract, pension, account, or trust described in subparagraph (A) or (B) of paragraph (5) of section 219(g) (determined without regard to the last sentence of such paragraph (5)). For purposes of this paragraph, the term “eligible employee” means any employee of the employer other than an employee who is permitted to be excluded under paragraph (12)(A). For purposes of paragraphs (7) and (11)— The following amounts may be distributed upon hardship of the employee: Contributions made pursuant to a salary reduction agreement (within the meaning of section 3121(a)(5)(D)). Qualified nonelective contributions (as defined in section 401(m)(4)(C)). Qualified matching contributions described in section 401(k)(3)(D)(ii)(I). Earnings on any contributions described in clause (i), (ii), or (iii). A distribution shall not be treated as failing to be made upon the hardship of an employee solely because the employee does not take any available loan under the plan.

(c) Taxability of beneficiary under nonqualified annuities or under annuities purchased by exempt organizations Premiums paid by an employer for an annuity contract which is not subject to subsection (a) shall be included in the gross income of the employee in accordance with section 83 (relating to property transferred in connection with performance of services), except that the value of such contract shall be substituted for the fair market value of the property for purposes of applying such section. The preceding sentence shall not apply to that portion of the premiums paid which is excluded from gross income under subsection (b). In the case of any portion of any contract which is attributable to premiums to which this subsection applies, the amount actually paid or made available under such contract to any beneficiary which is attributable to such premiums shall be taxable to the beneficiary (in the year in which so paid or made available) under section 72 (relating to annuities).

§ 404 Deduction for contributions of an employer to an employees’ trust or annuity plan and compensation under a deferred-payment plan

(a) General rule If contributions are paid by an employer to or under a stock bonus, pension, profit-sharing, or annuity plan, or if compensation is paid or accrued on account of any employee under a plan deferring the receipt of such compensation, such contributions or compensation shall not be deductible under this chapter; but, if they would otherwise be deductible, they shall be deductible under this section, subject, however, to the following limitations as to the amounts deductible in any year: In the taxable year when paid, if the contributions are paid into a pension trust (other than a trust to which paragraph (3) applies), and if such taxable year ends within or with a taxable year of the trust for which the trust is exempt under section 501(a), in the case of a defined benefit plan other than a multiemployer plan, in an amount determined under subsection ( o ), and in the case of any other plan in an amount determined as follows: the amount necessary to satisfy the minimum funding standard provided by section 412(a) for plan years ending within or with such taxable year (or for any prior plan year), if such amount is greater than the amount determined under clause (ii) or (iii) (whichever is applicable with respect to the plan), the amount necessary to provide with respect to all of the employees under the trust the remaining unfunded cost of their past and current service credits distributed as a level amount, or a level percentage of compensation, over the remaining future service of each such employee, as determined under regulations prescribed by the Secretary, but if such remaining unfunded cost with respect to any 3 individuals is more than 50 percent of such remaining unfunded cost, the amount of such unfunded cost attributable to such individuals shall be distributed over a period of at least 5 taxable years, an amount equal to the normal cost of the plan, as determined under regulations prescribed by the Secretary, plus, if past service or other supplementary pension or annuity credits are provided by the plan, an amount necessary to amortize the unfunded costs attributable to such credits in equal annual payments (until fully amortized) over 10 years, as determined under regulations prescribed by the Secretary. In determining the amount deductible in such year under the foregoing limitations the funding method and the actuarial assumptions used shall be those used for such year under section 431, and the maximum amount deductible for such year shall be an amount equal to the full funding limitation for such year determined under section 431. In the case of a multiemployer plan which the Secretary of Labor finds to be collectively bargained which makes an election under this subparagraph (in such manner and at such time as may be provided under regulations prescribed by the Secretary), if the full funding limitation determined under section 431(c)(6) for such year is zero, if as a result of any plan amendment applying to such plan year, the amount determined under section 431(c)(6)(A)(ii) exceeds the amount determined under section 431(c)(6)(A)(i), and if the funding method and the actuarial assumptions used are those used for such year under section 431, the maximum amount deductible in such year under the limitations of this paragraph shall be an amount equal to the lesser of— the full funding limitation for such year determined by applying section 431(c)(6) but increasing the amount referred to in subparagraph (A) thereof by the decrease in the present value of all unamortized liabilities resulting from such amendment, or the normal cost under the plan reduced by the amount necessary to amortize in equal annual installments over 10 years (until fully amortized) the decrease described in clause (i). In the case of any election under this subparagraph, the amount deductible under the limitations of this paragraph with respect to any of the plan years following the plan year for which such election was made shall be determined as provided under such regulations as may be prescribed by the Secretary to carry out the purposes of this subparagraph. In the case of a plan which the Secretary of Labor finds to be collectively bargained, established or maintained by an employer doing business in not less than 40 States and engaged in the trade or business of furnishing or selling services described in section 168(i)(10)(C), with respect to which the rates have been established or approved by a State or political subdivision thereof, by any agency or instrumentality of the United States, or by a public service or public utility commission or other similar body of any State or political subdivision thereof, and in the case of any employer which is a member of a controlled group with such employer, subparagraph (B) shall be applied by substituting for the words “plan amendment” the words “plan amendment or increase in benefits payable under title II of the Social Security Act”. For the purposes of this subparagraph, the term “controlled group” has the meaning provided by section 1563(a), determined without regard to section 1563(a)(4) and (e)(3)(C). In the case of a defined benefit plan which is a multiemployer plan, except as provided in regulations, the maximum amount deductible under the limitations of this paragraph shall not be less than the excess (if any) of— 140 percent of the current liability of the plan determined under section 431(c)(6)(D), over the value of the plan’s assets determined under section 431(c)(2). Any amount paid in a taxable year in excess of the amount deductible in such year under the foregoing limitations shall be deductible in the succeeding taxable years in order of time to the extent of the difference between the amount paid and deductible in each such succeeding year and the maximum amount deductible for such year under the foregoing limitations. In the taxable year when paid, in an amount determined in accordance with paragraph (1), if the contributions are paid toward the purchase of retirement annuities, or retirement annuities and medical benefits as described in section 401(h), and such purchase is part of a plan which meets the requirements of section 401(a)(3), (4), (5), (6), (7), (8), (9), (11), (12), (13), (14), (15), (16), (17), 1 (19), (20), (22), (26), (27), (31), and (37) and, if applicable, the requirements of section 401(a)(10) and of section 401(d), and if refunds of premiums, if any, are applied within the current taxable year or next succeeding taxable year toward the purchase of such retirement annuities, or such retirement annuities and medical benefits. In the taxable year when paid, if the contributions are paid into a stock bonus or profit-sharing trust, and if such taxable year ends within or with a taxable year of the trust with respect to which the trust is exempt under section 501(a), in an amount not in excess of the greater of— 25 percent of the compensation otherwise paid or accrued during the taxable year to the beneficiaries under the stock bonus or profit-sharing plan, or the amount such employer is required to contribute to such trust under section 401(k)(11) for such year. Any amount paid into the trust in any taxable year in excess of the limitation of clause (i) (or the corresponding provision of prior law) shall be deductible in the succeeding taxable years in order of time, but the amount so deductible under this clause in any 1 such succeeding taxable year together with the amount allowable under clause (i) shall not exceed the amount described in subclause (I) or (II) of clause (i), whichever is greater, with respect to such taxable year. For purposes of this subparagraph, the term “stock bonus or profit-sharing trust” shall not include any trust designed to provide benefits upon retirement and covering a period of years, if under the plan the amounts to be contributed by the employer can be determined actuarially as provided in paragraph (1). If the contributions are made to 2 or more stock bonus or profit-sharing trusts, such trusts shall be considered a single trust for purposes of applying the limitations in this subparagraph. Except as provided by the Secretary, a defined contribution plan which is subject to the funding standards of section 412 shall be treated in the same manner as a stock bonus or profit-sharing plan for purposes of this subparagraph. In the case of a profit-sharing plan, or a stock bonus plan in which contributions are determined with reference to profits, of a group of corporations which is an affiliated group within the meaning of section 1504, if any member of such affiliated group is prevented from making a contribution which it would otherwise have made under the plan, by reason of having no current or accumulated earnings or profits or because such earnings or profits are less than the contributions which it would otherwise have made, then so much of the contribution which such member was so prevented from making may be made, for the benefit of the employees of such member, by the other members of the group, to the extent of current or accumulated earnings or profits, except that such contribution by each such other member shall be limited, where the group does not file a consolidated return, to that proportion of its total current and accumulated earnings or profits remaining after adjustment for its contribution deductible without regard to this subparagraph which the total prevented contribution bears to the total current and accumulated earnings or profits of all the members of the group remaining after adjustment for all contributions deductible without regard to this subparagraph. Contributions made under the preceding sentence shall be deductible under subparagraph (A) of this paragraph by the employer making such contribution, and, for the purpose of determining amounts which may be carried forward and deducted under the second sentence of subparagraph (A) of this paragraph in succeeding taxable years, shall be deemed to have been made by the employer on behalf of whose employees such contributions were made. If a stock bonus, pension, or profit-sharing trust would qualify for exemption under section 501(a) except for the fact that it is a trust created or organized outside the United States, contributions to such a trust by an employer which is a resident, or corporation, or other entity of the United States, shall be deductible under the preceding paragraphs. If the plan is not one included in paragraph (1), (2), or (3), in the taxable year in which an amount attributable to the contribution is includible in the gross income of employees participating in the plan, but, in the case of a plan in which more than one employee participates only if separate accounts are maintained for each employee. For purposes of this section, any vacation pay which is treated as deferred compensation shall be deductible for the taxable year of the employer in which paid to the employee. For purposes of paragraphs (1), (2), and (3), a taxpayer shall be deemed to have made a payment on the last day of the preceding taxable year if the payment is on account of such taxable year and is made not later than the time prescribed by law for filing the return for such taxable year (including extensions thereof). If amounts are deductible under the foregoing paragraphs of this subsection (other than paragraph (5)) in connection with 1 or more defined contribution plans and 1 or more defined benefit plans or in connection with trusts or plans described in 2 or more of such paragraphs, the total amount deductible in a taxable year under such plans shall not exceed the greater of— 25 percent of the compensation otherwise paid or accrued during the taxable year to the beneficiaries under such plans, or the amount of contributions made to or under the defined benefit plans to the extent such contributions do not exceed the amount of employer contributions necessary to satisfy the minimum funding standard provided by section 412 with respect to any such defined benefit plans for the plan year which ends with or within such taxable year (or for any prior plan year). A defined contribution plan which is a pension plan shall not be treated as failing to provide definitely determinable benefits merely by limiting employer contributions to amounts deductible under this section. In the case of a defined benefit plan which is a single employer plan, the amount necessary to satisfy the minimum funding standard provided by section 412 shall not be less than the excess (if any) of the plan’s funding target (as defined in section 430(d)(1)) over the value of the plan’s assets (as determined under section 430(g)(3)). Any amount paid under the plans in any taxable year in excess of the limitation of subparagraph (A) shall be deductible in the succeeding taxable years in order of time, but the amount so deductible under this subparagraph in any 1 such succeeding taxable year together with the amount allowable under subparagraph (A) shall not exceed 25 percent of the compensation otherwise paid or accrued during such taxable year to the beneficiaries under the plans. This paragraph shall not have the effect of reducing the amount otherwise deductible under paragraphs (1), (2), and (3), if no employee is a beneficiary under more than 1 trust or under a trust and an annuity plan. If, in connection with 1 or more defined contribution plans and 1 or more defined benefit plans, no amounts (other than elective deferrals (as defined in section 402(g)(3))) are contributed to any of the defined contribution plans for the taxable year, then subparagraph (A) shall not apply with respect to any of such defined contribution plans and defined benefit plans. In the case of employer contributions to 1 or more defined contribution plans— if such contributions do not exceed 6 percent of the compensation otherwise paid or accrued during the taxable year to the beneficiaries under such plans, this paragraph shall not apply to such contributions or to employer contributions to the defined benefit plans to which this paragraph would otherwise apply by reason of contributions to the defined contribution plans, and if such contributions exceed 6 percent of such compensation, this paragraph shall be applied by only taking into account such contributions to the extent of such excess. For purposes of this clause, amounts carried over from preceding taxable years under subparagraph (B) shall be treated as employer contributions to 1 or more defined contributions plans to the extent attributable to employer contributions to such plans in such preceding taxable years. In applying this paragraph, any single-employer plan covered under section 4021 of the Employee Retirement Income Security Act of 1974 shall not be taken into account. In applying this paragraph, any multiemployer plan shall not be taken into account. For purposes of this paragraph, a plan described in section 412(e)(3) shall be treated as a defined benefit plan. In the case of a plan included in paragraph (1), (2), or (3) which provides contributions or benefits for employees some or all of whom are employees within the meaning of section 401(c)(1), for purposes of this section— the term “employee” includes an individual who is an employee within the meaning of section 401(c)(1), and the employer of such individual is the person treated as his employer under section 401(c)(4); the term “earned income” has the meaning assigned to it by section 401(c)(2); the contributions to such plan on behalf of an individual who is an employee within the meaning of section 401(c)(1) shall be considered to satisfy the conditions of section 162 or 212 to the extent that such contributions do not exceed the earned income of such individual (determined without regard to the deductions allowed by this section) derived from the trade or business with respect to which such plan is established, and to the extent that such contributions are not allocable (determined in accordance with regulations prescribed by the Secretary) to the purchase of life, accident, health, or other insurance; and any reference to compensation shall, in the case of an individual who is an employee within the meaning of section 401(c)(1), be considered to be a reference to the earned income of such individual derived from the trade or business with respect to which the plan is established. Notwithstanding the provisions of paragraphs (3) and (7), if contributions are paid into a trust which forms a part of an employee stock ownership plan (as described in section 4975(e)(7)), and such contributions are, on or before the time prescribed in paragraph (6), applied by the plan to the repayment of the principal of a loan incurred for the purpose of acquiring qualifying employer securities (as described in section 4975(e)(8)), such contributions shall be deductible under this paragraph for the taxable year determined under paragraph (6). The amount deductible under this paragraph shall not, however, exceed 25 percent of the compensation otherwise paid or accrued during the taxable year to the employees under such employee stock ownership plan. Any amount paid into such trust in any taxable year in excess of the amount deductible under this paragraph shall be deductible in the succeeding taxable years in order of time to the extent of the difference between the amount paid and deductible in each such succeeding year and the maximum amount deductible for such year under the preceding sentence. Notwithstanding the provisions of paragraphs (3) and (7), if contributions are made to an employee stock ownership plan (described in subparagraph (A)) and such contributions are applied by the plan to the repayment of interest on a loan incurred for the purpose of acquiring qualifying employer securities (as described in subparagraph (A)), such contributions shall be deductible for the taxable year with respect to which such contributions are made as determined under paragraph (6). This paragraph shall not apply to an S corporation. A qualified gratuitous transfer (as defined in section 664(g)(1)) shall have no effect on the amount or amounts otherwise deductible under paragraph (3) or (7) or under this paragraph. In the case of contributions made by a minister described in section 414(e)(5) to a retirement income account described in section 403(b)(9) and not by a person other than such minister, such contributions— shall be treated as made to a trust which is exempt from tax under section 501(a) and which is part of a plan which is described in section 401(a), and shall be deductible under this subsection to the extent such contributions do not exceed the limit on elective deferrals under section 402(g) or the limit on annual additions under section 415. For purposes of this paragraph, all plans in which the minister is a participant shall be treated as one plan. For purposes of determining under this section— whether compensation of an employee is deferred compensation; and when deferred compensation is paid, no amount shall be treated as received by the employee, or paid, until it is actually received by the employee. For purposes of paragraphs (3), (7), (8), and (9) and subsection (h)(1)(C), the term “compensation” shall include amounts treated as “participant’s compensation” under subparagraph (C) or (D) of section 415(c)(3).

(b) Method of contributions, etc., having the effect of a plan; certain deferred benefits If— there is no plan, but there is a method or arrangement of employer contributions or compensation which has the effect of a stock bonus, pension, profit-sharing, or annuity plan, or other plan deferring the receipt of compensation (including a plan described in paragraph (2)), subsection (a) shall apply as if there were such a plan. For purposes of this section, any plan providing for deferred benefits (other than compensation) for employees, their spouses, or their dependents shall be treated as a plan deferring the receipt of compensation. In the case of such a plan, for purposes of this section, the determination of when an amount is includible in gross income shall be made without regard to any provisions of this chapter excluding such benefits from gross income. Subparagraph (A) shall not apply to any benefit provided through a welfare benefit fund (as defined in section 419(e)).

(c) Certain negotiated plans If contributions are paid by an employer— under a plan under which such contributions are held in trust for the purpose of paying (either from principal or income or both) for the benefit of employees and their families and dependents at least medical or hospital care, or pensions on retirement or death of employees; and such plan was established prior to January 1, 1954 , as a result of an agreement between employee representatives and the Government of the United States during a period of Government operation, under seizure powers, of a major part of the productive facilities of the industry in which such employer is engaged, such contributions shall not be deductible under this section nor be made nondeductible by this section, but the deductibility thereof shall be governed solely by section 162 (relating to trade or business expenses). For purposes of this chapter and subtitle B, in the case of any individual who before July 1, 1974 , was a participant in a plan described in the preceding sentence— such individual, if he is or was an employee within the meaning of section 401(c)(1), shall be treated (with respect to service covered by the plan) as being an employee other than an employee within the meaning of section 401(c)(1) and as being an employee of a participating employer under the plan, earnings derived from service covered by the plan shall be treated as not being earned income within the meaning of section 401(c)(2), and such individual shall be treated as an employee of a participating employer under the plan with respect to service before July 1, 1975 , covered by the plan. Section 277 (relating to deductions incurred by certain membership organizations in transactions with members) does not apply to any trust described in this subsection. The first and third sentences of this subsection shall have no application with respect to amounts contributed to a trust on or after any date on which such trust is qualified for exemption from tax under section 501(a).

(d) Deductibility of payments of deferred compensation, etc., to independent contractors If a plan would be described in so much of subsection (a) as precedes paragraph (1) thereof (as modified by subsection (b)) but for the fact that there is no employer-employee relationship, the contributions or compensation— shall not be deductible by the payor thereof under this chapter, but shall (if they would be deductible under this chapter but for paragraph (1)) be deductible under this subsection for the taxable year in which an amount attributable to the contribution or compensation is includible in the gross income of the persons participating in the plan.

(e) Contributions allocable to life insurance protection for self-employed individuals In the case of a self-employed individual described in section 401(c)(1), contributions which are allocable (determined under regulations prescribed by the Secretary) to the purchase of life, accident, health, or other insurance shall not be taken into account under paragraph (1), (2), or (3) of subsection (a).

([(f) Repealed. Pub. L. 98–369, div. A, title VII, § 713(b)(3), July 18, 1984, 98 Stat. 957]

(g) Certain employer liability payments considered as contributions For purposes of this section, any amount paid by an employer under section 4041(b), 4062, 4063, or 4064, or part 1 of subtitle E of title IV of the Employee Retirement Income Security Act of 1974 shall be treated as a contribution to which this section applies by such employer to or under a stock bonus, pension, profit-sharing, or annuity plan. In the case of a payment described in paragraph (1) made by an entity which is liable because it is a member of a commonly controlled group of corporations, trades, or businesses, within the meaning of subsection (b) or (c) of section 414, the fact that the entity did not directly employ participants of the plan with respect to which the liability payment was made shall not affect the deductibility of a payment which otherwise satisfies the conditions of section 162 (relating to trade or business expenses) or section 212 (relating to expenses for the production of income). Except as otherwise provided in this paragraph, any payment described in paragraph (1) shall (subject to the last sentence of subsection (a)(1)(A)) be deductible under this section when paid. Subparagraph (A) shall not apply (and subsection (a)(1)(A) shall apply) to any payments described in paragraph (1) which are paid to terminate a plan under section 4041(b) of the Employee Retirement Income Security Act of 1974 to the extent such payments result in the assets of the plan being in excess of the total amount of benefits under such plan which are guaranteed by the Pension Benefit Guaranty Corporation under section 4022 of such Act. Subparagraph (A) shall not apply to any payment described in paragraph (1) which is made under section 4062(c) of such Act and such payment shall be deductible at such time as may be prescribed in regulations which are based on principles similar to the principles of subsection (a)(1)(A). For purposes of this subsection, any reference to a section of the Employee Retirement Income Security Act of 1974 shall be treated as a reference to such section as in effect on the date of the enactment of the Retirement Protection Act of 1994.

(h) Special rules for simplified employee pensions Employer contributions to a simplified employee pension shall be treated as if they are made to a plan subject to the requirements of this section. Employer contributions to a simplified employee pension are subject to the following limitations: Contributions made for a year are deductible— in the case of a simplified employee pension maintained on a calendar year basis, for the taxable year with or within which the calendar year ends, or in the case of a simplified employee pension which is maintained on the basis of the taxable year of the employer, for such taxable year. Contributions shall be treated for purposes of this subsection as if they were made for a taxable year if such contributions are made on account of such taxable year and are made not later than the time prescribed by law for filing the return for such taxable year (including extensions thereof). The amount deductible in a taxable year for a simplified employee pension shall not exceed 25 percent of the compensation paid to the employees during the calendar year ending with or within the taxable year (or during the taxable year in the case of a taxable year described in subparagraph (A)(ii)). The excess of the amount contributed over the amount deductible for a taxable year shall be deductible in the succeeding taxable years in order of time, subject to the 25 percent limit of the preceding sentence. For any taxable year for which the employer has a deduction under paragraph (1), the otherwise applicable limitations in subsection (a)(3)(A) shall be reduced by the amount of the allowable deductions under paragraph (1) with respect to participants in the trust subject to subsection (a)(3)(A). For purposes of subsection (a)(7), a simplified employee pension shall be treated as if it were a separate stock bonus or profit-sharing trust.

([(i) Repealed. Pub. L. 99–514, title XI, § 1171(b)(6), Oct. 22, 1986, 100 Stat. 2513]

(j) Special rules relating to application with section 415 In computing the amount of any deduction allowable under paragraph (1), (2), (3), (4), (7), or (9) of subsection (a) for any year— in the case of a defined benefit plan, there shall not be taken into account any benefits for any year in excess of any limitation on such benefits under section 415 for such year, or in the case of a defined contribution plan, the amount of any contributions otherwise taken into account shall be reduced by any annual additions in excess of the limitation under section 415 for such year. For purposes of clause (i), (ii) or (iii) of subsection (a)(1)(A), and in computing the full funding limitation, there shall not be taken into account any adjustments under section 415(d)(1) for any year before the year for which such adjustment first takes effect.

(k) Deduction for dividends paid on certain employer securities In the case of a C corporation, there shall be allowed as a deduction for a taxable year the amount of any applicable dividend paid in cash by such corporation with respect to applicable employer securities. Such deduction shall be in addition to the deductions allowed under subsection (a). For purposes of this subsection— The term “applicable dividend” means any dividend which, in accordance with the plan provisions— is paid in cash to the participants in the plan or their beneficiaries, is paid to the plan and is distributed in cash to participants in the plan or their beneficiaries not later than 90 days after the close of the plan year in which paid, is, at the election of such participants or their beneficiaries— payable as provided in clause (i) or (ii), or paid to the plan and reinvested in qualifying employer securities, or is used to make payments on a loan described in subsection (a)(9) the proceeds of which were used to acquire the employer securities (whether or not allocated to participants) with respect to which the dividend is paid. A dividend described in subparagraph (A)(iv) which is paid with respect to any employer security which is allocated to a participant shall not be treated as an applicable dividend unless the plan provides that employer securities with a fair market value of not less than the amount of such dividend are allocated to such participant for the year which (but for subparagraph (A)) such dividend would have been allocated to such participant. For purposes of this subsection, the term “applicable employer securities” means, with respect to any dividend, employer securities which are held on the record date for such dividend by an employee stock ownership plan which is maintained by— the corporation paying such dividend, or any other corporation which is a member of a controlled group of corporations (within the meaning of section 409( l )(4)) which includes such corporation. The deduction under paragraph (1) shall be allowable in the taxable year of the corporation in which the dividend is paid or distributed to a participant or his beneficiary. For purposes of subparagraph (A), an applicable dividend reinvested pursuant to clause (iii)(II) of paragraph (2)(A) shall be treated as paid in the taxable year of the corporation in which such dividend is reinvested in qualifying employer securities or in which the election under clause (iii) of paragraph (2)(A) is made, whichever is later. In the case of an applicable dividend described in clause (iv) of paragraph (2)(A), the deduction under paragraph (1) shall be allowable in the taxable year of the corporation in which such dividend is used to repay the loan described in such clause. For purposes of this subsection— The Secretary may disallow the deduction under paragraph (1) for any dividend if the Secretary determines that such dividend constitutes, in substance, an avoidance or evasion of taxation. A plan shall not be treated as violating the requirements of section 401, 409, or 4975(e)(7), or as engaging in a prohibited transaction for purposes of section 4975(d)(3), merely by reason of any payment or distribution described in paragraph (2)(A). For purposes of this subsection— The term “employer securities” has the meaning given such term by section 409( l ). The term “employee stock ownership plan” has the meaning given such term by section 4975(e)(7). Such term includes a tax credit employee stock ownership plan (as defined in section 409). In accordance with section 411, an applicable dividend described in clause (iii)(II) of paragraph (2)(A) shall be subject to the requirements of section 411(a)(1).

(l) Limitation on amount of annual compensation taken into account For purposes of applying the limitations of this section, the amount of annual compensation of each employee taken into account under the plan for any year shall not exceed $200, 000. T h e S ecre t a rys ha ll a d j u s tt h e$ 200,000 amount at the same time, and by the same amount, as any adjustment under section 401(a)(17)(B). For purposes of clause (i), (ii), or (iii) of subsection (a)(1)(A), and in computing the full funding limitation, any adjustment under the preceding sentence shall not be taken into account for any year before the year for which such adjustment first takes effect.

(m) Special rules for simple retirement accounts Employer contributions to a simple retirement account shall be treated as if they are made to a plan subject to the requirements of this section. Contributions described in paragraph (1) shall be deductible in the taxable year of the employer with or within which the calendar year for which the contributions were made ends. For purposes of this subsection, contributions shall be treated as made for a taxable year if they are made on account of the taxable year and are made not later than the time prescribed by law for filing the return for the taxable year (including extensions thereof).

(n) Elective deferrals not taken into account for purposes of deduction limits Elective deferrals (as defined in section 402(g)(3)) shall not be subject to any limitation contained in paragraph (3), (7), or (9) of subsection (a) or paragraph (1)(C) of subsection (h) and such elective deferrals shall not be taken into account in applying any such limitation to any other contributions.

(o) Deduction limit for single-employer plans For purposes of subsection (a)(1)(A)— In the case of a defined benefit plan to which subsection (a)(1)(A) applies (other than a multiemployer plan), the amount determined under this subsection for any taxable year shall be equal to the greater of— the sum of the amounts determined under paragraph (2) with respect to each plan year ending with or within the taxable year, or the sum of the minimum required contributions under section 430 for such plan years. The amount determined under this paragraph for any plan year shall be equal to the excess (if any) of— the sum of— the funding target for the plan year, the target normal cost for the plan year, and the cushion amount for the plan year, over the value (determined under section 430(g)(3)) of the assets of the plan which are held by the plan as of the valuation date for the plan year. If section 430(i) does not apply to a plan for a plan year, the amount determined under subparagraph (A)(i) for the plan year shall in no event be less than the sum of— the funding target for the plan year (determined as if section 430(i) applied to the plan), plus the target normal cost for the plan year (as so determined). For purposes of paragraph (2)(A)(i)(III)— The cushion amount for any plan year is the sum of— 50 percent of the funding target for the plan year, and the amount by which the funding target for the plan year would increase if the plan were to take into account— increases in compensation which are expected to occur in succeeding plan years, or if the plan does not base benefits for service to date on compensation, increases in benefits which are expected to occur in succeeding plan years (determined on the basis of the average annual increase in benefits over the 6 immediately preceding plan years). In making the computation under subparagraph (A)(ii), the plan’s actuary shall assume that the limitations under subsection ( l ) and section 415(b) shall apply. In the case of a plan year during which a plan is covered under section 4021 of the Employee Retirement Income Security Act of 1974, the plan’s actuary may, notwithstanding subsection ( l ), take into account increases in the limitations which are expected to occur in succeeding plan years. For purposes of determining the amount under paragraph (3) for any plan year, in the case of a plan which has 100 or fewer participants for the plan year, the liability of the plan attributable to benefit increases for highly compensated employees (as defined in section 414(q)) resulting from a plan amendment which is made or becomes effective, whichever is later, within the last 2 years shall not be taken into account in determining the target liability. For purposes of determining the number of plan participants, all defined benefit plans maintained by the same employer (or any member of such employer’s controlled group (within the meaning of section 412(d)(3)) shall be treated as one plan, but only participants of such member or employer shall be taken into account. In the case of a plan which, subject to section 4041 of the Employee Retirement Income Security Act of 1974, terminates during the plan year, the amount determined under paragraph (2) shall in no event be less than the amount required to make the plan sufficient for benefit liabilities (within the meaning of section 4041(d) of such Act). Any computation under this subsection for any plan year shall use the same actuarial assumptions which are used for the plan year under section 430 (determined by not taking into account any adjustment under clause (iv) of subsection (h)(2)(C) thereof). Any term used in this subsection which is also used in section 430 shall have the same meaning given such term by section 430. Solely for purposes of this subsection, a CSEC plan shall be treated as though section 430 applied to such plan and the minimum required contribution for any plan year shall be the amount described in section 412(a)(2)(D).

“Effective for taxable years beginning after December 31, 1973 , if— an employer is engaged in a trade or business in a foreign country, such employer is required by the laws of that country to make payments, based on periods of service, to its employees or their beneficiaries after the employees’ retirement, death, or other separation from the service, and such employer establishes a trust (whether organized within or outside the United States) for the purpose of funding the payments required by such law, then, in determining for purposes of paragraph (5) of section 404(a) of the Internal Revenue Code of 1986 [formerly I.R.C. 1954] the taxable year in which any contribution to or under the plan is includible in the gross income of the nonresident alien employees of such employer, such paragraph (5) shall be treated as not requiring that separate accounts be maintained for such nonresident alien employees.”

§ 404A Deduction for certain foreign deferred compensation plans

(a) General rule Amounts paid or accrued by an employer under a qualified foreign plan— shall not be allowable as a deduction under this chapter, but if they would otherwise be deductible, shall be allowed as a deduction under this section for the taxable year for which such amounts are properly taken into account under this section.

(b) Rules for qualified funded plans For purposes of this section— Except as otherwise provided in this section, in the case of a qualified funded plan contributions are properly taken into account for the taxable year in which paid. For purposes of paragraph (1), a payment made after the close of a taxable year shall be treated as made on the last day of such year if the payment is made— on account of such year, and not later than the time prescribed by law for filing the return for such year (including extensions thereof). In the case of a qualified funded plan, the amount allowable as a deduction for the taxable year shall be subject to— in the case of— a plan under which the benefits are fixed or determinable, limitations similar to those contained in clauses (ii) and (iii) of subparagraph (A) of section 404(a)(1) (determined without regard to the last sentence of such subparagraph (A)), or any other plan, limitations similar to the limitations contained in paragraph (3) of section 404(a), and limitations similar to those contained in paragraph (7) of section 404(a). If— the aggregate of the contributions paid during the taxable year reduced by any contributions not allowable as a deduction under paragraphs (1) and (2) of subsection (g), exceeds the amount allowable as a deduction under subsection (a) (determined without regard to subsection (d)), such excess shall be treated as an amount paid in the succeeding taxable year. In the case of a qualified funded plan, a contribution shall be taken into account only if it is paid— to a trust (or the equivalent of a trust) which meets the requirements of section 401(a)(2), for a retirement annuity, or to a participant or beneficiary.

(c) Rules relating to qualified reserve plans For purposes of this section— In the case of a qualified reserve plan, the amount properly taken into account for the taxable year is the reasonable addition for such year to a reserve for the taxpayer’s liability under the plan. Unless otherwise required or permitted in regulations prescribed by the Secretary, the reserve for the taxpayer’s liability shall be determined under the unit credit method modified to reflect the requirements of paragraphs (3) and (4). All benefits paid under the plan shall be charged to the reserve. In the case of a plan which is or has been a qualified reserve plan, an amount equal to that portion of any decrease for the taxable year in the reserve which is not attributable to the payment of benefits shall be included in gross income. In the case of a qualified reserve plan, an item shall be taken into account for a taxable year only if— there is no substantial risk that the rights of the employee will be forfeited, and such item meets such additional requirements as the Secretary may by regulations prescribe as necessary or appropriate to ensure that the liability will be satisfied. There shall be amortized over a 10-year period any increase or decrease to the reserve on account of— the adoption of the plan or a plan amendment, experience gains and losses, any change in actuarial assumptions, changes in the interest rate under subsection (g)(3)(B), and such other factors as may be prescribed by regulations.

(d) Amounts taken into account must be consistent with amounts allowed under foreign law In the case of any plan, the amount allowed as a deduction under subsection (a) for any taxable year shall equal— the lesser of— the cumulative United States amount, or the cumulative foreign amount, reduced by the aggregate amount determined under this section for all prior taxable years. For purposes of paragraph (1)— The term “cumulative United States amount” means the aggregate amount determined with respect to the plan under this section for the taxable year and for all prior taxable years to which this section applies. Such determination shall be made for each taxable year without regard to the application of paragraph (1). The term “cumulative foreign amount” means the aggregate amount allowed as a deduction under the appropriate foreign tax laws for the taxable year and all prior taxable years to which this section applies. In determining the earnings and profits and accumulated profits of any foreign corporation with respect to a qualified foreign plan, except as provided in regulations, the amount determined under paragraph (1) with respect to any plan for any taxable year shall in no event exceed the amount allowed as a deduction under the appropriate foreign tax laws for such taxable year.

(e) Qualified foreign plan For purposes of this section, the term “qualified foreign plan” means any written plan of an employer for deferring the receipt of compensation but only if— such plan is for the exclusive benefit of the employer’s employees or their beneficiaries, 90 percent or more of the amounts taken into account for the taxable year under the plan are attributable to services— performed by nonresident aliens, and the compensation for which is not subject to tax under this chapter, and the employer elects (at such time and in such manner as the Secretary shall by regulations prescribe) to have this section apply to such plan.

(f) Funded and reserve plans For purposes of this section— The term “qualified funded plan” means a qualified foreign plan which is not a qualified reserve plan. The term “qualified reserve plan” means a qualified foreign plan with respect to which an election made by the taxpayer is in effect for the taxable year. An election under the preceding sentence shall be made in such manner and form as the Secretary may by regulations prescribe and, once made, may be revoked only with the consent of the Secretary.

(g) Other special rules Except as provided in section 404(a)(5), no deduction shall be allowed under this section for any item to the extent such item is attributable to services— performed by a citizen or resident of the United States who is a highly compensated employee (within the meaning of section 414(q)), or performed in the United States the compensation for which is subject to tax under this chapter. No deduction shall be allowed under this section with respect to any plan for any taxable year unless the taxpayer furnishes to the Secretary with respect to such plan (at such time as the Secretary may by regulations prescribe)— a statement from the foreign tax authorities specifying the amount of the deduction allowed in computing taxable income under foreign law for such year with respect to such plan, if the return under foreign tax law shows the deduction for plan contributions or reserves as a separate, identifiable item, a copy of the foreign tax return for the taxable year, or such other statement, return, or other evidence as the Secretary prescribes by regulation as being sufficient to establish the amount of the deduction under foreign law. If the deduction under foreign tax law is adjusted, the taxpayer shall notify the Secretary of such adjustment on or before the date prescribed by regulations, and the Secretary shall redetermine the amount of the tax for the year or years affected. In any case described in the preceding sentence, rules similar to the rules of subsection (c) of section 905 shall apply. Except as provided in subparagraph (B), principles similar to those set forth in paragraphs (3) and (6) of section 431(c) shall apply for purposes of this section. In the case of a qualified reserve plan, in lieu of taking rates of interest into account under subparagraph (A), the rate of interest for the plan shall be the rate selected by the taxpayer which is within the permissible range. Any rate selected by the taxpayer for the plan under this subparagraph shall remain in effect for such plan until the first taxable year for which such rate is no longer within the permissible range. At such time, the taxpayer shall select a new rate of interest which is within the permissible range applicable at such time. For purposes of this subparagraph, the term “permissible range” means a rate of interest which is not more than 20 percent above, and not more than 20 percent below, the average rate of interest for long-term corporate bonds in the appropriate country for the 15-year period ending on the last day before the beginning of the taxable year. Any change in the method (but not the actuarial assumptions) used to determine the amount allowed as a deduction under subsection (a) shall be treated as a change in accounting method under section 446(e). For purposes of section 481, any election under this section shall be treated as a change in the taxpayer’s method of accounting. In applying section 481 with respect to any such election, the period for taking into account any increase or decrease in accumulated profits, earnings and profits or taxable income resulting from the application of section 481(a)(2) shall be the year for which the election is made and the fourteen succeeding years.

(h) Regulations The Secretary shall prescribe such regulations as may be necessary to carry out the purposes of this section (including regulations providing for the coordination of the provisions of this section with section 404 in the case of a plan which has been subject to both of such sections).

[§ 405 Repealed. Pub. L. 98–369, div. A, title IV, § 491(a), July 18, 1984, 98 Stat. 848]

“Notwithstanding— subparagraph (D) of section 405(b)(1) of the Internal Revenue Code of 1954 (as in effect before its repeal by this section) [see above], and the terms of any bond described in subsection (b) of such section 405, such a bond may be redeemed at any time after the date of the enactment of this Act [ July 18, 1984 ] in the same manner as if the individual redeeming the bond had attained age 59½.”

§ 406 Employees of foreign affiliates covered by section 3121(l) agreements

(a) Treatment as employees of American employer For purposes of applying this part with respect to a pension, profit-sharing, or stock bonus plan described in section 401(a) or an annuity plan described in section 403(a), of an American employer (as defined in section 3121(h)), an individual who is a citizen or resident of the United States and who is an employee of a foreign affiliate (as defined in section 3121( l )(6)) of such American employer shall be treated as an employee of such American employer, if— such American employer has entered into an agreement under section 3121( l ) which applies to the foreign affiliate of which such individual is an employee; the plan of such American employer expressly provides for contributions or benefits for individuals who are citizens or residents of the United States and who are employees of its foreign affiliates to which an agreement entered into by such American employer under section 3121( l ) applies; and contributions under a funded plan of deferred compensation (whether or not a plan described in section 401(a) or 403(a)) are not provided by any other person with respect to the remuneration paid to such individual by the foreign affiliate.

(b) Special rules for application of section 401(a) For purposes of applying section 401(a)(4) and section 410(b) with respect to an individual who is treated as an employee of an American employer under subsection (a)— if such individual is a highly compensated employee (within the meaning of section 414(q)), he shall be treated as having such capacity with respect to such American employer; and the determination of whether such individual is a highly compensated employee (as so defined) shall be made by treating such individual’s total compensation (determined with the application of paragraph (2) of this subsection) as compensation paid by such American employer and by determining such individual’s status with regard to such American employer. For purposes of applying paragraph (5) of section 401(a) with respect to an individual who is treated as an employee of an American employer under subsection (a)— the total compensation of such individual shall be the remuneration paid to such individual by the foreign affiliate which would constitute his total compensation if his services had been performed for such American employer, and the basic or regular rate of compensation of such individual shall be determined under regulations prescribed by the Secretary; and such individual shall be treated as having paid the amount paid by such American employer which is equivalent to the tax imposed by section 3101.

([(c) Repealed. Pub. L. 104–188, title I, § 1401(b)(7), Aug. 20, 1996, 110 Stat. 1789]

(d) Deductibility of contributions For purposes of applying section 404 with respect to contributions made to or under a pension, profit-sharing, stock bonus, or annuity plan by an American employer, or by another taxpayer which is entitled to deduct its contributions under section 404(a)(3)(B), on behalf of an individual who is treated as an employee of such American employer under subsection (a)— except as provided in paragraph (2), no deduction shall be allowed to such American employer or to any other taxpayer which is entitled to deduct its contributions under such sections, there shall be allowed as a deduction to the foreign affiliate of which such individual is an employee an amount equal to the amount which (but for paragraph (1)) would be deductible under section 404 by the American employer if he were an employee of the American employer, and any reference to compensation shall be considered to be a reference to the total compensation of such individual (determined with the application of subsection (b)(2)). Any amount deductible by a foreign affiliate under this subsection shall be deductible for its taxable year with or within which the taxable year of such American employer ends.

(e) Treatment as employee under related provisions An individual who is treated as an employee of an American employer under subsection (a) shall also be treated as an employee of such American employer, with respect to the plan described in subsection (a)(2), for purposes of applying the following provisions of this title: Section 72(f) (relating to special rules for computing employees’ contributions). Section 2039 (relating to annuities).

§ 407 Certain employees of domestic subsidiaries engaged in business outside the United States

(a) Treatment as employees of domestic parent corporation For purposes of applying this part with respect to a pension, profit-sharing, or stock bonus plan described in section 401(a) or an annuity plan described in section 403(a), of a domestic parent corporation, an individual who is a citizen or resident of the United States and who is an employee of a domestic subsidiary (within the meaning of paragraph (2)) of such domestic parent corporation shall be treated as an employee of such domestic parent corporation, if— the plan of such domestic parent corporation expressly provides for contributions or benefits for individuals who are citizens or residents of the United States and who are employees of its domestic subsidiaries; and contributions under a funded plan of deferred compensation (whether or not a plan described in section 401(a) or 403(a)) are not provided by any other person with respect to the remuneration paid to such individual by the domestic subsidiary. For purposes of this section— A corporation shall be treated as a domestic subsidiary for any taxable year only if— such corporation is a domestic corporation 80 percent or more of the outstanding voting stock of which is owned by another domestic corporation; 95 percent or more of its gross income for the three-year period immediately preceding the close of its taxable year which ends on or before the close of the taxable year of such other domestic corporation (or for such part of such period during which the corporation was in existence), was derived from sources without the United States; and 90 percent or more of its gross income for such period (or such part) was derived from the active conduct of a trade or business. If for the period (or part thereof) referred to in clauses (ii) and (iii) such corporation has no gross income, the provisions of clauses (ii) and (iii) shall be treated as satisfied if it is reasonable to anticipate that, with respect to the first taxable year thereafter for which such corporation has gross income, the provisions of such clauses will be satisfied. The domestic parent corporation of any domestic subsidiary is the domestic corporation which owns 80 percent or more of the outstanding voting stock of such domestic subsidiary.

(b) Special rules for application of section 401(a) For purposes of applying section 401(a)(4) and section 410(b) with respect to an individual who is treated as an employee of a domestic parent corporation under subsection (a)— if such individual is a highly compensated employee (within the meaning of section 414(q)), he shall be treated as having such capacity with respect to such domestic parent corporation; and the determination of whether such individual is a highly compensated employee (as so defined) shall be made by treating such individual’s total compensation (determined with the application of paragraph (2) of this subsection) as compensation paid by such domestic parent corporation and by determining such individual’s status with regard to such domestic parent corporation. For purposes of applying paragraph (5) of section 401(a) with respect to an individual who is treated as an employee of a domestic parent corporation under subsection (a), the total compensation of such individual shall be the remuneration paid to such individual by the domestic subsidiary which would constitute his total compensation if his services had been performed for such domestic parent corporation, and the basic or regular rate of compensation of such individual shall be determined under regulations prescribed by the Secretary.

([(c) Repealed. Pub. L. 104–188, title I, § 1401(b)(8), Aug. 20, 1996, 110 Stat. 1789]

(d) Deductibility of contributions For purposes of applying section 404 with respect to contributions made to or under a pension, profit-sharing, stock bonus, or annuity plan by a domestic parent corporation, or by another corporation which is entitled to deduct its contributions under section 404(a)(3)(B), on behalf of an individual who is treated as an employee of such domestic corporation under subsection (a)— except as provided in paragraph (2), no deduction shall be allowed to such domestic parent corporation or to any other corporation which is entitled to deduct its contributions under such sections, there shall be allowed as a deduction to the domestic subsidiary of which such individual is an employee an amount equal to the amount which (but for paragraph (1)) would be deductible under section 404 by the domestic parent corporation if he were an employee of the domestic parent corporation, and any reference to compensation shall be considered to be a reference to the total compensation of such individual (determined with the application of subsection (b)(2)). Any amount deductible by a domestic subsidiary under this subsection shall be deductible for its taxable year with or within which the taxable year of such domestic parent corporation ends.

(e) Treatment as employee under related provisions An individual who is treated as an employee of a domestic parent corporation under subsection (a) shall also be treated as an employee of such domestic parent corporation, with respect to the plan described in subsection (a)(1)(A), for purposes of applying the following provisions of this title: Section 72(f) (relating to special rules for computing employees’ contributions). Section 2039 (relating to annuities).

§ 408 Individual retirement accounts

(a) Individual retirement account For purposes of this section, the term “individual retirement account” means a trust created or organized in the United States for the exclusive benefit of an individual or his beneficiaries, but only if the written governing instrument creating the trust meets the following requirements: Except in the case of a rollover contribution described in subsection (d)(3) or in section 402(c), 403(a)(4), 403(b)(8), or 457(e)(16), no contribution will be accepted unless it is in cash, and contributions will not be accepted for the taxable year on behalf of any individual in excess of the amount in effect for such taxable year under section 219(b)(1)(A). The trustee is a bank (as defined in subsection (n)) or such other person who demonstrates to the satisfaction of the Secretary that the manner in which such other person will administer the trust will be consistent with the requirements of this section. No part of the trust funds will be invested in life insurance contracts. The interest of an individual in the balance in his account is nonforfeitable. The assets of the trust will not be commingled with other property except in a common trust fund or common investment fund. Under regulations prescribed by the Secretary, rules similar to the rules of section 401(a)(9) and the incidental death benefit requirements of section 401(a) shall apply to the distribution of the entire interest of an individual for whose benefit the trust is maintained.

(b) Individual retirement annuity For purposes of this section, the term “individual retirement annuity” means an annuity contract, or an endowment contract (as determined under regulations prescribed by the Secretary), issued by an insurance company which meets the following requirements: The contract is not transferable by the owner. Under the contract— the premiums are not fixed, the annual premium on behalf of any individual will not exceed the dollar amount in effect under section 219(b)(1)(A), and any refund of premiums will be applied before the close of the calendar year following the year of the refund toward the payment of future premiums or the purchase of additional benefits. Under regulations prescribed by the Secretary, rules similar to the rules of section 401(a)(9) and the incidental death benefit requirements of section 401(a) shall apply to the distribution of the entire interest of the owner. The entire interest of the owner is nonforfeitable. Such term does not include such an annuity contract for any taxable year of the owner in which it is disqualified on the application of subsection (e) or for any subsequent taxable year. For purposes of this subsection, no contract shall be treated as an endowment contract if it matures later than the taxable year in which the individual in whose name such contract is purchased attains the applicable age (determined under section 401(a)(9)(C)(v) for the calendar year in which such taxable year begins); if it is not for the exclusive benefit of the individual in whose name it is purchased or his beneficiaries; or if the aggregate annual premiums under all such contracts purchased in the name of such individual for any taxable year exceed the dollar amount in effect under section 219(b)(1)(A).

(c) Accounts established by employers and certain associations of employees A trust created or organized in the United States by an employer for the exclusive benefit of his employees or their beneficiaries, or by an association of employees (which may include employees within the meaning of section 401(c)(1)) for the exclusive benefit of its members or their beneficiaries, shall be treated as an individual retirement account (described in subsection (a)), but only if the written governing instrument creating the trust meets the following requirements: The trust satisfies the requirements of paragraphs (1) through (6) of subsection (a). There is a separate accounting for the interest of each employee or member (or spouse of an employee or member). There is a separate accounting for any interest of an employee or member (or spouse of an employee or member) in a Roth IRA. The assets of the trust may be held in a common fund for the account of all individuals who have an interest in the trust.

(d) Tax treatment of distributions Except as otherwise provided in this subsection, any amount paid or distributed out of an individual retirement plan shall be included in gross income by the payee or distributee, as the case may be, in the manner provided under section 72. For purposes of applying section 72 to any amount described in paragraph (1)— all individual retirement plans shall be treated as 1 contract, all distributions during any taxable year shall be treated as 1 distribution, and the value of the contract, income on the contract, and investment in the contract shall be computed as of the close of the calendar year in which the taxable year begins. For purposes of subparagraph (C), the value of the contract shall be increased by the amount of any distributions during the calendar year. An amount is described in this paragraph as a rollover contribution if it meets the requirements of subparagraphs (A) and (B). Paragraph (1) does not apply to any amount paid or distributed out of an individual retirement account or individual retirement annuity to the individual for whose benefit the account or annuity is maintained if— the entire amount received (including money and any other property) is paid into an individual retirement account or individual retirement annuity (other than an endowment contract) for the benefit of such individual not later than the 60th day after the day on which he receives the payment or distribution; or the entire amount received (including money and any other property) is paid into an eligible retirement plan for the benefit of such individual not later than the 60th day after the date on which the payment or distribution is received, except that the maximum amount which may be paid into such plan may not exceed the portion of the amount received which is includible in gross income (determined without regard to this paragraph). For purposes of clause (ii), the term “eligible retirement plan” means an eligible retirement plan described in clause (iii), (iv), (v), or (vi) of section 402(c)(8)(B). This paragraph does not apply to any amount described in subparagraph (A)(i) received by an individual from an individual retirement account or individual retirement annuity if at any time during the 1-year period ending on the day of such receipt such individual received any other amount described in that subparagraph from an individual retirement account or an individual retirement annuity which was not includible in his gross income because of the application of this paragraph. In the case of an inherited individual retirement account or individual retirement annuity— this paragraph shall not apply to any amount received by an individual from such an account or annuity (and no amount transferred from such account or annuity to another individual retirement account or annuity shall be excluded from gross income by reason of such transfer), and such inherited account or annuity shall not be treated as an individual retirement account or annuity for purposes of determining whether any other amount is a rollover contribution. An individual retirement account or individual retirement annuity shall be treated as inherited if— the individual for whose benefit the account or annuity is maintained acquired such account by reason of the death of another individual, and such individual was not the surviving spouse of such other individual. If any amount paid or distributed out of an individual retirement account or individual retirement annuity would meet the requirements of subparagraph (A) but for the fact that the entire amount was not paid into an eligible plan as required by clause (i) or (ii) of subparagraph (A), such amount shall be treated as meeting the requirements of subparagraph (A) to the extent it is paid into an eligible plan referred to in such clause not later than the 60th day referred to in such clause. For purposes of clause (i), the term “eligible plan” means any account, annuity, contract, or plan referred to in subparagraph (A). This paragraph shall not apply to any amount to the extent such amount is required to be distributed under subsection (a)(6) or (b)(3). For purposes of this paragraph, rules similar to the rules of section 402(c)(7) (relating to frozen deposits) shall apply. In the case of any payment or distribution out of a simple retirement account (as defined in subsection (p)) to which section 72(t)(6)(A) applies, this paragraph shall not apply unless such payment or distribution is paid into another simple retirement account. If— a distribution is made from an individual retirement plan, and a rollover contribution is made to an eligible retirement plan described in section 402(c)(8)(B)(iii), (iv), (v), or (vi) with respect to all or part of such distribution, then, notwithstanding paragraph (2), the rules of clause (ii) shall apply for purposes of applying section 72. In the case of a distribution described in clause (i)— section 72 shall be applied separately to such distribution, notwithstanding the pro rata allocation of income on, and investment in, the contract to distributions under section 72, the portion of such distribution rolled over to an eligible retirement plan described in clause (i) shall be treated as from income on the contract (to the extent of the aggregate income on the contract from all individual retirement plans of the distributee), and appropriate adjustments shall be made in applying section 72 to other distributions in such taxable year and subsequent taxable years. The Secretary may waive the 60-day requirement under subparagraphs (A) and (D) where the failure to waive such requirement would be against equity or good conscience, including casualty, disaster, or other events beyond the reasonable control of the individual subject to such requirement. Paragraph (1) does not apply to the distribution of any contribution paid during a taxable year to an individual retirement account or for an individual retirement annuity if— such distribution is received on or before the day prescribed by law (including extensions of time) for filing such individual’s return for such taxable year, no deduction is allowed under section 219 with respect to such contribution, and such distribution is accompanied by the amount of net income attributable to such contribution. In the case of such a distribution, for purposes of section 61, any net income described in subparagraph (C) shall be deemed to have been earned and receivable in the taxable year in which such contribution is made. In the case of any individual, if the aggregate contributions (other than rollover contributions) paid for any taxable year to an individual retirement account or for an individual retirement annuity do not exceed the dollar amount in effect under section 219(b)(1)(A), paragraph (1) shall not apply to the distribution of any such contribution to the extent that such contribution exceeds the amount allowable as a deduction under section 219 for the taxable year for which the contribution was paid— if such distribution is received after the date described in paragraph (4), but only to the extent that no deduction has been allowed under section 219 with respect to such excess contribution. If employer contributions on behalf of the individual are paid for the taxable year to a simplified employee pension, the dollar limitation of the preceding sentence shall be increased by the lesser of the amount of such contributions or the dollar limitation in effect under section 415(c)(1)(A) for such taxable year. If— the taxpayer reasonably relies on information supplied pursuant to subtitle F for determining the amount of a rollover contribution, but the information was erroneous, subparagraph (A) shall be applied by increasing the dollar limit set forth therein by that portion of the excess contribution which was attributable to such information. For purposes of this paragraph, the amount allowable as a deduction under section 219 shall be computed without regard to section 219(g). The transfer of an individual’s interest in an individual retirement account or an individual retirement annuity to his spouse or former spouse under a divorce or separation instrument described in clause (i) of section 121(d)(3)(C) is not to be considered a taxable transfer made by such individual notwithstanding any other provision of this subtitle, and such interest at the time of the transfer is to be treated as an individual retirement account of such spouse, and not of such individual. Thereafter such account or annuity for purposes of this subtitle is to be treated as maintained for the benefit of such spouse. Notwithstanding any other provision of this subsection or section 72(t), paragraph (1) and section 72(t)(1) shall apply to the transfer or distribution from a simplified employee pension of any contribution under a salary reduction arrangement described in subsection (k)(6) (or any income allocable thereto) before a determination as to whether the requirements of subsection (k)(6)(A)(iii) are met with respect to such contribution. For purposes of paragraphs (4) and (5) and section 4973, any amount excludable or excluded from gross income under section 402(h) or 402(k) shall be treated as an amount allowable or allowed as a deduction under section 219. So much of the aggregate amount of qualified charitable distributions with respect to a taxpayer made during any taxable year which does not exceed 50,000, and such distribution meets the requirements of clauses (iii) and (iv). For purposes of this subparagraph, the term “split-interest entity” means— a charitable remainder annuity trust (as defined in section 664(d)(1)), but only if such trust is funded exclusively by qualified charitable distributions, a charitable remainder unitrust (as defined in section 664(d)(2)), but only if such unitrust is funded exclusively by qualified charitable distributions, or a charitable gift annuity (as defined in section 501(m)(5)), but only if such annuity is funded exclusively by qualified charitable distributions and commences fixed payments of 5 percent or greater not later than 1 year from the date of funding. A distribution meets the requirements of this clause only if— in the case of a distribution to a charitable remainder annuity trust or a charitable remainder unitrust, a deduction for the entire value of the remainder interest in the distribution for the benefit of a specified charitable organization would be allowable under section 170 (determined without regard to subsection (b) thereof and this paragraph), and in the case of a charitable gift annuity, a deduction in an amount equal to the amount of the distribution reduced by the value of the annuity described in section 501(m)(5)(B) would be allowable under section 170 (determined without regard to subsection (b) thereof and this paragraph). A distribution meets the requirements of this clause only if— no person holds an income interest in the split-interest entity other than the individual for whose benefit such account is maintained, the spouse of such individual, or both, and the income interest in the split-interest entity is nonassignable. Notwithstanding section 664(b), distributions made from a trust described in subclause (I) or (II) of clause (ii) shall be treated as ordinary income in the hands of the beneficiary to whom the annuity described in section 664(d)(1)(A) or the payment described in section 664(d)(2)(A) is paid. Qualified charitable distributions made to fund a charitable gift annuity shall not be treated as an investment in the contract for purposes of section 72(c). In the case of any taxable year beginning after 2023, each of the dollar amounts in subparagraphs (A) and (F) shall be increased by an amount equal to— such dollar amount, multiplied by the cost-of-living adjustment determined under section 1(f)(3) for the calendar year in which the taxable year begins, determined by substituting “calendar year 2022” for “calendar year 2016” in subparagraph (A)(ii) thereof. If any dollar amount increased under clause (i) is not a multiple of $1, 000, s u c h d o ll a r am o u n t s ha ll b ero u n d e d t o t h e n e a res t m u lt i pl eo f$ 1,000. In the case of an individual who is an eligible individual (as defined in section 223(c)) and who elects the application of this paragraph for a taxable year, gross income of the individual for the taxable year does not include a qualified HSA funding distribution to the extent such distribution is otherwise includible in gross income. For purposes of this paragraph, the term “qualified HSA funding distribution” means a distribution from an individual retirement plan (other than a plan described in subsection (k) or (p)) of the employee to the extent that such distribution is contributed to the health savings account of the individual in a direct trustee-to-trustee transfer. The amount excluded from gross income by subparagraph (A) shall not exceed the excess of— the annual limitation under section 223(b) computed on the basis of the type of coverage under the high deductible health plan covering the individual at the time of the qualified HSA funding distribution, over in the case of a distribution described in clause (ii)(II), the amount of the earlier qualified HSA funding distribution. Except as provided in subclause (II), an individual may make an election under subparagraph (A) only for one qualified HSA funding distribution during the lifetime of the individual. Such an election, once made, shall be irrevocable. If a qualified HSA funding distribution is made during a month in a taxable year during which an individual has self-only coverage under a high deductible health plan as of the first day of the month, the individual may elect to make an additional qualified HSA funding distribution during a subsequent month in such taxable year during which the individual has family coverage under a high deductible health plan as of the first day of the subsequent month. If, at any time during the testing period, the individual is not an eligible individual, then the aggregate amount of all contributions to the health savings account of the individual made under subparagraph (A)— shall be includible in the gross income of the individual for the taxable year in which occurs the first month in the testing period for which such individual is not an eligible individual, and the tax imposed by this chapter for any taxable year on the individual shall be increased by 10 percent of the amount which is so includible. Subclauses (I) and (II) of clause (i) shall not apply if the individual ceased to be an eligible individual by reason of the death of the individual or the individual becoming disabled (within the meaning of section 72(m)(7)). The term “testing period” means the period beginning with the month in which the qualified HSA funding distribution is contributed to a health savings account and ending on the last day of the 12th month following such month. Notwithstanding section 72, in determining the extent to which an amount is treated as otherwise includible in gross income for purposes of subparagraph (A), the aggregate amount distributed from an individual retirement plan shall be treated as includible in gross income to the extent that such amount does not exceed the aggregate amount which would have been so includible if all amounts from all individual retirement plans were distributed. Proper adjustments shall be made in applying section 72 to other distributions in such taxable year and subsequent taxable years.

(e) Tax treatment of accounts and annuities Any individual retirement account is exempt from taxation under this subtitle unless such account has ceased to be an individual retirement account by reason of paragraph (2) or (3). Notwithstanding the preceding sentence, any such account is subject to the taxes imposed by section 511 (relating to imposition of tax on unrelated business income of charitable, etc. organizations). If, during any taxable year of the individual for whose benefit any individual retirement account is established, that individual or his beneficiary engages in any transaction prohibited by section 4975 with respect to such account, such account ceases to be an individual retirement account as of the first day of such taxable year. For purposes of this paragraph— the individual for whose benefit any account was established is treated as the creator of such account, the separate account for any individual within an individual retirement account maintained by an employer or association of employees is treated as a separate individual retirement account, and each individual retirement plan of the individual shall be treated as a separate contract. In any case in which any account ceases to be an individual retirement account by reason of subparagraph (A) as of the first day of any taxable year, paragraph (1) of subsection (d) applies as if there were a distribution on such first day in an amount equal to the fair market value (on such first day) of all assets in the account (on such first day). If during any taxable year the owner of an individual retirement annuity borrows any money under or by use of such contract, the contract ceases to be an individual retirement annuity as of the first day of such taxable year. Such owner shall include in gross income for such year an amount equal to the fair market value of such contract as of such first day. If, during any taxable year of the individual for whose benefit an individual retirement account is established, that individual uses the account or any portion thereof as security for a loan, the portion so used is treated as distributed to that individual. If the assets of an individual retirement account or any part of such assets are used to purchase an endowment contract for the benefit of the individual for whose benefit the account is established— to the extent that the amount of the assets involved in the purchase are not attributable to the purchase of life insurance, the purchase is treated as a rollover contribution described in subsection (d)(3), and to the extent that the amount of the assets involved in the purchase are attributable to the purchase of life, health, accident, or other insurance, such amounts are treated as distributed to that individual (but the provisions of subsection (f) do not apply). Any common trust fund or common investment fund of individual retirement account assets which is exempt from taxation under this subtitle does not cease to be exempt on account of the participation or inclusion of assets of a trust exempt from taxation under section 501(a) which is described in section 401(a).

([(f) Repealed. Pub. L. 99–514, title XI, § 1123(d)(2), Oct. 22, 1986, 100 Stat. 2475]

(g) Community property laws This section shall be applied without regard to any community property laws.

(h) Custodial accounts For purposes of this section, a custodial account shall be treated as a trust if the assets of such account are held by a bank (as defined in subsection (n)) or another person who demonstrates, to the satisfaction of the Secretary, that the manner in which he will administer the account will be consistent with the requirements of this section, and if the custodial account would, except for the fact that it is not a trust, constitute an individual retirement account described in subsection (a). For purposes of this title, in the case of a custodial account treated as a trust by reason of the preceding sentence, the custodian of such account shall be treated as the trustee thereof.

(i) Reports The trustee of an individual retirement account and the issuer of an endowment contract described in subsection (b) or an individual retirement annuity shall make such reports regarding such account, contract, or annuity to the Secretary and to the individuals for whom the account, contract, or annuity is, or is to be, maintained with respect to contributions (and the years to which they relate), distributions aggregating $10 or more in any calendar year, and such other matters as the Secretary may require. The reports required by this subsection— shall be filed at such time and in such manner as the Secretary prescribes, and shall be furnished to individuals— not later than January 31 of the calendar year following the calendar year to which such reports relate, and in such manner as the Secretary prescribes. In the case of a simple retirement account under subsection (p), only one report under this subsection shall be required to be submitted each calendar year to the Secretary (at the time provided under paragraph (2)) but, in addition to the report under this subsection, there shall be furnished, within 31 days after each calendar year, to the individual on whose behalf the account is maintained a statement with respect to the account balance as of the close of, and the account activity during, such calendar year.

(j) Increase in maximum limitations for simplified employee pensions In the case of any simplified employee pension, subsections (a)(1) and (b)(2) of this section shall be applied by increasing the amounts contained therein by the amount of the limitation in effect under section 415(c)(1)(A).

(k) Simplified employee pension defined For purposes of this title, the term “simplified employee pension” means an individual retirement account or individual retirement annuity— with respect to which the requirements of paragraphs (2), (3), (4), and (5) of this subsection are met, and if such account or annuity is part of a top-heavy plan (as defined in section 416), with respect to which the requirements of section 416(c)(2) are met. This paragraph is satisfied with respect to a simplified employee pension for a year only if for such year the employer contributes to the simplified employee pension of each employee who— has attained age 21, has performed service for the employer during at least 3 of the immediately preceding 5 years, and received at least $450 in co m p e n s a t i o n (w i t hin t h e m e anin g o f sec t i o n 414 (q) (4)) f ro m t h ee m pl oyer f or t h eye a r . F or p u r p oseso f t hi s p a r a g r a p h, t h eres ha ll b ee x c l u d e df ro m co n s i d er a t i o n e m pl oyees d escr ib e d in s u b p a r a g r a p h (A) or (C) o f sec t i o n 410 (b) (3) . F or p u r p oseso f an y a rr an g e m e n t d escr ib e d in s u b sec t i o n (k) (6), an ye m pl oyee w h o i se l i g ib l e t o ha v ee m pl oyerco n t r ib u t i o n s ma d eo n t h ee m pl oyee ’ s b e ha l f u n d ers u c ha rr an g e m e n t s ha ll b e t re a t e d a s i f s u c ha co n t r ib u t i o n w a s ma d e . T h ere q u i re m e n t so f t hi s p a r a g r a p ha re m e tw i t h res p ec tt o a s im pl i f i e d e m pl oyee p e n s i o n f or a ye a r i ff ors u c h ye a r t h eco n t r ib u t i o n s ma d e b y t h ee m pl oyer t os im pl i f i e d e m pl oyee p e n s i o n s f or hi se m pl oyees d o n o t d i scr imina t e in f a v oro f an y hi g h l yco m p e n s a t e d e m pl oyee (w i t hin t h e m e anin g o f sec t i o n 414 (q)) . F or p u r p oseso f s u b p a r a g r a p h (A), t h eres ha ll b ee x c l u d e df ro m co n s i d er a t i o n e m pl oyees d escr ib e d in s u b p a r a g r a p h (A) or (C) o f sec t i o n 410 (b) (3) . F or p u r p oseso f s u b p a r a g r a p h (A), an d e x ce pt a s p ro v i d e d in s u b p a r a g r a p h (D), e m pl oyerco n t r ib u t i o n s t os im pl i f i e d e m pl oyee p e n s i o n s (o t h er t han co n t r ib u t i o n s u n d er ana rr an g e m e n t d escr ib e d in p a r a g r a p h (6)) s ha ll b eco n s i d ere dd i scr imina t ory u n l essco n t r ib u t i o n s t h ere t o b e a r a u ni f or m re l a t i o n s hi pt o t h eco m p e n s a t i o n (n o t in e x cesso f t h e f i rs t$ 200,000) of each employee maintaining a simplified employee pension. For purposes of subparagraph (C), the rules of section 401( l )(2) shall apply to contributions to simplified employee pensions (other than contributions under an arrangement described in paragraph (6)). A simplified employee pension meets the requirements of this paragraph only if— employer contributions thereto are not conditioned on the retention in such pension of any portion of the amount contributed, and there is no prohibition imposed by the employer on withdrawals from the simplified employee pension. The requirements of this paragraph are met with respect to a simplified employee pension only if employer contributions to such pension are determined under a definite written allocation formula which specifies— the requirements which an employee must satisfy to share in an allocation, and the manner in which the amount allocated is computed. A simplified employee pension shall not fail to meet the requirements of this subsection for a year merely because, under the terms of the pension, an employee may elect to have the employer make payments— as elective employer contributions to the simplified employee pension on behalf of the employee, or to the employee directly in cash. Clause (i) shall not apply to a simplified employee pension unless an election described in clause (i)(I) is made or is in effect with respect to not less than 50 percent of the employees of the employer eligible to participate. Clause (i) shall not apply to a simplified employee pension for any year unless the deferral percentage for such year of each highly compensated employee eligible to participate is not more than the product of— the average of the deferral percentages for such year of all employees (other than highly compensated employees) eligible to participate, multiplied by 1.25. Clause (i) shall not apply to a simplified employee pension unless the requirements of section 401(a)(30) are met. This paragraph shall not apply with respect to any year in the case of a simplified employee pension maintained by an employer with more than 25 employees who were eligible to participate (or would have been required to be eligible to participate if a pension was maintained) at any time during the preceding year. Rules similar to the rules of section 401(k)(8) shall apply to any excess contribution under this paragraph. Any excess contribution under a simplified employee pension shall be treated as an excess contribution for purposes of section 4979. For purposes of clause (i), the term “excess contribution” means, with respect to a highly compensated employee, the excess of elective employer contributions under this paragraph over the maximum amount of such contributions allowable under subparagraph (A)(iii). For purposes of this paragraph, the deferral percentage for an employee for a year shall be the ratio of— the amount of elective employer contributions actually paid over to the simplified employee pension on behalf of the employee for the year, to the employee’s compensation (not in excess of the first 450 amount in paragraph (2)(C) at the same time and in the same manner as under section 415(d) and shall adjust the $200, 000 am o u n t in p a r a g r a p h s (3) (C) an d (6) (D) (ii) a tt h es am e t im e, an d b y t h es am e am o u n t, a s an y a d j u s t m e n t u n d ersec t i o n 401 (a) (17) (B); e x ce ptt ha t an y in cre a se in t h e$ 450 amount which is not a multiple of $50 s ha ll b ero u n d e d t o t h e n e x tl o w es t m u lt i pl eo f$ 50. For excise tax on certain excess contributions, see section 4979.

(l) Simplified employer reports An employer who makes a contribution on behalf of an employee to a simplified employee pension shall provide such simplified reports with respect to such contributions as the Secretary may require by regulations. The reports required by this subsection shall be filed at such time and in such manner, and information with respect to such contributions shall be furnished to the employee at such time and in such manner, as may be required by regulations. Except as provided in this paragraph, no report shall be required under this section by an employer maintaining a qualified salary reduction arrangement under subsection (p). The trustee of any simple retirement account established pursuant to a qualified salary reduction arrangement under subsection (p) and the issuer of an annuity established under such an arrangement shall provide to the employer maintaining the arrangement, each year a description containing the following information: The name and address of the employer and the trustee or issuer. The requirements for eligibility for participation. The benefits provided with respect to the arrangement. The time and method of making elections with respect to the arrangement. The procedures for, and effects of, withdrawals (including rollovers) from the arrangement. The employer shall notify each employee immediately before the period for which an election described in subsection (p)(5)(C) may be made of the employee’s opportunity to make such election. Such notice shall include a copy of the description described in subparagraph (B).

(m) Investment in collectibles treated as distributions The acquisition by an individual retirement account or by an individually-directed account under a plan described in section 401(a) of any collectible shall be treated (for purposes of this section and section 402) as a distribution from such account in an amount equal to the cost to such account of such collectible. For purposes of this subsection, the term “collectible” means— any work of art, any rug or antique, any metal or gem, any stamp or coin, any alcoholic beverage, or any other tangible personal property specified by the Secretary for purposes of this subsection. For purposes of this subsection, the term “collectible” shall not include— any coin which is— a gold coin described in paragraph (7), (8), (9), or (10) of section 5112(a) of title 31 , United States Code, a silver coin described in section 5112(e) of title 31 , United States Code, a platinum coin described in section 5112(k) of title 31 , United States Code, or a coin issued under the laws of any State, or any gold, silver, platinum, or palladium bullion of a fineness equal to or exceeding the minimum fineness that a contract market (as described in section 5 of the Commodity Exchange Act, 7 U.S.C. 7 ) requires for metals which may be delivered in satisfaction of a regulated futures contract, if such bullion is in the physical possession of a trustee described under subsection (a) of this section. 1

(n) Bank For purposes of subsection (a)(2), the term “bank” means— any bank (as defined in section 581), an insured credit union (within the meaning of paragraph (6) or (7) of section 101 of the Federal Credit Union Act), and a corporation which, under the laws of the State of its incorporation, is subject to supervision and examination by the Commissioner of Banking or other officer of such State in charge of the administration of the banking laws of such State.

(o) Definitions and rules relating to nondeductible contributions to individual retirement plans Subject to the provisions of this subsection, designated nondeductible contributions may be made on behalf of an individual to an individual retirement plan. The amount of the designated nondeductible contributions made on behalf of any individual for any taxable year shall not exceed the nondeductible limit for such taxable year. For purposes of this paragraph— The term “nondeductible limit” means the excess of— the amount allowable as a deduction under section 219 (determined without regard to section 219(g)), over the amount allowable as a deduction under section 219 (determined with regard to section 219(g)). If a taxpayer elects not to deduct an amount which (without regard to this clause) is allowable as a deduction under section 219 for any taxable year, the nondeductible limit for such taxable year shall be increased by such amount. For purposes of this paragraph, the term “designated nondeductible contribution” means any contribution to an individual retirement plan for the taxable year which is designated (in such manner as the Secretary may prescribe) as a contribution for which a deduction is not allowable under section 219. Any designation under clause (i) shall be made on the return of tax imposed by chapter 1 for the taxable year. In determining for which taxable year a designated nondeductible contribution is made, the rule of section 219(f)(3) shall apply. Any individual who— makes a designated nondeductible contribution to any individual retirement plan for any taxable year, or receives any amount from any individual retirement plan for any taxable year, shall include on his return of the tax imposed by chapter 1 for such taxable year and any succeeding taxable year (or on such other form as the Secretary may prescribe for any such taxable year) information described in subparagraph (B). The following information is described in this subparagraph: The amount of designated nondeductible contributions for the taxable year. The amount of distributions from individual retirement plans for the taxable year. The excess (if any) of— the aggregate amount of designated nondeductible contributions for all preceding taxable years, over the aggregate amount of distributions from individual retirement plans which was excludable from gross income for such taxable years. The aggregate balance of all individual retirement plans of the individual as of the close of the calendar year in which the taxable year begins. Such other information as the Secretary may prescribe. For penalty where individual reports designated nondeductible contributions not made, see section 6693(b). In the case of an individual who for a taxable year excludes from gross income under section 131 a qualified foster care payment which is a difficulty of care payment, if— the deductible amount in effect for the taxable year under section 219(b), exceeds the amount of compensation includible in the individual’s gross income for the taxable year, the individual may elect to increase the nondeductible limit under paragraph (2) for the taxable year by an amount equal to the lesser of such excess or the amount so excluded.

(p) Simple retirement accounts For purposes of this title, the term “simple retirement account” means an individual retirement plan (as defined in section 7701(a)(37))— with respect to which the requirements of paragraphs (3), (4), and (5) are met; and except in the case of a rollover contribution described in subsection (d)(3)(G) or a rollover contribution otherwise described in subsection (d)(3) or in section 402(c), 403(a)(4), 403(b)(8), or 457(e)(16), which is made after the 2-year period described in section 72(t)(6), with respect to which the only contributions allowed are contributions under a qualified salary reduction arrangement. For purposes of this subsection, the term “qualified salary reduction arrangement” means a written arrangement of an eligible employer under which— an employee eligible to participate in the arrangement may elect to have the employer make payments— as elective employer contributions to a simple retirement account on behalf of the employee, or to the employee directly in cash, the amount which an employee may elect under clause (i) for any year is required to be expressed as a percentage of compensation and may not exceed a total of the applicable dollar amount for any year, the employer is required to make a matching contribution to the simple retirement account for any year in an amount equal to so much of the amount the employee elects under clause (i)(I) as does not exceed the applicable percentage of compensation for the year, the employer may make nonelective contributions of a uniform percentage (up to 10 percent) of compensation for each employee who is eligible to participate in the arrangement, and who has at least $5, 000 o f co m p e n s a t i o n f ro m t h ee m pl oyer f or t h eye a r, b u t s u c h co n t r ib u t i o n s w i t h res p ec tt o an ye m pl oyees ha ll n o t e x cee d$ 5,000 for the year, and no contributions may be made other than contributions described in clause (i), (iii), or (iv). The compensation taken into account under clause (iv) for any year shall not exceed the limitation in effect for such year under section 401(a)(17). An employer shall be treated as meeting the requirements of subparagraph (A)(iii) for any year if, in lieu of the contributions described in such clause, the employer elects to make nonelective contributions of 2 percent of compensation for each employee who is eligible to participate in the arrangement and who has at least $5, 000 o f co m p e n s a t i o n f ro m t h ee m pl oyer f or t h eye a r . I f an e m pl oyer mak es an e l ec t i o n u n d er t hi ss u b p a r a g r a p h f or an yye a r, t h ee m pl oyers ha ll n o t i f ye m pl oyeeso f s u c h e l ec t i o n w i t hina re a so nab l e p er i o d o f t im e b e f ore t h e 60 - d a y p er i o df ors u c h ye a r u n d er p a r a g r a p h (5) (C) . T h eco m p e n s a t i o n t ak e nin t o a cco u n t u n d erc l a u se (i) f or an yye a rs ha ll n o t e x cee d t h e l imi t a t i o nin e ff ec t f ors u c h ye a r u n d ersec t i o n 401 (a) (17) . I n t h ec a seo f an e m pl oyer w hi c hha d m ore t han 25 e m pl oyees w h orece i v e d a tl e a s t$ 5,000 of compensation from the employer for the preceding year, and which makes the election under subparagraph (E)(i)(II) for any year, clause (i) shall be applied for such year by substituting “3 percent” for “2 percent”. For purposes of this subsection— The term “eligible employer” means, with respect to any year, an employer which had no more than 100 employees who received at least 5,000 of compensation from the employer for the preceding year, and which makes the election under subparagraph (E)(i)(II) for any year, subclause (I) shall be applied for such year by substituting “4 percent” for “3 percent”. An arrangement shall not be treated as a qualified salary reduction arrangement for any year if the employer (or any predecessor employer) maintained a qualified plan with respect to which contributions were made, or benefits were accrued, for service in any year in the period beginning with the year such arrangement became effective and ending with the year for which the determination is being made. If only individuals other than employees described in subparagraph (A) of section 410(b)(3) are eligible to participate in such arrangement, then the preceding sentence shall be applied without regard to any qualified plan in which only employees so described are eligible to participate. For purposes of this subparagraph, the term “qualified plan” means a plan, contract, pension, or trust described in subparagraph (A) or (B) of section 219(g)(5). For purposes of subparagraph (A)(ii), the applicable dollar amount is— the adjusted dollar amount in the case of an eligible employer described in clause (iii) which had not more than 25 employees who received at least $5, 000 o f co m p e n s a t i o n f ro m t h ee m pl oyer f or t h e p rece d in g ye a r, t h e a d j u s t e dd o ll a r am o u n t in t h ec a seo f an e l i g ib l ee m pl oyer d escr ib e d in c l a u se (iii) w hi c hi s n o t d escr ib e d in s u b c l a u se (I) an d w hi c h e l ec t s, a t s u c h t im e an d in s u c hmann er a s p rescr ib e d b y t h e S ecre t a ry, t h e a ppl i c a t i o n o f t hi ss u b c l a u se f or t h eye a r, an d$ 10,000 in any other case. For purposes of clause (i), the adjusted dollar amount is an amount equal to 110 percent of the dollar amount in effect under clause (i)(III) for calendar year 2024. In the case of a year beginning after December 31, 2005 , the Secretary shall adjust the $10, 000 am o u n t u n d erc l a u se (i) (III) a tt h es am e t im e an d in t h es am e mann er a s u n d ersec t i o n 415 (d), e x ce ptt ha tt h e ba se p er i o d t ak e nin t o a cco u n t s ha ll b e t h ec a l e n d a r q u a r t er b e g innin g J u l y 1, 2004, an d an y in cre a se u n d er t hi ss u b p a r a g r a p h w hi c hi s n o t am u lt i pl eo f$ 500 shall be rounded to the next lower multiple of 5,000 amount in subparagraph (A)(iv)(II) shall be increased by an amount equal to— such amount, multiplied by the cost-of-living adjustment determined under section 1(f)(3) for the calendar year in which the taxable year begins, determined by substituting “2023” for “2016” in subparagraph (A)(ii) thereof. If any amount as adjusted under the preceding sentence is not a multiple of $100, s u c ham o u n t s ha ll b ero u n d e d t o t h e n e a res t m u lt i pl eo f$ 100. An eligible employer which had not more than 25 employees who received at least $5, 000 o f co m p e n s a t i o n f ro m t h ee m pl oyer f or 1 or m oreye a rs, an d w hi c hha s m ore t han 25 s u c h e m pl oyees f or an ys u b se q u e n t ye a r, s ha ll b e t re a t e df or p u r p oseso f s u b p a r a g r a p h (E) (i) a s ha v in g 25 s u c h e m pl oyees f or t h e 2 ye a rs f o ll o w in g t h e l a s t ye a r t h ee m pl oyer ha d n o t m ore t han 25 s u c h e m pl oyees, an d n o t a s ha v in g ma d e t h ee l ec t i o n u n d ers u b p a r a g r a p h (E) (i) (II) f ors u c h 2 ye a rs . R u l ess imi l a r t o t h eseco n d se n t e n ceo f s u b p a r a g r a p h (C) (i) (II) s ha ll a ppl y f or p u r p oseso f t hi ss u b p a r a g r a p h . T h ere q u i re m e n t so f t hi s p a r a g r a p ha re m e tw i t h res p ec tt o a s im pl ere t i re m e n t a cco u n t i f t h ee m pl oyee ’ sr i g h t s t o an yco n t r ib u t i o n t o t h es im pl ere t i re m e n t a cco u n t a re n o n f or f e i t ab l e . F or p u r p oseso f t hi s p a r a g r a p h, r u l ess imi l a r t o t h er u l eso f s u b sec t i o n (k) (4) s ha ll a ppl y . T h ere q u i re m e n t so f t hi s p a r a g r a p ha re m e tw i t h res p ec tt o an ys im pl ere t i re m e n t a cco u n t f or a ye a ro n l y i f, u n d er t h e q u a l i f i e d s a l a ryre d u c t i o na rr an g e m e n t, a ll e m pl oyeeso f t h ee m pl oyer w h o — rece i v e d a tl e a s t$ 5,000 in compensation from the employer during any 2 preceding years, and are reasonably expected to receive at least $5,000 in compensation during the year, are eligible to make the election under paragraph (2)(A)(i) or receive the nonelective contribution described in paragraph (2)(B). An employer may elect to exclude from the requirement under subparagraph (A) employees described in section 410(b)(3). The requirements of this paragraph are met with respect to any simple retirement account if, under the qualified salary reduction arrangement— an employer must— make the elective employer contributions under paragraph (2)(A)(i) not later than the close of the 30-day period following the last day of the month with respect to which the contributions are to be made, and make the matching contributions under paragraph (2)(A)(iii) or the nonelective contributions under paragraph (2)(B) not later than the date described in section 404(m)(2)(B), an employee may elect to terminate participation in such arrangement at any time during the year, except that if an employee so terminates, the arrangement may provide that the employee may not elect to resume participation until the beginning of the next year, and each employee eligible to participate may elect, during the 60-day period before the beginning of any year (and the 60-day period before the first day such employee is eligible to participate), to participate in the arrangement, or to modify the amounts subject to such arrangement, for such year. For purposes of this subsection— The term “compensation” means amounts described in paragraphs (3) and (8) of section 6051(a). For purposes of the preceding sentence, amounts described in section 6051(a)(3) shall be determined without regard to section 3401(a)(3). In the case of an employee described in subparagraph (B), the term “compensation” means net earnings from self-employment determined under section 1402(a) without regard to any contribution under this subsection. The preceding sentence shall be applied as if the term “trade or business” for purposes of section 1402 included service described in section 1402(c)(6). The term “employee” includes an employee as defined in section 401(c)(1). The term “year” means the calendar year. A plan shall not be treated as failing to satisfy the requirements of this subsection or any other provision of this title merely because the employer makes all contributions to the individual retirement accounts or annuities of a designated trustee or issuer. The preceding sentence shall not apply unless each plan participant is notified in writing (either separately or as part of the notice under subsection ( l )(2)(C)) that the participant’s balance may be transferred without cost or penalty to another individual account or annuity in accordance with subsection (d)(3)(G). In the case of any simple retirement account— subsection (a)(1) shall be applied by substituting for “the amount in effect for such taxable year under section 219(b)(1)(A)” the following: “the sum of the dollar amount in effect under subsection (p)(2)(A)(ii), the employer contribution required under subsection (p)(2)(A)(iii) or (p)(2)(B)(i), whichever is applicable, and a contribution which meets the requirement of subsection (p)(2)(A)(iv) with respect to the employee”, and subsection (b)(2)(B) shall be applied by substituting for “the dollar amount in effect under section 219(b)(1)(A)” the following: “the sum of the dollar amount in effect under subsection (p)(2)(A)(ii), the employer contribution required under subsection (p)(2)(A)(iii) or (p)(2)(B)(i), whichever is applicable, and a contribution which meets the requirement of subsection (p)(2)(A)(iv) with respect to the employee”. Any matching contribution described in paragraph (2)(A)(iii) which is made on behalf of a self-employed individual (as defined in section 401(c)) shall not be treated as an elective employer contribution to a simple retirement account for purposes of this title. An employer which fails to meet any applicable requirement by reason of an acquisition, disposition, or similar transaction shall not be treated as failing to meet such requirement during the transition period if— the employer satisfies requirements similar to the requirements of section 410(b)(6)(C)(i)(II); and the qualified salary reduction arrangement maintained by the employer would satisfy the requirements of this subsection after the transaction if the employer which maintained the arrangement before the transaction had remained a separate employer. For purposes of this paragraph, the term “applicable requirement” means— the requirement under paragraph (2)(A)(i) that an employer be an eligible employer; the requirement under paragraph (2)(D) that an arrangement be the only plan of an employer; and the participation requirements under paragraph (4). For purposes of this paragraph, the term “transition period” means the period beginning on the date of any transaction described in subparagraph (A) and ending on the last day of the second calendar year following the calendar year in which such transaction occurs. Subject to the requirements of this paragraph, an employer may elect (in such form and manner as the Secretary may prescribe) at any time during a year to terminate the qualified salary reduction arrangement under paragraph (2), but only if the employer establishes and maintains (as of the day after the termination date) a safe harbor plan to replace the terminated arrangement. The terminated arrangement and safe harbor plan shall both be treated as violating the requirements of paragraph (2)(A)(ii) or section 401(a)(30) (whichever is applicable) if the aggregate elective contributions of the employee under the terminated arrangement during its last plan year and under the safe harbor plan during its transition year exceed the sum of— the applicable dollar amount for such arrangement (determined on a full-year basis) under this subsection (after the application of section 414(v)) with respect to the employee for such last plan year multiplied by a fraction equal to the number of days in such plan year divided by 365, and the applicable dollar amount (as so determined) under section 402(g)(1) for such safe harbor plan on such elective contributions during the transition year multiplied by a fraction equal to the number of days in such transition year divided by 365. For purposes of this paragraph, the transition year is the period beginning after the termination date and ending on the last day of the calendar year during which the termination occurs. For purposes of this paragraph, the term “safe harbor plan” means a qualified cash or deferred arrangement which meets the requirements of paragraph (11), (12), (13), or (16) of section 401(k). An individual retirement plan which is designated as a Roth IRA shall not be treated as a simple retirement account under this subsection unless the employee elects for such plan to be so treated (at such time and in such manner as the Secretary may provide).

(q) Deemed IRAs under qualified employer plans If— a qualified employer plan elects to allow employees to make voluntary employee contributions to a separate account or annuity established under the plan, and under the terms of the qualified employer plan, such account or annuity meets the applicable requirements of this section or section 408A for an individual retirement account or annuity, then such account or annuity shall be treated for purposes of this title in the same manner as an individual retirement plan and not as a qualified employer plan (and contributions to such account or annuity as contributions to an individual retirement plan and not to the qualified employer plan). For purposes of subparagraph (B), the requirements of subsection (a)(5) shall not apply. For purposes of this title, a qualified employer plan shall not fail to meet any requirement of this title solely by reason of establishing and maintaining a program described in paragraph (1). For purposes of this subsection— The term “qualified employer plan” has the meaning given such term by section 72(p)(4)(A)(i); except that such term shall also include an eligible deferred compensation plan (as defined in section 457(b)) of an eligible employer described in section 457(e)(1)(A). The term “voluntary employee contribution” means any contribution (other than a mandatory contribution within the meaning of section 411(c)(2)(C))— which is made by an individual as an employee under a qualified employer plan which allows employees to elect to make contributions described in paragraph (1), and with respect to which the individual has designated the contribution as a contribution to which this subsection applies.

(r) Cross references For tax on excess contributions in individual retirement accounts or annuities, see section 4973. For tax on certain accumulations in individual retirement accounts or annuities, see section 4974.

§ 408A Roth IRAs

(a) General rule Except as provided in this section, a Roth IRA shall be treated for purposes of this title in the same manner as an individual retirement plan.

(b) Roth IRA For purposes of this title, the term “Roth IRA” means an individual retirement plan (as defined in section 7701(a)(37)) which is designated (in such manner as the Secretary may prescribe) at the time of establishment of the plan as a Roth IRA. Such designation shall be made in such manner as the Secretary may prescribe.

(c) Treatment of contributions No deduction shall be allowed under section 219 for a contribution to a Roth IRA. The aggregate amount of contributions for any taxable year to all Roth IRAs maintained for the benefit of an individual shall not exceed the excess (if any) of— the maximum amount allowable as a deduction under section 219 with respect to such individual for such taxable year (computed without regard to subsection (g) of such section), over the aggregate amount of contributions for such taxable year to all other individual retirement plans (other than Roth IRAs) maintained for the benefit of the individual. The amount determined under paragraph (2) for any taxable year shall not exceed an amount equal to the amount determined under paragraph (2)(A) for such taxable year, reduced (but not below zero) by the amount which bears the same ratio to such amount as— the excess of— the taxpayer’s adjusted gross income for such taxable year, over the applicable dollar amount, bears to $15, 000 ($ 10,000 in the case of a joint return or a married individual filing a separate return). The rules of subparagraphs (B) and (C) of section 219(g)(2) shall apply to any reduction under this subparagraph. For purposes of this paragraph— adjusted gross income shall be determined in the same manner as under section 219(g)(3), except that any amount included in gross income under subsection (d)(3) shall not be taken into account, and the applicable dollar amount is— in the case of a taxpayer filing a joint return, $150, 000, in t h ec a seo f an yo t h er t a x p a yer (o t h er t hanama rr i e d in d i v i d u a l f i l in g a se p a r a t ere t u r n),$ 95,000, and in the case of a married individual filing a separate return, zero. Section 219(g)(4) shall apply for purposes of this paragraph. In the case of any taxable year beginning in a calendar year after 2006, the dollar amounts in subclauses (I) and (II) of subparagraph (B)(ii) shall each be increased by an amount equal to— such dollar amount, multiplied by the cost-of-living adjustment determined under section 1(f)(3) for the calendar year in which the taxable year begins, determined by substituting “calendar year 2005” for “calendar year 2016” in subparagraph (A)(ii) thereof. Any increase determined under the preceding sentence shall be rounded to the nearest multiple of $1,000. The amount determined under subparagraph (A) shall be increased by the lesser of— the amount of contributions described in section 529(c)(3)(E) for the taxable year, or the amount of the reduction determined under such subparagraph (determined without regard to this subparagraph). Notwithstanding subsections (a)(6) and (b)(3) of section 408 (relating to required distributions), the following provisions shall not apply to any Roth IRA: Section 401(a)(9)(A). The incidental death benefit requirements of section 401(a). No rollover contribution may be made to a Roth IRA unless it is a qualified rollover contribution. A qualified rollover contribution shall not be taken into account for purposes of paragraph (2). Clause (i) shall not apply to any qualified rollover contribution described in subsection (e)(1)(C). For purposes of this section, the rule of section 219(f)(3) shall apply.

(d) Distribution rules For purposes of this title— Any qualified distribution from a Roth IRA shall not be includible in gross income. For purposes of this subsection— The term “qualified distribution” means any payment or distribution— made on or after the date on which the individual attains age 59½, made to a beneficiary (or to the estate of the individual) on or after the death of the individual, attributable to the individual’s being disabled (within the meaning of section 72(m)(7)), or which is a qualified special purpose distribution. A payment or distribution from a Roth IRA shall not be treated as a qualified distribution under subparagraph (A) if such payment or distribution is made within the 5-taxable year period beginning with the first taxable year for which the individual made a contribution to a Roth IRA (or such individual’s spouse, or employer in the case of a simple retirement account (as defined in section 408(p)) or simplified employee pension (as defined in section 408(k)), made a contribution to a Roth IRA) established for such individual. The term “qualified distribution” shall not include any distribution of any contribution described in section 408(d)(4) and any net income allocable to the contribution. Notwithstanding sections 402(c), 403(b)(8), 408(d)(3), and 457(e)(16), in the case of any distribution to which this paragraph applies— there shall be included in gross income any amount which would be includible were it not part of a qualified rollover contribution, section 72(t) shall not apply, and unless the taxpayer elects not to have this clause apply, any amount required to be included in gross income for any taxable year beginning in 2010 by reason of this paragraph shall be so included ratably over the 2-taxable-year period beginning with the first taxable year beginning in 2011. Any election under clause (iii) for any distributions during a taxable year may not be changed after the due date for such taxable year. This paragraph shall apply to a distribution from an eligible retirement plan (as defined by section 402(c)(8)(B)) maintained for the benefit of an individual which is contributed to a Roth IRA maintained for the benefit of such individual in a qualified rollover contribution. This paragraph shall not apply to a distribution which is a qualified rollover contribution from a Roth IRA or a qualified rollover contribution from a designated Roth account which is a rollover contribution described in section 402A(c)(3)(A). The conversion of an individual retirement plan (other than a Roth IRA) to a Roth IRA shall be treated for purposes of this paragraph as a distribution to which this paragraph applies. Trustees of Roth IRAs, trustees of individual retirement plans, persons subject to section 6047(d)(1), or all of the foregoing persons, whichever is appropriate, shall include such additional information in reports required under section 408(i) or 6047 as the Secretary may require to ensure that amounts required to be included in gross income under subparagraph (A) are so included. In the case of a qualified rollover contribution to a Roth IRA of a distribution to which subparagraph (A)(iii) applied, the following rules shall apply: The amount otherwise required to be included in gross income for any taxable year beginning in 2010 or the first taxable year in the 2-year period under subparagraph (A)(iii) shall be increased by the aggregate distributions from Roth IRAs for such taxable year which are allocable under paragraph (4) to the portion of such qualified rollover contribution required to be included in gross income under subparagraph (A)(i). The amount required to be included in gross income for any taxable year under subparagraph (A)(iii) shall not exceed the aggregate amount required to be included in gross income under subparagraph (A)(iii) for all taxable years in the 2-year period (without regard to subclause (I)) reduced by amounts included for all preceding taxable years. If the individual required to include amounts in gross income under such subparagraph dies before all of such amounts are included, all remaining amounts shall be included in gross income for the taxable year which includes the date of death. If the spouse of the individual described in subclause (I) acquires the individual’s entire interest in any Roth IRA to which such qualified rollover contribution is properly allocable, the spouse may elect to treat the remaining amounts described in subclause (I) as includible in the spouse’s gross income in the taxable years of the spouse ending with or within the taxable years of such individual in which such amounts would otherwise have been includible. Any such election may not be made or changed after the due date for the spouse’s taxable year which includes the date of death. If— any portion of a distribution from a Roth IRA is properly allocable to a qualified rollover contribution described in this paragraph; and such distribution is made within the 5-taxable year period beginning with the taxable year in which such contribution was made, then section 72(t) shall be applied as if such portion were includible in gross income. Clause (i) shall apply only to the extent of the amount of the qualified rollover contribution includible in gross income under subparagraph (A)(i). Section 408(d)(2) shall be applied separately with respect to Roth IRAs and other individual retirement plans. For purposes of applying this section and section 72 to any distribution from a Roth IRA, such distribution shall be treated as made— from contributions to the extent that the amount of such distribution, when added to all previous distributions from the Roth IRA, does not exceed the aggregate contributions to the Roth IRA; and from such contributions in the following order: Contributions other than qualified rollover contributions to which paragraph (3) applies. Qualified rollover contributions to which paragraph (3) applies on a first-in, first-out basis. Any distribution allocated to a qualified rollover contribution under clause (ii)(II) shall be allocated first to the portion of such contribution required to be included in gross income. For purposes of this section, the term “qualified special purpose distribution” means any distribution to which subparagraph (F) of section 72(t)(2) applies. Except as provided by the Secretary, if, on or before the due date for any taxable year, a taxpayer transfers in a trustee-to-trustee transfer any contribution to an individual retirement plan made during such taxable year from such plan to any other individual retirement plan, then, for purposes of this chapter, such contribution shall be treated as having been made to the transferee plan (and not the transferor plan). Subparagraph (A) shall not apply to the transfer of any contribution unless such transfer is accompanied by any net income allocable to such contribution. Subparagraph (A) shall apply to the transfer of any contribution only to the extent no deduction was allowed with respect to the contribution to the transferor plan. Subparagraph (A) shall not apply in the case of a qualified rollover contribution to which subsection (d)(3) applies (including by reason of subparagraph (C) thereof). For purposes of this subsection, the due date for any taxable year is the date prescribed by law (including extensions of time) for filing the taxpayer’s return for such taxable year.

(e) Qualified rollover contribution For purposes of this section— The term “qualified rollover contribution” means a rollover contribution— to a Roth IRA from another such account, from an eligible retirement plan, but only if— in the case of an individual retirement plan, such rollover contribution meets the requirements of section 408(d)(3), and in the case of any eligible retirement plan (as defined in section 402(c)(8)(B) other than clauses (i) and (ii) thereof), such rollover contribution meets the requirements of section 402(c), 403(b)(8), or 457(e)(16), as applicable, and from a qualified tuition program to the extent provided in section 529(c)(3)(E). For purposes of section 408(d)(3)(B), there shall be disregarded any qualified rollover contribution from an individual retirement plan (other than a Roth IRA) to a Roth IRA. The earnings and contributions of any qualified tuition program from which a qualified rollover contribution is made under subparagraph (C) shall be treated in the same manner as the earnings and contributions of a Roth IRA from which a qualified rollover contribution is made under subparagraph (A). The term “qualified rollover contribution” includes a contribution to a Roth IRA maintained for the benefit of an individual made before the end of the 1-year period beginning on the date on which such individual receives an amount under section 1477 of title 10 , United States Code, or section 1967 of title 38 of such Code, with respect to a person, to the extent that such contribution does not exceed— the sum of the amounts received during such period by such individual under such sections with respect to such person, reduced by the amounts so received which were contributed to a Coverdell education savings account under section 530(d)(9). Section 408(d)(3)(B) shall not apply with respect to amounts treated as a rollover by subparagraph (A). For purposes of applying section 72 in the case of a distribution which is not a qualified distribution, the amount treated as a rollover by reason of subparagraph (A) shall be treated as investment in the contract. In the case of any payment or distribution out of a simple retirement account (as defined in section 408(p)) with respect to which an election has been made under section 408(p)(12) and to which 72(t)(6) applies, the term “qualified rollover contribution” shall not include any payment or distribution paid into an account other than another simple retirement account (as so defined).

§ 409 Qualifications for tax credit employee stock ownership plans

(a) Tax credit employee stock ownership plan defined Except as otherwise provided in this title, for purposes of this title, the term “tax credit employee stock ownership plan” means a defined contribution plan which— meets the requirements of section 401(a), is designed to invest primarily in employer securities, and meets the requirements of subsections (b), (c), (d), (e), (f), (g), (h), and ( o ) of this section.

(b) Required allocation of employer securities A plan meets the requirements of this subsection if— the plan provides for the allocation for the plan year of all employer securities transferred to it or purchased by it (because of the requirements of section 41(c)(1)(B)) 1 to the accounts of all participants who are entitled to share in such allocation, and for the plan year the allocation to each participant so entitled is an amount which bears substantially the same proportion to the amount of all such securities allocated to all such participants in the plan for that year as the amount of compensation paid to such participant during that year bears to the compensation paid to all such participants during that year. For purposes of paragraph (1), compensation of any participant in excess of the first $100,000 per year shall be disregarded. For purposes of this subsection, the amount of compensation paid to a participant for any period is the amount of such participant’s compensation (within the meaning of section 415(c)(3)) for such period. Notwithstanding paragraph (1), the allocation to the account of any participant which is attributable to the basic employee plan credit or the credit allowed under section 41 1 (relating to the employee stock ownership credit) may be extended over whatever period may be necessary to comply with the requirements of section 415.

(c) Participants must have nonforfeitable rights A plan meets the requirements of this subsection only if it provides that each participant has a nonforfeitable right to any employer security allocated to his account.

(d) Employer securities must stay in the plan A plan meets the requirements of this subsection only if it provides that no employer security allocated to a participant’s account under subsection (b) (or allocated to a participant’s account in connection with matched employer and employee contributions) may be distributed from that account before the end of the 84th month beginning after the month in which the security is allocated to the account. To the extent provided in the plan, the preceding sentence shall not apply in the case of— death, disability, separation from service, or termination of the plan; a transfer of a participant to the employment of an acquiring employer from the employment of the selling corporation in the case of a sale to the acquiring corporation of substantially all of the assets used by the selling corporation in a trade or business conducted by the selling corporation, or with respect to the stock of a selling corporation, a disposition of such selling corporation’s interest in a subsidiary when the participant continues employment with such subsidiary. This subsection shall not apply to any distribution required under section 401(a)(9) or to any distribution or reinvestment required under section 401(a)(28).

(e) Voting rights A plan meets the requirements of this subsection if it meets the requirements of paragraph (2) or (3), whichever is applicable. If the employer has a registration-type class of securities, the plan meets the requirements of this paragraph only if each participant or beneficiary in the plan is entitled to direct the plan as to the manner in which securities of the employer which are entitled to vote and are allocated to the account of such participant or beneficiary are to be voted. If the employer does not have a registration-type class of securities, the plan meets the requirements of this paragraph only if each participant or beneficiary in the plan is entitled to direct the plan as to the manner in which voting rights under securities of the employer which are allocated to the account of such participant or beneficiary are to be exercised with respect to any corporate matter which involves the voting of such shares with respect to the approval or disapproval of any corporate merger or consolidation, recapitalization, reclassification, liquidation, dissolution, sale of substantially all assets of a trade or business, or such similar transaction as the Secretary may prescribe in regulations. For purposes of this subsection, the term, “registration-type class of securities” means— a class of securities required to be registered under section 12 of the Securities Exchange Act of 1934, and a class of securities which would be required to be so registered except for the exemption from registration provided in subsection (g)(2)(H) of such section 12. A plan meets the requirements of paragraph (3) with respect to an issue if— the plan permits each participant 1 vote with respect to such issue, and the trustee votes the shares held by the plan in the proportion determined after application of subparagraph (A).

(f) Plan must be established before employer’s due date A plan meets the requirements of this subsection only if it is established on or before the due date (including any extension of such date) for the filing of the employer’s tax return for the first taxable year of the employer for which an employee plan credit is claimed by the employer with respect to the plan. A plan which otherwise meets the requirements of this section shall not be considered to have failed to meet the requirements of section 401(a) merely because it was not established by the close of the first taxable year of the employer for which an employee plan credit is claimed by the employer with respect to the plan.

(g) Transferred amounts must stay in plan even though investment credit is redetermined or recaptured A plan meets the requirement of this subsection only if it provides that amounts which are transferred to the plan (because of the requirements of section 48(n)(1) or 41(c)(1)(B)) 1 shall remain in the plan (and, if allocated under the plan, shall remain so allocated) even though part or all of the employee plan credit or the credit allowed under section 41 1 (relating to employee stock ownership credit) is recaptured or redetermined. For purposes of the preceding sentence, the references to section 48(n)(1) 1 and the employee plan credit shall refer to such section and credit as in effect before the enactment of the Tax Reform Act of 1984.

(h) Right to demand employer securities; put option A plan meets the requirements of this subsection if a participant who is entitled to a distribution from the plan— has a right to demand that his benefits be distributed in the form of employer securities, and if the employer securities are not readily tradable on an established market, has a right to require that the employer repurchase employer securities under a fair valuation formula. A plan which otherwise meets the requirements of this subsection or of section 4975(e)(7) shall not be considered to have failed to meet the requirements of section 401(a) merely because under the plan the benefits may be distributed in cash or in the form of employer securities. A plan to which this subparagraph applies shall not be treated as failing to meet the requirements of this subsection or section 401(a) merely because it does not permit a participant to exercise the right described in paragraph (1)(A) if such plan provides that the participant entitled to a distribution has a right to receive the distribution in cash, except that such plan may distribute employer securities subject to a requirement that such securities may be resold to the employer under terms which meet the requirements of paragraph (1)(B). This subparagraph shall apply to a plan which otherwise meets the requirements of this subsection or section 4975(e)(7) and which is established and maintained by— an employer whose charter or bylaws restrict the ownership of substantially all outstanding employer securities to employees or to a trust described in section 401(a), or an S corporation. In the case of a plan established and maintained by a bank (as defined in section 581) which is prohibited by law from redeeming or purchasing its own securities, the requirements of paragraph (1)(B) shall not apply if the plan provides that participants entitled to a distribution from the plan shall have a right to receive a distribution in cash. An employer shall be deemed to satisfy the requirements of paragraph (1)(B) if it provides a put option for a period of at least 60 days following the date of distribution of stock of the employer and, if the put option is not exercised within such 60-day period, for an additional period of at least 60 days in the following plan year (as provided in regulations promulgated by the Secretary). If an employer is required to repurchase employer securities which are distributed to the employee as part of a total distribution, the requirements of paragraph (1)(B) shall be treated as met if— the amount to be paid for the employer securities is paid in substantially equal periodic payments (not less frequently than annually) over a period beginning not later than 30 days after the exercise of the put option described in paragraph (4) and not exceeding 5 years, and there is adequate security provided and reasonable interest paid on the unpaid amounts referred to in subparagraph (A). For purposes of this paragraph, the term “total distribution” means the distribution within 1 taxable year to the recipient of the balance to the credit of the recipient’s account. If an employer is required to repurchase employer securities as part of an installment distribution, the requirements of paragraph (1)(B) shall be treated as met if the amount to be paid for the employer securities is paid not later than 30 days after the exercise of the put option described in paragraph (4). Paragraph (1)(A) shall not apply with respect to the portion of the participant’s account which the employee elected to have reinvested under section 401(a)(28)(B) or subparagraph (B) or (C) of section 401(a)(35).

(i) Reimbursement for expenses of establishing and administering plan A plan which otherwise meets the requirements of this section shall not be treated as failing to meet such requirements merely because it provides that— As reimbursement for the expenses of establishing the plan, the employer may withhold from amounts due the plan for the taxable year for which the plan is established (or the plan may pay) so much of the amounts paid or incurred in connection with the establishment of the plan as does not exceed the sum of— 10 percent of the first $100, 000 w hi c h t h ee m pl oyer i sre q u i re d t o t r an s f er t o t h e pl an f or t ha tt a x ab l eye a r u n d ersec t i o n 41 (c) (1) (B), 1 an d 5 p erce n t o f an y am o u n t sore q u i re d t o b e t r an s f erre d in e x cesso f t h e f i rs t$ 100,000; and As reimbursement for the expenses of administering the plan, the employer may withhold from amounts due the plan (or the plan may pay) so much of the amounts paid or incurred during the taxable year as expenses of administering the plan as does not exceed the lesser of— the sum of— 10 percent of the first $100, 000 o f t h e d i v i d e n d s p ai d t o t h e pl an w i t h res p ec tt os t oc k o f t h ee m pl oyer d u r in g t h e pl an ye a re n d in g w i t h or w i t hin t h ee m pl oyer ’ s t a x ab l eye a r, an d 5 p erce n t o f t h e am o u n t o f s u c h d i v i d e n d s in e x cesso f$ 100,000 or $100,000.

(j) Conditional contributions to the plan A plan which otherwise meets the requirements of this section shall not be treated as failing to satisfy such requirements (or as failing to satisfy the requirements of section 401(a) of this title or of section 403(c)(1) of the Employee Retirement Income Security Act of 1974) merely because of the return of a contribution (or a provision permitting such a return) if— the contribution to the plan is conditioned on a determination by the Secretary that such plan meets the requirements of this section, the application for a determination described in paragraph (1) is filed with the Secretary not later than 90 days after the date on which an employee plan credit is claimed, and the contribution is returned within 1 year after the date on which the Secretary issues notice to the employer that such plan does not satisfy the requirements of this section.

(k) Requirements relating to certain withdrawals Notwithstanding any other law or rule of law— the withdrawal from a plan which otherwise meets the requirements of this section by the employer of an amount contributed for purposes of the matching employee plan credit shall not be considered to make the benefits forfeitable, and the plan shall not, by reason of such withdrawal, fail to be for the exclusive benefit of participants or their beneficiaries, if the withdrawn amounts were not matched by employee contributions or were in excess of the limitations of section 415. Any withdrawal described in the preceding sentence shall not be considered to violate the provisions of section 403(c)(1) of the Employee Retirement Income Security Act of 1974. For purposes of this subsection, the reference to the matching employee plan credit shall refer to such credit as in effect before the enactment of the Tax Reform Act of 1984.

(l) Employer securities defined For purposes of this section— The term “employer securities” means common stock issued by the employer (or by a corporation which is a member of the same controlled group) which is readily tradable on an established securities market. If there is no common stock which meets the requirements of paragraph (1), the term “employer securities” means common stock issued by the employer (or by a corporation which is a member of the same controlled group) having a combination of voting power and dividend rights equal to or in excess of— that class of common stock of the employer (or of any other such corporation) having the greatest voting power, and that class of common stock of the employer (or of any other such corporation) having the greatest dividend rights. Noncallable preferred stock shall be treated as employer securities if such stock is convertible at any time into stock which meets the requirements of paragraph (1) or (2) (whichever is applicable) and if such conversion is at a conversion price which (as of the date of the acquisition by the tax credit employee stock ownership plan) is reasonable. For purposes of the preceding sentence, under regulations prescribed by the Secretary, preferred stock shall be treated as noncallable if after the call there will be a reasonable opportunity for a conversion which meets the requirements of the preceding sentence. For purposes of this subsection, the term “controlled group of corporations” has the meaning given to such term by section 1563(a) (determined without regard to subsections (a)(4) and (e)(3)(C) of section 1563). For purposes of subparagraph (A), if the common parent owns directly stock possessing at least 50 percent of the voting power of all classes of stock and at least 50 percent of each class of nonvoting stock in a first tier subsidiary, such subsidiary (and all other corporations below it in the chain which would meet the 80 percent test of section 1563(a) if the first tier subsidiary were the common parent) shall be treated as includible corporations. For purposes of subparagraph (A), if the common parent owns directly stock possessing all of the voting power of all classes of stock and all of the nonvoting stock, in a first tier subsidiary, and if the first tier subsidiary owns directly stock possessing at least 50 percent of the voting power of all classes of stock, and at least 50 percent of each class of nonvoting stock, in a second tier subsidiary of the common parent, such second tier subsidiary (and all other corporations below it in the chain which would meet the 80 percent test of section 1563(a) if the second tier subsidiary were the common parent) shall be treated as includible corporations. Nonvoting common stock of an employer described in the second sentence of section 401(a)(22) shall be treated as employer securities if an employer has a class of nonvoting common stock outstanding and the specific shares that the plan acquires have been issued and outstanding for at least 24 months.

(m) Nonrecognition of gain or loss on contribution of employer securities to tax credit employee stock ownership plan No gain or loss shall be recognized to the taxpayer with respect to the transfer of employer securities to a tax credit employee stock ownership plan maintained by the taxpayer to the extent that such transfer is required under section 41(c)(1)(B), 1 or subparagraph (A) or (B) of section 48(n)(1). 1

(n) Securities received in certain transactions A plan to which section 1042 applies and an eligible worker-owned cooperative (within the meaning of section 1042(c)) shall provide that no portion of the assets of the plan or cooperative attributable to (or allocable in lieu of) employer securities acquired by the plan or cooperative in a sale to which section 1042 applies may accrue (or be allocated directly or indirectly under any plan of the employer meeting the requirements of section 401(a))— during the nonallocation period, for the benefit of— any taxpayer who makes an election under section 1042(a) with respect to employer securities, any individual who is related to the taxpayer (within the meaning of section 267(b)), or for the benefit of any other person who owns (after application of section 318(a)) more than 25 percent of— any class of outstanding stock of the corporation which issued such employer securities or of any corporation which is a member of the same controlled group of corporations (within the meaning of subsection ( l )(4)) as such corporation, or the total value of any class of outstanding stock of any such corporation. For purposes of subparagraph (B), section 318(a) shall be applied without regard to the employee trust exception in paragraph (2)(B)(i). If a plan fails to meet the requirements of paragraph (1)— the plan shall be treated as having distributed to the person described in paragraph (1) the amount allocated to the account of such person in violation of paragraph (1) at the time of such allocation, the provisions of section 4979A shall apply, and the statutory period for the assessment of any tax imposed by section 4979A shall not expire before the date which is 3 years from the later of— the 1st allocation of employer securities in connection with a sale to the plan to which section 1042 applies, or the date on which the Secretary is notified of such failure. For purposes of this subsection— Paragraph (1)(A)(ii) shall not apply to any individual if— such individual is a lineal descendant of the taxpayer, and the aggregate amount allocated to the benefit of all such lineal descendants during the nonallocation period does not exceed more than 5 percent of the employer securities (or amounts allocated in lieu thereof) held by the plan which are attributable to a sale to the plan by any person related to such descendants (within the meaning of section 267(c)(4)) in a transaction to which section 1042 applied. A person shall be treated as failing to meet the stock ownership limitation under paragraph (1)(B) if such person fails such limitation— at any time during the 1-year period ending on the date of sale of qualified securities to the plan or cooperative, or on the date as of which qualified securities are allocated to participants in the plan or cooperative. The term “nonallocation period” means the period beginning on the date of the sale of the qualified securities and ending on the later of— the date which is 10 years after the date of sale, or the date of the plan allocation attributable to the final payment of acquisition indebtedness incurred in connection with such sale.

(o) Distribution and payment requirements A plan meets the requirements of this subsection if— The plan provides that, if the participant and, if applicable pursuant to sections 401(a)(11) and 417, with the consent of the participant’s spouse elects, the distribution of the participant’s account balance in the plan will commence not later than 1 year after the close of the plan year— in which the participant separates from service by reason of the attainment of normal retirement age under the plan, disability, or death, or which is the 5th plan year following the plan year in which the participant otherwise separates from service, except that this clause shall not apply if the participant is reemployed by the employer before distribution is required to begin under this clause. For purposes of this subsection, the account balance of a participant shall not include any employer securities acquired with the proceeds of the loan described in section 404(a)(9) until the close of the plan year in which such loan is repaid in full. The plan provides that, unless the participant elects otherwise, the distribution of the participant’s account balance will be in substantially equal periodic payments (not less frequently than annually) over a period not longer than the greater of— 5 years, or in the case of a participant with an account balance in excess of $800, 000, 5 ye a rs pl u s 1 a dd i t i o na l ye a r (b u t n o t m ore t han 5 a dd i t i o na l ye a rs) f ore a c h$ 160,000 or fraction thereof by which such balance exceeds $800,000. The Secretary shall adjust the dollar amounts under paragraph (1)(C) at the same time and in the same manner as under section 415(d).

(p) Prohibited allocations of securities in an S corporation An employee stock ownership plan holding employer securities consisting of stock in an S corporation shall provide that no portion of the assets of the plan attributable to (or allocable in lieu of) such employer securities may, during a nonallocation year, accrue (or be allocated directly or indirectly under any plan of the employer meeting the requirements of section 401(a)) for the benefit of any disqualified person. If a plan fails to meet the requirements of paragraph (1), the plan shall be treated as having distributed to any disqualified person the amount allocated to the account of such person in violation of paragraph (1) at the time of such allocation. For excise tax relating to violations of paragraph (1) and ownership of synthetic equity, see section 4979A. For purposes of this subsection— The term “nonallocation year” means any plan year of an employee stock ownership plan if, at any time during such plan year— such plan holds employer securities consisting of stock in an S corporation, and disqualified persons own at least 50 percent of the number of shares of stock in the S corporation. For purposes of subparagraph (A)— The rules of section 318(a) shall apply for purposes of determining ownership, except that— in applying paragraph (1) thereof, the members of an individual’s family shall include members of the family described in paragraph (4)(D), and paragraph (4) thereof shall not apply. Notwithstanding the employee trust exception in section 318(a)(2)(B)(i), an individual shall be treated as owning deemed-owned shares of the individual. Solely for purposes of applying paragraph (5), this subparagraph shall be applied after the attribution rules of paragraph (5) have been applied. For purposes of this subsection— The term “disqualified person” means any person if— the aggregate number of deemed-owned shares of such person and the members of such person’s family is at least 20 percent of the number of deemed-owned shares of stock in the S corporation, or in the case of a person not described in clause (i), the number of deemed-owned shares of such person is at least 10 percent of the number of deemed-owned shares of stock in such corporation. In the case of a disqualified person described in subparagraph (A)(i), any member of such person’s family with deemed-owned shares shall be treated as a disqualified person if not otherwise treated as a disqualified person under subparagraph (A). The term “deemed-owned shares” means, with respect to any person— the stock in the S corporation constituting employer securities of an employee stock ownership plan which is allocated to such person under the plan, and such person’s share of the stock in such corporation which is held by such plan but which is not allocated under the plan to participants. For purposes of clause (i)(II), a person’s share of unallocated S corporation stock held by such plan is the amount of the unallocated stock which would be allocated to such person if the unallocated stock were allocated to all participants in the same proportions as the most recent stock allocation under the plan. For purposes of this paragraph, the term “member of the family” means, with respect to any individual— the spouse of the individual, an ancestor or lineal descendant of the individual or the individual’s spouse, a brother or sister of the individual or the individual’s spouse and any lineal descendant of the brother or sister, and the spouse of any individual described in clause (ii) or (iii). A spouse of an individual who is legally separated from such individual under a decree of divorce or separate maintenance shall not be treated as such individual’s spouse for purposes of this subparagraph. For purposes of paragraphs (3) and (4), in the case of a person who owns synthetic equity in the S corporation, except to the extent provided in regulations, the shares of stock in such corporation on which such synthetic equity is based shall be treated as outstanding stock in such corporation and deemed-owned shares of such person if such treatment of synthetic equity of 1 or more such persons results in— the treatment of any person as a disqualified person, or the treatment of any year as a nonallocation year. For purposes of this paragraph, synthetic equity shall be treated as owned by a person in the same manner as stock is treated as owned by a person under the rules of paragraphs (2) and (3) of section 318(a). If, without regard to this paragraph, a person is treated as a disqualified person or a year is treated as a nonallocation year, this paragraph shall not be construed to result in the person or year not being so treated. For purposes of this subsection— The term “employee stock ownership plan” has the meaning given such term by section 4975(e)(7). The term “employer security” has the meaning given such term by section 409( l ). The term “synthetic equity” means any stock option, warrant, restricted stock, deferred issuance stock right, or similar interest or right that gives the holder the right to acquire or receive stock of the S corporation in the future. Except to the extent provided in regulations, synthetic equity also includes a stock appreciation right, phantom stock unit, or similar right to a future cash payment based on the value of such stock or appreciation in such value. The Secretary shall prescribe such regulations as may be necessary to carry out the purposes of this subsection. The Secretary may, by regulation or other guidance of general applicability, provide that a nonallocation year occurs in any case in which the principal purpose of the ownership structure of an S corporation constitutes an avoidance or evasion of this subsection.

§ 409A Inclusion in gross income of deferred compensation under nonqualified deferred compensation plans

(a) Rules relating to constructive receipt If at any time during a taxable year a nonqualified deferred compensation plan— fails to meet the requirements of paragraphs (2), (3), and (4), or is not operated in accordance with such requirements, all compensation deferred under the plan for the taxable year and all preceding taxable years shall be includible in gross income for the taxable year to the extent not subject to a substantial risk of forfeiture and not previously included in gross income. Clause (i) shall only apply with respect to all compensation deferred under the plan for participants with respect to whom the failure relates. If compensation is required to be included in gross income under subparagraph (A) for a taxable year, the tax imposed by this chapter for the taxable year shall be increased by the sum of— the amount of interest determined under clause (ii), and an amount equal to 20 percent of the compensation which is required to be included in gross income. For purposes of clause (i), the interest determined under this clause for any taxable year is the amount of interest at the underpayment rate plus 1 percentage point on the underpayments that would have occurred had the deferred compensation been includible in gross income for the taxable year in which first deferred or, if later, the first taxable year in which such deferred compensation is not subject to a substantial risk of forfeiture. The requirements of this paragraph are met if the plan provides that compensation deferred under the plan may not be distributed earlier than— separation from service as determined by the Secretary (except as provided in subparagraph (B)(i)), the date the participant becomes disabled (within the meaning of subparagraph (C)), death, a specified time (or pursuant to a fixed schedule) specified under the plan at the date of the deferral of such compensation, to the extent provided by the Secretary, a change in the ownership or effective control of the corporation, or in the ownership of a substantial portion of the assets of the corporation, or the occurrence of an unforeseeable emergency. In the case of any specified employee, the requirement of subparagraph (A)(i) is met only if distributions may not be made before the date which is 6 months after the date of separation from service (or, if earlier, the date of death of the employee). For purposes of the preceding sentence, a specified employee is a key employee (as defined in section 416(i) without regard to paragraph (5) thereof) of a corporation any stock in which is publicly traded on an established securities market or otherwise. For purposes of subparagraph (A)(vi)— The term “unforeseeable emergency” means a severe financial hardship to the participant resulting from an illness or accident of the participant, the participant’s spouse, or a dependent (as defined in section 152(a)) of the participant, loss of the participant’s property due to casualty, or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the participant. The requirement of subparagraph (A)(vi) is met only if, as determined under regulations of the Secretary, the amounts distributed with respect to an emergency do not exceed the amounts necessary to satisfy such emergency plus amounts necessary to pay taxes reasonably anticipated as a result of the distribution, after taking into account the extent to which such hardship is or may be relieved through reimbursement or compensation by insurance or otherwise or by liquidation of the participant’s assets (to the extent the liquidation of such assets would not itself cause severe financial hardship). For purposes of subparagraph (A)(ii), a participant shall be considered disabled if the participant— is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, or is, by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, receiving income replacement benefits for a period of not less than 3 months under an accident and health plan covering employees of the participant’s employer. The requirements of this paragraph are met if the plan does not permit the acceleration of the time or schedule of any payment under the plan, except as provided in regulations by the Secretary. The requirements of this paragraph are met if the requirements of subparagraphs (B) and (C) are met. The requirements of this subparagraph are met if the plan provides that compensation for services performed during a taxable year may be deferred at the participant’s election only if the election to defer such compensation is made not later than the close of the preceding taxable year or at such other time as provided in regulations. In the case of the first year in which a participant becomes eligible to participate in the plan, such election may be made with respect to services to be performed subsequent to the election within 30 days after the date the participant becomes eligible to participate in such plan. In the case of any performance-based compensation based on services performed over a period of at least 12 months, such election may be made no later than 6 months before the end of the period. The requirements of this subparagraph are met if, in the case of a plan which permits under a subsequent election a delay in a payment or a change in the form of payment— the plan requires that such election may not take effect until at least 12 months after the date on which the election is made, in the case of an election related to a payment not described in clause (ii), (iii), or (vi) of paragraph (2)(A), the plan requires that the payment with respect to which such election is made be deferred for a period of not less than 5 years from the date such payment would otherwise have been made, and the plan requires that any election related to a payment described in paragraph (2)(A)(iv) may not be made less than 12 months prior to the date of the first scheduled payment under such paragraph.

(b) Rules relating to funding In the case of assets set aside (directly or indirectly) in a trust (or other arrangement determined by the Secretary) for purposes of paying deferred compensation under a nonqualified deferred compensation plan, for purposes of section 83 such assets shall be treated as property transferred in connection with the performance of services whether or not such assets are available to satisfy claims of general creditors— at the time set aside if such assets (or such trust or other arrangement) are located outside of the United States, or at the time transferred if such assets (or such trust or other arrangement) are subsequently transferred outside of the United States. This paragraph shall not apply to assets located in a foreign jurisdiction if substantially all of the services to which the nonqualified deferred compensation relates are performed in such jurisdiction. In the case of compensation deferred under a nonqualified deferred compensation plan, there is a transfer of property within the meaning of section 83 with respect to such compensation as of the earlier of— the date on which the plan first provides that assets will become restricted to the provision of benefits under the plan in connection with a change in the employer’s financial health, or the date on which assets are so restricted, whether or not such assets are available to satisfy claims of general creditors. If— during any restricted period with respect to a single-employer defined benefit plan, assets are set aside or reserved (directly or indirectly) in a trust (or other arrangement as determined by the Secretary) or transferred to such a trust or other arrangement for purposes of paying deferred compensation of an applicable covered employee under a nonqualified deferred compensation plan of the plan sponsor or member of a controlled group which includes the plan sponsor, or a nonqualified deferred compensation plan of the plan sponsor or member of a controlled group which includes the plan sponsor provides that assets will become restricted to the provision of benefits under the plan to an applicable covered employee in connection with such restricted period (or other similar financial measure determined by the Secretary) with respect to the defined benefit plan, or assets are so restricted, such assets shall, for purposes of section 83, be treated as property transferred in connection with the performance of services whether or not such assets are available to satisfy claims of general creditors. Clause (i) shall not apply with respect to any assets which are so set aside before the restricted period with respect to the defined benefit plan. For purposes of this section, the term “restricted period” means, with respect to any plan described in subparagraph (A)— any period during which the plan is in at-risk status (as defined in section 430(i)), any period the plan sponsor is a debtor in a case under title 11, United States Code, or similar Federal or State law, and the 12-month period beginning on the date which is 6 months before the termination date of the plan if, as of the termination date, the plan is not sufficient for benefit liabilities (within the meaning of section 4041 of the Employee Retirement Income Security Act of 1974). If an employer provides directly or indirectly for the payment of any Federal, State, or local income taxes with respect to any compensation required to be included in gross income by reason of this paragraph— interest shall be imposed under subsection (a)(1)(B)(i)(I) on the amount of such payment in the same manner as if such payment was part of the deferred compensation to which it relates, such payment shall be taken into account in determining the amount of the additional tax under subsection (a)(1)(B)(i)(II) in the same manner as if such payment was part of the deferred compensation to which it relates, and no deduction shall be allowed under this title with respect to such payment. For purposes of this section— The term “applicable covered employee” means any— covered employee of a plan sponsor, covered employee of a member of a controlled group which includes the plan sponsor, and former employee who was a covered employee at the time of termination of employment with the plan sponsor or a member of a controlled group which includes the plan sponsor. The term “covered employee” means an individual described in section 162(m)(3) or an individual subject to the requirements of section 16(a) of the Securities Exchange Act of 1934. For each taxable year that assets treated as transferred under this subsection remain set aside in a trust or other arrangement subject to paragraph (1), (2), or (3), any increase in value in, or earnings with respect to, such assets shall be treated as an additional transfer of property under this subsection (to the extent not previously included in income). If amounts are required to be included in gross income by reason of paragraph (1), (2), or (3) for a taxable year, the tax imposed by this chapter for such taxable year shall be increased by the sum of— the amount of interest determined under subparagraph (B), and an amount equal to 20 percent of the amounts required to be included in gross income. For purposes of subparagraph (A), the interest determined under this subparagraph for any taxable year is the amount of interest at the underpayment rate plus 1 percentage point on the underpayments that would have occurred had the amounts so required to be included in gross income by paragraph (1), (2), or (3) been includible in gross income for the taxable year in which first deferred or, if later, the first taxable year in which such amounts are not subject to a substantial risk of forfeiture.

(c) No inference on earlier income inclusion or requirement of later inclusion Nothing in this section shall be construed to prevent the inclusion of amounts in gross income under any other provision of this chapter or any other rule of law earlier than the time provided in this section. Any amount included in gross income under this section shall not be required to be included in gross income under any other provision of this chapter or any other rule of law later than the time provided in this section.

(d) Other definitions and special rules For purposes of this section: The term “nonqualified deferred compensation plan” means any plan that provides for the deferral of compensation, other than— a qualified employer plan, and any bona fide vacation leave, sick leave, compensatory time, disability pay, or death benefit plan. The term “qualified employer plan” means— any plan, contract, pension, account, or trust described in subparagraph (A) or (B) of section 219(g)(5) (without regard to subparagraph (A)(iii)), any eligible deferred compensation plan (within the meaning of section 457(b)), and any plan described in section 415(m). The term “plan” includes any agreement or arrangement, including an agreement or arrangement that includes one person. The rights of a person to compensation are subject to a substantial risk of forfeiture if such person’s rights to such compensation are conditioned upon the future performance of substantial services by any individual. References to deferred compensation shall be treated as including references to income (whether actual or notional) attributable to such compensation or such income. Except as provided by the Secretary, rules similar to the rules of subsections (b) and (c) of section 414 shall apply. An arrangement under which an employee may receive qualified stock (as defined in section 83(i)(2)) shall not be treated as a nonqualified deferred compensation plan with respect to such employee solely because of such employee’s election, or ability to make an election, to defer recognition of income under section 83(i).

(e) Regulations The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section, including regulations— providing for the determination of amounts of deferral in the case of a nonqualified deferred compensation plan which is a defined benefit plan, relating to changes in the ownership and control of a corporation or assets of a corporation for purposes of subsection (a)(2)(A)(v), exempting arrangements from the application of subsection (b) if such arrangements will not result in an improper deferral of United States tax and will not result in assets being effectively beyond the reach of creditors, defining financial health for purposes of subsection (b)(2), and disregarding a substantial risk of forfeiture in cases where necessary to carry out the purposes of this section.

§ 410 Minimum participation standards

(a) Participation A trust shall not constitute a qualified trust under section 401(a) if the plan of which it is a part requires, as a condition of participation in the plan, that an employee complete a period of service with the employer or employers maintaining the plan extending beyond the later of the following dates— the date on which the employee attains the age of 21; or the date on which he completes 1 year of service. In the case of any plan which provides that after not more than 2 years of service each participant has a right to 100 percent of his accrued benefit under the plan which is nonforfeitable (within the meaning of section 411) at the time such benefit accrues, clause (ii) of subparagraph (A) shall be applied by substituting “2 years of service” for “1 year of service”. In the case of any plan maintained exclusively for employees of an educational institution (as defined in section 170(b)(1)(A)(ii)) by an employer which is exempt from tax under section 501(a) which provides that each participant having at least 1 year of service has a right to 100 percent of his accrued benefit under the plan which is nonforfeitable (within the meaning of section 411) at the time such benefit accrues, clause (i) of subparagraph (A) shall be applied by substituting “26” for “21”. This clause shall not apply to any plan to which clause (i) applies. A trust shall not constitute a qualified trust under section 401(a) if the plan of which it is a part excludes from participation (on the basis of age) employees who have attained a specified age. For purposes of this subsection, the term “year of service” means a 12-month period during which the employee has not less than 1,000 hours of service. For purposes of this paragraph, computation of any 12-month period shall be made with reference to the date on which the employee’s employment commenced, except that, under regulations prescribed by the Secretary of Labor, such computation may be made by reference to the first day of a plan year in the case of an employee who does not complete 1,000 hours of service during the 12-month period beginning on the date his employment commenced. In the case of any seasonal industry where the customary period of employment is less than 1,000 hours during a calendar year, the term “year of service” shall be such period as may be determined under regulations prescribed by the Secretary of Labor. For purposes of this subsection, the term “hour of service” means a time of service determined under regulations prescribed by the Secretary of Labor. For purposes of this subsection, in the case of any maritime industry, 125 days of service shall be treated as 1,000 hours of service. The Secretary of Labor may prescribe regulations to carry out this subparagraph. A plan shall be treated as not meeting the requirements of paragraph (1) unless it provides that any employee who has satisfied the minimum age and service requirements specified in such paragraph, and who is otherwise entitled to participate in the plan, commences participation in the plan no later than the earlier of— the first day of the first plan year beginning after the date on which such employee satisfied such requirements, or the date 6 months after the date on which he satisfied such requirements, unless such employee was separated from the service before the date referred to in subparagraph (A) or (B), whichever is applicable. Except as otherwise provided in subparagraphs (B), (C), and (D), all years of service with the employer or employers maintaining the plan shall be taken into account in computing the period of service for purposes of paragraph (1). In the case of any employee who has any 1-year break in service (as defined in section 411(a)(6)(A)) under a plan to which the service requirements of clause (i) of paragraph (1)(B) apply, if such employee has not satisfied such requirements, service before such break shall not be required to be taken into account. In computing an employee’s period of service for purposes of paragraph (1) in the case of any participant who has any 1-year break in service (as defined in section 411(a)(6)(A)), service before such break shall not be required to be taken into account under the plan until he has completed a year of service (as defined in paragraph (3)) after his return. For purposes of paragraph (1), in the case of a nonvested participant, years of service with the employer or employers maintaining the plan before any period of consecutive 1-year breaks in service shall not be required to be taken into account in computing the period of service if the number of consecutive 1-year breaks in service within such period equals or exceeds the greater of— 5, or the aggregate number of years of service before such period. If any years of service are not required to be taken into account by reason of a period of breaks in service to which clause (i) applies, such years of service shall not be taken into account in applying clause (i) to a subsequent period of breaks in service. For purposes of clause (i), the term “nonvested participant” means a participant who does not have any nonforfeitable right under the plan to an accrued benefit derived from employer contributions. In the case of each individual who is absent from work for any period— by reason of the pregnancy of the individual, by reason of the birth of a child of the individual, by reason of the placement of a child with the individual in connection with the adoption of such child by such individual, or for purposes of caring for such child for a period beginning immediately following such birth or placement, the plan shall treat as hours of service, solely for purposes of determining under this paragraph whether a 1-year break in service (as defined in section 411(a)(6)(A)) has occurred, the hours described in clause (ii). The hours described in this clause are— the hours of service which otherwise would normally have been credited to such individual but for such absence, or in any case in which the plan is unable to determine the hours described in subclause (I), 8 hours of service per day of such absence, except that the total number of hours treated as hours of service under this clause by reason of any such pregnancy or placement shall not exceed 501 hours. The hours described in clause (ii) shall be treated as hours of service as provided in this subparagraph— only in the year in which the absence from work begins, if a participant would be prevented from incurring a 1-year break in service in such year solely because the period of absence is treated as hours of service as provided in clause (i); or in any other case, in the immediately following year. For purposes of this subparagraph, the term “year” means the period used in computations pursuant to paragraph (3). A plan shall not fail to satisfy the requirements of this subparagraph solely because it provides that no credit will be given pursuant to this subparagraph unless the individual furnishes to the plan administrator such timely information as the plan may reasonably require to establish— that the absence from work is for reasons referred to in clause (i), and the number of days for which there was such an absence.

(b) Minimum coverage requirements A trust shall not constitute a qualified trust under section 401(a) unless such trust is designated by the employer as part of a plan which meets 1 of the following requirements: The plan benefits at least 70 percent of employees who are not highly compensated employees. The plan benefits— a percentage of employees who are not highly compensated employees which is at least 70 percent of the percentage of highly compensated employees benefiting under the plan. The plan meets the requirements of paragraph (2). A plan shall be treated as meeting the requirements of this paragraph if— the plan benefits such employees as qualify under a classification set up by the employer and found by the Secretary not to be discriminatory in favor of highly compensated employees, and the average benefit percentage for employees who are not highly compensated employees is at least 70 percent of the average benefit percentage for highly compensated employees. For purposes of this paragraph, the term “average benefit percentage” means, with respect to any group, the average of the benefit percentages calculated separately with respect to each employee in such group (whether or not a participant in any plan). For purposes of this paragraph— The term “benefit percentage” means the employer-provided contribution or benefit of an employee under all qualified plans maintained by the employer, expressed as a percentage of such employee’s compensation (within the meaning of section 414(s)). At the election of an employer, the benefit percentage for any plan year shall be computed on the basis of contributions or benefits for— such plan year, or any consecutive plan year period (not greater than 3 years) which ends with such plan year and which is specified in such election. An election under this clause, once made, may be revoked or modified only with the consent of the Secretary. For purposes of determining who is an employee for purposes of determining the average benefit percentage under subparagraph (B)— except as provided in clause (ii), paragraph (4)(A) shall not apply, or if the employer elects, paragraph (4)(A) shall be applied by using the lowest age and service requirements of all qualified plans maintained by the employer. For purposes of this paragraph, the term “qualified plan” means any plan which (without regard to this subsection) meets the requirements of section 401(a). For purposes of this subsection, there shall be excluded from consideration— employees who are included in a unit of employees covered by an agreement which the Secretary of Labor finds to be a collective bargaining agreement between employee representatives and one or more employers, if there is evidence that retirement benefits were the subject of good faith bargaining between such employee representatives and such employer or employers, in the case of a trust established or maintained pursuant to an agreement which the Secretary of Labor finds to be a collective bargaining agreement between air pilots represented in accordance with title II of the Railway Labor Act and one or more employers, all employees not covered by such agreement, and employees who are nonresident aliens and who receive no earned income (within the meaning of section 911(d)(2)) from the employer which constitutes income from sources within the United States (within the meaning of section 861(a)(3)). Subparagraph (A) shall not apply with respect to coverage of employees under a plan pursuant to an agreement under such subparagraph. For purposes of subparagraph (B), management pilots who are not represented in accordance with title II of the Railway Labor Act shall be treated as covered by a collective bargaining agreement described in such subparagraph if the management pilots manage the flight operations of air pilots who are so represented and the management pilots are, pursuant to the terms of the agreement, included in the group of employees benefitting under the trust described in such subparagraph. Subparagraph (B) shall not apply in the case of a plan which provides contributions or benefits for employees whose principal duties are not customarily performed aboard an aircraft in flight (other than management pilots described in the preceding sentence). If a plan— prescribes minimum age and service requirements as a condition of participation, and excludes all employees not meeting such requirements from participation, then such employees shall be excluded from consideration for purposes of this subsection. If employees not meeting the minimum age or service requirements of subsection (a)(1) (without regard to subparagraph (B) thereof) are covered under a plan of the employer which meets the requirements of paragraph (1) separately with respect to such employees, such employees may be excluded from consideration in determining whether any plan of the employer meets the requirements of paragraph (1). An employee shall not be treated as meeting the age and service requirements described in this paragraph until the first date on which, under the plan, any employee with the same age and service would be eligible to commence participation in the plan. If, under section 414(r), an employer is treated as operating separate lines of business for a year, the employer may apply the requirements of this subsection for such year separately with respect to employees in each separate line of business. Subparagraph (A) shall not apply with respect to any plan maintained by an employer unless such plan benefits such employees as qualify under a classification set up by the employer and found by the Secretary not to be discriminatory in favor of highly compensated employees. For purposes of this subsection— The term “highly compensated employee” has the meaning given such term by section 414(q). An employer may elect to designate— 2 or more trusts, 1 or more trusts and 1 or more annuity plans, or 2 or more annuity plans, as part of 1 plan intended to qualify under section 401(a) to determine whether the requirements of this subsection are met with respect to such trusts or annuity plans. If an employer elects to treat any trusts or annuity plans as 1 plan under this subparagraph, such trusts or annuity plans shall be treated as 1 plan for purposes of section 401(a)(4). If a person becomes, or ceases to be, a member of a group described in subsection (b), (c), (m), or (o) of section 414, then the requirements of this subsection shall be treated as having been met during the transition period with respect to any plan covering employees of such person or any other member of such group if— such requirements were met immediately before each such change, and the coverage under such plan is not significantly changed during the transition period (other than by reason of the change in members of a group) or such plan meets such other requirements as the Secretary may prescribe by regulation. For purposes of clause (i), the term “transition period” means the period— beginning on the date of the change in members of a group, and ending on the last day of the 1st plan year beginning after the date of such change. A trust which is part of a tax credit employee stock ownership plan which is the only plan of an employer intended to qualify under section 401(a) shall not be treated as not a qualified trust under section 401(a) solely because it fails to meet the requirements of this subsection if— such plan benefits 50 percent or more of all the employees who are eligible under a nondiscriminatory classification under the plan, and the sum of the amounts allocated to each participant’s account for the year does not exceed 2 percent of the compensation of that participant for the year. In the case of contributions which are subject to section 401(k) or 401(m), employees who are eligible to contribute (or elect to have contributions made on their behalf) shall be treated as benefiting under the plan (other than for purposes of paragraph (2)(A)(ii)). A plan maintained by an employer which has no employees other than highly compensated employees for any year shall be treated as meeting the requirements of this subsection for such year. The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this subsection.

(c) Application of participation standards to certain plans The provisions of this section (other than paragraph (2) of this subsection) shall not apply to— a governmental plan (within the meaning of section 414(d)), a church plan (within the meaning of section 414(e)) with respect to which the election provided by subsection (d) of this section has not been made, a plan which has not at any time after September 2, 1974 , provided for employer contributions, and a plan established and maintained by a society, order, or association described in section 501(c)(8) or (9) if no part of the contributions to or under such plan are made by employers of participants in such plan. A plan described in paragraph (1) shall be treated as meeting the requirements of this section for purposes of section 401(a), except that in the case of a plan described in subparagraph (B), (C), or (D) of paragraph (1), this paragraph shall apply only if such plan meets the requirements of section 401(a)(3) (as in effect on September 1, 1974 ).

(d) Election by church to have participation, vesting, funding, etc., provisions apply If the church or convention or association of churches which maintains any church plan makes an election under this subsection (in such form and manner as the Secretary may by regulations prescribe), then the provisions of this title relating to participation, vesting, funding, etc. (as in effect from time to time) shall apply to such church plan as if such provisions did not contain an exclusion for church plans. An election under this subsection with respect to any church plan shall be binding with respect to such plan, and, once made, shall be irrevocable.

§ 411 Minimum vesting standards

(a) General rule A trust shall not constitute a qualified trust under section 401(a) unless the plan of which such trust is a part provides that an employee’s right to his normal retirement benefit is nonforfeitable upon the attainment of normal retirement age (as defined in paragraph (8)) and in addition satisfies the requirements of paragraphs (1), (2), and (11) of this subsection and the requirements of subsection (b)(3), and also satisfies, in the case of a defined benefit plan, the requirements of subsection (b)(1) and, in the case of a defined contribution plan, the requirements of subsection (b)(2). A plan satisfies the requirements of this paragraph if an employee’s rights in his accrued benefit derived from his own contributions are nonforfeitable. In the case of a defined benefit plan, a plan satisfies the requirements of this paragraph if it satisfies the requirements of clause (ii) or (iii). A plan satisfies the requirements of this clause if an employee who has completed at least 5 years of service has a nonforfeitable right to 100 percent of the employee’s accrued benefit derived from employer contributions. A plan satisfies the requirements of this clause if an employee has a nonforfeitable right to a percentage of the employee’s accrued benefit derived from employer contributions determined under the following table: Years of service: The nonforfeitable percentage is: 3 20 4 40 5 60 6 80 7 or more 100. In the case of a defined contribution plan, a plan satisfies the requirements of this paragraph if it satisfies the requirements of clause (ii) or (iii). A plan satisfies the requirements of this clause if an employee who has completed at least 3 years of service has a nonforfeitable right to 100 percent of the employee’s accrued benefit derived from employer contributions. A plan satisfies the requirements of this clause if an employee has a nonforfeitable right to a percentage of the employee’s accrued benefit derived from employer contributions determined under the following table: Years of service: The nonforfeitable percentage is: 2 20 3 40 4 60 5 80 6 or more 100. For purposes of this subsection— A right to an accrued benefit derived from employer contributions shall not be treated as forfeitable solely because the plan provides that it is not payable if the participant dies (except in the case of a survivor annuity which is payable as provided in section 401(a)(11)). A right to an accrued benefit derived from employer contributions shall not be treated as forfeitable solely because the plan provides that the payment of benefits is suspended for such period as the employee is employed, subsequent to the commencement of payment of such benefits— in the case of a plan other than a multi-employer plan, by the employer who maintains the plan under which such benefits were being paid; and in the case of a multiemployer plan, in the same industry, the same trade or craft, and the same geographic area covered by the plan as when such benefits commenced. The Secretary of Labor shall prescribe such regulations as may be necessary to carry out the purposes of this subparagraph, including regulations with respect to the meaning of the term “employed”. A right to an accrued benefit derived from employer contributions shall not be treated as forfeitable solely because plan amendments may be given retroactive application as provided in section 412(d)(2). A right to an accrued benefit derived from employer contributions shall not be treated as forfeitable solely because the plan provides that, in the case of a participant who does not have a nonforfeitable right to at least 50 percent of his accrued benefit derived from employer contributions, such accrued benefit may be forfeited on account of the withdrawal by the participant of any amount attributable to the benefit derived from mandatory contributions (as defined in subsection (c)(2)(C)) made by such participant. Clause (i) shall not apply to a plan unless the plan provides that any accrued benefit forfeited under a plan provision described in such clause shall be restored upon repayment by the participant of the full amount of the withdrawal described in such clause plus, in the case of a defined benefit plan, interest. Such interest shall be computed on such amount at the rate determined for purposes of subsection (c)(2)(C) on the date of such repayment (computed annually from the date of such withdrawal). The plan provision required under this clause may provide that such repayment must be made (I) in the case of a withdrawal on account of separation from service, before the earlier of 5 years after the first date on which the participant is subsequently re-employed by the employer, or the close of the first period of 5 consecutive 1-year breaks in service commencing after the withdrawal; or (II) in the case of any other withdrawal, 5 years after the date of the withdrawal. In the case of accrued benefits derived from employer contributions which accrued before September 2, 1974 , a right to such accrued benefit derived from employer contributions shall not be treated as forfeitable solely because the plan provides that an amount of such accrued benefit may be forfeited on account of the withdrawal by the participant of an amount attributable to the benefit derived from mandatory contributions (as defined in subsection (c)(2)(C)) made by such participant before September 2, 1974 if such amount forfeited is proportional to such amount withdrawn. This clause shall not apply to any plan to which any mandatory contribution is made after September 2, 1974 . The Secretary shall prescribe such regulations as may be necessary to carry out the purposes of this clause. For purposes of this subparagraph, in the case of any class-year plan, a withdrawal of employee contributions shall be treated as a withdrawal of such contributions on a plan year by plan year basis in succeeding order of time. For nonforfeitability where the employee has a nonforfeitable right to at least 50 percent of his accrued benefit, see section 401(a)(19). A right to an accrued benefit derived from employer contributions under a multiemployer plan shall not be treated as forfeitable solely because the plan provides that benefits accrued as a result of service with the participant’s employer before the employer had an obligation to contribute under the plan may not be payable if the employer ceases contributions to the multiemployer plan. A participant’s right to an accrued benefit derived from employer contributions under a multiemployer plan shall not be treated as forfeitable solely because— the plan is amended to reduce benefits under section 4281 of the Employee Retirement Income Security Act of 1974, or benefit payments under the plan may be suspended under section 418E or under section 4281 of the Employee Retirement Income Security Act of 1974. A matching contribution (within the meaning of section 401(m)) shall not be treated as forfeitable merely because such contribution is forfeitable if the contribution to which the matching contribution relates is treated as an excess contribution under section 401(k)(8)(B), an excess deferral under section 402(g)(2)(A), a permissible withdrawal under section 414(w), or an excess aggregate contribution under section 401(m)(6)(B). In computing the period of service under the plan for purposes of determining the nonforfeitable percentage under paragraph (2), all of an employee’s years of service with the employer or employers maintaining the plan shall be taken into account, except that the following may be disregarded: years of service before age 18; years of service during a period for which the employee declined to contribute to a plan requiring employee contributions; years of service with an employer during any period for which the employer did not maintain the plan or a predecessor plan (as defined under regulations prescribed by the Secretary); service not required to be taken into account under paragraph (6); years of service before January 1, 1971 , unless the employee has had at least 3 years of service after December 31, 1970 ; years of service before the first plan year to which this section applies, if such service would have been disregarded under the rules of the plan with regard to breaks in service as in effect on the applicable date; and in the case of a multiemployer plan, years of service— with an employer after— a complete withdrawal of that employer from the plan (within the meaning of section 4203 of the Employee Retirement Income Security Act of 1974), or to the extent permitted in regulations prescribed by the Secretary, a partial withdrawal described in section 4205(b)(2)(A)(i) of such Act in conjunction with the decertification of the collective bargaining representative, and with any employer under the plan after the termination date of the plan under section 4048 of such Act. For purposes of this subsection, except as provided in subparagraph (C), the term “year of service” means a calendar year, plan year, or other 12-consecutive month period designated by the plan (and not prohibited under regulations prescribed by the Secretary of Labor) during which the participant has completed 1,000 hours of service. For purposes of this subsection, the term “hours of service” has the meaning provided by section 410(a)(3)(C). In the case of any seasonal industry where the customary period of employment is less than 1,000 hours during a calendar year, the term “year of service” shall be such period as may be determined under regulations prescribed by the Secretary of Labor. For purposes of this subsection, in the case of any maritime industry, 125 days of service shall be treated as 1,000 hours of service. The Secretary of Labor may prescribe regulations to carry out the purposes of this subparagraph. For purposes of this paragraph, the term “1-year break in service” means a calendar year, plan year, or other 12-consecutive-month period designated by the plan (and not prohibited under regulations prescribed by the Secretary of Labor) during which the participant has not completed more than 500 hours of service. For purposes of paragraph (4), in the case of any employee who has any 1-year break in service, years of service before such break shall not be required to be taken into account until he has completed a year of service after his return. For purposes of paragraph (4), in the case of any participant in a defined contribution plan, or an insured defined benefit plan which satisfies the requirements of subsection (b)(1)(F), who has 5 consecutive 1-year breaks in service, years of service after such 5-year period shall not be required to be taken into account for purposes of determining the nonforfeitable percentage of his accrued benefit derived from employer contributions which accrued before such 5-year period. For purposes of paragraph (4), in the case of a nonvested participant, years of service with the employer or employers maintaining the plan before any period of consecutive 1-year breaks in service shall not be required to be taken into account if the number of consecutive 1-year breaks in service within such period equals or exceeds the greater of— 5, or the aggregate number of years of service before such period. If any years of service are not required to be taken into account by reason of a period of breaks in service to which clause (i) applies, such years of service shall not be taken into account in applying clause (i) to a subsequent period of breaks in service. For purposes of clause (i), the term “nonvested participant” means a participant who does not have any nonforfeitable right under the plan to an accrued benefit derived from employer contributions. In the case of each individual who is absent from work for any period— by reason of the pregnancy of the individual, by reason of the birth of a child of the individual, by reason of the placement of a child with the individual in connection with the adoption of such child by such individual, or for purposes of caring for such child for a period beginning immediately following such birth or placement, the plan shall treat as hours of service, solely for purposes of determining under this paragraph whether a 1-year break in service has occurred, the hours described in clause (ii). The hours described in this clause are— the hours of service which otherwise would normally have been credited to such individual but for such absence, or in any case in which the plan is unable to determine the hours described in subclause (I), 8 hours of service per day of absence, except that the total number of hours treated as hours of service under this clause by reason of any such pregnancy or placement shall not exceed 501 hours. The hours described in clause (ii) shall be treated as hours of service as provided in this subparagraph— only in the year in which the absence from work begins, if a participant would be prevented from incurring a 1-year break in service in such year solely because the period of absence is treated as hours of service as provided in clause (i); or in any other case, in the immediately following year. For purposes of this subparagraph, the term “year” means the period used in computations pursuant to paragraph (5). A plan shall not fail to satisfy the requirements of this subparagraph solely because it provides that no credit will be given pursuant to this subparagraph unless the individual furnishes to the plan administrator such timely information as the plan may reasonably require to establish— that the absence from work is for reasons referred to in clause (i), and the number of days for which there was such an absence. For purposes of this section, the term “accrued benefit” means— in the case of a defined benefit plan, the employee’s accrued benefit determined under the plan and, except as provided in subsection (c)(3), expressed in the form of an annual benefit commencing at normal retirement age, or in the case of a plan which is not a defined benefit plan, the balance of the employee’s account. Notwithstanding paragraph (4), for purposes of determining the employee’s accrued benefit under the plan, the plan may disregard service performed by the employee with respect to which he has received— a distribution of the present value of his entire nonforfeitable benefit if such distribution was in an amount (not more than the dollar limit under section 411(a)(11)(A)) permitted under regulations prescribed by the Secretary, or a distribution of the present value of his nonforfeitable benefit attributable to such service which he elected to receive. Clause (i) of this subparagraph shall apply only if such distribution was made on termination of the employee’s participation in the plan. Clause (ii) of this subparagraph shall apply only if such distribution was made on termination of the employee’s participation in the plan or under such other circumstances as may be provided under regulations prescribed by the Secretary. For purposes of determining the employee’s accrued benefit under a plan, the plan may not disregard service as provided in subparagraph (B) unless the plan provides an opportunity for the participant to repay the full amount of the distribution described in such subparagraph (B) with, in the case of a defined benefit plan, interest at the rate determined for purposes of subsection (c)(2)(C) and provides that upon such repayment the employee’s accrued benefit shall be recomputed by taking into account service so disregarded. This subparagraph shall apply only in the case of a participant who— received such a distribution in any plan year to which this section applies, which distribution was less than the present value of his accrued benefit, resumes employment covered under the plan, and repays the full amount of such distribution with, in the case of a defined benefit plan, interest at the rate determined for purposes of subsection (c)(2)(C). The plan provision required under this subparagraph may provide that such repayment must be made (I) in the case of a withdrawal on account of separation from service, before the earlier of 5 years after the first date on which the participant is subsequently re-employed by the employer, or the close of the first period of 5 consecutive 1-year breaks in service commencing after the withdrawal; or (II) in the case of any other withdrawal, 5 years after the date of the withdrawal. The accrued benefit of an employee shall not be less than the amount determined under subsection (c)(2)(B) with respect to the employee’s accumulated contributions. For purposes of this section, the term “normal retirement age” means the earlier of— the time a plan participant attains normal retirement age under the plan, or the later of— the time a plan participant attains age 65, or the 5th anniversary of the time a plan participant commenced participation in the plan. For purposes of this section, the term “normal retirement benefit” means the greater of the early retirement benefit under the plan, or the benefit under the plan commencing at normal retirement age. The normal retirement benefit shall be determined without regard to— medical benefits, and disability benefits not in excess of the qualified disability benefit. For purposes of this paragraph, a qualified disability benefit is a disability benefit provided by a plan which does not exceed the benefit which would be provided for the participant if he separated from the service at normal retirement age. For purposes of this paragraph, the early retirement benefit under a plan shall be determined without regard to any benefits commencing before benefits payable under title II of the Social Security Act become payable which— do not exceed such social security benefits, and terminate when such social security benefits commence. A plan amendment changing any vesting schedule under the plan shall be treated as not satisfying the requirements of paragraph (2) if the nonforfeitable percentage of the accrued benefit derived from employer contributions (determined as of the later of the date such amendment is adopted, or the date such amendment becomes effective) of any employee who is a participant in the plan is less than such nonforfeitable percentage computed under the plan without regard to such amendment. A plan amendment changing any vesting schedule under the plan shall be treated as not satisfying the requirements of paragraph (2) unless each participant having not less than 3 years of service is permitted to elect, within a reasonable period after the adoption of such amendment, to have his nonforfeitable percentage computed under the plan without regard to such amendment. If the present value of any nonforfeitable accrued benefit exceeds $7,000, a plan meets the requirements of this paragraph only if such plan provides that such benefit may not be immediately distributed without the consent of the participant. For purposes of subparagraph (A), the present value shall be calculated in accordance with section 417(e)(3). This paragraph shall not apply to any distribution of dividends to which section 404(k) applies. A plan shall not fail to meet the requirements of this paragraph if, under the terms of the plan, the present value of the nonforfeitable accrued benefit is determined without regard to that portion of such benefit which is attributable to rollover contributions (and earnings allocable thereto). For purposes of this subparagraph, the term “rollover contributions” means any rollover contribution under sections 402(c), 403(a)(4), 403(b)(8), 408(d)(3)(A)(ii), and 457(e)(16). An applicable defined benefit plan shall not be treated as failing to meet— subject to subparagraph (B), the requirements of subsection (a)(2), or the requirements of subsection (a)(11) or (c), or the requirements of section 417(e), with respect to accrued benefits derived from employer contributions, solely because the present value of the accrued benefit (or any portion thereof) of any participant is, under the terms of the plan, equal to the amount expressed as the balance in the hypothetical account described in subparagraph (C) or as an accumulated percentage of the participant’s final average compensation. In the case of an applicable defined benefit plan, such plan shall be treated as meeting the requirements of subsection (a)(2) only if an employee who has completed at least 3 years of service has a nonforfeitable right to 100 percent of the employee’s accrued benefit derived from employer contributions. For purposes of this subsection— The term “applicable defined benefit plan” means a defined benefit plan under which the accrued benefit (or any portion thereof) is calculated as the balance of a hypothetical account maintained for the participant or as an accumulated percentage of the participant’s final average compensation. The Secretary shall issue regulations which include in the definition of an applicable defined benefit plan any defined benefit plan (or any portion of such a plan) which has an effect similar to an applicable defined benefit plan.

(b) Accrued benefit requirements A defined benefit plan satisfies the requirements of this paragraph if the accrued benefit to which each participant is entitled upon his separation from the service is not less than— 3 percent of the normal retirement benefit to which he would be entitled if he commenced participation at the earliest possible entry age under the plan and served continuously until the earlier of age 65 or the normal retirement age specified under the plan, multiplied by the number of years (not in excess of 33⅓) of his participation in the plan. In the case of a plan providing retirement benefits based on compensation during any period, the normal retirement benefit to which a participant would be entitled shall be determined as if he continued to earn annually the average rate of compensation which he earned during consecutive years of service, not in excess of 10, for which his compensation was the highest. For purposes of this subparagraph, social security benefits and all other relevant factors used to compute benefits shall be treated as remaining constant as of the current year for all years after such current year. A defined benefit plan satisfies the requirements of this paragraph for a particular plan year if under the plan the accrued benefit payable at the normal retirement age is equal to the normal retirement benefit and the annual rate at which any individual who is or could be a participant can accrue the retirement benefits payable at normal retirement age under the plan for any later plan year is not more than 133⅓ percent of the annual rate at which he can accrue benefits for any plan year beginning on or after such particular plan year and before such later plan year. For purposes of this subparagraph— any amendment to the plan which is in effect for the current year shall be treated as in effect for all other plan years; any change in an accrual rate which does not apply to any individual who is or could be a participant in the current year shall be disregarded; the fact that benefits under the plan may be payable to certain employees before normal retirement age shall be disregarded; and social security benefits and all other relevant factors used to compute benefits shall be treated as remaining constant as of the current year for all years after the current year. A defined benefits plan satisfies the requirements of this paragraph if the accrued benefit to which any participant is entitled upon his separation from the service is not less than a fraction of the annual benefit commencing at normal retirement age to which he would be entitled under the plan as in effect on the date of his separation if he continued to earn annually until normal retirement age the same rate of compensation upon which his normal retirement benefit would be computed under the plan, determined as if he had attained normal retirement age on the date on which any such determination is made (but taking into account no more than the 10 years of service immediately preceding his separation from service). Such fraction shall be a fraction, not exceeding 1, the numerator of which is the total number of his years of participation in the plan (as of the date of his separation from the service) and the denominator of which is the total number of years he would have participated in the plan if he separated from the service at the normal retirement age. For purposes of this subparagraph, social security benefits and all other relevant factors used to compute benefits shall be treated as remaining constant as of the current year for all years after such current year. Subparagraphs (A), (B), and (C) shall not apply with respect to years of participation before the first plan year to which this section applies, but a defined benefit plan satisfies the requirements of this subparagraph with respect to such years of participation only if the accrued benefit of any participant with respect to such years of participation is not less than the greater of— his accrued benefit determined under the plan, as in effect from time to time prior to September 2, 1974 , or an accrued benefit which is not less than one-half of the accrued benefit to which such participant would have been entitled if subparagraph (A), (B), or (C) applied with respect to such years of participation. Notwithstanding subparagraphs (A), (B), and (C) of this paragraph, a plan shall not be treated as not satisfying the requirements of this paragraph solely because the accrual of benefits under the plan does not become effective until the employee has two continuous years of service. For purposes of this subparagraph, the term “years of service” has the meaning provided by section 410(a)(3)(A). Notwithstanding subparagraphs (A), (B), and (C), a defined benefit plan satisfies the requirements of this paragraph if such plan— is funded exclusively by the purchase of insurance contracts, and satisfies the requirements of subparagraphs (B) and (C) of section 412(e)(3) (relating to certain insurance contract plans), but only if an employee’s accrued benefit as of any applicable date is not less than the cash surrender value his insurance contracts would have on such applicable date if the requirements of subparagraphs (D), (E), and (F) of section 412(e)(3) were satisfied. Notwithstanding the preceding subparagraphs, a defined benefit plan shall be treated as not satisfying the requirements of this paragraph if the participant’s accrued benefit is reduced on account of any increase in his age or service. The preceding sentence shall not apply to benefits under the plan commencing before entitlement to benefits payable under title II of the Social Security Act which benefits under the plan— do not exceed such social security benefits, and terminate when such social security benefits commence. Notwithstanding the preceding subparagraphs, a defined benefit plan shall be treated as not satisfying the requirements of this paragraph if, under the plan, an employee’s benefit accrual is ceased, or the rate of an employee’s benefit accrual is reduced, because of the attainment of any age. A plan shall not be treated as failing to meet the requirements of this subparagraph solely because the plan imposes (without regard to age) a limitation on the amount of benefits that the plan provides or a limitation on the number of years of service or years of participation which are taken into account for purposes of determining benefit accrual under the plan. In the case of any employee who, as of the end of any plan year under a defined benefit plan, has attained normal retirement age under such plan— if distribution of benefits under such plan with respect to such employee has commenced as of the end of such plan year, then any requirement of this subparagraph for continued accrual of benefits under such plan with respect to such employee during such plan year shall be treated as satisfied to the extent of the actuarial equivalent of inservice distribution of benefits, and if distribution of benefits under such plan with respect to such employee has not commenced as of the end of such year in accordance with section 401(a)(14)(C), and the payment of benefits under such plan with respect to such employee is not suspended during such plan year pursuant to subsection (a)(3)(B), then any requirement of this subparagraph for continued accrual of benefits under such plan with respect to such employee during such plan year shall be treated as satisfied to the extent of any adjustment in the benefit payable under the plan during such plan year attributable to the delay in the distribution of benefits after the attainment of normal retirement age. The preceding provisions of this clause shall apply in accordance with regulations of the Secretary. Such regulations may provide for the application of the preceding provisions of this clause, in the case of any such employee, with respect to any period of time within a plan year. A plan shall not be treated as failing to meet the requirements of clause (i) solely because the subsidized portion of any early retirement benefit is disregarded in determining benefit accruals. The Secretary shall provide by regulation for the coordination of the requirements of this subparagraph with the requirements of subsection (a), sections 404, 410, and 415, and the provisions of this subchapter precluding discrimination in favor of highly compensated employees. A defined contribution plan satisfies the requirements of this paragraph if, under the plan, allocations to the employee’s account are not ceased, and the rate at which amounts are allocated to the employee’s account is not reduced, because of the attainment of any age. The Secretary shall provide by regulation for the application of the requirements of this paragraph to target benefit plans. The Secretary may provide by regulation for the coordination of the requirements of this paragraph with the requirements of subsection (a), sections 404, 410, and 415, and the provisions of this subchapter precluding discrimination in favor of highly compensated employees. A plan satisfies the requirements of this paragraph if— in the case of the defined benefit plan, the plan requires separate accounting for the portion of each employee’s accrued benefit derived from any voluntary employee contributions permitted under the plan; and in the case of any plan which is not a defined benefit plan, the plan requires separate accounting for each employee’s accrued benefit. For purposes of determining an employee’s accrued benefit, the term “year of participation” means a period of service (beginning at the earliest date on which the employee is a participant in the plan and which is included in a period of service required to be taken into account under section 410(a)(5), determined without regard to section 410(a)(5)(E)) as determined under regulations prescribed by the Secretary of Labor which provide for the calculation of such period on any reasonable and consistent basis. For purposes of this paragraph, except as provided in subparagraph (C), in the case of any employee whose customary employment is less than full time, the calculation of such employee’s service on any basis which provides less than a ratable portion of the accrued benefit to which he would be entitled under the plan if his customary employment were full time shall not be treated as made on a reasonable and consistent basis. For purposes of this paragraph, in the case of any employee whose service is less than 1,000 hours during any calendar year, plan year or other 12-consecutive month period designated by the plan (and not prohibited under regulations prescribed by the Secretary of Labor) the calculation of his period of service shall not be treated as not made on a reasonable and consistent basis solely because such service is not taken into account. In the case of any seasonal industry where the customary period of employment is less than 1,000 hours during a calendar year, the term “year of participation” shall be such period as determined under regulations prescribed by the Secretary of Labor. For purposes of this subsection, in the case of any maritime industry, 125 days of service shall be treated as a year of participation. The Secretary of Labor may prescribe regulations to carry out the purposes of this subparagraph. A plan shall not be treated as failing to meet the requirements of paragraph (1)(H)(i) if a participant’s accrued benefit, as determined as of any date under the terms of the plan, would be equal to or greater than that of any similarly situated, younger individual who is or could be a participant. For purposes of this subparagraph, a participant is similarly situated to any other individual if such participant is identical to such other individual in every respect (including period of service, compensation, position, date of hire, work history, and any other respect) except for age. In determining the accrued benefit as of any date for purposes of this subparagraph, the subsidized portion of any early retirement benefit or retirement-type subsidy shall be disregarded. For purposes of this subparagraph, the accrued benefit may, under the terms of the plan, be expressed as an annuity payable at normal retirement age, the balance of a hypothetical account, or the current value of the accumulated percentage of the employee’s final average compensation. An applicable defined benefit plan shall be treated as failing to meet the requirements of paragraph (1)(H) unless the terms of the plan provide that any interest credit (or an equivalent amount) for any plan year shall be at a rate which is not greater than a market rate of return. A plan shall not be treated as failing to meet the requirements of this subclause merely because the plan provides for a reasonable minimum guaranteed rate of return or for a rate of return that is equal to the greater of a fixed or variable rate of return. An applicable defined benefit plan shall be treated as failing to meet the requirements of paragraph (1)(H) unless the plan provides that an interest credit (or equivalent amount) of less than zero shall in no event result in the account balance or similar amount being less than the aggregate amount of contributions credited to the account. The Secretary may provide by regulation for rules governing the calculation of a market rate of return for purposes of subclause (I) and for permissible methods of crediting interest to the account (including fixed or variable interest rates) resulting in effective rates of return meeting the requirements of subclause (I). If, after June 29, 2005 , an applicable plan amendment is adopted, the plan shall be treated as failing to meet the requirements of paragraph (1)(H) unless the requirements of clause (iii) are met with respect to each individual who was a participant in the plan immediately before the adoption of the amendment. Subject to clause (iv), the requirements of this clause are met with respect to any participant if the accrued benefit of the participant under the terms of the plan as in effect after the amendment is not less than the sum of— the participant’s accrued benefit for years of service before the effective date of the amendment, determined under the terms of the plan as in effect before the amendment, plus the participant’s accrued benefit for years of service after the effective date of the amendment, determined under the terms of the plan as in effect after the amendment. For purposes of clause (iii)(I), the plan shall credit the accumulation account or similar amount 1 with the amount of any early retirement benefit or retirement-type subsidy for the plan year in which the participant retires if, as of such time, the participant has met the age, years of service, and other requirements under the plan for entitlement to such benefit or subsidy. For purposes of this subparagraph— The term “applicable plan amendment” means an amendment to a defined benefit plan which has the effect of converting the plan to an applicable defined benefit plan. If the benefits of 2 or more defined benefit plans established or maintained by an employer are coordinated in such a manner as to have the effect of the adoption of an amendment described in subclause (I), the sponsor of the defined benefit plan or plans providing for such coordination shall be treated as having adopted such a plan amendment as of the date such coordination begins. The Secretary shall issue regulations to prevent the avoidance of the purposes of this subparagraph through the use of 2 or more plan amendments rather than a single amendment. For purposes of this subparagraph, the term “applicable defined benefit plan” has the meaning given such term by section 411(a)(13). An applicable defined benefit plan shall not be treated as meeting the requirements of clause (i) unless the plan provides that, upon the termination of the plan— if the interest credit rate (or an equivalent amount) under the plan is a variable rate, the rate of interest used to determine accrued benefits under the plan shall be equal to the average of the rates of interest used under the plan during the 5-year period ending on the termination date, and the interest rate and mortality table used to determine the amount of any benefit under the plan payable in the form of an annuity payable at normal retirement age shall be the rate and table specified under the plan for such purpose as of the termination date, except that if such interest rate is a variable rate, the interest rate shall be determined under the rules of subclause (I). A plan shall not be treated as failing to meet the requirements of paragraph (1)(H)(i) solely because the plan provides offsets against benefits under the plan to the extent such offsets are otherwise allowable in applying the requirements of section 401(a). A plan shall not be treated as failing to meet the requirements of paragraph (1)(H) solely because the plan provides a disparity in contributions or benefits with respect to which the requirements of section 401( l ) are met. A plan shall not be treated as failing to meet the requirements of paragraph (1)(H) solely because the plan provides for indexing of accrued benefits under the plan. Except in the case of any benefit provided in the form of a variable annuity, clause (i) shall not apply with respect to any indexing which results in an accrued benefit less than the accrued benefit determined without regard to such indexing. For purposes of this subparagraph, the term “indexing” means, in connection with an accrued benefit, the periodic adjustment of the accrued benefit by means of the application of a recognized investment index or methodology. For purposes of this paragraph, the terms “early retirement benefit” and “retirement-type subsidy” have the meaning given such terms in subsection (d)(6)(B)(i). For purposes of this paragraph, any reference to the accrued benefit shall be a reference to such benefit accrued to date. For purposes of subparagraphs (A), (B), and (C) of paragraph (1), in the case of an applicable defined benefit plan (as defined in subsection (a)(13)(C)) which provides variable interest crediting rates, the interest crediting rate which is treated as in effect and as the projected interest crediting rate shall be a reasonable projection of such variable interest crediting rate, not to exceed 6 percent.

(c) Allocation of accrued benefits between employer and employee contributions For purposes of this section, an employee’s accrued benefit derived from employer contributions as of any applicable date is the excess, if any, of the accrued benefit for such employee as of such applicable date over the accrued benefit derived from contributions made by such employee as of such date. In the case of a plan other than a defined benefit plan, the accrued benefit derived from contributions made by an employee as of any applicable date is— except as provided in clause (ii), the balance of the employee’s separate account consisting only of his contributions and the income, expenses, gains, and losses attributable thereto, or if a separate account is not maintained with respect to an employee’s contributions under such a plan, the amount which bears the same ratio to his total accrued benefit as the total amount of the employee’s contributions (less withdrawals) bears to the sum of such contributions and the contributions made on his behalf by the employer (less withdrawals). In the case of a defined benefit plan, the accrued benefit derived from contributions made by an employee as of any applicable date is the amount equal to the employee’s accumulated contributions expressed as an annual benefit commencing at normal retirement age, using an interest rate which would be used under the plan under section 417(e)(3) (as of the determination date). For purposes of this subsection, the term “accumulated contribution” means the total of— all mandatory contributions made by the employee, interest (if any) under the plan to the end of the last plan year to which subsection (a)(2) does not apply (by reason of the applicable effective date), and interest on the sum of the amounts determined under clauses (i) and (ii) compounded annually— at the rate of 120 percent of the Federal mid-term rate (as in effect under section 1274 for the 1st month of a plan year) for the period beginning with the 1st plan year to which subsection (a)(2) applies (by reason of the applicable effective date) and ending with the date on which the determination is being made, and at the interest rate which would be used under the plan under section 417(e)(3) (as of the determination date) for the period beginning with the determination date and ending on the date on which the employee attains normal retirement age. For purposes of this subparagraph, the term “mandatory contributions” means amounts contributed to the plan by the employee which are required as a condition of employment, as a condition of participation in such plan, or as a condition of obtaining benefits under the plan attributable to employer contributions. The Secretary is authorized to adjust by regulation the conversion factor described in subparagraph (B) from time to time as he may deem necessary. No such adjustment shall be effective for a plan year beginning before the expiration of 1 year after such adjustment is determined and published. For purposes of this section, in the case of any defined benefit plan, if an employee’s accrued benefit is to be determined as an amount other than an annual benefit commencing at normal retirement age, or if the accrued benefit derived from contributions made by an employee is to be determined with respect to a benefit other than an annual benefit in the form of a single life annuity (without ancillary benefits) commencing at normal retirement age, the employee’s accrued benefit, or the accrued benefits derived from contributions made by an employee, as the case may be, shall be the actuarial equivalent of such benefit or amount determined under paragraph (1) or (2).

(d) Special rules A plan which satisfies the requirements of this section shall be treated as satisfying any vesting requirements resulting from the application of section 401(a)(4) unless— there has been a pattern of abuse under the plan (such as a dismissal of employees before their accrued benefits become nonforfeitable) tending to discriminate in favor of employees who are highly compensated employees (within the meaning of section 414(q)), or there have been, or there is reason to believe there will be, an accrual of benefits or forfeitures tending to discriminate in favor of employees who are highly compensated employees (within the meaning of section 414(q)). Subsection (a) shall not apply to benefits which may not be provided for designated employees in the event of early termination of the plan under provisions of the plan adopted pursuant to regulations prescribed by the Secretary to preclude the discrimination prohibited by section 401(a)(4). Notwithstanding the provisions of subsection (a), a trust shall not constitute a qualified trust under section 401(a) unless the plan of which such trust is a part provides that— upon its termination or partial termination, or in the case of a plan to which section 412 does not apply, upon complete discontinuance of contributions under the plan, the rights of all affected employees to benefits accrued to the date of such termination, partial termination, or discontinuance, to the extent funded as of such date, or the amounts credited to the employees’ accounts, are nonforfeitable. This paragraph shall not apply to benefits or contributions which, under provisions of the plan adopted pursuant to regulations prescribed by the Secretary to preclude the discrimination prohibited by section 401(a)(4), may not be used for designated employees in the event of early termination of the plan. For purposes of this paragraph, in the case of the complete discontinuance of contributions under a profit-sharing or stock bonus plan, such plan shall be treated as having terminated on the day on which the plan administrator notifies the Secretary (in accordance with regulations) of the discontinuance. In the case of a defined benefit plan which permits voluntary employee contributions, the portion of an employee’s accrued benefit derived from such contributions shall be treated as an accrued benefit derived from employee contributions under a plan other than a defined benefit plan. A plan shall be treated as not satisfying the requirements of this section if the accrued benefit of a participant is decreased by an amendment of the plan, other than an amendment described in section 412(d)(2), or section 4281 of the Employee Retirement Income Security Act of 1974. For purposes of subparagraph (A), a plan amendment which has the effect of— eliminating or reducing an early retirement benefit or a retirement-type subsidy (as defined in regulations), or eliminating an optional form of benefit, with respect to benefits attributable to service before the amendment shall be treated as reducing accrued benefits. In the case of a retirement-type subsidy, the preceding sentence shall apply only with respect to a participant who satisfies (either before or after the amendment) the preamendment conditions for the subsidy. The Secretary shall by regulations provide that this subparagraph shall not apply to any plan amendment which reduces or eliminates benefits or subsidies which create significant burdens or complexities for the plan and plan participants, unless such amendment adversely affects the rights of any participant in a more than de minimis manner. The Secretary may by regulations provide that this subparagraph shall not apply to a plan amendment described in clause (ii) (other than a plan amendment having an effect described in clause (i)). For purposes of this paragraph, any— tax credit employee stock ownership plan (as defined in section 409(a)), or employee stock ownership plan (as defined in section 4975(e)(7)), shall not be treated as failing to meet the requirements of this paragraph merely because it modifies distribution options in a nondiscriminatory manner. A defined contribution plan (in this subparagraph referred to as the “transferee plan”) shall not be treated as failing to meet the requirements of this subsection merely because the transferee plan does not provide some or all of the forms of distribution previously available under another defined contribution plan (in this subparagraph referred to as the “transferor plan”) to the extent that— the forms of distribution previously available under the transferor plan applied to the account of a participant or beneficiary under the transferor plan that was transferred from the transferor plan to the transferee plan pursuant to a direct transfer rather than pursuant to a distribution from the transferor plan, the terms of both the transferor plan and the transferee plan authorize the transfer described in subclause (I), the transfer described in subclause (I) was made pursuant to a voluntary election by the participant or beneficiary whose account was transferred to the transferee plan, the election described in subclause (III) was made after the participant or beneficiary received a notice describing the consequences of making the election, and the transferee plan allows the participant or beneficiary described in subclause (III) to receive any distribution to which the participant or beneficiary is entitled under the transferee plan in the form of a single sum distribution. Clause (i) shall apply to plan mergers and other transactions having the effect of a direct transfer, including consolidations of benefits attributable to different employers within a multiple employer plan. Except to the extent provided in regulations, a defined contribution plan shall not be treated as failing to meet the requirements of this section merely because of the elimination of a form of distribution previously available thereunder. This subparagraph shall not apply to the elimination of a form of distribution with respect to any participant unless— a single sum payment is available to such participant at the same time or times as the form of distribution being eliminated, and such single sum payment is based on the same or greater portion of the participant’s account as the form of distribution being eliminated.

(e) Application of vesting standards to certain plans The provisions of this section (other than paragraph (2)) shall not apply to— a governmental plan (within the meaning of section 414(d)), a church plan (within the meaning of section 414(e)) with respect to which the election provided by section 410(d) has not been made, a plan which has not, at any time after September 2, 1974 , provided for employer contributions, and a plan established and maintained by a society, order, or association described in section 501(c)(8) or (9), if no part of the contributions to or under such plan are made by employers of participants in such plan. A plan described in paragraph (1) shall be treated as meeting the requirements of this section, for purposes of section 401(a), if such plan meets the vesting requirements resulting from the application of sections 401(a)(4) and 401(a)(7) as in effect on September 1, 1974 .

(f) Special rule for determining normal retirement age for certain existing defined benefit plans Notwithstanding subsection (a)(8), an applicable plan shall not be treated as failing to meet any requirement of this subchapter, or as failing to have a uniform normal retirement age for purposes of this subchapter, solely because the plan provides for a normal retirement age described in paragraph (2). For purposes of this subsection— The term “applicable plan” means a defined benefit plan the terms of which, on or before December 8, 2014 , provided for a normal retirement age which is the earlier of— an age otherwise permitted under subsection (a)(8), or the age at which a participant completes the number of years (not less than 30 years) of benefit accrual service specified by the plan. A plan shall not fail to be treated as an applicable plan solely because the normal retirement age described in the preceding sentence only applied to certain participants or only applied to employees of certain employers in the case of a plan maintained by more than 1 employer. Subject to subparagraph (C), if, after December 8, 2014 , an applicable plan is amended to expand the application of the normal retirement age described in subparagraph (A) to additional participants or to employees of additional employers maintaining the plan, such plan shall also be treated as an applicable plan with respect to such participants or employees. A defined benefit plan shall be an applicable plan only with respect to an individual who— is a participant in the plan on or before January 1, 2017 , or is an employee at any time on or before January 1, 2017 , of any employer maintaining the plan, and who becomes a participant in such plan after such date.

“The amendments made by this section [amending this section and section 1053 of Title 29 , Labor] shall apply to plan years beginning on or after the earlier of— the later of— January 1, 1997 , or the date on which the last of the collective bargaining agreements pursuant to which the plan is maintained terminates (determined without regard to any extension thereof after the date of the enactment of this Act [ Aug. 20, 1996 ]), or January 1, 1999 . Such amendments shall not apply to any individual who does not have more than 1 hour of service under the plan on or after the 1st day of the 1st plan year to which such amendments apply.”

“Nothing in the amendments made by this section [amending this section and sections 623, 1053, and 1054 of Title 29, Labor] shall be construed to create an inference with respect to— the treatment of applicable defined benefit plans or conversions to applicable defined benefit plans under sections 204(b)(1)(H) of the Employee Retirement Income Security Act of 1974 [ 29 U.S.C. 1054(b)(1)(H) ], 4(i)(1) of the Age Discrimination in Employment Act of 1967 [ 29 U.S.C. 623(i)(1) ], and 411(b)(1)(H) of the Internal Revenue Code of 1986, as in effect before such amendments, or the determination of whether an applicable defined benefit plan fails to meet the requirements of sections 203(a)(2), 204(c), or 205(g) of the Employee Retirement Income Security Act of 1974 [ 29 U.S.C. 1053(a)(2) , 1054(c), 1055(g)] or sections 411(a)(2), 411(c), or 417(e) of such Code, as in effect before such amendments, solely because the present value of the accrued benefit (or any portion thereof) of any participant is, under the terms of the plan, equal to the amount expressed as the balance in a hypothetical account or as an accumulated percentage of the participant’s final average compensation. For purposes of this subsection, the term ‘applicable defined benefit plan’ has the meaning given such term by section 203(f)(3) of the Employee Retirement Income Security Act of 1974 [ 29 U.S.C. 1053(f)(3) ] and section 411(a)(13)(C) of such Code, as in effect after such amendments.”

“In the case of a plan that was adopted and in effect before December 8, 1994 , if— a plan amendment was adopted or made effective on or before the date of the enactment of this Act [ Aug. 20, 1996 ] applying the amendments made by section 767 of the Uruguay Round Agreements Act [ Pub. L. 103–465 , see Effective Date of 1994 Amendment note set out above], and within 1 year after the date of the enactment of this Act [ Aug. 20, 1996 ], a plan amendment is adopted which repeals the amendment referred to in paragraph (1), the amendment referred to in paragraph (1) shall not be taken into account in applying section 767(d)(3)(A) of the Uruguay Round Agreements Act, as amended by subsection (a).”

“In the case of any plan maintained on January 1, 1974 , if, not later than 2 years after the date of the enactment of this Act [ Sept. 2, 1974 ], the plan administrator petitions the Secretary of Labor, the Secretary of Labor may prescribe an alternate method which shall be treated as satisfying the requirements of subsection (a)(2) of section 411 of the Internal Revenue Code of 1986 [formerly I.R.C. 1954], or of subsection (b)(1) (other than subparagraph (D) thereof) of such section 411, or of both such provisions for a period of not more than 4 years. The Secretary may prescribe such alternate method only when he finds that— the application of such requirements would increase the costs of the plan to such an extent that there would result a substantial risk to the voluntary continuation of the plan or a substantial curtailment of benefit levels or the levels of employees’ compensation, the application of such requirements or discontinuance of the plan would be adverse to the interests of plan participants in the aggregate, and a waiver or extension of time granted under [former] section 412(d) or (e) would be inadequate. In the case of any plan with respect to which an alternate method has been prescribed under the preceding provisions of this subsection for a period of not more than 4 years, if, not later than 1 year before the expiration of such period, the plan administrator petitions the Secretary of Labor for an extension of such alternate method, and the Secretary makes the findings required by the preceding sentence, such alternate method may be extended for not more than 3 years.”

§ 412 Minimum funding standards

(a) Requirement to meet minimum funding standard A plan to which this section applies shall satisfy the minimum funding standard applicable to the plan for any plan year. For purposes of paragraph (1), a plan shall be treated as satisfying the minimum funding standard for a plan year if— in the case of a defined benefit plan which is not a multiemployer plan or a CSEC plan, the employer makes contributions to or under the plan for the plan year which, in the aggregate, are not less than the minimum required contribution determined under section 430 for the plan for the plan year, in the case of a money purchase plan which is not a multiemployer plan, the employer makes contributions to or under the plan for the plan year which are required under the terms of the plan, in the case of a multiemployer plan, the employers make contributions to or under the plan for any plan year which, in the aggregate, are sufficient to ensure that the plan does not have an accumulated funding deficiency under section 431 as of the end of the plan year, and in the case of a CSEC plan, the employers make contributions to or under the plan for any plan year which, in the aggregate, are sufficient to ensure that the plan does not have an accumulated funding deficiency under section 433 as of the end of the plan year.

(b) Liability for contributions Except as provided in paragraph (2), the amount of any contribution required by this section (including any required installments under paragraphs (3) and (4) of section 430(j) or under section 433(f)) shall be paid by the employer responsible for making contributions to or under the plan. If the employer referred to in paragraph (1) is a member of a controlled group, each member of such group shall be jointly and severally liable for payment of such contributions. Paragraph (1) shall not apply in the case of a multiemployer plan for any plan year in which the plan is in critical status pursuant to section 432. This paragraph shall only apply if the plan sponsor adopts a rehabilitation plan in accordance with section 432(e) and complies with such rehabilitation plan (and any modifications of the plan).

(c) Variance from minimum funding standards If— an employer is (or in the case of a multiemployer plan or a CSEC plan, 10 percent or more of the number of employers contributing to or under the plan are) unable to satisfy the minimum funding standard for a plan year without temporary substantial business hardship (substantial business hardship in the case of a multiemployer plan), and application of the standard would be adverse to the interests of plan participants in the aggregate, the Secretary may, subject to subparagraph (C), waive the requirements of subsection (a) for such year with respect to all or any portion of the minimum funding standard. The Secretary shall not waive the minimum funding standard with respect to a plan for more than 3 of any 15 (5 of any 15 in the case of a multiemployer plan) consecutive plan years. If a waiver is granted under subparagraph (A) for any plan year— in the case of a defined benefit plan which is not a multiemployer plan or a CSEC plan, the minimum required contribution under section 430 for the plan year shall be reduced by the amount of the waived funding deficiency and such amount shall be amortized as required under section 430(e), in the case of a multiemployer plan, the funding standard account shall be credited under section 431(b)(3)(C) with the amount of the waived funding deficiency and such amount shall be amortized as required under section 431(b)(2)(C), and in the case of a CSEC plan, the funding standard account shall be credited under section 433(b)(3)(C) with the amount of the waived funding deficiency and such amount shall be amortized as required under section 433(b)(2)(C). The Secretary may not waive under subparagraph (A) any portion of the minimum funding standard under subsection (a) for a plan year which is attributable to any waived funding deficiency for any preceding plan year. For purposes of this subsection, the factors taken into account in determining temporary substantial business hardship (substantial business hardship in the case of a multiemployer plan) shall include (but shall not be limited to) whether or not— the employer is operating at an economic loss, there is substantial unemployment or underemployment in the trade or business and in the industry concerned, the sales and profits of the industry concerned are depressed or declining, and it is reasonable to expect that the plan will be continued only if the waiver is granted. For purposes of this section and part III of this subchapter, the term “waived funding deficiency” means the portion of the minimum funding standard under subsection (a) (determined without regard to the waiver) for a plan year waived by the Secretary and not satisfied by employer contributions. Except as provided in subparagraph (C), the Secretary may require an employer maintaining a defined benefit plan which is a single-employer plan (within the meaning of section 4001(a)(15) of the Employee Retirement Income Security Act of 1974) to provide security to such plan as a condition for granting or modifying a waiver under paragraph (1) or for granting an extension under section 433(d). Any security provided under clause (i) may be perfected and enforced only by the Pension Benefit Guaranty Corporation, or at the direction of the Corporation, by a contributing sponsor (within the meaning of section 4001(a)(13) of the Employee Retirement Income Security Act of 1974), or a member of such sponsor’s controlled group (within the meaning of section 4001(a)(14) of such Act). Except as provided in subparagraph (C), the Secretary shall, before granting or modifying a waiver under this subsection or an extension under section 433(d) with respect to a plan described in subparagraph (A)(i)— provide the Pension Benefit Guaranty Corporation with— notice of the completed application for any waiver, modification, or extension, and an opportunity to comment on such application within 30 days after receipt of such notice, and consider— any comments of the Corporation under clause (i)(II), and any views of any employee organization (within the meaning of section 3(4) of the Employee Retirement Income Security Act of 1974) representing participants in the plan which are submitted in writing to the Secretary in connection with such application. Information provided to the Corporation under this subparagraph shall be considered tax return information and subject to the safeguarding and reporting requirements of section 6103(p). The preceding provisions of this paragraph shall not apply to any plan with respect to which the sum of— the aggregate unpaid minimum required contributions (within the meaning of section 4971(c)(4)) for the plan year and all preceding plan years, or the accumulated funding deficiency under section 433, whichever is applicable, the present value of all waiver amortization installments determined for the plan year and succeeding plan years under section 430(e)(2) or 433(b)(2)(C), whichever is applicable, and the total amounts not paid by reason of an extension in effect under section 433(d), is less than $1,000,000. The amount described in clause (i)(I) shall include any increase in such amount which would result if all applications for waivers or extensions with respect to the minimum funding standard under this subsection which are pending with respect to such plan were denied. In the case of a defined benefit plan which is not a multiemployer plan, no waiver may be granted under this subsection with respect to any plan for any plan year unless an application therefor is submitted to the Secretary not later than the 15th day of the 3rd month beginning after the close of such plan year. In the case of a defined benefit plan which is not a multiemployer plan, if an employer is a member of a controlled group, the temporary substantial business hardship requirements of paragraph (1) shall be treated as met only if such requirements are met— with respect to such employer, and with respect to the controlled group of which such employer is a member (determined by treating all members of such group as a single employer). The Secretary may provide that an analysis of a trade or business or industry of a member need not be conducted if the Secretary determines such analysis is not necessary because the taking into account of such member would not significantly affect the determination under this paragraph. The Secretary shall, before granting a waiver under this subsection, require each applicant to provide evidence satisfactory to the Secretary that the applicant has provided notice of the filing of the application for such waiver to each affected party (as defined in section 4001(a)(21) of the Employee Retirement Income Security Act of 1974). Such notice shall include a description of the extent to which the plan is funded for benefits which are guaranteed under title IV of the Employee Retirement Income Security Act of 1974 and for benefit liabilities. The Secretary shall consider any relevant information provided by a person to whom notice was given under subparagraph (A). No amendment of a plan which increases the liabilities of the plan by reason of any increase in benefits, any change in the accrual of benefits, or any change in the rate at which benefits become nonforfeitable under the plan shall be adopted if a waiver under this subsection or an extension of time under section 431(d) or section 433(d) is in effect with respect to the plan, or if a plan amendment described in subsection (d)(2) which reduces the accrued benefit of any participant has been made at any time in the preceding 12 months (24 months in the case of a multiemployer plan). If a plan is amended in violation of the preceding sentence, any such waiver, or extension of time, shall not apply to any plan year ending on or after the date on which such amendment is adopted. Subparagraph (A) shall not apply to any plan amendment which— the Secretary determines to be reasonable and which provides for only de minimis increases in the liabilities of the plan, only repeals an amendment described in subsection (d)(2), or is required as a condition of qualification under part I of subchapter D of chapter 1.

(d) Miscellaneous rules If the funding method or a plan year for a plan is changed, the change shall take effect only if approved by the Secretary. For purposes of this section, any amendment applying to a plan year which— is adopted after the close of such plan year but no later than 2½ months after the close of the plan year (or, in the case of a multiemployer plan, no later than 2 years after the close of such plan year), does not reduce the accrued benefit of any participant determined as of the beginning of the first plan year to which the amendment applies, and does not reduce the accrued benefit of any participant determined as of the time of adoption except to the extent required by the circumstances, shall, at the election of the plan administrator, be deemed to have been made on the first day of such plan year. No amendment described in this paragraph which reduces the accrued benefits of any participant shall take effect unless the plan administrator files a notice with the Secretary notifying him of such amendment and the Secretary has approved such amendment, or within 90 days after the date on which such notice was filed, failed to disapprove such amendment. No amendment described in this subsection shall be approved by the Secretary unless the Secretary determines that such amendment is necessary because of a temporary substantial business hardship (as determined under subsection (c)(2)) or a substantial business hardship (as so determined) in the case of a multiemployer plan and that a waiver under subsection (c) (or, in the case of a multiemployer plan or a CSEC plan, any extension of the amortization period under section 431(d) or section 433(d)) is unavailable or inadequate. For purposes of this section, the term “controlled group” means any group treated as a single employer under subsection (b), (c), (m), or ( o ) of section 414.

(e) Plans to which section applies Except as provided in paragraphs (2) and (4), this section applies to a plan if, for any plan year beginning on or after the effective date of this section for such plan under the Employee Retirement Income Security Act of 1974— such plan included a trust which qualified (or was determined by the Secretary to have qualified) under section 401(a), or such plan satisfied (or was determined by the Secretary to have satisfied) the requirements of section 403(a). This section shall not apply to— any profit-sharing or stock bonus plan, any insurance contract plan described in paragraph (3), any governmental plan (within the meaning of section 414(d)), any church plan (within the meaning of section 414(e)) with respect to which the election provided by section 410(d) has not been made, any plan which has not, at any time after September 2, 1974 , provided for employer contributions, or any plan established and maintained by a society, order, or association described in section 501(c)(8) or (9), if no part of the contributions to or under such plan are made by employers of participants in such plan. No plan described in subparagraph (C), (D), or (F) shall be treated as a qualified plan for purposes of section 401(a) unless such plan meets the requirements of section 401(a)(7) as in effect on September 1, 1974 . A plan is described in this paragraph if— the plan is funded exclusively by the purchase of individual insurance contracts, such contracts provide for level annual premium payments to be paid extending not later than the retirement age for each individual participating in the plan, and commencing with the date the individual became a participant in the plan (or, in the case of an increase in benefits, commencing at the time such increase becomes effective), benefits provided by the plan are equal to the benefits provided under each contract at normal retirement age under the plan and are guaranteed by an insurance carrier (licensed under the laws of a State to do business with the plan) to the extent premiums have been paid, premiums payable for the plan year, and all prior plan years, under such contracts have been paid before lapse or there is reinstatement of the policy, no rights under such contracts have been subject to a security interest at any time during the plan year, and no policy loans are outstanding at any time during the plan year. A plan funded exclusively by the purchase of group insurance contracts which is determined under regulations prescribed by the Secretary to have the same characteristics as contracts described in the preceding sentence shall be treated as a plan described in this paragraph. This section applies with respect to a terminated multiemployer plan to which section 4021 of the Employee Retirement Income Security Act of 1974 applies until the last day of the plan year in which the plan terminates (within the meaning of section 4041A(a)(2) of such Act).

“In the case of a multiemployer plan that is a party to an agreement that was approved by the Pension Benefit Guaranty Corporation prior to June 30, 2005 , and that— increases benefits, and provides for special withdrawal liability rules under section 4203(f) of the Employee Retirement Income Security Act of 1974 ( 29 U.S.C. 1383 [(f)]), the amendments made by sections 201, 202, 211, and 212 of this Act [enacting sections 431 and 432 of this title and sections 1084 and 1085 of Title 29, Labor, and amending this section, section 4971 of this title , and sections 1081, 1082, and 1132 of Title 29] shall not apply to the benefit increases under any plan amendment adopted prior to June 30, 2005 , that are funded pursuant to such agreement if the plan is funded in compliance with such agreement (and any amendments thereto).”

§ 413 Collectively bargained plans, etc.

(a) Application of subsection (b) Subsection (b) applies to— a plan maintained pursuant to an agreement which the Secretary of Labor finds to be a collective-bargaining agreement between employee representatives and one or more employers, and each trust which is a part of such plan.

(b) General rule If this subsection applies to a plan, notwithstanding any other provision of this title— Section 410 shall be applied as if all employees of each of the employers who are parties to the collective-bargaining agreement and who are subject to the same benefit computation formula under the plan were employed by a single employer. Sections 401(a)(4) and 411(d)(3) shall be applied as if all participants who are subject to the same benefit computation formula and who are employed by employers who are parties to the collective bargaining agreement were employed by a single employer. For purposes of section 401(a), in determining whether the plan of an employer is for the exclusive benefit of his employees and their beneficiaries, all plan participants shall be considered to be his employees. Section 411 (other than subsection (d)(3)) shall be applied as if all employers who have been parties to the collective-bargaining agreement constituted a single employer, except that the application of any rules with respect to breaks in service shall be made under regulations prescribed by the Secretary of Labor. The minimum funding standard provided by section 412 shall be determined as if all participants in the plan were employed by a single employer. For a plan year the liability under section 4971 of each employer who is a party to the collective bargaining agreement shall be determined in a reasonable manner not inconsistent with regulations prescribed by the Secretary— first on the basis of their respective delinquencies in meeting required employer contributions under the plan, and then on the basis of their respective liabilities for contributions under the plan. For purposes of this subsection and section 4971(e), an employer’s withdrawal liability under part 1 of subtitle E of title IV of the Employee Retirement Income Security Act of 1974 shall not be treated as a liability for contributions under the plan. Each applicable limitation provided by section 404(a) shall be determined as if all participants in the plan were employed by a single employer. The amounts contributed to or under the plan by each employer who is a party to the agreement, for the portion of his taxable year which is included within such a plan year, shall be considered not to exceed such a limitation if the anticipated employer contributions for such plan year (determined in a manner consistent with the manner in which actual employer contributions for such plan year are determined) do not exceed such limitation. If such anticipated contributions exceed such a limitation, the portion of each such employer’s contributions which is not deductible under section 404 shall be determined in accordance with regulations prescribed by the Secretary. For purposes of this subsection, employees of employee representatives shall be treated as employees of an employer described in subsection (a)(1) if such representatives meet the requirements of sections 401(a)(4) and 410 with respect to such employees. Notwithstanding subsection (a), in the case of a plan (and trust forming part thereof) which covers any professional employee, paragraph (1) shall be applied by substituting “section 410(a)” for “section 410”, and paragraph (2) shall not apply.

(c) Plans maintained by more than one employer In the case of a plan maintained by more than one employer— Section 410(a) shall be applied as if all employees of each of the employers who maintain the plan were employed by a single employer. For purposes of sections 401(a) and 408(c), in determining whether the plan of an employer is for the exclusive benefit of his employees and their beneficiaries all plan participants shall be considered to be his employees. Section 411 shall be applied as if all employers who maintain the plan constituted a single employer, except that the application of any rules with respect to breaks in service shall be made under regulations prescribed by the Secretary of Labor. In the case of a plan established after December 31, 1988 , each employer shall be treated as maintaining a separate plan for purposes of section 412 unless such plan uses a method for determining required contributions which provides that any employer contributes not less than the amount which would be required if such employer maintained a separate plan. In the case of a plan not described in subparagraph (A), the requirements of section 412 shall be determined as if all participants in the plan were employed by a single employer unless the plan administrator elects not later than the close of the first plan year of the plan beginning after the date of enactment of the Technical and Miscellaneous Revenue Act of 1988 to have the provisions of subparagraph (A) apply. An election under the preceding sentence shall take effect for the plan year in which made and, once made, may be revoked only with the consent of the Secretary. For a plan year the liability under section 4971 of each employer who maintains the plan shall be determined in a reasonable manner not inconsistent with regulations prescribed by the Secretary— first on the basis of their respective delinquencies in meeting required employer contributions under the plan, and then on the basis of their respective liabilities for contributions under the plan. In the case of a plan established after December 31, 1988 , each applicable limitation provided by section 404(a) shall be determined as if each employer were maintaining a separate plan. In the case of a plan not described in subparagraph (A), each applicable limitation provided by section 404(a) shall be determined as if all participants in the plan were employed by a single employer, except that if an election is made under paragraph (4)(B), subparagraph (A) shall apply to such plan. If this subparagraph applies, the amounts contributed to or under the plan by each employer who maintains the plan (for the portion of the taxable year included within a plan year) shall be considered not to exceed any such limitation if the anticipated employer contributions for such plan year (determined in a reasonable manner not inconsistent with regulations prescribed by the Secretary) do not exceed such limitation. If such anticipated contributions exceed such a limitation, the portion of each such employer’s contributions which is not deductible under section 404 shall be determined in accordance with regulations prescribed by the Secretary. Except as provided in subparagraph (B), allocations of amounts under paragraphs (4), (5), and (6) among the employers maintaining the plan shall not be inconsistent with regulations prescribed for this purpose by the Secretary. For purposes of applying paragraphs (4)(A) and (6)(A), the assets and liabilities of each plan shall be treated as the assets and liabilities which would be allocated to a plan maintained by the employer if the employer withdrew from the multiple employer plan.

(d) CSEC plans Notwithstanding any other provision of this section, in the case of a CSEC plan— The requirements of section 412 shall be determined as if all participants in the plan were employed by a single employer. Paragraphs (1), (2), (3), and (5) of subsection (c) shall apply. Each applicable limitation provided by section 404(a) shall be determined as if all participants in the plan were employed by a single employer. The amounts contributed to or under the plan by each employer who maintains the plan (for the portion of the taxable year included within a plan year) shall be considered not to exceed such applicable limitation if the anticipated employer contributions for such plan year of all employers (determined in a reasonable manner not inconsistent with regulations prescribed by the Secretary) do not exceed such limitation. If such anticipated contributions exceed such limitation, the portion of each such employer’s contributions which is not deductible under section 404 shall be determined in accordance with regulations prescribed by the Secretary. Allocations of amounts under paragraph (3) and subsection (c)(5) among the employers maintaining the plan shall not be inconsistent with the regulations prescribed for this purpose by the Secretary.

(e) Application of qualification requirements for certain multiple employer plans with pooled plan providers Except as provided in paragraph (2), if a defined contribution plan to which subsection (c) applies— is maintained by employers which have a common interest other than having adopted the plan, or in the case of a plan not described in subparagraph (A), has a pooled plan provider, then the plan shall not be treated as failing to meet the requirements under this title applicable to a plan described in section 401(a) or to a plan that consists of individual retirement accounts described in section 408 (including by reason of subsection (c) thereof), whichever is applicable, merely because one or more employers of employees covered by the plan fail to take such actions as are required of such employers for the plan to meet such requirements. Paragraph (1) shall not apply to any plan unless the terms of the plan provide that in the case of any employer in the plan failing to take the actions described in paragraph (1)— the assets of the plan attributable to employees of such employer (or beneficiaries of such employees) will be transferred to a plan maintained only by such employer (or its successor), to an eligible retirement plan as defined in section 402(c)(8)(B) for each individual whose account is transferred, or to any other arrangement that the Secretary determines is appropriate, unless the Secretary determines it is in the best interests of the employees of such employer (and the beneficiaries of such employees) to retain the assets in the plan, and such employer (and not the plan with respect to which the failure occurred or any other employer in such plan) shall, except to the extent provided by the Secretary, be liable for any liabilities with respect to such plan attributable to employees of such employer (or beneficiaries of such employees). If the pooled plan provider of a plan described in paragraph (1)(B) does not perform substantially all of the administrative duties which are required of the provider under paragraph (3)(A)(i) for any plan year, the Secretary may provide that the determination as to whether the plan meets the requirements under this title applicable to a plan described in section 401(a) or to a plan that consists of individual retirement accounts described in section 408 (including by reason of subsection (c) thereof), whichever is applicable, shall be made in the same manner as would be made without regard to paragraph (1). For purposes of this subsection, the term “pooled plan provider” means, with respect to any plan, a person who— is designated by the terms of the plan as a named fiduciary (within the meaning of section 402(a)(2) of the Employee Retirement Income Security Act of 1974), as the plan administrator, and as the person responsible to perform all administrative duties (including conducting proper testing with respect to the plan and the employees of each employer in the plan) which are reasonably necessary to ensure that— the plan meets any requirement applicable under the Employee Retirement Income Security Act of 1974 or this title to a plan described in section 401(a) or to a plan that consists of individual retirement accounts described in section 408 (including by reason of subsection (c) thereof), whichever is applicable, and each employer in the plan takes such actions as the Secretary or such person determines are necessary for the plan to meet the requirements described in subclause (I), including providing to such person any disclosures or other information which the Secretary may require or which such person otherwise determines are necessary to administer the plan or to allow the plan to meet such requirements, registers as a pooled plan provider with the Secretary, and provides such other information to the Secretary as the Secretary may require, before beginning operations as a pooled plan provider, acknowledges in writing that such person is a named fiduciary (within the meaning of section 402(a)(2) of the Employee Retirement Income Security Act of 1974), and the plan administrator, with respect to the plan, and is responsible for ensuring that all persons who handle assets of, or who are fiduciaries of, the plan are bonded in accordance with section 412 of the Employee Retirement Income Security Act of 1974. The Secretary may perform audits, examinations, and investigations of pooled plan providers as may be necessary to enforce and carry out the purposes of this subsection. For purposes of this paragraph, in determining whether a person meets the requirements of this paragraph to be a pooled plan provider with respect to any plan, all persons who perform services for the plan and who are treated as a single employer under subsection (b), (c), (m), or (o) of section 414 shall be treated as one person. Except with respect to the administrative duties of the pooled plan provider described in subparagraph (A)(i), each employer in a plan which has a pooled plan provider shall be treated as the plan sponsor with respect to the portion of the plan attributable to employees of such employer (or beneficiaries of such employees). The Secretary shall issue such guidance as the Secretary determines appropriate to carry out this subsection, including guidance— to identify the administrative duties and other actions required to be performed by a pooled plan provider under this subsection, which describes the procedures to be taken to terminate a plan which fails to meet the requirements to be a plan described in paragraph (1), including the proper treatment of, and actions needed to be taken by, any employer in the plan and the assets and liabilities of the plan attributable to employees of such employer (or beneficiaries of such employees), and identifying appropriate cases to which the rules of paragraph (2)(A) will apply to employers in the plan failing to take the actions described in paragraph (1). The Secretary shall take into account under clause (iii) whether the failure of an employer or pooled plan provider to provide any disclosures or other information, or to take any other action, necessary to administer a plan or to allow a plan to meet requirements applicable to the plan under section 401(a) or 408, whichever is applicable, has continued over a period of time that demonstrates a lack of commitment to compliance. An employer or pooled plan provider shall not be treated as failing to meet a requirement of guidance issued by the Secretary under this paragraph if, before the issuance of such guidance, the employer or pooled plan provider complies in good faith with a reasonable interpretation of the provisions of this subsection to which such guidance relates. The Secretary shall publish model plan language which meets the requirements of this subsection and of paragraphs (43) and (44) of section 3 of the Employee Retirement Income Security Act of 1974 and which may be adopted in order for a plan to be treated as a plan described in paragraph (1)(B).

§ 414 Definitions and special rules

(a) Service for predecessor employer For purposes of this part— in any case in which the employer maintains a plan of a predecessor employer, service for such predecessor shall be treated as service for the employer, and in any case in which the employer maintains a plan which is not the plan maintained by a predecessor employer, service for such predecessor shall, to the extent provided in regulations prescribed by the Secretary, be treated as service for the employer.

(b) Employees of controlled group of corporations For purposes of sections 401, 408(k), 408(p), 410, 411, 415, and 416, all employees of all corporations which are members of a controlled group of corporations (within the meaning of section 1563(a), determined without regard to section 1563(a)(4) and (e)(3)(C)) shall be treated as employed by a single employer. With respect to a plan adopted by more than one such corporation, the applicable limitations provided by section 404(a) shall be determined as if all such employers were a single employer, and allocated to each employer in accordance with regulations prescribed by the Secretary. For purposes of applying the attribution rules under section 1563 with respect to paragraph (1), the following rules apply: Community property laws shall be disregarded for purposes of determining ownership. Except as provided by the Secretary, stock of an individual not attributed under section 1563(e)(5) to such individual’s spouse shall not be attributed to such spouse by reason of the combined application of paragraphs (1) and (6)(A) of section 1563(e). Except as provided by the Secretary, in the case of stock in different corporations that is attributed to a child under section 1563(e)(6)(A) from each parent, and is not attributed to such parents as spouses under section 1563(e)(5), such attribution to the child shall not by itself result in such corporations being members of the same controlled group. If application of paragraph (2) causes 2 or more entities to be a controlled group or to no longer be in a controlled group, such change shall be treated as a transaction to which section 410(b)(6)(C) applies.

(c) Employees of partnerships, proprietorships, etc., which are under common control Except as provided in paragraph (2), for purposes of sections 401, 408(k), 408(p), 410, 411, 415, and 416, under regulations prescribed by the Secretary, all employees of trades or businesses (whether or not incorporated) which are under common control shall be treated as employed by a single employer. The regulations prescribed under this subsection shall be based on principles similar to the principles which apply in the case of subsection (b). Except as provided in subparagraphs (B) and (C), for purposes of this subsection and subsection (m), an organization that is otherwise eligible to participate in a church plan shall not be aggregated with another such organization and treated as a single employer with such other organization for a plan year beginning in a taxable year unless— one such organization provides (directly or indirectly) at least 80 percent of the operating funds for the other organization during the preceding taxable year of the recipient organization, and there is a degree of common management or supervision between the organizations such that the organization providing the operating funds is directly involved in the day-to-day operations of the other organization. Notwithstanding subparagraph (A), for purposes of this subsection and subsection (m), an organization that is a nonqualified church-controlled organization shall be aggregated with 1 or more other nonqualified church-controlled organizations, or with an organization that is not exempt from tax under section 501, and treated as a single employer with such other organization, if at least 80 percent of the directors or trustees of such other organization are either representatives of, or directly or indirectly controlled by, such nonqualified church-controlled organization. For purposes of this subparagraph, the term “nonqualified church-controlled organization” means a church-controlled tax-exempt organization described in section 501(c)(3) that is not a qualified church-controlled organization (as defined in section 3121(w)(3)(B)). The church or convention or association of churches with which an organization described in subparagraph (A) is associated (within the meaning of subsection (e)(3)(D)), or an organization designated by such church or convention or association of churches, may elect to treat such organizations as a single employer for a plan year. Such election, once made, shall apply to all succeeding plan years unless revoked with notice provided to the Secretary in such manner as the Secretary shall prescribe. For purposes of subparagraph (A), in the case of a church plan, an employer may elect to treat churches (as defined in section 403(b)(12)(B)) separately from entities that are not churches (as so defined), without regard to whether such entities maintain separate church plans. Such election, once made, shall apply to all succeeding plan years unless revoked with notice provided to the Secretary in such manner as the Secretary shall prescribe.

(d) Governmental plan For purposes of this part, the term “governmental plan” means a plan established and maintained for its employees by the Government of the United States, by the government of any State or political subdivision thereof, or by any agency or instrumentality of any of the foregoing. The term “governmental plan” also includes any plan to which the Railroad Retirement Act of 1935 or 1937 applies and which is financed by contributions required under that Act and any plan of an international organization which is exempt from taxation by reason of the International Organizations Immunities Act ( 59 Stat. 669 ). The term “governmental plan” includes a plan which is established and maintained by an Indian tribal government (as defined in section 7701(a)(40)), a subdivision of an Indian tribal government (determined in accordance with section 7871(d)), or an agency or instrumentality of either, and all of the participants of which are employees of such entity substantially all of whose services as such an employee are in the performance of essential governmental functions but not in the performance of commercial activities (whether or not an essential government function).

(e) Church plan For purposes of this part, the term “church plan” means a plan established and maintained (to the extent required in paragraph (2)(B)) for its employees (or their beneficiaries) by a church or by a convention or association of churches which is exempt from tax under section 501. The term “church plan” does not include a plan— which is established and maintained primarily for the benefit of employees (or their beneficiaries) of such church or convention or association of churches who are employed in connection with one or more unrelated trades or businesses (within the meaning of section 513); or if less than substantially all of the individuals included in the plan are individuals described in paragraph (1) or (3)(B) (or their beneficiaries). For purposes of this subsection— A plan established and maintained for its employees (or their beneficiaries) by a church or by a convention or association of churches includes a plan maintained by an organization, whether a civil law corporation or otherwise, the principal purpose or function of which is the administration or funding of a plan or program for the provision of retirement benefits or welfare benefits, or both, for the employees of a church or a convention or association of churches, if such organization is controlled by or associated with a church or a convention or association of churches. The term employee of a church or a convention or association of churches shall include— a duly ordained, commissioned, or licensed minister of a church in the exercise of his ministry, regardless of the source of his compensation; an employee of an organization, whether a civil law corporation or otherwise, which is exempt from tax under section 501 and which is controlled by or associated with a church or a convention or association of churches; and an individual described in subparagraph (E). A church or a convention or association of churches which is exempt from tax under section 501 shall be deemed the employer of any individual included as an employee under subparagraph (B). An organization, whether a civil law corporation or otherwise, is associated with a church or a convention or association of churches if it shares common religious bonds and convictions with that church or convention or association of churches. If an employee who is included in a church plan separates from the service of a church or a convention or association of churches or an organization described in clause (ii) of paragraph (3)(B), the church plan shall not fail to meet the requirements of this subsection merely because the plan— retains the employee’s accrued benefit or account for the payment of benefits to the employee or his beneficiaries pursuant to the terms of the plan; or receives contributions on the employee’s behalf after the employee’s separation from such service, but only for a period of 5 years after such separation, unless the employee is disabled (within the meaning of the disability provisions of the church plan or, if there are no such provisions in the church plan, within the meaning of section 72(m)(7)) at the time of such separation from service. If a plan established and maintained for its employees (or their beneficiaries) by a church or by a convention or association of churches which is exempt from tax under section 501 fails to meet one or more of the requirements of this subsection and corrects its failure to meet such requirements within the correction period, the plan shall be deemed to meet the requirements of this subsection for the year in which the correction was made and for all prior years. If a correction is not made within the correction period, the plan shall be deemed not to meet the requirements of this subsection beginning with the date on which the earliest failure to meet one or more of such requirements occurred. The term “correction period” means— the period, ending 270 days after the date of mailing by the Secretary of a notice of default with respect to the plan’s failure to meet one or more of the requirements of this subsection; any period set by a court of competent jurisdiction after a final determination that the plan fails to meet such requirements, or, if the court does not specify such period, any reasonable period determined by the Secretary on the basis of all the facts and circumstances, but in any event not less than 270 days after the determination has become final; or any additional period which the Secretary determines is reasonable or necessary for the correction of the default, whichever has the latest ending date. For purposes of this part— A duly ordained, commissioned, or licensed minister of a church is described in paragraph (3)(B) if, in connection with the exercise of their ministry, the minister— is a self-employed individual (within the meaning of section 401(c)(1)(B), or is employed by an organization other than an organization which is described in section 501(c)(3) and with respect to which the minister shares common religious bonds. For purposes of sections 403(b)(1)(A) and 404(a)(10), a minister described in clause (i)(I) shall be treated as employed by the minister’s own employer which is an organization described in section 501(c)(3) and exempt from tax under section 501(a). In the case of a minister described in subparagraph (A)(i)(I)— the minister’s includible compensation under section 403(b)(3) shall be determined by reference to the minister’s earned income (within the meaning of section 401(c)(2)) from such ministry rather than the amount of compensation which is received from an employer, and the years (and portions of years) in which such minister was a self-employed individual (within the meaning of section 401(c)(1)(B)) with respect to such ministry shall be included for purposes of section 403(b)(4). If a duly ordained, commissioned, or licensed minister of a church in the exercise of his or her ministry participates in a church plan (within the meaning of this section) and in the exercise of such ministry is employed by an employer not otherwise participating in such church plan, then such employer may exclude such minister from being treated as an employee of such employer for purposes of applying sections 401(a)(3), 401(a)(4), and 401(a)(5), as in effect on September 1, 1974 , and sections 401(a)(4), 401(a)(5), 401(a)(26), 401(k)(3), 401(m), 403(b)(1)(D) (including section 403(b)(12)), and 410 to any stock bonus, pension, profit-sharing, or annuity plan (including an annuity described in section 403(b) or a retirement income account described in section 403(b)(9)). The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purpose of, and prevent the abuse of, this subparagraph. If any compensation is taken into account in determining the amount of any contributions made to, or benefits to be provided under, any church plan, such compensation shall not also be taken into account in determining the amount of any contributions made to, or benefits to be provided under, any other stock bonus, pension, profit-sharing, or annuity plan which is not a church plan. In the case of a contribution to a church plan made on behalf of a minister described in subparagraph (A)(i)(II), such contribution shall not be included in the gross income of the minister to the extent that such contribution would not be so included if the minister was an employee of a church.

(f) Multiemployer plan For purposes of this part, the term “multiemployer plan” means a plan— to which more than one employer is required to contribute, which is maintained pursuant to one or more collective bargaining agreements between one or more employee organizations and more than one employer, and which satisfies such other requirements as the Secretary of Labor may prescribe by regulation. For purposes of this subsection, all trades or businesses (whether or not incorporated) which are under common control within the meaning of subsection (c) are considered a single employer. Notwithstanding paragraph (1), a plan is a multiemployer plan on and after its termination date under title IV of the Employee Retirement Income Security Act of 1974 if the plan was a multiemployer plan under this subsection for the plan year preceding its termination date. For any plan year which began before the date of the enactment of the Multiemployer Pension Plan Amendments Act of 1980, the term “multiemployer plan” means a plan described in this subsection as in effect immediately before that date. Within one year after the date of the enactment of the Multiemployer Pension Plan Amendments Act of 1980, a multiemployer plan may irrevocably elect, pursuant to procedures established by the Pension Benefit Guaranty Corporation and subject to the provisions of section 4403(b) and (c) of the Employee Retirement Income Security Act of 1974, that the plan shall not be treated as a multiemployer plan for any purpose under such Act or this title, if for each of the last 3 plan years ending prior to the effective date of the Multiemployer Pension Plan Amendments Act of 1980— the plan was not a multiemployer plan because the plan was not a plan described in section 3(37)(A)(iii) of the Employee Retirement Income Security Act of 1974 and section 414(f)(1)(C) (as such provisions were in effect on the day before the date of the enactment of the Multiemployer Pension Plan Amendments Act of 1980); and the plan had been identified as a plan that was not a multiemployer plan in substantially all its filings with the Pension Benefit Guaranty Corporation, the Secretary of Labor and the Secretary. Within 1 year after the enactment of the Pension Protection Act of 2006— An election under paragraph (5) may be revoked, pursuant to procedures prescribed by the Pension Benefit Guaranty Corporation, if, for each of the 3 plan years prior to the date of the enactment of that Act, the plan would have been a multiemployer plan but for the election under paragraph (5), and a plan that meets the criteria in subparagraph (A) and (B) of paragraph (1) of this subsection or that is described in subparagraph (E) may, pursuant to procedures prescribed by the Pension Benefit Guaranty Corporation, elect to be a multiemployer plan, if— for each of the 3 plan years immediately preceding the first plan year for which the election under this paragraph is effective with respect to the plan, the plan has met those criteria or is so described, substantially all of the plan’s employer contributions for each of those plan years were made or required to be made by organizations that were exempt from tax under section 501, and the plan was established prior to September 2, 1974 . An election under this paragraph shall be effective for all purposes under this Act 1 and under the Employee Retirement Income Security Act of 1974, starting with any plan year beginning on or after January 1, 1999 , and ending before January 1, 2008 , as designated by the plan in the election made under subparagraph (A)(ii). Once made, an election under this paragraph shall be irrevocable, except that a plan described in subparagraph (A)(ii) shall cease to be a multiemployer plan as of the plan year beginning immediately after the first plan year for which the majority of its employer contributions were made or required to be made by organizations that were not exempt from tax under section 501. The fact that a plan makes an election under subparagraph (A)(ii) does not imply that the plan was not a multiemployer plan prior to the date of the election or would not be a multiemployer plan without regard to the election. A plan is described in this subparagraph if it is a plan sponsored by an organization which is described in section 501(c)(5) and exempt from tax under section 501(a) and which was established in Chicago, Illinois, on August 12, 1881 . For purposes of this title and the Employee Retirement Income Security Act of 1974, a plan making an election under this paragraph shall be treated as maintained pursuant to a collective bargaining agreement if a collective bargaining agreement, expressly or otherwise, provides for or permits employer contributions to the plan by one or more employers that are signatory to such agreement, or participation in the plan by one or more employees of an employer that is signatory to such agreement, regardless of whether the plan was created, established, or maintained for such employees by virtue of another document that is not a collective bargaining agreement.

(g) Plan administrator For purposes of this part, the term “plan administrator” means— the person specifically so designated by the terms of the instrument under which the plan is operated; in the absence of a designation referred to in paragraph (1)— in the case of a plan maintained by a single employer, such employer, in the case of a plan maintained by two or more employers or jointly by one or more employers and one or more employee organizations, the association, committee, joint board of trustees, or other similar group of representatives of the parties who maintained the plan, or in any case to which subparagraph (A) or (B) does not apply, such other person as the Secretary may by regulation, prescribe.

(h) Tax treatment of certain contributions Effective with respect to taxable years beginning after December 31, 1973 , for purposes of this title, any amount contributed— to an employees’ trust described in section 401(a), or under a plan described in section 403(a), shall not be treated as having been made by the employer if it is designated as an employee contribution. For purposes of paragraph (1), in the case of any plan established by the government of any State or political subdivision thereof, or by any agency or instrumentality of any of the foregoing, or a governmental plan described in the last sentence of section 414(d) (relating to plans of Indian tribal governments), where the contributions of employing units are designated as employee contributions but where any employing unit picks up the contributions, the contributions so picked up shall be treated as employer contributions.

(i) Defined contribution plan For purposes of this part, the term “defined contribution plan” means a plan which provides for an individual account for each participant and for benefits based solely on the amount contributed to the participant’s account, and any income, expenses, gains and losses, and any forfeitures of accounts of other participants which may be allocated to such participant’s account.

(j) Defined benefit plan For purposes of this part, the term “defined benefit plan” means any plan which is not a defined contribution plan.

(k) Certain plans A defined benefit plan which provides a benefit derived from employer contributions which is based partly on the balance of the separate account of a participant shall— for purposes of section 410 (relating to minimum participation standards), be treated as a defined contribution plan, for purposes of sections 72(d) (relating to treatment of employee contributions as separate contract), 411(a)(7)(A) (relating to minimum vesting standards), 415 (relating to limitations on benefits and contributions under qualified plans), and 401(m) (relating to nondiscrimination tests for matching requirements and employee contributions), be treated as consisting of a defined contribution plan to the extent benefits are based on the separate account of a participant and as a defined benefit plan with respect to the remaining portion of benefits under the plan, and for purposes of section 4975 (relating to tax on prohibited transactions), be treated as a defined benefit plan.

(l) Merger and consolidations of plans or transfers of plan assets A trust which forms a part of a plan shall not constitute a qualified trust under section 401 and a plan shall be treated as not described in section 403(a) unless in the case of any merger or consolidation of the plan with, or in the case of any transfer of assets or liabilities of such plan to, any other trust plan after September 2, 1974 , each participant in the plan would (if the plan then terminated) receive a benefit immediately after the merger, consolidation, or transfer which is equal to or greater than the benefit he would have been entitled to receive immediately before the merger, consolidation, or transfer (if the plan had then terminated). The preceding sentence does not apply to any multiemployer plan with respect to any transaction to the extent that participants either before or after the transaction are covered under a multiemployer plan to which Title IV of the Employee Retirement Income Security Act of 1974 applies. In the case of a plan spin-off of a defined benefit plan, a trust which forms part of— the original plan, or any plan spun off from such plan, shall not constitute a qualified trust under this section unless the applicable percentage of excess assets are allocated to each of such plans. For purposes of subparagraph (A), the term “applicable percentage” means, with respect to each of the plans described in clauses (i) and (ii) of subparagraph (A), the percentage determined by dividing— the excess (if any) of— the sum of the funding target and target normal cost determined under section 430, over the amount of the assets required to be allocated to the plan after the spin-off (without regard to this paragraph), by the sum of the excess amounts determined separately under clause (i) for all such plans. For purposes of subparagraph (A), the term “excess assets” means an amount equal to the excess (if any) of— the fair market value of the assets of the original plan immediately before the spin-off, over the amount of assets required to be allocated after the spin-off to all plans (determined without regard to this paragraph). A plan involved in a spin-off which is described in clause (ii), (iii), or (iv) shall not be taken into account for purposes of this paragraph, except that the amount determined under subparagraph (C)(ii) shall be increased by the amount of assets allocated to such plan. A plan is described in this clause if, after such spin-off, such plan is maintained by an employer who is not a member of the same controlled group as the employer maintaining the original plan. A plan as described in this clause if, after the spin-off, any employer maintaining such plan (and any member of the same controlled group as such employer) does not maintain any other plan remaining after the spin-off which is also maintained by another employer (or member of the same controlled group as such other employer) which maintained the plan in existence before the spin-off. A plan is described in this clause if, pursuant to the transaction involving the spin-off, the plan is terminated. For purposes of this subparagraph, the term “controlled group” means any group treated as a single employer under subsection (b), (c), (m), or ( o ). This paragraph does not apply to any multiemployer plan with respect to any spin-off to the extent that participants either before or after the spin-off are covered under a multiemployer plan to which title IV of the Employee Retirement Income Security Act of 1974 applies. Except as provided by the Secretary, rules similar to the rules of this paragraph shall apply to transactions similar to spin-offs. For purposes of this paragraph, in the case of a bridge depository institution established under section 11(i) of the Federal Deposit Insurance Act ( 12 U.S.C. 1821(i) )— such bank shall be treated as a member of any controlled group which includes any insured bank (as defined in section 3(h) of such Act ( 12 U.S.C. 1813(h) ))— which maintains a defined benefit plan, which is closed by the appropriate bank regulatory authorities, and any asset and liabilities of which are received by the bridge depository institution, and the requirements of this paragraph shall not be treated as met with respect to such plan unless during the 180-day period beginning on the date such insured bank is closed— the bridge depository institution has the right to require the plan to transfer (subject to the provisions of this paragraph) not more than 50 percent of the excess assets (as defined in subparagraph (C)) to a defined benefit plan maintained by the bridge depository institution with respect to participants or former participants (including retirees and beneficiaries) in the original plan employed by the bridge depository institution or formerly employed by the closed bank, and no other merger, spin-off, termination, or similar transaction involving the portion of the excess assets described in subclause (I) may occur without the prior written consent of the bridge depository institution.

(m) Employees of an affiliated service group For purposes of the employee benefit requirements listed in paragraph (4), except to the extent otherwise provided in regulations, all employees of the members of an affiliated service group shall be treated as employed by a single employer. For purposes of this subsection, the term “affiliated service group” means a group consisting of a service organization (hereinafter in this paragraph referred to as the “first organization”) and one or more of the following: any service organization which— is a shareholder or partner in the first organization, and regularly performs services for the first organization or is regularly associated with the first organization in performing services for third persons, and any other organization if— a significant portion of the business of such organization is the performance of services (for the first organization, for organizations described in subparagraph (A), or for both) of a type historically performed in such service field by employees, and 10 percent or more of the interests in such organization is held by persons who are highly compensated employees (within the meaning of section 414(q)) of the first organization or an organization described in subparagraph (A). For purposes of this subsection, the term “service organization” means an organization the principal business of which is the performance of services. For purposes of this subsection, the employee benefit requirements listed in this paragraph are— paragraphs (3), (4), (7), (16), (17), and (26) of section 401(a), and sections 408(k), 408(p), 410, 411, 415, and 416. For purposes of this subsection, the term “affiliated service group” also includes a group consisting of— an organization the principal business of which is performing, on a regular and continuing basis, management functions for 1 organization (or for 1 organization and other organizations related to such 1 organization), and the organization (and related organizations) for which such functions are so performed by the organization described in subparagraph (A). For purposes of this paragraph, the term “related organizations” has the same meaning as the term “related persons” when used in section 144(a)(3). For purposes of this subsection— The term “organization” means a corporation, partnership, or other organization. In determining ownership, the principles of section 318(a) shall apply, except that community property laws shall be disregarded for purposes of determining ownership. For purposes of applying the attribution rules under section 318 with respect to clause (i), the following rules apply: Community property laws shall be disregarded for purposes of determining ownership. Except as provided by the Secretary, stock of an individual not attributed under section 318(a)(1)(A)(i) to such individual’s spouse shall not be attributed by reason of the combined application of paragraphs (1)(A)(ii) and (4) of section 318(a) to such spouse from a child who has not attained the age of 21 years. Except as provided by the Secretary, in the case of stock in different organizations which is attributed under section 318(a)(1)(A)(ii) from each parent to a child who has not attained the age of 21 years, and is not attributed to such parents as spouses under section 318(a)(1)(A)(i), such attribution to the child shall not by itself result in such organizations being members of the same affiliated service group. If the application of clause (ii) causes two or more entities to be an affiliated service group, or to no longer be in an affiliated service group, such change shall be treated as a transaction to which section 410(b)(6)(C) applies.

(n) Employee leasing For purposes of the requirements listed in paragraph (3), with respect to any person (hereinafter in this subsection referred to as the “recipient”) for whom a leased employee performs services— the leased employee shall be treated as an employee of the recipient, but contributions or benefits provided by the leasing organization which are attributable to services performed for the recipient shall be treated as provided by the recipient. For purposes of paragraph (1), the term “leased employee” means any person who is not an employee of the recipient and who provides services to the recipient if— such services are provided pursuant to an agreement between the recipient and any other person (in this subsection referred to as the “leasing organization”), such person has performed such services for the recipient (or for the recipient and related persons) on a substantially full-time basis for a period of at least 1 year, and such services are performed under primary direction or control by the recipient. For purposes of this subsection, the requirements listed in this paragraph are— paragraphs (3), (4), (7), (16), (17), and (26) of section 401(a), sections 408(k), 408(p), 410, 411, 415, and 416, and sections 79, 106, 117(d), 125, 127, 129, 132, 137, 274(j), 505, and 4980B. In the case of any leased employee, paragraph (1) shall apply only for purposes of determining whether the requirements listed in paragraph (3) are met for periods after the close of the period referred to in paragraph (2)(B). In the case of a person who is an employee of the recipient (whether by reason of this subsection or otherwise), for purposes of the requirements listed in paragraph (3), years of service for the recipient shall be determined by taking into account any period for which such employee would have been a leased employee but for the requirements of paragraph (2)(B). In the case of requirements described in subparagraphs (A) and (B) of paragraph (3), this subsection shall not apply to any leased employee with respect to services performed for a recipient if— such employee is covered by a plan which is maintained by the leasing organization and meets the requirements of subparagraph (B), and leased employees (determined without regard to this paragraph) do not constitute more than 20 percent of the recipient’s nonhighly compensated work force. A plan meets the requirements of this subparagraph if— such plan is a money purchase pension plan with a nonintegrated employer contribution rate for each participant of at least 10 percent of compensation, such plan provides for full and immediate vesting, and each employee of the leasing organization (other than employees who perform substantially all of their services for the leasing organization) immediately participates in such plan. Clause (iii) shall not apply to any individual whose compensation from the leasing organization in each plan year during the 4-year period ending with the plan year is less than $1,000. For purposes of this paragraph— The term “highly compensated employee” has the meaning given such term by section 414(q). The term “nonhighly compensated work force” means the aggregate number of individuals (other than highly compensated employees)— who are employees of the recipient (without regard to this subsection) and have performed services for the recipient (or for the recipient and related persons) on a substantially full-time basis for a period of at least 1 year, or who are leased employees with respect to the recipient (determined without regard to this paragraph). The term “compensation” has the same meaning as when used in section 415; except that such term shall include— any employer contribution under a qualified cash or deferred arrangement to the extent not included in gross income under section 402(e)(3) or 402(h)(1)(B), any amount which the employee would have received in cash but for an election under a cafeteria plan (within the meaning of section 125), and any amount contributed to an annuity contract described in section 403(b) pursuant to a salary reduction agreement (within the meaning of section 3121(a)(5)(D)). For purposes of this subsection— The term “related persons” has the same meaning as when used in section 144(a)(3). The rules of subsections (b), (c), (m), and ( o ) shall apply.

(o) Regulations The Secretary shall prescribe such regulations (which may provide rules in addition to the rules contained in subsections (m) and (n)) as may be necessary to prevent the avoidance of any employee benefit requirement listed in subsection (m)(4) or (n)(3) or any requirement under section 457 through the use of— separate organizations, employee leasing, or other arrangements. The regulations prescribed under subsection (n) shall include provisions to minimize the recordkeeping requirements of subsection (n) in the case of an employer which has no top-heavy plans (within the meaning of section 416(g)) and which uses the services of persons (other than employees) for an insignificant percentage of the employer’s total workload.

(p) Qualified domestic relations order defined For purposes of this subsection and section 401(a)(13)— The term “qualified domestic relations order” means a domestic relations order— which creates or recognizes the existence of an alternate payee’s right to, or assigns to an alternate payee the right to, receive all or a portion of the benefits payable with respect to a participant under a plan, and with respect to which the requirements of paragraphs (2) and (3) are met. The term “domestic relations order” means any judgment, decree, or order (including approval of a property settlement agreement) which— relates to the provision of child support, alimony payments, or marital property rights to a spouse, former spouse, child, or other dependent of a participant, and is made pursuant to a State or Tribal domestic relations law (including a community property law). For purposes of clause (ii), the term “Tribal” with respect to a domestic relations law means such a law which is issued by or under the laws of an Indian tribal government, a subdivision of such an Indian tribal government, or an agency or instrumentality of either. A domestic relations order meets the requirements of this paragraph only if such order clearly specifies— the name and the last known mailing address (if any) of the participant and the name and mailing address of each alternate payee covered by the order, the amount or percentage of the participant’s benefits to be paid by the plan to each such alternate payee, or the manner in which such amount or percentage is to be determined, the number of payments or period to which such order applies, and each plan to which such order applies. A domestic relations order meets the requirements of this paragraph only if such order— does not require a plan to provide any type or form of benefit, or any option, not otherwise provided under the plan, does not require the plan to provide increased benefits (determined on the basis of actuarial value), and does not require the payment of benefits to an alternate payee which are required to be paid to another alternate payee under another order previously determined to be a qualified domestic relations order. A domestic relations order shall not be treated as failing to meet the requirements of subparagraph (A) of paragraph (3) solely because such order requires that payment of benefits be made to an alternate payee— in the case of any payment before a participant has separated from service, on or after the date on which the participant attains (or would have attained) the earliest retirement age, as if the participant had retired on the date on which such payment is to begin under such order (but taking into account only the present value of the benefits actually accrued and not taking into account the present value of any employer subsidy for early retirement), and in any form in which such benefits may be paid under the plan to the participant (other than in the form of a joint and survivor annuity with respect to the alternate payee and his or her subsequent spouse). For purposes of clause (ii), the interest rate assumption used in determining the present value shall be the interest rate specified in the plan or, if no rate is specified, 5 percent. For purposes of this paragraph, the term “earliest retirement age” means the earlier of— the date on which the participant is entitled to a distribution under the plan, or the later of— the date the participant attains age 50, or the earliest date on which the participant could begin receiving benefits under the plan if the participant separated from service. To the extent provided in any qualified domestic relations order— the former spouse of a participant shall be treated as a surviving spouse of such participant for purposes of sections 401(a)(11) and 417 (and any spouse of the participant shall not be treated as a spouse of the participant for such purposes), and if married for at least 1 year, the surviving former spouse shall be treated as meeting the requirements of section 417(d). In the case of any domestic relations order received by a plan— the plan administrator shall promptly notify the participant and each alternate payee of the receipt of such order and the plan’s procedures for determining the qualified status of domestic relations orders, and within a reasonable period after receipt of such order, the plan administrator shall determine whether such order is a qualified domestic relations order and notify the participant and each alternate payee of such determination. Each plan shall establish reasonable procedures to determine the qualified status of domestic relations orders and to administer distributions under such qualified orders. During any period in which the issue of whether a domestic relations order is a qualified domestic relations order is being determined (by the plan administrator, by a court of competent jurisdiction, or otherwise), the plan administrator shall separately account for the amounts (hereinafter in this paragraph referred to as the “segregated amounts”) which would have been payable to the alternate payee during such period if the order had been determined to be a qualified domestic relations order. If within the 18-month period described in subparagraph (E) the order (or modification thereof) is determined to be a qualified domestic relations order, the plan administrator shall pay the segregated amounts (including any interest thereon) to the person or persons entitled thereto. If within the 18-month period described in subparagraph (E)— it is determined that the order is not a qualified domestic relations order, or the issue as to whether such order is a qualified domestic relations order is not resolved, then the plan administrator shall pay the segregated amounts (including any interest thereon) to the person or persons who would have been entitled to such amounts if there had been no order. Any determination that an order is a qualified domestic relations order which is made after the close of the 18-month period described in subparagraph (E) shall be applied prospectively only. For purposes of this paragraph, the 18-month period described in this subparagraph is the 18-month period beginning with the date on which the first payment would be required to be made under the domestic relations order. The term “alternate payee” means any spouse, former spouse, child or other dependent of a participant who is recognized by a domestic relations order as having a right to receive all, or a portion of, the benefits payable under a plan with respect to such participant. This subsection shall not apply to any plan to which section 401(a)(13) does not apply. For purposes of this title, except as provided in regulations, any distribution from an annuity contract under section 403(b) pursuant to a qualified domestic relations order shall be treated in the same manner as a distribution from a plan to which section 401(a)(13) applies. With respect to the requirements of subsections (a) and (k) of section 401, section 403(b), section 409(d), and section 457(d), a plan shall not be treated as failing to meet such requirements solely by reason of payments to an alternative payee pursuant to a qualified domestic relations order. For purposes of this title, a distribution or payment from a governmental plan (as defined in subsection (d)) or a church plan (as described in subsection (e)) or an eligible deferred compensation plan (within the meaning of section 457(b)) shall be treated as made pursuant to a qualified domestic relations order if it is made pursuant to a domestic relations order which meets the requirement of clause (i) of paragraph (1)(A). If a distribution or payment from an eligible deferred compensation plan described in section 457(b) is made pursuant to a qualified domestic relations order, rules similar to the rules of section 402(e)(1)(A) shall apply to such distribution or payment. In prescribing regulations under this subsection and section 401(a)(13), the Secretary of Labor shall consult with the Secretary.

(q) Highly compensated employee The term “highly compensated employee” means any employee who— was a 5-percent owner at any time during the year or the preceding year, or for the preceding year— had compensation from the employer in excess of $80, 000, an d i f t h ee m pl oyere l ec t s t h e a ppl i c a t i o n o f t hi sc l a u se f ors u c h p rece d in g ye a r, w a s in t h e t o p - p ai d g ro u p o f e m pl oyees f ors u c h p rece d in g ye a r . T h e S ecre t a rys ha ll a d j u s tt h e$ 80,000 amount under subparagraph (B) at the same time and in the same manner as under section 415(d), except that the base period shall be the calendar quarter ending September 30, 1996 . An employee shall be treated as a 5-percent owner for any year if at any time during such year such employee was a 5-percent owner (as defined in section 416(i)(1)) of the employer. An employee is in the top-paid group of employees for any year if such employee is in the group consisting of the top 20 percent of the employees when ranked on the basis of compensation paid during such year. For purposes of this subsection, the term “compensation” has the meaning given such term by section 415(c)(3). For purposes of subsection (r) and for purposes of determining the number of employees in the top-paid group, the following employees shall be excluded— employees who have not completed 6 months of service, employees who normally work less than 17½ hours per week, employees who normally work during not more than 6 months during any year, employees who have not attained age 21, and except to the extent provided in regulations, employees who are included in a unit of employees covered by an agreement which the Secretary of Labor finds to be a collective bargaining agreement between employee representatives and the employer. Except as provided by the Secretary, the employer may elect to apply subparagraph (A), (B), (C), or (D) by substituting a shorter period of service, smaller number of hours or months, or lower age for the period of service, number of hours or months, or age (as the case may be) than that specified in such subparagraph. A former employee shall be treated as a highly compensated employee if— such employee was a highly compensated employee when such employee separated from service, or such employee was a highly compensated employee at any time after attaining age 55. Subsections (b), (c), (m), (n), and ( o ) shall be applied before the application of this subsection. For purposes of this subsection and subsection (r), employees who are nonresident aliens and who receive no earned income (within the meaning of section 911(d)(2)) from the employer which constitutes income from sources within the United States (within the meaning of section 861(a)(3)) shall not be treated as employees. In the case of a church plan (as defined in subsection (e)), no employee shall be considered an officer, a person whose principal duties consist of supervising the work of other employees, or a highly compensated employee for any year unless such employee is a highly compensated employee under paragraph (1) for such year.

(r) Special rules for separate line of business For purposes of sections 129(d)(8) and 410(b), an employer shall be treated as operating separate lines of business during any year if the employer for bona fide business reasons operates separate lines of business. A line of business shall not be treated as separate under paragraph (1) unless— such line of business has at least 50 employees who are not excluded under subsection (q)(5), the employer notifies the Secretary that such line of business is being treated as separate for purposes of paragraph (1), and such line of business meets guidelines prescribed by the Secretary or the employer receives a determination from the Secretary that such line of business may be treated as separate for purposes of paragraph (1). The requirements of subparagraph (C) of paragraph (2) shall not apply to any line of business if the highly compensated employee percentage with respect to such line of business is— not less than one-half, and not more than twice, the percentage which highly compensated employees are of all employees of the employer. An employer shall be treated as meeting the requirements of clause (i) if at least 10 percent of all highly compensated employees of the employer perform services solely for such line of business. The requirements of subparagraph (A) shall be treated as met with respect to any line of business if such requirements were met with respect to such line of business for the preceding year and if— no more than a de minimis number of employees were shifted to or from the line of business after the close of the preceding year, or the employees shifted to or from the line of business after the close of the preceding year contained a substantially proportional number of highly compensated employees. For purposes of this subsection, the term “highly compensated employee percentage” means the percentage which highly compensated employees performing services for the line of business are of all employees performing services for the line of business. For purposes of this subsection, benefits which are attributable to services provided to a line of business shall be treated as provided by such line of business. The Secretary shall prescribe rules providing for— the allocation of headquarters personnel among the lines of business of the employer, and the treatment of other employees providing services for more than 1 line of business of the employer or not in lines of business meeting the requirements of paragraph (2). For purposes of this subsection, the term “separate line of business” includes an operating unit in a separate geographic area separately operated for a bona fide business reason. This subsection shall not apply in the case of any affiliated service group (within the meaning of section 414(m)).

(s) Compensation For purposes of any applicable provision— Except as provided in this subsection, the term “compensation” has the meaning given such term by section 415(c)(3). An employer may elect not to include as compensation any amount which is contributed by the employer pursuant to a salary reduction agreement and which is not includible in the gross income of an employee under section 125, 132(f)(4), 402(e)(3), 402(h), or 403(b). The Secretary shall by regulation provide for alternative methods of determining compensation which may be used by an employer, except that such regulations shall provide that an employer may not use an alternative method if the use of such method discriminates in favor of highly compensated employees (within the meaning of subsection (q)). For purposes of this subsection, the term “applicable provision” means any provision which specifically refers to this subsection.

(t) Application of controlled group rules to certain employee benefits All employees who are treated as employed by a single employer under subsection (b), (c), or (m) shall be treated as employed by a single employer for purposes of an applicable section. The provisions of subsection ( o ) shall apply with respect to the requirements of an applicable section. For purposes of this subsection, the term “applicable section” means section 79, 106, 117(d), 125, 127, 129, 132, 137, 274(j), 505, or 4980B.

(u) Special rules relating to veterans’ reemployment rights under USERRA and to differential wage payments to members on active duty If any contribution is made by an employer or an employee under an individual account plan with respect to an employee, or by an employee to a defined benefit plan that provides for employee contributions, and such contribution is required by reason of such employee’s rights under chapter 43 of title 38, United States Code, resulting from qualified military service, then— such contribution shall not be subject to any otherwise applicable limitation contained in section 402(g), 402(h), 403(b), 404(a), 404(h), 408, 415, or 457, and shall not be taken into account in applying such limitations to other contributions or benefits under such plan or any other plan, with respect to the year in which the contribution is made, such contribution shall be subject to the limitations referred to in subparagraph (A) with respect to the year to which the contribution relates (in accordance with rules prescribed by the Secretary), and such plan shall not be treated as failing to meet the requirements of section 401(a)(4), 401(a)(26), 401(k)(3), 401(k)(11), 401(k)(12), 401(m), 403(b)(12), 408(k)(3), 408(k)(6), 408(p), 410(b), or 416 by reason of the making of (or the right to make) such contribution. For purposes of the preceding sentence, any elective deferral or employee contribution made under paragraph (2) shall be treated as required by reason of the employee’s rights under such chapter 43. For purposes of this subchapter and section 457, if an employee is entitled to the benefits of chapter 43 of title 38, United States Code, with respect to any plan which provides for elective deferrals, the employer sponsoring the plan shall be treated as meeting the requirements of such chapter 43 with respect to such elective deferrals only if such employer— permits such employee to make additional elective deferrals under such plan (in the amount determined under subparagraph (B) or such lesser amount as is elected by the employee) during the period which begins on the date of the reemployment of such employee with such employer and has the same length as the lesser of— the product of 3 and the period of qualified military service which resulted in such rights, and 5 years, and makes a matching contribution with respect to any additional elective deferral made pursuant to clause (i) which would have been required had such deferral actually been made during the period of such qualified military service. The amount determined under this subparagraph with respect to any plan is the maximum amount of the elective deferrals that the individual would have been permitted to make under the plan in accordance with the limitations referred to in paragraph (1)(A) during the period of qualified military service if the individual had continued to be employed by the employer during such period and received compensation as determined under paragraph (7). Proper adjustment shall be made to the amount determined under the preceding sentence for any elective deferrals actually made during the period of such qualified military service. For purposes of this paragraph, the term “elective deferral” has the meaning given such term by section 402(g)(3); except that such term shall include any deferral of compensation under an eligible deferred compensation plan (as defined in section 457(b)). References in subparagraphs (A) and (B) to elective deferrals shall be treated as including references to employee contributions. For purposes of this subchapter and subchapter E, no provision of chapter 43 of title 38, United States Code, shall be construed as requiring— any crediting of earnings to an employee with respect to any contribution before such contribution is actually made, or any allocation of any forfeiture with respect to the period of qualified military service. If any plan suspends the obligation to repay any loan made to an employee from such plan for any part of any period during which such employee is performing service in the uniformed services (as defined in chapter 43 of title 38, United States Code), whether or not qualified military service, such suspension shall not be taken into account for purposes of section 72(p), 401(a), or 4975(d)(1). For purposes of this subsection, the term “qualified military service” means any service in the uniformed services (as defined in chapter 43 of title 38, United States Code) by any individual if such individual is entitled to reemployment rights under such chapter with respect to such service. For purposes of this subsection, the term “individual account plan” means any defined contribution plan (including any tax-sheltered annuity plan under section 403(b), any simplified employee pension under section 408(k), any qualified salary reduction arrangement under section 408(p), and any eligible deferred compensation plan (as defined in section 457(b))). For purposes of sections 403(b)(3), 415(c)(3), and 457(e)(5), an employee who is in qualified military service shall be treated as receiving compensation from the employer during such period of qualified military service equal to— the compensation the employee would have received during such period if the employee were not in qualified military service, determined based on the rate of pay the employee would have received from the employer but for absence during the period of qualified military service, or if the compensation the employee would have received during such period was not reasonably certain, the employee’s average compensation from the employer during the 12-month period immediately preceding the qualified military service (or, if shorter, the period of employment immediately preceding the qualified military service). For purposes of this subchapter and section 457, an employer sponsoring a retirement plan shall be treated as meeting the requirements of chapter 43 of title 38, United States Code, only if each of the following requirements is met: An individual reemployed under such chapter is treated with respect to such plan as not having incurred a break in service with the employer maintaining the plan by reason of such individual’s period of qualified military service. Each period of qualified military service served by an individual is, upon reemployment under such chapter, deemed with respect to such plan to constitute service with the employer maintaining the plan for the purpose of determining the nonforfeitability of the individual’s accrued benefits under such plan and for the purpose of determining the accrual of benefits under such plan. An individual reemployed under such chapter is entitled to accrued benefits that are contingent on the making of, or derived from, employee contributions or elective deferrals only to the extent the individual makes payment to the plan with respect to such contributions or deferrals. No such payment may exceed the amount the individual would have been permitted or required to contribute had the individual remained continuously employed by the employer throughout the period of qualified military service. Any payment to such plan shall be made during the period beginning with the date of reemployment and whose duration is 3 times the period of the qualified military service (but not greater than 5 years). For benefit accrual purposes, an employer sponsoring a retirement plan may treat an individual who dies or becomes disabled (as defined under the terms of the plan) while performing qualified military service with respect to the employer maintaining the plan as if the individual has resumed employment in accordance with the individual’s reemployment rights under chapter 43 of title 38, United States Code, on the day preceding death or disability (as the case may be) and terminated employment on the actual date of death or disability. In the case of any such treatment, and subject to subparagraphs (B) and (C), any full or partial compliance by such plan with respect to the benefit accrual requirements of paragraph (8) with respect to such individual shall be treated for purposes of paragraph (1) as if such compliance were required under such chapter 43. Subparagraph (A) shall apply only if all individuals performing qualified military service with respect to the employer maintaining the plan (as determined under subsections (b), (c), (m), and ( o )) who die or became disabled as a result of performing qualified military service prior to reemployment by the employer are credited with service and benefits on reasonably equivalent terms. The amount of employee contributions and the amount of elective deferrals of an individual treated as reemployed under subparagraph (A) for purposes of applying paragraph (8)(C) shall be determined on the basis of the individual’s average actual employee contributions or elective deferrals for the lesser of— the 12-month period of service with the employer immediately prior to qualified military service, or if service with the employer is less than such 12-month period, the actual length of continuous service with the employer. This subsection shall not apply to any retirement plan to which chapter 43 of title 38, United States Code, does not apply. For purposes of this section, any reference to chapter 43 of title 38, United States Code, shall be treated as a reference to such chapter as in effect on December 12, 1994 (without regard to any subsequent amendment). Except as provided in this paragraph, for purposes of applying this title to a retirement plan to which this subsection applies— an individual receiving a differential wage payment shall be treated as an employee of the employer making the payment, the differential wage payment shall be treated as compensation, and the plan shall not be treated as failing to meet the requirements of any provision described in paragraph (1)(C) by reason of any contribution or benefit which is based on the differential wage payment. Notwithstanding subparagraph (A)(i), for purposes of section 401(k)(2)(B)(i)(I), 403(b)(7)(A)(ii), 403(b)(11)(A), or 457(d)(1)(A)(ii), 2 an individual shall be treated as having been severed from employment during any period the individual is performing service in the uniformed services described in section 3401(h)(2)(A). If an individual elects to receive a distribution by reason of clause (i), the plan shall provide that the individual may not make an elective deferral or employee contribution during the 6-month period beginning on the date of the distribution. Subparagraph (A)(iii) shall apply only if all employees of an employer (as determined under subsections (b), (c), (m), and ( o )) performing service in the uniformed services described in section 3401(h)(2)(A) are entitled to receive differential wage payments on reasonably equivalent terms and, if eligible to participate in a retirement plan maintained by the employer, to make contributions based on the payments on reasonably equivalent terms. For purposes of applying this subparagraph, the provisions of paragraphs (3), (4), and (5) of section 410(b) shall apply. For purposes of this paragraph, the term “differential wage payment” has the meaning given such term by section 3401(h)(2).

(v) Catch-up contributions for individuals age 50 or over An applicable employer plan shall not be treated as failing to meet any requirement of this title solely because the plan permits an eligible participant to make additional elective deferrals in any plan year. A plan shall not permit additional elective deferrals under paragraph (1) for any year in an amount greater than the lesser of— the applicable dollar amount, or the excess (if any) of— the participant’s compensation (as defined in section 415(c)(3)) for the year, over any other elective deferrals of the participant for such year which are made without regard to this subsection. For purposes of this paragraph— In the case of an applicable employer plan other than a plan described in section 401(k)(11) or 408(p), the applicable dollar amount is $5, 000 (t h e a d j u s t e dd o ll a r am o u n t, in t h ec a seo f an e l i g ib l e p a r t i c i p an tw h o w o u l d a tt aina g e 60 b u tw o u l d n o t a tt aina g e 64 b e f ore t h ec l oseo f t h e t a x ab l eye a r) . I n t h ec a seo f ana ppl i c ab l ee m pl oyer pl an d escr ib e d in sec t i o n 401 (k) (11) or 408 (p), e x ce pt a s p ro v i d e d in c l a u se (iii), t h e a ppl i c ab l e d o ll a r am o u n t i s$ 2,500 (the adjusted dollar amount, in the case of an eligible participant who would attain age 60 but would not attain age 64 before the close of the taxable year). In the case of an applicable employer plan— which is maintained by an eligible employer described in section 408(p)(2)(E)(i)(I), or to which an election under section 408(p)(2)(E)(i)(II) applies for the year (including a plan described in section 401(k)(11) which is maintained by an eligible employer described in section 408(p)(2)(E)(i)(II) and to which such election applies by reason of subparagraphs (B)(i)(I) and (E) of section 401(k)(11)), the applicable dollar amount is an amount equal to 110 percent of the dollar amount in effect under clause (ii) for calendar year 2024. In the case of a year beginning after December 31, 2006 , the Secretary shall adjust annually the $5, 000 am o u n t in s u b p a r a g r a p h (B) (i) an d t h e$ 2,500 amount in subparagraph (B)(ii) for increases in the cost-of-living at the same time and in the same manner as adjustments under section 415(d); except that the base period taken into account shall be the calendar quarter beginning July 1, 2005 , and any increase under this subparagraph which is not a multiple of $500 s ha ll b ero u n d e d t o t h e n e x tl o w er m u lt i pl eo f$ 500. In the case of a year beginning after December 31, 2025 , the Secretary shall adjust annually the adjusted dollar amounts applicable under clauses (i) and (ii) of subparagraph (E) for increases in the cost-of-living at the same time and in the same manner as adjustments under the preceding sentence; except that the base period taken into account shall be the calendar quarter beginning July 1, 2024 . In the case of a year beginning after December 31, 2024 , the Secretary shall adjust annually the dollar amount described in subparagraph (B)(iii) in the manner provided under clause (i) of this subparagraph, except that the base period taken into account shall be the calendar quarter beginning July 1, 2023 . For purposes of this paragraph, plans described in clauses (i), (ii), and (iv) of paragraph (6)(A) that are maintained by the same employer (as determined under subsection (b), (c), (m) or ( o )) shall be treated as a single plan, and plans described in clause (iii) of paragraph (6)(A) that are maintained by the same employer shall be treated as a single plan. For purposes of subparagraph (B), the adjusted dollar amount is— in the case of clause (i) of subparagraph (B), the greater of— $10, 000, or anam o u n t e q u a lt o 150 p erce n t o f t h e d o ll a r am o u n tw hi c h w o u l d b e in e ff ec t u n d ers u c h c l a u se f or 2024 f ore l i g ib l e p a r t i c i p an t s n o t d escr ib e d in t h e p a re n t h e t i c a l in s u c h c l a u se, or in t h ec a seo f c l a u se (ii) o f s u b p a r a g r a p h (B), t h e g re a t ero f —$ 5,000, or an amount equal to equal to 3 150 percent of the dollar amount which would be in effect under such clause for 2025 for eligible participants not described in the parenthetical in such clause. In the case of any contribution to a plan under paragraph (1)— such contribution shall not, with respect to the year in which the contribution is made— be subject to any otherwise applicable limitation contained in sections 401(a)(30), 402(h), 403(b), 408, 415(c), and 457(b)(2) (determined without regard to section 457(b)(3)), or be taken into account in applying such limitations to other contributions or benefits under such plan or any other such plan, and except as provided in paragraph (4), such plan shall not be treated as failing to meet the requirements of section 401(a)(4), 401(k)(3), 401(k)(11), 403(b)(12), 408(k), 410(b), or 416 by reason of the making of (or the right to make) such contribution. An applicable employer plan shall be treated as failing to meet the nondiscrimination requirements under section 401(a)(4) with respect to benefits, rights, and features unless the plan allows all eligible participants to make the same election with respect to the additional elective deferrals under this subsection. For purposes of subparagraph (A), all plans maintained by employers who are treated as a single employer under subsection (b), (c), (m), or ( o ) of section 414 shall be treated as 1 plan, except that a plan described in clause (i) of section 410(b)(6)(C) shall not be treated as a plan of the employer until the expiration of the transition period with respect to such plan (as determined under clause (ii) of such section). For purposes of this subsection, the term “eligible participant” means a participant in a plan— who would attain age 50 by the end of the taxable year, with respect to whom no other elective deferrals may (without regard to this subsection) be made to the plan for the plan (or other applicable) year by reason of the application of any limitation or other restriction described in paragraph (3) or comparable limitation or restriction contained in the terms of the plan. For purposes of this subsection— The term “applicable employer plan” means— an employees’ trust described in section 401(a) which is exempt from tax under section 501(a), a plan under which amounts are contributed by an individual’s employer for an annuity contract described in section 403(b), an eligible deferred compensation plan under section 457 of an eligible employer described in section 457(e)(1)(A), and an arrangement meeting the requirements of section 408(k) or (p). The term “elective deferral” has the meaning given such term by subsection (u)(2)(C). This subsection shall not apply to a participant for any year for which a higher limitation applies to the participant under section 457(b)(3). Except as provided in subparagraph (C), in the case of an eligible participant whose wages (as defined in section 3121(a)) for the preceding calendar year from the employer sponsoring the plan exceed $145, 000, p a r a g r a p h (1) s ha ll a ppl yo n l y i f an y a dd i t i o na l e l ec t i v e d e f err a l s a re d es i g na t e d R o t h co n t r ib u t i o n s (a s d e f in e d in sec t i o n 402 A (c) (1)) ma d e p u rs u an tt o an e m pl oyeee l ec t i o n . I n t h ec a seo f ana ppl i c ab l ee m pl oyer pl an w i t h res p ec tt o w hi c h s u b p a r a g r a p h (A) a ppl i es t o an y p a r t i c i p an t f or a pl an ye a r, p a r a g r a p h (1) s ha ll n o t a ppl y t o t h e pl an u n l ess t h e pl an p ro v i d es t ha t an ye l i g ib l e p a r t i c i p an t ma y mak e t h e p a r t i c i p an t ’ s a dd i t i o na l e l ec t i v e d e f err a l s a s d es i g na t e d R o t h co n t r ib u t i o n s . S u b p a r a g r a p h (A) s ha ll n o t a ppl y in t h ec a seo f ana ppl i c ab l ee m pl oyer pl an d escr ib e d in p a r a g r a p h (6) (A) (i v) . T h e S ecre t a ry ma y p ro v i d e b yre gu l a t i o n s t ha t an e l i g ib l e p a r t i c i p an t ma ye l ec tt oc han g e t h e p a r t i c i p an t ’ se l ec t i o n t o mak e a dd i t i o na l e l ec t i v e d e f err a l s i f t h e p a r t i c i p an t ’ sco m p e n s a t i o ni s d e t er min e d t oe x cee d t h e l imi t a t i o n u n d ers u b p a r a g r a p h (A) a f t er t h ee l ec t i o ni s ma d e . I n t h ec a seo f a ye a r b e g innin g a f t erDece mb er 31, 2024, t h e S ecre t a rys ha ll a d j u s t ann u a ll y t h e$ 145,000 amount in subparagraph (A) for increases in the cost-of-living at the same time and in the same manner as adjustments under 415(d); except that the base period taken into account shall be the calendar quarter beginning July 1, 2023 , and any increase under this subparagraph which is not a multiple of $5, 000 s ha ll b ero u n d e d t o t h e n e x tl o w er m u lt i pl eo f$ 5,000.

(w) Special rules for certain withdrawals from eligible automatic contribution arrangements If an eligible automatic contribution arrangement allows an employee to elect to make permissible withdrawals— the amount of any such withdrawal shall be includible in the gross income of the employee for the taxable year of the employee in which the distribution is made, no tax shall be imposed under section 72(t) with respect to the distribution, and the arrangement shall not be treated as violating any restriction on distributions under this title solely by reason of allowing the withdrawal. In the case of any distribution to an employee by reason of an election under this paragraph, employer matching contributions shall be forfeited or subject to such other treatment as the Secretary may prescribe. For purposes of this subsection— The term “permissible withdrawal” means any withdrawal from an eligible automatic contribution arrangement meeting the requirements of this paragraph which— is made pursuant to an election by an employee, and consists of elective contributions described in paragraph (3)(B) (and earnings attributable thereto). Subparagraph (A) shall not apply to an election by an employee unless the election is made no later than the date which is 90 days after the date of the first elective contribution with respect to the employee under the arrangement. Subparagraph (A) shall not apply to any election by an employee unless the amount of any distribution by reason of the election is equal to the amount of elective contributions made with respect to the first payroll period to which the eligible automatic contribution arrangement applies to the employee and any succeeding payroll period beginning before the effective date of the election (and earnings attributable thereto). For purposes of this subsection, the term “eligible automatic contribution arrangement” means an arrangement under an applicable employer plan— under which a participant may elect to have the employer make payments as contributions under the plan on behalf of the participant, or to the participant directly in cash, under which the participant is treated as having elected to have the employer make such contributions in an amount equal to a uniform percentage of compensation provided under the plan until the participant specifically elects not to have such contributions made (or specifically elects to have such contributions made at a different percentage), and which meets the requirements of paragraph (4). The administrator of a plan containing an arrangement described in paragraph (3) shall, within a reasonable period before each plan year, give to each employee to whom an arrangement described in paragraph (3) applies for such plan year notice of the employee’s rights and obligations under the arrangement which— is sufficiently accurate and comprehensive to apprise the employee of such rights and obligations, and is written in a manner calculated to be understood by the average employee to whom the arrangement applies. A notice shall not be treated as meeting the requirements of subparagraph (A) with respect to an employee unless— the notice includes an explanation of the employee’s right under the arrangement to elect not to have elective contributions made on the employee’s behalf (or to elect to have such contributions made at a different percentage), the employee has a reasonable period of time after receipt of the notice described in clause (i) and before the first elective contribution is made to make such election, and the notice explains how contributions made under the arrangement will be invested in the absence of any investment election by the employee. For purposes of this subsection, the term “applicable employer plan” means— an employees’ trust described in section 401(a) which is exempt from tax under section 501(a), a plan under which amounts are contributed by an individual’s employer for an annuity contract described in section 403(b), an eligible deferred compensation plan described in section 457(b) which is maintained by an eligible employer described in section 457(e)(1)(A), a simplified employee pension the terms of which provide for a salary reduction arrangement described in section 408(k)(6), and a simple retirement account (as defined in section 408(p)). A withdrawal described in paragraph (1) (subject to the limitation of paragraph (2)(C)) shall not be taken into account for purposes of section 401(k)(3) or for purposes of applying the limitation under section 402(g)(1).

(x) Special rules for eligible combined defined benefit plans and qualified cash or deferred arrangements Except as provided in this subsection, the requirements of this title shall be applied to any defined benefit plan or applicable defined contribution plan which is part of an eligible combined plan in the same manner as if each such plan were not a part of the eligible combined plan. In the case of a termination of the defined benefit plan and the applicable defined contribution plan forming part of an eligible combined plan, the plan administrator shall terminate each such plan separately. For purposes of this subsection— The term “eligible combined plan” means a plan— which is maintained by an employer which, at the time the plan is established, is a small employer, which consists of a defined benefit plan and an applicable defined contribution plan, the assets of which are held in a single trust forming part of the plan and are clearly identified and allocated to the defined benefit plan and the applicable defined contribution plan to the extent necessary for the separate application of this title under paragraph (1), and with respect to which the benefit, contribution, vesting, and nondiscrimination requirements of subparagraphs (B), (C), (D), (E), and (F) are met. For purposes of this subparagraph, the term “small employer” has the meaning given such term by section 4980D(d)(2), except that such section shall be applied by substituting “500” for “50” each place it appears. The benefit requirements of this subparagraph are met with respect to the defined benefit plan forming part of the eligible combined plan if the accrued benefit of each participant derived from employer contributions, when expressed as an annual retirement benefit, is not less than the applicable percentage of the participant’s final average pay. For purposes of this clause, final average pay shall be determined using the period of consecutive years (not exceeding 5) during which the participant had the greatest aggregate compensation from the employer. For purposes of clause (i), the applicable percentage is the lesser of— 1 percent multiplied by the number of years of service with the employer, or 20 percent. If the defined benefit plan under clause (i) is an applicable defined benefit plan as defined in section 411(a)(13)(B) which meets the interest credit requirements of section 411(b)(5)(B)(i), the plan shall be treated as meeting the requirements of clause (i) with respect to any plan year if each participant receives a pay credit for the year which is not less than the percentage of compensation determined in accordance with the following table: If the participant’s age as of the beginning of the year is— The percentage is— 30 or less 2 Over 30 but less than 40 4 40 or over but less than 50 6 50 or over 8. For purposes of this subparagraph, years of service shall be determined under the rules of paragraphs (4), (5), and (6) of section 411(a), except that the plan may not disregard any year of service because of a participant making, or failing to make, any elective deferral with respect to the qualified cash or deferred arrangement to which subparagraph (C) applies. The contribution requirements of this subparagraph with respect to any applicable defined contribution plan forming part of an eligible combined plan are met if— the qualified cash or deferred arrangement included in such plan constitutes an automatic contribution arrangement, and the employer is required to make matching contributions on behalf of each employee eligible to participate in the arrangement in an amount equal to 50 percent of the elective contributions of the employee to the extent such elective contributions do not exceed 4 percent of compensation. Rules similar to the rules of clauses (ii) and (iii) of section 401(k)(12)(B) shall apply for purposes of this clause. An applicable defined contribution plan shall not be treated as failing to meet the requirements of clause (i) because the employer makes nonelective contributions under the plan but such contributions shall not be taken into account in determining whether the requirements of clause (i)(II) are met. The vesting requirements of this subparagraph are met if— in the case of a defined benefit plan forming part of an eligible combined plan an employee who has completed at least 3 years of service has a nonforfeitable right to 100 percent of the employee’s accrued benefit under the plan derived from employer contributions, and in the case of an applicable defined contribution plan forming part of eligible combined plan— an employee has a nonforfeitable right to any matching contribution made under the qualified cash or deferred arrangement included in such plan by an employer with respect to any elective contribution, including matching contributions in excess of the contributions required under subparagraph (C)(i)(II), and an employee who has completed at least 3 years of service has a nonforfeitable right to 100 percent of the employee’s accrued benefit derived under the arrangement from nonelective contributions of the employer. For purposes of this subparagraph, the rules of section 411 shall apply to the extent not inconsistent with this subparagraph. In the case of a defined benefit plan or applicable defined contribution plan forming part of an eligible combined plan, the requirements of this subparagraph are met if all contributions and benefits under each such plan, and all rights and features under each such plan, must be provided uniformly to all participants. The requirements of this subparagraph are met if the requirements of clauses (ii) and (iii) are met. The requirements of this clause are met if— the requirements of subparagraphs (B) and (C) are met without regard to section 401( l ), and the requirements of sections 401(a)(4) and 410(b) are met with respect to both the applicable defined contribution plan and defined benefit plan forming part of an eligible combined plan without regard to section 401( l ). The requirements of this clause are met if the applicable defined contribution plan and defined benefit plan forming part of an eligible combined plan meet the requirements of sections 401(a)(4) and 410(b) without being combined with any other plan. A qualified cash or deferred arrangement which is included in an applicable defined contribution plan forming part of an eligible combined plan shall be treated as meeting the requirements of section 401(k)(3)(A)(ii) if the requirements of paragraph (2)(C) are met with respect to such arrangement. In applying section 401(m)(11) to any matching contribution with respect to a contribution to which paragraph (2)(C) applies, the contribution requirement of paragraph (2)(C) and the notice requirements of paragraph (5)(B) shall be substituted for the requirements otherwise applicable under clauses (i) and (ii) of section 401(m)(11)(A). A defined benefit plan and applicable defined contribution plan forming part of an eligible combined plan for any plan year shall be treated as meeting the requirements of section 416 for the plan year. For purposes of this subsection— A qualified cash or deferred arrangement shall be treated as an automatic contribution arrangement if the arrangement— provides that each employee eligible to participate in the arrangement is treated as having elected to have the employer make elective contributions in an amount equal to 4 percent of the employee’s compensation unless the employee specifically elects not to have such contributions made or to have such contributions made at a different rate, and meets the notice requirements under subparagraph (B). The requirements of this subparagraph are met if the requirements of clauses (ii) and (iii) are met. The requirements of this clause are met if each employee to whom subparagraph (A)(i) applies— receives a notice explaining the employee’s right under the arrangement to elect not to have elective contributions made on the employee’s behalf or to have the contributions made at a different rate, and has a reasonable period of time after receipt of such notice and before the first elective contribution is made to make such election. The requirements of this clause are met if each employee eligible to participate in the arrangement is, within a reasonable period before any year, given notice of the employee’s rights and obligations under the arrangement. The requirements of clauses (i) and (ii) of section 401(k)(12)(D) shall be met with respect to the notices described in clauses (ii) and (iii) of this subparagraph. Section 414(k) shall not apply to an eligible combined plan. An eligible combined plan shall be treated as a single plan for purposes of sections 6058 and 6059. For purposes of this subsection— The term “applicable defined contribution plan” means a defined contribution plan which includes a qualified cash or deferred arrangement. The term “qualified cash or deferred arrangement” has the meaning given such term by section 401(k)(2).

(y) Cooperative and small employer charity pension plans For purposes of this title, except as provided in this subsection, a CSEC plan is a defined benefit plan (other than a multiemployer plan)— to which section 104 of the Pension Protection Act of 2006 applies, without regard to— section 104(a)(2) of such Act; the amendments to such section 104 by section 202(b) of the Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act of 2010; and paragraph (3)(B); that, as of June 25, 2010 , was maintained by more than one employer and all of the employers were organizations described in section 501(c)(3); that, as of June 25, 2010 , was maintained by an employer— described in section 501(c)(3), chartered under part B of subtitle II of title 36, United States Code, with employees in at least 40 States, and whose primary exempt purpose is to provide services with respect to children; or that, as of January 1, 2000 , was maintained by an employer— described in section 501(c)(3), who has been in existence since at least 1938, who conducts medical research directly or indirectly through grant making, and whose primary exempt purpose is to provide services with respect to mothers and children. All employers that are treated as a single employer under subsection (b) or (c) shall be treated as a single employer for purposes of determining if a plan was maintained by more than one employer under subparagraphs (B) and (C) of paragraph (1). If a plan falls within the definition of a CSEC plan under this subsection (without regard to this paragraph), such plan shall be a CSEC plan unless the plan sponsor elects not later than the close of the first plan year of the plan beginning after December 31, 2013 , not to be treated as a CSEC plan. An election under the preceding sentence shall take effect for such plan year and, once made, may be revoked only with the consent of the Secretary. If a plan described in subparagraph (A) is treated as a CSEC plan, section 104 of the Pension Protection Act of 2006, as amended by the Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act of 2010, shall cease to apply to such plan as of the first date as of which such plan is treated as a CSEC plan.

(z) Certain plan transfers and mergers Under rules prescribed by the Secretary, except as provided in paragraph (2), no amount shall be includible in gross income by reason of— a transfer of all or a portion of the accrued benefit of a participant or beneficiary, whether or not vested, from a church plan that is a plan described in section 401(a) or an annuity contract described in section 403(b) to an annuity contract described in section 403(b), if such plan and annuity contract are both maintained by the same church or convention or association of churches, a transfer of all or a portion of the accrued benefit of a participant or beneficiary, whether or not vested, from an annuity contract described in section 403(b) to a church plan that is a plan described in section 401(a), if such plan and annuity contract are both maintained by the same church or convention or association of churches, or a merger of a church plan that is a plan described in section 401(a), or an annuity contract described in section 403(b), with an annuity contract described in section 403(b), if such plan and annuity contract are both maintained by the same church or convention or association of churches. Paragraph (1) shall not apply to a transfer or merger unless the participant’s or beneficiary’s total accrued benefit immediately after the transfer or merger is equal to or greater than the participant’s or beneficiary’s total accrued benefit immediately before the transfer or merger, and such total accrued benefit is nonforfeitable after the transfer or merger. A plan or annuity contract shall not fail to be considered to be described in section 401(a) or 403(b) merely because such plan or annuity contract engages in a transfer or merger described in this subsection. For purposes of this subsection— The term “church or convention or association of churches” includes an organization described in subparagraph (A) or (B)(ii) of subsection (e)(3). The term “annuity contract” includes a custodial account described in section 403(b)(7) and a retirement income account described in section 403(b)(9). The term “accrued benefit” means— in the case of a defined benefit plan, the employee’s accrued benefit determined under the plan, and in the case of a plan other than a defined benefit plan, the balance of the employee’s account under the plan.

(aa) Special rules applicable to benefit overpayments A plan shall not fail to be treated as described in clause (i), (ii), (iii), or (iv) of section 219(g)(5)(A) (and shall not fail to be treated as satisfying the requirements of section 401(a) or 403) merely because— the plan fails to obtain payment from any participant, beneficiary, employer, plan sponsor, fiduciary, or other party on account of any inadvertent benefit overpayment made by the plan, or the plan sponsor amends the plan to increase past, or decrease future, benefit payments to affected participants and beneficiaries in order to adjust for prior inadvertent benefit overpayments. Paragraph (1) shall not fail to apply to a plan merely because, after discovering a benefit overpayment, such plan— reduces future benefit payments to the correct amount provided for under the terms of the plan, or seeks recovery from the person or persons responsible for such overpayment. Nothing in this subsection shall relieve an employer of any obligation imposed on it to make contributions to a plan to meet the minimum funding standards under sections 412 and 430 or to prevent or restore an impermissible forfeiture in accordance with section 411. Notwithstanding paragraph (1), a plan to which paragraph (1) applies shall observe any limitations imposed on it by section 401(a)(17) or 415. The plan may enforce such limitations using any method approved by the Secretary for recouping benefits previously paid or allocations previously made in excess of such limitations. The Secretary may issue regulations or other guidance of general applicability specifying how benefit overpayments and their recoupment or non-recoupment from a participant or beneficiary shall be taken into account for purposes of satisfying any requirement applicable to a plan to which paragraph (1) applies.

(bb) Eliminating unnecessary plan requirements related to unenrolled participants Notwithstanding any other provision of this title, with respect to any defined contribution plan, no disclosure, notice, or other plan document (other than the notices and documents described in subparagraphs (A) and (B)) shall be required to be furnished under this title to any unenrolled participant if the unenrolled participant is furnished— an annual reminder notice of such participant’s eligibility to participate in such plan and any applicable election deadlines under the plan, and any document requested by such participant that the participant would be entitled to receive notwithstanding this subsection. For purposes of this subsection, the term “unenrolled participant” means an employee who— is eligible to participate in a defined contribution plan, has been furnished— the summary plan description pursuant to section 104(b) of the Employee Retirement Income Security Act of 1974, and any other notices related to eligibility under the plan and required to be furnished under this title, or the Employee Retirement Income Security Act of 1974, in connection with such participant’s initial eligibility to participate in such plan, is not participating in such plan, and satisfies such other criteria as the Secretary of the Treasury may determine appropriate, as prescribed in guidance issued in consultation with the Secretary of Labor. For purposes of this subsection, any eligibility to participate in the plan following any period for which such employee was not eligible to participate shall be treated as initial eligibility. For purposes of this subsection, the term “annual reminder notice” means the notice described in section 111(c) of the Employee Retirement Income Security Act of 1974.

(cc) Correcting automatic contribution errors Any plan or arrangement shall not fail to be treated as a plan described in sections 401(a), 403(b), 408, or 457(b), as applicable, solely by reason of a corrected error. For purposes of this subsection, the term “corrected error” means a reasonable administrative error— made in implementing an automatic enrollment or automatic escalation feature with respect to an eligible employee (or an affirmative election made by an eligible employee covered by such feature), or made by failing to afford an eligible employee the opportunity to make an affirmative election because such employee was improperly excluded from the plan], 3 and that is corrected prospectively by implementing an automatic enrollment or automatic escalation feature with respect to an eligible employee (or an affirmative election made by an eligible employee) determined in accordance with the terms of an eligible automatic contribution arrangement (as defined under subsection (w)(3)), provided that— such implementation error is corrected not later than— the date of the first payment of compensation made by the employer to the employee on or after the last day of the 9½ month-period after the end of the plan year during which such error with respect to the employee first occurred, or if earlier in the case of an employee who notifies the plan sponsor of such error, the date of the first payment of compensation made by the employer to the employee on or after the last day of the month following the month in which such notification was made, in the case of an employee who would have been entitled to additional matching contributions had any missed elective deferral been made, the plan sponsor makes a corrective allocation, not later than the deadline specified by the Secretary in regulations or other guidance prescribed under paragraph (3), of matching contributions on behalf of the employee in an amount equal to the additional matching contributions to which the employee would have been so entitled (adjusted to account for earnings had the missed elective deferrals been made). such implementation error is of a type which is so corrected for all similarly situated participants in a nondiscriminatory manner, notice of such error is given to the employee not later than 45 days after the date on which correct deferrals begin, and the notice under clause (iv) satisfies such regulations or other guidance as the Secretary prescribes under paragraph (4). Such correction may occur before or after the participant has terminated employment and may occur without regard to whether the error is identified by the Secretary. If the requirements of paragraph (2)(B) are satisfied, the employer will not be required to provide eligible employees with the missed amount of elective deferrals resulting from a reasonable administrative error described in paragraph (2)(A)(i) or (ii) through a qualified nonelective contribution, or otherwise. The Secretary shall by regulations or other guidance of general applicability prescribe— the deadline for making a corrective allocation of matching contributions required by paragraph (2)(B)(ii), the content of the notice required by paragraph (2)(B)(iv), the manner in which the amount of the corrective allocation under paragraph (2)(B)(ii) is determined, the manner of adjustment to account for earnings on matching contributions under paragraph (2)(B)(ii), and such other rules as are necessary to carry out the purposes of the subsection.

(a) In general Except as otherwise provided in this section— an arrangement shall not be treated as a qualified cash or deferred arrangement described in section 401(k) unless such arrangement meets the automatic enrollment requirements of subsection (b), and an annuity contract otherwise described in section 403(b) which is purchased under a salary reduction agreement shall not be treated as described in such section unless such agreement meets the automatic enrollment requirements of subsection (b).

(b) Automatic enrollment requirements An arrangement or agreement meets the requirements of this subsection if such arrangement or agreement is an eligible automatic contribution arrangement (as defined in section 414(w)(3)) which meets the requirements of paragraphs (2) through (4). An eligible automatic contribution arrangement meets the requirements of this paragraph if such arrangement allows employees to make permissible withdrawals (as defined in section 414(w)(2)). An eligible automatic contribution arrangement meets the requirements of this paragraph if— the uniform percentage of compensation contributed by the participant under such arrangement during the first year of participation is not less than 3 percent and not more than 10 percent (unless the participant specifically elects not to have such contributions made or to have such contributions made at a different percentage), and effective for the first day of each plan year starting after each completed year of participation under such arrangement such uniform percentage is increased by 1 percentage point (to at least 10 percent, but not more than 15 percent) unless the participant specifically elects not to have such contributions made or to have such contributions made at a different percentage. In the case of any eligible automatic contribution arrangement (other than an arrangement that meets the requirements of paragraph (12) or (13) of section 401(k)), for plan years ending before January 1, 2025 , subparagraph (A)(ii) shall be applied by substituting “10 percent” for “15 percent”. An eligible automatic contribution arrangement meets the requirements of this paragraph if amounts contributed pursuant to such arrangement, and for which no investment is elected by the participant, are invested in accordance with the requirements of section 2550.404c-5 of title 29, Code of Federal Regulations (or any successor regulations).

(c) Exceptions For purposes of this section— Subsection (a) shall not apply to any simple plan (within the meaning of section 401(k)(11)). Subsection (a) shall not apply to— any qualified cash or deferred arrangement established before the date of the enactment of this section, or any annuity contract purchased under a plan established before the date of the enactment of this section. Subparagraph (A) shall not apply in the case of an employer adopting after such date of enactment a plan maintained by more than one employer, and subsection (a) shall apply with respect to such employer as if such plan were a single plan. Subsection (a) shall not apply to any governmental plan (within the meaning of section 414(d)) or any church plan (within the meaning of section 414(e)). Subsection (a) shall not apply to any qualified cash or deferred arrangement, or any annuity contract purchased under a plan, while the employer maintaining such plan (and any predecessor employer) has been in existence for less than 3 years. Subsection (a) shall not apply to any qualified cash or deferred arrangement, or any annuity contract purchased under a plan, earlier than the date that is 1 year after the close of the first taxable year with respect to which the employer maintaining the plan normally employed more than 10 employees. In the case of a plan maintained by more than 1 employer, subparagraphs (A) and (B) shall be applied separately with respect to each such employer, and all such employers to which subsection (a) applies (after the application of this paragraph) shall be treated as maintaining a separate plan for purposes of this section.

§ 415 Limitations on benefits and contribution under qualified plans

(a) General rule A trust which is a part of a pension, profitsharing, or stock bonus plan shall not constitute a qualified trust under section 401(a) if— in the case of a defined benefit plan, the plan provides for the payment of benefits with respect to a participant which exceed the limitation of subsection (b), or in the case of a defined contribution plan, contributions and other additions under the plan with respect to any participant for any taxable year exceed the limitation of subsection (c). In the case of— an employee annuity plan described in section 403(a), an annuity contract described in section 403(b), or a simplified employee pension described in section 408(k), such a contract, plan, or pension shall not be considered to be described in section 403(a), 403(b), or 408(k), as the case may be, unless it satisfies the requirements of subparagraph (A) or subparagraph (B) of paragraph (1), whichever is appropriate, and has not been disqualified under subsection (g). In the case of an annuity contract described in section 403(b), the preceding sentence shall apply only to the portion of the annuity contract which exceeds the limitation of subsection (b) or the limitation of subsection (c), whichever is appropriate.

(b) Limitation for defined benefit plans Benefits with respect to a participant exceed the limitation of this subsection if, when expressed as an annual benefit (within the meaning of paragraph (2)), such annual benefit is greater than the lesser of— $160, 000, or 100 p erce n t o f t h e p a r t i c i p an t ’ s a v er a g eco m p e n s a t i o n f or hi s hi g h 3 ye a rs . F or p u r p oseso f p a r a g r a p h (1), t h e t er m “ ann u a l b e n e f i t ” m e an s ab e n e f i tp a y ab l e ann u a ll y in t h e f or m o f a s t r ai g h tl i f e ann u i t y (w i t hn o an c i ll a ry b e n e f i t s) u n d er a pl an t o w hi c h e m pl oyees d o n o t co n t r ib u t e an d u n d er w hi c hn oro ll o v erco n t r ib u t i o n s (a s d e f in e d in sec t i o n s 402 (c), 403 (a) (4), 403 (b) (8), 408 (d) (3), an d 457 (e) (16)) a re ma d e . I f t h e b e n e f i t u n d er t h e pl ani s p a y ab l e inan y f or m o t h er t han t h e f or m d escr ib e d in s u b p a r a g r a p h (A), or i f t h ee m pl oyeesco n t r ib u t e t o t h e pl an or mak ero ll o v erco n t r ib u t i o n s (a s d e f in e d in sec t i o n s 402 (c), 403 (a) (4), 403 (b) (8), 408 (d) (3), an d 457 (e) (16)), t h e d e t er mina t i o n s a s t o w h e t h er t h e l imi t a t i o n d escr ib e d in p a r a g r a p h (1) ha s b ee n s a t i s f i e d s ha ll b e ma d e, ina ccor d an ce w i t h re gu l a t i o n s p rescr ib e d b y t h e S ecre t a ry b y a d j u s t in g s u c hb e n e f i t so t ha t i t i se q u i v a l e n tt o t h e b e n e f i t d escr ib e d in s u b p a r a g r a p h (A) . F or p u r p oseso f t hi ss u b p a r a g r a p h, an y an c i ll a ry b e n e f i tw hi c hi s n o t d i rec tl yre l a t e d t ore t i re m e n t in co m e b e n e f i t ss ha ll n o t b e t ak e nin t o a cco u n t; an d t ha tp or t i o n o f an y j o in t an d s u r v i v or ann u i t y w hi c h co n s t i t u t es a q u a l i f i e d j o in t an d s u r v i v or ann u i t y (a s d e f in e d in sec t i o n 417) s ha ll n o t b e t ak e nin t o a cco u n t . I f t h ere t i re m e n t in co m e b e n e f i t u n d er t h e pl anb e g in s b e f ore a g e 62, t h e d e t er mina t i o na s t o w h e t h er t h e$ 160,000 limitation set forth in paragraph (1)(A) has been satisfied shall be made, in accordance with regulations prescribed by the Secretary, by reducing the limitation of paragraph (1)(A) so that such limitation (as so reduced) equals an annual benefit (beginning when such retirement income benefit begins) which is equivalent to a $160, 000 ann u a l b e n e f i t b e g innin g a t a g e 62. I f t h ere t i re m e n t in co m e b e n e f i t u n d er t h e pl anb e g in s a f t er a g e 65, t h e d e t er mina t i o na s t o w h e t h er t h e$ 160,000 limitation set forth in paragraph (1)(A) has been satisfied shall be made, in accordance with regulations prescribed by the Secretary, by increasing the limitation of paragraph (1)(A) so that such limitation (as so increased) equals an annual benefit (beginning when such retirement income benefit begins) which is equivalent to a 10,000 for the plan year, or for any prior plan year, and the employer has not at any time maintained a defined contribution plan in which the participant participated. In the case of an employee who has less than 10 years of participation in a defined benefit plan, the limitation referred to in paragraph (1)(A) shall be the limitation determined under such paragraph (without regard to this paragraph) multiplied by a fraction— the numerator of which is the number of years (or part thereof) of participation in the defined benefit plan of the employer, and the denominator of which is 10. The provisions of subparagraph (A) shall apply to the limitations under paragraphs (1)(B) and (4), except that such subparagraph shall be applied with respect to years of service with an employer rather than years of participation in a plan. In no event shall subparagraph (A) or (B) reduce the limitations referred to in paragraphs (1) and (4) to an amount less than ⅒ of such limitation (determined without regard to this paragraph). To the extent provided in regulations, subparagraph (A) shall be applied separately with respect to each change in the benefit structure of a plan. The computation of— benefits under a defined contribution plan, for purposes of section 401(a)(4), contributions made on behalf of a participant in a defined benefit plan, for purposes of section 401(a)(4), and contributions and benefits provided for a participant in a plan described in section 414(k), for purposes of this section shall not be made on a basis inconsistent with regulations prescribed by the Secretary. For a year, the limitation referred to in paragraph (1)(B) shall not apply to benefits with respect to a participant under a defined benefit plan (other than a multiemployer plan)— which is maintained for such year pursuant to a collective bargaining agreement between employee representatives and one or more employers, which, at all times during such year, has at least 100 participants, under which benefits are determined solely by reference to length of service, the particular years during which service was rendered, age at retirement, and date of retirement, which provides that an employee who has at least 4 years of service has a nonforfeitable right to 100 percent of his accrued benefit derived from employer contributions, and which requires, as a condition of participation in the plan, that an employee complete a period of not more than 60 consecutive days of service with the employer or employers maintaining the plan. This paragraph shall not apply to a participant whose compensation for any 3 years during the 10-year period immediately preceding the year in which he separates from service exceeded the average compensation for such 3 years of all participants in such plan. This paragraph shall not apply to a participant for any period for which he is a participant under another plan to which this section applies which is maintained by an employer maintaining this plan. For any year for which the paragraph applies to benefits with respect to a participant, paragraph (1)(A) and subsection (d)(1)(A) shall be applied with respect to such participant by substituting one-half the amount otherwise applicable for such year under paragraph (1)(A) for “$160,000”. For purposes of this subsection, the term “social security retirement age” means the age used as the retirement age under section 216( l ) of the Social Security Act, except that such section shall be applied— without regard to the age increase factor, and as if the early retirement age under section 216( l )(2) of such Act were 62. Except as provided in subparagraph (B), in the case of any participant who is a commercial airline pilot, if, as of the time of the participant’s retirement, regulations prescribed by the Federal Aviation Administration require an individual to separate from service as a commercial airline pilot after attaining any age occurring on or after age 60 and before age 62, paragraph (2)(C) shall be applied by substituting such age for age 62. If a participant described in subparagraph (A) separates from service before age 60, the rules of paragraph (2)(C) shall apply. In the case of a plan maintained for its employees by any State or political subdivision thereof, or by any agency or instrumentality of the foregoing, or a governmental plan described in the last sentence of section 414(d) (relating to plans of Indian tribal governments), the limitation with respect to a qualified participant under this subsection shall not be less than the accrued benefit of the participant under the plan (determined without regard to any amendment of the plan made after October 14, 1987 ). For purposes of this paragraph, the term “qualified participant” means a participant who first became a participant in the plan maintained by the employer before January 1, 1990 . This paragraph shall not apply to any plan unless each employer maintaining the plan elects before the close of the 1st plan year beginning after December 31, 1989 , to have this subsection (other than paragraph (2)(G)). An election under clause (i) may be revoked not later than the last day of the third plan year beginning after the date of the enactment of this clause. The revocation shall apply to all plan years to which the election applied and to all subsequent plan years. Any amount paid by a plan in a taxable year ending after the revocation shall be includible in income in such taxable year under the rules of this chapter in effect for such taxable year, except that, for purposes of applying the limitations imposed by this section, any portion of such amount which is attributable to any taxable year during which the election was in effect shall be treated as received in such taxable year. In the case of a governmental plan (as defined in section 414(d)) or a multiemployer plan (as defined in section 414(f)), subparagraph (B) of paragraph (1) shall not apply. Subparagraph (B) of paragraph (1) shall not apply to a plan maintained by an organization described in section 3121(w)(3)(A) except with respect to highly compensated benefits. For purposes of this paragraph, the term “highly compensated benefits” means any benefits accrued for an employee in any year on or after the first year in which such employee is a highly compensated employee (as defined in section 414(q)) of the organization described in section 3121(w)(3)(A). For purposes of applying paragraph (1)(B) to highly compensated benefits, all benefits of the employee otherwise taken into account (without regard to this paragraph) shall be taken into account. Subparagraph (B) of paragraph (1) shall not apply to a participant in an eligible rural electric cooperative plan, except in the case of a participant who was a highly compensated employee (as defined in section 414(q)) of an employer maintaining such plan for the earlier of— the plan year in which the participant terminated employment with such employer, or the plan year in which distributions commence under the plan with respect to the participant, or for any of the 5 plan years immediately preceding such earlier plan year. For purposes of this paragraph— The term “eligible rural electric cooperative plan” means a plan maintained by more than 1 employer, with respect to which at least 85 percent of the employers maintaining the plan are rural cooperatives described in clause (i) or (ii) of section 401(k)(7)(B) or are a national association of such a rural cooperative. An employer maintaining an eligible rural cooperative plan may elect not to have subparagraph (A) apply to its employees. The Secretary shall prescribe such regulations and other guidance as are necessary to limit the application of subparagraph (A) such that it does not result in increased benefits for highly compensated employees.

(c) Limitation for defined contribution plans Contributions and other additions with respect to a participant exceed the limitation of this subsection if, when expressed as an annual addition (within the meaning of paragraph (2)) to the participant’s account, such annual addition is greater than the lesser of— 10,000. The total amount of additions with respect to any participant which may be taken into account for purposes of this subparagraph for all years may not exceed $40, 000. F or p u r p oseso f t hi s p a r a g r a p h — a ll ye a rso f ser v i ce b y — a d u l yor d ain e d, co mmi ss i o n e d, or l i ce n se d mini s t ero f a c h u rc h, or a l a y p erso n, a s an e m pl oyeeo f a c h u rc h, a co n v e n t i o n or a ssoc ia t i o n o f c h u rc h es, in c l u d in g an or g ani z a t i o n d escr ib e d in sec t i o n 414 (e) (3) (B) (ii), s ha ll b eco n s i d ere d a sye a rso f ser v i ce f or 1 e m pl oyer, an d a ll am o u n t sco n t r ib u t e df or ann u i t yco n t r a c t s b ye a c h s u c h c h u rc h (orco n v e n t i o n or a ssoc ia t i o n o f c h u rc h es) ors u c h or g ani z a t i o n d u r in g s u c h ye a rs f ors u c hmini s t eror l a y p erso n s ha ll b eco n s i d ere d t o ha v e b ee n co n t r ib u t e d b y 1 e m pl oyer . I n t h ec a seo f an y in d i v i d u a l d escr ib e d in s u b p a r a g r a p h (B) p er f or min g ser v i ceso u t s i d e t h e U ni t e d St a t es, co n t r ib u t i o n s an d o t h er a dd i t i o n s f or anann u i t yco n t r a c t orre t i re m e n t in co m e a cco u n t d escr ib e d in sec t i o n 403 (b) w i t h res p ec tt os u c h e m pl oyee, w h e n e x p resse d a s anann u a l a dd i t i o n t os u c h e m pl oyee ’ s a cco u n t, s ha ll n o t b e t re a t e d a se x cee d in g t h e l imi t a t i o n o f p a r a g r a p h (1) i f s u c hann u a l a dd i t i o ni s n o t in e x cesso f$ 3,000. This subparagraph shall not apply with respect to any taxable year to any individual whose adjusted gross income for such taxable year (determined separately and without regard to community property laws) exceeds $17,000. For purposes of this paragraph, the term “annual addition” has the meaning given such term by paragraph (2). For purposes of this paragraph, the terms “church” and “convention or association of churches” have the same meaning as when used in section 414(e). For purposes of paragraph (1)(B), in the case of an individual who for a taxable year excludes from gross income under section 131 a qualified foster care payment which is a difficulty of care payment, the participant’s compensation, or earned income, as the case may be, shall be increased by the amount so excluded. Any contribution by the participant which is allowable due to such increase— shall be treated for purposes of this title as investment in the contract, and shall not cause a plan (and any arrangement which is part of such plan) to be treated as failing to meet any requirements of this chapter solely by reason of allowing any such contributions.

(d) Cost-of-living adjustments The Secretary shall adjust annually— the $160, 000 am o u n t in s u b sec t i o n (b) (1) (A), in t h ec a seo f a p a r t i c i p an tw h o i sse p a r a t e df ro m ser v i ce, t h e am o u n tt ak e nin t o a cco u n t u n d ers u b sec t i o n (b) (1) (B), an d t h e$ 40,000 amount in subsection (c)(1)(A), for increases in the cost-of-living in accordance with regulations prescribed by the Secretary. The regulations prescribed under paragraph (1) shall provide for— an adjustment with respect to any calendar year based on the increase in the applicable index for the calendar quarter ending September 30 of the preceding calendar year over such index for the base period, and adjustment procedures which are similar to the procedures used to adjust benefit amounts under section 215(i)(2)(A) of the Social Security Act. For purposes of paragraph (2)— The base period taken into account for purposes of paragraph (1)(A) is the calendar quarter beginning July 1, 2001 . The base period taken into account for purposes of paragraph (1)(B) with respect to individuals separating from service with the employer after December 31, 1994 , is the calendar quarter beginning July 1 of the calendar year preceding the calendar year in which such separation occurs. The base period taken into account for purposes of paragraph (1)(B) with respect to individuals separating from service with the employer before January 1, 1995 , is the calendar quarter beginning October 1 of the calendar year preceding the calendar year in which such separation occurs. The base period taken into account for purposes of paragraph (1)(C) is the calendar quarter beginning July 1, 2001 . Any increase under subparagraph (A) of paragraph (1) which is not a multiple of $5, 000 s ha ll b ero u n d e d t o t h e n e x tl o w es t m u lt i pl eo f$ 5,000. This subparagraph shall also apply for purposes of any provision of this title that provides for adjustments in accordance with the method contained in this subsection, except to the extent provided in such provision. Any increase under subparagraph (C) of paragraph (1) which is not a multiple of $1, 000 s ha ll b ero u n d e d t o t h e n e x tl o w es t m u lt i pl eo f$ 1,000.

([(e) Repealed. Pub. L. 104–188, title I, § 1452(a), Aug. 20, 1996, 110 Stat. 1816]

(f) Combining of plans For purposes of applying the limitations of subsections (b) and (c)— all defined benefit plans (whether or not terminated) of an employer are to be treated as one defined benefit plan, and all defined contribution plans (whether or not terminated) of an employer are to be treated as one defined contribution plan. Notwithstanding paragraph (1) and subsection (g), a multiemployer plan (as defined in section 414(f)) shall not be combined or aggregated— with any other plan which is not a multiemployer plan for purposes of applying subsection (b)(1)(B) to such other plan, or with any other multiemployer plan for purposes of applying the limitations established in this section.

(g) Aggregation of plans Except as provided in subsection (f)(2), the Secretary, in applying the provisions of this section to benefits or contributions under more than one plan maintained by the same employer, and to any trusts, contracts, accounts, or bonds referred to in subsection (a)(2), with respect to which the participant has the control required under section 414(b) or (c), as modified by subsection (h), shall, under regulations prescribed by the Secretary, disqualify one or more trusts, plans, contracts, accounts, or bonds, or any combination thereof until such benefits or contributions do not exceed the limitations contained in this section. In addition to taking into account such other factors as may be necessary to carry out the purposes of subsection (f), the regulations prescribed under this paragraph shall provide that no plan which has been terminated shall be disqualified until all other trusts, plans, contracts, accounts, or bonds have been disqualified.

(h) 50 percent control For purposes of applying subsections (b) and (c) of section 414 to this section, the phrase “more than 50 percent” shall be substituted for the phrase “at least 80 percent” each place it appears in section 1563(a)(1).

(i) Records not available for past periods Where for the period before January 1, 1976 , or (if later) the first day of the first plan year of the plan, the records necessary for the application of this section are not available, the Secretary may by regulations prescribe alternate methods for determining the amounts to be taken into account for such period.

(j) Regulations; definition of year The Secretary shall prescribe such regulations as may be necessary to carry out the purposes of this section, including, but not limited to, regulations defining the term “year” for purposes of any provision of this section.

(k) Special rules For purposes of this title, the term “defined contribution plan” or “defined benefit plan” means a defined contribution plan (within the meaning of section 414(i)) or a defined benefit plan (within the meaning of section 414(j)), whichever applies, which is— a plan described in section 401(a) which includes a trust which is exempt from tax under section 501(a), an annuity plan described in section 403(a), an annuity contract described in section 403(b), or a simplified employee pension. In the case of a defined benefit plan which maintains a qualified cost-of-living arrangement— any contribution made directly by an employee under such an arrangement shall not be treated as an annual addition for purposes of subsection (c), and any benefit under such arrangement which is allocable to an employer contribution which was transferred from a defined contribution plan and to which the requirements of subsection (c) were applied shall, for purposes of subsection (b), be treated as a benefit derived from an employee contribution (and subsection (c) shall not again apply to such contribution by reason of such transfer). For purposes of this paragraph, the term “qualified cost-of-living arrangement” means an arrangement under a defined benefit plan which— provides a cost-of-living adjustment to a benefit provided under such plan or a separate plan subject to the requirements of section 412, and meets the requirements of subparagraphs (C), (D), (E), and (F) and such other requirements as the Secretary may prescribe. An arrangement meets the requirement of this subparagraph only if the cost-of-living adjustment of participants is based— on increases in the cost-of-living after the annuity starting date, and on average cost-of-living increases determined by reference to 1 or more indexes prescribed by the Secretary, except that the arrangement may provide that the increase for any year will not be less than 3 percent of the retirement benefit (determined without regard to such increase). An arrangement meets the requirements of this subparagraph only if it is elective, it is available under the same terms to all participants, and it provides that such election may at least be made in the year in which the participant— attains the earliest retirement age under the defined benefit plan (determined without regard to any requirement of separation from service), or separates from service. An arrangement shall not meet the requirements of this subparagraph if the Secretary finds that a pattern of discrimination exists with respect to participation. An arrangement shall not meet the requirements of this paragraph if any key employee is eligible to participate. For purposes of this subparagraph, the term “key employee” has the meaning given such term by section 416(i)(1), except that in the case of a plan other than a top-heavy plan (within the meaning of section 416(g)), such term shall not include an individual who is a key employee solely by reason of section 416(i)(1)(A)(i). In the case of any repayment of contributions (including interest thereon) to the governmental plan with respect to an amount previously refunded upon a forfeiture of service credit under the plan or under another governmental plan maintained by a State or local government employer within the same State, any such repayment shall not be taken into account for purposes of this section. For purposes of this section, any annuity contract described in section 403(b) for the benefit of a participant shall be treated as a defined contribution plan maintained by each employer with respect to which the participant has the control required under subsection (b) or (c) of section 414 (as modified by subsection (h)). For purposes of this section, any contribution by an employer to a simplified employee pension plan for an individual for a taxable year shall be treated as an employer contribution to a defined contribution plan for such individual for such year.

(l) Treatment of certain medical benefits For purposes of this section, contributions allocated to any individual medical benefit account which is part of a pension or annuity plan shall be treated as an annual addition to a defined contribution plan for purposes of subsection (c). Subparagraph (B) of subsection (c)(1) shall not apply to any amount treated as an annual addition under the preceding sentence. For purposes of paragraph (1), the term “individual medical benefit account” means any separate account— which is established for a participant under a pension or annuity plan, and from which benefits described in section 401(h) are payable solely to such participant, his spouse, or his dependents.

(m) Treatment of qualified governmental excess benefit arrangements In determining whether a governmental plan (as defined in section 414(d)) meets the requirements of this section, benefits provided under a qualified governmental excess benefit arrangement shall not be taken into account. Income accruing to a governmental plan (or to a trust that is maintained solely for the purpose of providing benefits under a qualified governmental excess benefit arrangement) in respect of a qualified governmental excess benefit arrangement shall constitute income derived from the exercise of an essential governmental function upon which such governmental plan (or trust) shall be exempt from tax under section 115. For purposes of this chapter— the taxable year or years for which amounts in respect of a qualified governmental excess benefit arrangement are includible in gross income by a participant, and the treatment of such amounts when so includible by the participant, shall be determined as if such qualified governmental excess benefit arrangement were treated as a plan for the deferral of compensation which is maintained by a corporation not exempt from tax under this chapter and which does not meet the requirements for qualification under section 401. For purposes of this subsection, the term “qualified governmental excess benefit arrangement” means a portion of a governmental plan if— such portion is maintained solely for the purpose of providing to participants in the plan that part of the participant’s annual benefit otherwise payable under the terms of the plan that exceeds the limitations on benefits imposed by this section, under such portion no election is provided at any time to the participant (directly or indirectly) to defer compensation, and benefits described in subparagraph (A) are not paid from a trust forming a part of such governmental plan unless such trust is maintained solely for the purpose of providing such benefits.

(n) Special rules relating to purchase of permissive service credit If a participant makes 1 or more contributions to a defined benefit governmental plan (within the meaning of section 414(d)) to purchase permissive service credit under such plan, then the requirements of this section shall be treated as met only if— the requirements of subsection (b) are met, determined by treating the accrued benefit derived from all such contributions as an annual benefit for purposes of subsection (b), or the requirements of subsection (c) are met, determined by treating all such contributions as annual additions for purposes of subsection (c). For purposes of— applying paragraph (1)(A), the plan shall not fail to meet the reduced limit under subsection (b)(2)(C) solely by reason of this subsection, and applying paragraph (1)(B), the plan shall not fail to meet the percentage limitation under subsection (c)(1)(B) solely by reason of this subsection. For purposes of this subsection— The term “permissive service credit” means service credit— recognized by the governmental plan for purposes of calculating a participant’s benefit under the plan, which such participant has not received under such governmental plan, and which such participant may receive only by making a voluntary additional contribution, in an amount determined under such governmental plan, which does not exceed the amount necessary to fund the benefit attributable to such service credit. Such term may include service credit for periods for which there is no performance of service, and, notwithstanding clause (ii), may include service credited in order to provide an increased benefit for service credit which a participant is receiving under the plan. A plan shall fail to meet the requirements of this section if— more than 5 years of nonqualified service credit are taken into account for purposes of this subsection, or any nonqualified service credit is taken into account under this subsection before the employee has at least 5 years of participation under the plan. For purposes of subparagraph (B), the term “nonqualified service credit” means permissive service credit other than that allowed with respect to— service (including parental, medical, sabbatical, and similar leave) as an employee of the Government of the United States, any State or political subdivision thereof, or any agency or instrumentality of any of the foregoing (other than military service or service for credit which was obtained as a result of a repayment described in subsection (k)(3)), service (including parental, medical, sabbatical, and similar leave) as an employee (other than as an employee described in clause (i)) of an educational organization described in section 170(b)(1)(A)(ii) which is a public, private, or sectarian school which provides elementary or secondary education (through grade 12), or a comparable level of education, as determined under the applicable law of the jurisdiction in which the service was performed, service as an employee of an association of employees who are described in clause (i), or military service (other than qualified military service under section 414(u)) recognized by such governmental plan. In the case of service described in clause (i), (ii), or (iii), such service will be nonqualified service if recognition of such service would cause a participant to receive a retirement benefit for the same service under more than one plan. In the case of a trustee-to-trustee transfer to which section 403(b)(13)(A) or 457(e)(17)(A) applies (without regard to whether the transfer is made between plans maintained by the same employer)— the limitations of subparagraph (B) shall not apply in determining whether the transfer is for the purchase of permissive service credit, and the distribution rules applicable under this title to the defined benefit governmental plan to which any amounts are so transferred shall apply to such amounts and any benefits attributable to such amounts.

“In any case in which, on the date of enactment of this Act [ Sept. 2, 1974 ], an individual is a participant in both a defined benefit plan and a defined contribution plan maintained by the same employer, and the sum of the defined benefit plan fraction and the defined contribution plan fraction for the year during which such date occurs exceeds 1.4, the sum of such fractions may continue to exceed 1.4 if— the defined benefit plan fraction is not increased, by amendment of the plan or otherwise, after no contributions are made under the defined contribution plan after such date. A trust which is part of a pension, profit-sharing, or stock bonus plan described in the preceding sentence shall not be treated as not constituting a qualified trust under section 401(a) of the Internal Revenue Code of 1986 [formerly I.R.C. 1954] on account of the provisions of section 415(e) of such Code, as long as it is described in the preceding sentence of this subsection.”

§ 416 Special rules for top-heavy plans

(a) General rule A trust shall not constitute a qualified trust under section 401(a) for any plan year if the plan of which it is a part is a top-heavy plan for such plan year unless such plan meets— the vesting requirements of subsection (b), and the minimum benefit requirements of subsection (c).

(b) Vesting requirements A plan satisfies the requirements of this subsection if it satisfies the requirements of either of the following subparagraphs: A plan satisfies the requirements of this subparagraph if an employee who has completed at least 3 years of service with the employer or employers maintaining the plan has a nonforfeitable right to 100 percent of his accrued benefit derived from employer contributions. A plan satisfies the requirements of this subparagraph if an employee has a nonforfeitable right to a percentage of his accrued benefit derived from employer contributions determined under the following table: Years of service The nonforfeitable percentage is: 2 20 3 40 4 60 5 80 6 or more 100 Except to the extent inconsistent with the provisions of this subsection, the rules of section 411 shall apply for purposes of this subsection.

(c) Plan must provide minimum benefits A defined benefit plan meets the requirements of this subsection if the accrued benefit derived from employer contributions of each participant who is a non-key employee, when expressed as an annual retirement benefit, is not less than the applicable percentage of the participant’s average compensation for years in the testing period. For purposes of subparagraph (A), the term “applicable percentage” means the lesser of— 2 percent multiplied by the number of years of service with the employer, or 20 percent. For purposes of this paragraph— Except as provided in clause (ii) or (iii), years of service shall be determined under the rules of paragraphs (4), (5), and (6) of section 411(a). A year of service with the employer shall not be taken into account under this paragraph if— the plan was not a top-heavy plan for any plan year ending during such year of service, or such year of service was completed in a plan year beginning before January 1, 1984 . For purposes of determining an employee’s years of service with the employer, any service with the employer shall be disregarded to the extent that such service occurs during a plan year when the plan benefits (within the meaning of section 410(b)) no key employee or former key employee. For purposes of this paragraph— A participant’s testing period shall be the period of consecutive years (not exceeding 5) during which the participant had the greatest aggregate compensation from the employer. The years taken into account under clause (i) shall be properly adjusted for years not included in a year of service. Except to the extent provided in the plan, a year shall not be taken into account under clause (i) if— such year ends in a plan year beginning before January 1, 1984 , or such year begins after the close of the last year in which the plan was a top-heavy plan. For purposes of this paragraph, the term “annual retirement benefit” means a benefit payable annually in the form of a single life annuity (with no ancillary benefits) beginning at the normal retirement age under the plan. A defined contribution plan meets the requirements of the subsection if the employer contribution for the year for each participant who is a non-key employee is not less than 3 percent of such participant’s compensation (within the meaning of section 415). Employer matching contributions (as defined in section 401(m)(4)(A)) shall be taken into account for purposes of this subparagraph (and any reduction under this sentence shall not be taken into account in determining whether section 401(k)(4)(A) applies). The percentage referred to in subparagraph (A) for any year shall not exceed the percentage at which contributions are made (or required to be made) under the plan for the year for the key employee for whom such percentage is the highest for the year. For purposes of this subparagraph, all defined contribution plans required to be included in an aggregation group under subsection (g)(2)(A)(i) shall be treated as one plan. This subparagraph shall not apply to any plan required to be included in an aggregation group if such plan enables a defined benefit plan required to be included in such group to meet the requirements of section 401(a)(4) or 410. Any employees not meeting the age or service requirements of section 410(a)(1) (without regard to subparagraph (B) thereof) may be excluded from consideration in determining whether any plan of the employer meets the requirements of subparagraphs (A) and (B).

([(d) Repealed. Pub. L. 99–514, title XI, § 1106(d)(3)(B)(i), Oct. 22, 1986, 100 Stat. 2424]

(e) Plan must meet requirements without taking into account social security and similar contributions and benefits A top-heavy plan shall not be treated as meeting the requirement of subsection (b) or (c) unless such plan meets such requirement without taking into account contributions or benefits under chapter 2 (relating to tax on self-employment income), chapter 21 (relating to Federal Insurance Contributions Act), title II of the Social Security Act, or any other Federal or State law.

(f) Coordination where employer has 2 or more plans The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section where the employer has 2 or more plans including (but not limited to) regulations to prevent inappropriate omissions or required duplication of minimum benefits or contributions.

(g) Top-heavy plan defined For purposes of this section— Except as provided in subparagraph (B), the term “top-heavy plan” means, with respect to any plan year— any defined benefit plan if, as of the determination date, the present value of the cumulative accrued benefits under the plan for key employees exceeds 60 percent of the present value of the cumulative accrued benefits under the plan for all employees, and any defined contribution plan if, as of the determination date, the aggregate of the accounts of key employees under the plan exceeds 60 percent of the aggregate of the accounts of all employees under such plan. Each plan of an employer required to be included in an aggregation group shall be treated as a top-heavy plan if such group is a top-heavy group. For purposes of this subsection— The term “aggregation group” means— each plan of the employer in which a key employee is a participant, and each other plan of the employer which enables any plan described in subclause (I) to meet the requirements of section 401(a)(4) or 410. The employer may treat any plan not required to be included in an aggregation group under clause (i) as being part of such group if such group would continue to meet the requirements of sections 401(a)(4) and 410 with such plan being taken into account. The term “top-heavy group” means any aggregation group if— the sum (as of the determination date) of— the present value of the cumulative accrued benefits for key employees under all defined benefit plans included in such group, and the aggregate of the accounts of key employees under all defined contribution plans included in such group, exceeds 60 percent of a similar sum determined for all employees. For purposes of determining— the present value of the cumulative accrued benefit for any employee, or the amount of the account of any employee, such present value or amount shall be increased by the aggregate distributions made with respect to such employee under the plan during the 1-year period ending on the determination date. The preceding sentence shall also apply to distributions under a terminated plan which if it had not been terminated would have been required to be included in an aggregation group. In the case of any distribution made for a reason other than severance from employment, death, or disability, subparagraph (A) shall be applied by substituting “5-year period” for “1-year period”. For purposes of this subsection— Except to the extent provided in regulations, any rollover contribution (or similar transfer) initiated by the employee and made after December 31, 1983 , to a plan shall not be taken into account with respect to the transferee plan for purposes of determining whether such plan is a top-heavy plan (or whether any aggregation group which includes such plan is a top-heavy group). If any individual is a non-key employee with respect to any plan for any plan year, but such individual was a key employee with respect to such plan for any prior plan year, any accrued benefit for such employee (and the account of such employee) shall not be taken into account. The term “determination date” means, with respect to any plan year— the last day of the preceding plan year, or in the case of the first plan year of any plan, the last day of such plan year. To the extent provided in regulations, this section shall be applied on the basis of any year specified in such regulations in lieu of plan years. If any individual has not performed services for the employer maintaining the plan at any time during the 1-year period ending on the determination date, any accrued benefit for such individual (and the account of such individual) shall not be taken into account. The accrued benefit of any employee (other than a key employee) shall be determined— under the method which is used for accrual purposes for all plans of the employer, or if there is no method described in clause (i), as if such benefit accrued not more rapidly than the slowest accrual rate permitted under section 411(b)(1)(C). The term “top-heavy plan” shall not include a simple retirement account under section 408(p). The term “top-heavy plan” shall not include a plan which consists solely of— a cash or deferred arrangement which meets the requirements of section 401(k)(12) or 401(k)(13) and matching contributions with respect to which the requirements of paragraph (11), (12), or (13) of section 401(m) are met, or a starter 401(k) deferral-only arrangement described in section 401(k)(16)(B) or a safe harbor deferral-only plan described in section 403(b)(16). Such term shall not include a plan solely because such plan does not provide nonelective or matching contributions to employees described in section 401(k)(15)(B)(i). If, but for this subparagraph, a plan would be treated as a top-heavy plan because it is a member of an aggregation group which is a top-heavy group, contributions under the plan may be taken into account in determining whether any other plan in the group meets the requirements of subsection (c)(2).

([(h) Repealed. Pub. L. 104–188, title I, § 1452(c)(7), Aug. 20, 1996, 110 Stat. 1816]

(i) Definitions For purposes of this section— The term “key employee” means an employee who, at any time during the plan year, is— an officer of the employer having an annual compensation greater than $130, 000, a 5 - p erce n t o w n ero f t h ee m pl oyer, or a 1 - p erce n t o w n ero f t h ee m pl oyer ha v in g anann u a l co m p e n s a t i o n f ro m t h ee m pl oyero f m ore t han$ 150,000. For purposes of clause (i), no more than 50 employees (or, if lesser, the greater of 3 or 10 percent of the employees) shall be treated as officers. In the case of plan years beginning after December 31, 2002 , the $130, 000 am o u n t in c l a u se (i) s ha ll b e a d j u s t e d a tt h es am e t im e an d in t h es am e mann er a s u n d ersec t i o n 415 (d), e x ce ptt ha tt h e ba se p er i o d s ha ll b e t h ec a l e n d a r q u a r t er b e g innin g J u l y 1, 2001, an d an y in cre a se u n d er t hi sse n t e n ce w hi c hi s n o t am u lt i pl eo f$ 5,000 shall be rounded to the next lower multiple of $5,000. Such term shall not include any officer or employee of an entity referred to in section 414(d) (relating to governmental plans). For purposes of determining the number of officers taken into account under clause (i), employees described in section 414(q)(5) shall be excluded. For purposes of this paragraph, the term “5-percent owner” means— if the employer is a corporation, any person who owns (or is considered as owning within the meaning of section 318) more than 5 percent of the outstanding stock of the corporation or stock possessing more than 5 percent of the total combined voting power of all stock of the corporation, or if the employer is not a corporation, any person who owns more than 5 percent of the capital or profits interest in the employer. For purposes of this paragraph, the term “1-percent owner” means any person who would be described in clause (i) if “1 percent” were substituted for “5 percent” each place it appears in clause (i). For purposes of this subparagraph— subparagraph (C) of section 318(a)(2) shall be applied by substituting “5 percent” for “50 percent”, and in the case of any employer which is not a corporation, ownership in such employer shall be determined in accordance with regulations prescribed by the Secretary which shall be based on principles similar to the principles of section 318 (as modified by subclause (I)). The rules of subsections (b), (c), and (m) of section 414 shall not apply for purposes of determining ownership in the employer. For purposes of this paragraph, the term “compensation” has the meaning given such term by section 414(q)(4). The term “non-key employee” means any employee who is not a key employee. In the case of a self-employed individual described in section 401(c)(1)— such individual shall be treated as an employee, and such individual’s earned income (within the meaning of section 401(c)(2)) shall be treated as compensation. The requirements of subsections (b), (c), and (d) shall not apply with respect to any employee included in a unit of employees covered by an agreement which the Secretary of Labor finds to be a collective bargaining agreement between employee representatives and 1 or more employers if there is evidence that retirement benefits were the subject of good faith bargaining between such employee representatives and such employer or employers. The terms “employee” and “key employee” include their beneficiaries. A simplified employee pension shall be treated as a defined contribution plan. In the case of a simplified employee pension, at the election of the employer, paragraphs (1)(A)(ii) and (2)(B) of subsection (g) shall be applied by taking into account aggregate employer contributions in lieu of the aggregate of the accounts of employees.

§ 417 Definitions and special rules for purposes of minimum survivor annuity requirements

(a) Election to waive qualified joint and survivor annuity or qualified preretirement survivor annuity A plan meets the requirements of section 401(a)(11) only if— under the plan, each participant— may elect at any time during the applicable election period to waive the qualified joint and survivor annuity form of benefit or the qualified preretirement survivor annuity form of benefit (or both), if the participant elects a waiver under clause (i), may elect the qualified optional survivor annuity at any time during the applicable election period, and may revoke any such election at any time during the applicable election period, and the plan meets the requirements of paragraphs (2), (3), and (4) of this subsection. Each plan shall provide that an election under paragraph (1)(A)(i) shall not take effect unless— the spouse of the participant consents in writing to such election, (ii) such election designates a beneficiary (or a form of benefits) which may not be changed without spousal consent (or the consent of the spouse expressly permits designations by the participant without any requirement of further consent by the spouse), and (iii) the spouse’s consent acknowledges the effect of such election and is witnessed by a plan representative or a notary public, or it is established to the satisfaction of a plan representative that the consent required under subparagraph (A) may not be obtained because there is no spouse, because the spouse cannot be located, or because of such other circumstances as the Secretary may by regulations prescribe. Any consent by a spouse (or establishment that the consent of a spouse may not be obtained) under the preceding sentence shall be effective only with respect to such spouse. Each plan shall provide to each participant, within a reasonable period of time before the annuity starting date (and consistent with such regulations as the Secretary may prescribe), a written explanation of— the terms and conditions of the qualified joint and survivor annuity and of the qualified optional survivor annuity, the participant’s right to make, and the effect of, an election under paragraph (1) to waive the joint and survivor annuity form of benefit, the rights of the participant’s spouse under paragraph (2), and the right to make, and the effect of, a revocation of an election under paragraph (1). Each plan shall provide to each participant, within the applicable period with respect to such participant (and consistent with such regulations as the Secretary may prescribe), a written explanation with respect to the qualified preretirement survivor annuity comparable to that required under subparagraph (A). For purposes of clause (i), the term “applicable period” means, with respect to a participant, whichever of the following periods ends last: The period beginning with the first day of the plan year in which the participant attains age 32 and ending with the close of the plan year preceding the plan year in which the participant attains age 35. A reasonable period after the individual becomes a participant. A reasonable period ending after paragraph (5) ceases to apply to the participant. A reasonable period ending after section 401(a)(11) applies to the participant. In the case of a participant who separates from service before attaining age 35, the applicable period shall be a reasonable period after separation. Each plan shall provide that, if section 401(a)(11) applies to a participant when part or all of the participant’s accrued benefit is to be used as security for a loan, no portion of the participant’s accrued benefit may be used as security for such loan unless— the spouse of the participant (if any) consents in writing to such use during the 90-day period ending on the date on which the loan is to be so secured, and requirements comparable to the requirements of paragraph (2) are met with respect to such consent. The requirements of this subsection shall not apply with respect to the qualified joint and survivor annuity form of benefit or the qualified preretirement survivor annuity form of benefit, as the case may be, if such benefit may not be waived (or another beneficiary selected) and if the plan fully subsidizes the costs of such benefit. For purposes of subparagraph (A), a plan fully subsidizes the costs of a benefit if under the plan the failure to waive such benefit by a participant would not result in a decrease in any plan benefits with respect to such participant and would not result in increased contributions from such participant. For purposes of this subsection, the term “applicable election period” means— in the case of an election to waive the qualified joint and survivor annuity form of benefit, the 180-day period ending on the annuity starting date, or in the case of an election to waive the qualified preretirement survivor annuity, the period which begins on the first day of the plan year in which the participant attains age 35 and ends on the date of the participant’s death. In the case of a participant who is separated from service, the applicable election period under subparagraph (B) with respect to benefits accrued before the date of such separation from service shall not begin later than such date. Notwithstanding any other provision of this subsection— A plan may provide the written explanation described in paragraph (3)(A) after the annuity starting date. In any case to which this subparagraph applies, the applicable election period under paragraph (6) shall not end before the 30th day after the date on which such explanation is provided. The Secretary may by regulations limit the application of clause (i), except that such regulations may not limit the period of time by which the annuity starting date precedes the provision of the written explanation other than by providing that the annuity starting date may not be earlier than termination of employment. A plan may permit a participant to elect (with any applicable spousal consent) to waive any requirement that the written explanation be provided at least 30 days before the annuity starting date (or to waive the 30-day requirement under subparagraph (A)) if the distribution commences more than 7 days after such explanation is provided.

(b) Definition of qualified joint and survivor annuity For purposes of this section and section 401(a)(11), the term “qualified joint and survivor annuity” means an annuity— for the life of the participant with a survivor annuity for the life of the spouse which is not less than 50 percent of (and is not greater than 100 percent of) the amount of the annuity which is payable during the joint lives of the participant and the spouse, and which is the actuarial equivalent of a single annuity for the life of the participant. Such term also includes any annuity in a form having the effect of an annuity described in the preceding sentence.

(c) Definition of qualified preretirement survivor annuity For purposes of this section and section 401(a)(11)— Except as provided in paragraph (2), the term “qualified preretirement survivor annuity” means a survivor annuity for the life of the surviving spouse of the participant if— the payments to the surviving spouse under such annuity are not less than the amounts which would be payable as a survivor annuity under the qualified joint and survivor annuity under the plan (or the actuarial equivalent thereof) if— in the case of a participant who dies after the date on which the participant attained the earliest retirement age, such participant had retired with an immediate qualified joint and survivor annuity on the day before the participant’s date of death, or in the case of a participant who dies on or before the date on which the participant would have attained the earliest retirement age, such participant had— separated from service on the date of death, survived to the earliest retirement age, retired with an immediate qualified joint and survivor annuity at the earliest retirement age, and died on the day after the day on which such participant would have attained the earliest retirement age, and under the plan, the earliest period for which the surviving spouse may receive a payment under such annuity is not later than the month in which the participant would have attained the earliest retirement age under the plan. In the case of an individual who separated from service before the date of such individual’s death, subparagraph (A)(ii)(I) shall not apply. In the case of any defined contribution plan or participant described in clause (ii) or (iii) of section 401(a)(11)(B), the term “qualified preretirement survivor annuity” means an annuity for the life of the surviving spouse the actuarial equivalent of which is not less than 50 percent of the portion of the account balance of the participant (as of the date of death) to which the participant had a nonforfeitable right (within the meaning of section 411(a)). For purposes of paragraphs (1) and (2), any security interest held by the plan by reason of a loan outstanding to the participant shall be taken into account in determining the amount of the qualified preretirement survivor annuity.

(d) Survivor annuities need not be provided if participant and spouse married less than 1 year Except as provided in paragraph (2), a plan shall not be treated as failing to meet the requirements of section 401(a)(11) merely because the plan provides that a qualified joint and survivor annuity (or a qualified preretirement survivor annuity) will not be provided unless the participant and spouse had been married throughout the 1-year period ending on the earlier of— the participant’s annuity starting date, or the date of the participant’s death. For purposes of paragraph (1), if— a participant marries within 1 year before the annuity starting date, and the participant and the participant’s spouse in such marriage have been married for at least a 1-year period ending on or before the date of the participant’s death, such participant and such spouse shall be treated as having been married throughout the 1-year period ending on the participant’s annuity starting date.

(e) Restrictions on cash-outs A plan may provide that the present value of a qualified joint and survivor annuity or a qualified preretirement survivor annuity will be immediately distributed if such value does not exceed the amount that can be distributed without the participant’s consent under section 411(a)(11). No distribution may be made under the preceding sentence after the annuity starting date unless the participant and the spouse of the participant (or where the participant has died, the surviving spouse) consents in writing to such distribution. If— the present value of the qualified joint and survivor annuity or the qualified preretirement survivor annuity exceeds the amount that can be distributed without the participant’s consent under section 411(a)(11), and the participant and the spouse of the participant (or where the participant has died, the surviving spouse) consent in writing to the distribution, the plan may immediately distribute the present value of such annuity. For purposes of paragraphs (1) and (2), the present value shall not be less than the present value calculated by using the applicable mortality table and the applicable interest rate. For purposes of subparagraph (A), the term “applicable mortality table” means a mortality table, modified as appropriate by the Secretary, based on the mortality table specified for the plan year under subparagraph (A) of section 430(h)(3) (without regard to subparagraph (C) or (D) of such section). For purposes of subparagraph (A), the term “applicable interest rate” means the adjusted first, second, and third segment rates applied under rules similar to the rules of section 430(h)(2)(C) (determined by not taking into account any adjustment under clause (iv) thereof) for the month before the date of the distribution or such other time as the Secretary may by regulations prescribe. For purposes of subparagraph (C), the adjusted first, second, and third segment rates are the first, second, and third segment rates which would be determined under section 430(h)(2)(C) (determined by not taking into account any adjustment under clause (iv) thereof) if section 430(h)(2)(D) were applied by substituting the average yields for the month described in subparagraph (C) for the average yields for the 24-month period described in such section.

(f) Other definitions and special rules For purposes of this section and section 401(a)(11)— The term “vested participant” means any participant who has a nonforfeitable right (within the meaning of section 411(a)) to any portion of such participant’s accrued benefit. The term “annuity starting date” means— the first day of the first period for which an amount is payable as an annuity, or in the case of a benefit not payable in the form of an annuity, the first day on which all events have occurred which entitle the participant to such benefit. For purposes of subparagraph (A), the first day of the first period for which a benefit is to be received by reason of disability shall be treated as the annuity starting date only if such benefit is not an auxiliary benefit. The term “earliest retirement age” means the earliest date on which, under the plan, the participant could elect to receive retirement benefits. A plan may take into account in any equitable manner (as determined by the Secretary) any increased costs resulting from providing a qualified joint or survivor annuity or a qualified preretirement survivor annuity. If the use of any participant’s accrued benefit (or any portion thereof) as security for a loan meets the requirements of subsection (a)(4), nothing in this section or section 411(a)(11) shall prevent any distribution required by reason of a failure to comply with the terms of such loan. No consent of a spouse shall be effective for purposes of subsection (e)(1) or (e)(2) (as the case may be) unless requirements comparable to the requirements for spousal consent to an election under subsection (a)(1)(A) are met. In prescribing regulations under this section and section 401(a)(11), the Secretary shall consult with the Secretary of Labor.

(g) Definition of qualified optional survivor annuity For purposes of this section, the term “qualified optional survivor annuity” means an annuity— for the life of the participant with a survivor annuity for the life of the spouse which is equal to the applicable percentage of the amount of the annuity which is payable during the joint lives of the participant and the spouse, and which is the actuarial equivalent of a single annuity for the life of the participant. Such term also includes any annuity in a form having the effect of an annuity described in the preceding sentence. For purposes of paragraph (1), if the survivor annuity percentage— is less than 75 percent, the applicable percentage is 75 percent, and is greater than or equal to 75 percent, the applicable percentage is 50 percent. For purposes of subparagraph (A), the term “survivor annuity percentage” means the percentage which the survivor annuity under the plan’s qualified joint and survivor annuity bears to the annuity payable during the joint lives of the participant and the spouse.

[§§ 418 to 418D Repealed. Pub. L. 113–235, div. O, title I, § 108(b)(1), Dec. 16, 2014, 128 Stat. 2787]

§ 418E Insolvent plans

(a) Suspension of certain benefit payments Notwithstanding section 411, in any case in which benefit payments under an insolvent multiemployer plan exceed the resource benefit level, any such payments of benefits which are not basic benefits shall be suspended, in accordance with this section, to the extent necessary to reduce the sum of such payments and the payments of such basic benefits to the greater of the resource benefit level or the level of basic benefits, unless an alternative procedure is prescribed by the Pension Benefit Guaranty Corporation under section 4022A(g)(5) of the Employee Retirement Income Security Act of 1974.

(b) Definitions For purposes of this section, for a plan year— A multiemployer plan is insolvent if the plan’s available resources are not sufficient to pay benefits under the plan when due for the plan year, or if the plan is determined to be insolvent under subsection (d). The term “resource benefit level” means the level of monthly benefits determined under subsections (c)(1) and (3) and (d)(3) to be the highest level which can be paid out of the plan’s available resources. The term “available resources” means the plan’s cash, marketable assets, contributions, withdrawal liability payments, and earnings, less reasonable administrative expenses and amounts owed for such plan year to the Pension Benefit Guaranty Corporation under section 4261(b)(2) of the Employee Retirement Income Security Act of 1974. The term “insolvency year” means a plan year in which a plan is insolvent.

(c) Benefit payments under insolvent plans The plan sponsor of a plan in critical status, as described in section 432(b)(2), shall determine in writing the plan’s resource benefit level for each insolvency year, based on the plan sponsor’s reasonable projection of the plan’s available resources and the benefits payable under the plan. The suspension of benefit payments under this section shall, in accordance with regulations prescribed by the Secretary, apply in substantially uniform proportions to the benefits of all persons in pay status under the plan, except that the Secretary may prescribe rules under which benefit suspensions for different participant groups may be varied equitably to reflect variations in contribution rates and other relevant factors including differences in negotiated levels of financial support for plan benefit obligations. For purposes of this paragraph— the term “person in pay status” means— a participant or beneficiary on the last day of the base plan year who, at any time during such year, was paid an early, late, normal, or disability retirement benefit (or a death benefit related to a retirement benefit), and to the extent provided in regulations prescribed by the Secretary of the Treasury, any other person who is entitled to such a benefit under the plan. the base plan year for any plan year is— if there is a relevant collective bargaining agreement, the last plan year ending at least 6 months before the relevant effective date, or if there is no relevant collective bargaining agreement, the last plan year ending at least 12 months before the beginning of the plan year. a relevant collective bargaining agreement is a collective bargaining agreement— which is in effect for at least 6 months during the plan year, and which has not been in effect for more than 36 months as of the end of the plan year. the relevant effective date is the earliest of the effective dates for the relevant collective bargaining agreements. Notwithstanding paragraph (2), if a plan sponsor determines in writing a resource benefit level for a plan year which is below the level of basic benefits, the payment of all benefits other than basic benefits shall be suspended for that plan year. If, by the end of an insolvency year, the plan sponsor determines in writing that the plan’s available resources in that insolvency year could have supported benefit payments above the resource benefit level for that insolvency year, the plan sponsor shall distribute the excess resources to the participants and beneficiaries who received benefit payments from the plan in that insolvency year, in accordance with regulations prescribed by the Secretary. For purposes of this paragraph, the term “excess resources” means available resources above the amount necessary to support the resource benefit level, but no greater than the amount necessary to pay benefits for the plan year at the benefit levels under the plan. If, by the end of an insolvency year, any benefit has not been paid at the resource benefit level, amounts up to the resource benefit level which were unpaid shall be distributed to the participants and beneficiaries, in accordance with regulations prescribed by the Secretary, to the extent possible taking into account the plan’s total available resources in that insolvency year. Except as provided in paragraph (4) or (5), a plan is not required to make retroactive benefit payments with respect to that portion of a benefit which was suspended under this section.

(d) Plan sponsor determination As of the end of the first plan year in which a plan is in critical status, as described in section 432(b)(2), and at least every 3 plan years thereafter (unless the plan is no longer in critical status, as described in section 432(b)(2)), the plan sponsor shall compare the value of plan assets for that plan year with the total amount of benefit payments made under the plan for that plan year. Unless the plan sponsor determines that the value of plan assets exceeds 3 times the total amount of benefit payments, the plan sponsor shall determine whether the plan will be insolvent in any of the next 5 plan years. If the plan sponsor makes such a determination that the plan will be insolvent in any of the next 5 plan years, the plan sponsor shall make the comparison under this paragraph at least annually until the plan sponsor makes a determination that the plan will not be insolvent in any of the next 5 plan years. If, at any time, the plan sponsor of a plan in critical status, as described in section 432(b)(2), reasonably determines, taking into account the plan’s recent and anticipated financial experience, that the plan’s available resources are not sufficient to pay benefits under the plan when due for the next plan year, the plan sponsor shall make such determination available to interested parties. The plan sponsor of a plan in critical status, as described in section 432(b)(2), shall determine in writing for each insolvency year the resource benefit level and the level of basic benefits no later than 3 months before the insolvency year. For purposes of this subsection, the value of plan assets shall be the value of the available plan assets determined under regulations prescribed by the Secretary of the Treasury.

(e) Notice requirements If the plan sponsor of a plan in critical status, as described in section 432(b)(2), determines under subsection (d)(1) or (2) that the plan may become insolvent (within the meaning of subsection (b)(1)), the plan sponsor shall— notify the Secretary and the parties described in section 101(f)(1) of the Employee Retirement Income Security Act of 1974 of that determination, and inform the parties described in section 101(f)(1) of the Employee Retirement Income Security Act of 1974 that if insolvency occurs certain benefit payments will be suspended, but that basic benefits will continue to be paid. No later than 2 months before the first day of each insolvency year, the plan sponsor of a plan in critical status, as described in section 432(b)(2), shall notify the Secretary, the Pension Benefit Guaranty Corporation, the parties described in section 418A(a)(2), and the plan participants and beneficiaries of the resource benefit level determined in writing for that insolvency year. In any case in which the plan sponsor anticipates that the resource benefit level for an insolvency year may not exceed the level of basic benefits, the plan sponsor shall notify the Pension Benefit Guaranty Corporation. Notice required by this subsection shall be given in accordance with regulations prescribed by the Pension Benefit Guaranty Corporation, except that notice to the Secretary shall be given in accordance with regulations prescribed by the Secretary. The Pension Benefit Guaranty Corporation may prescribe a time other than the time prescribed by this section for the making of a determination or the filing of a notice under this section.

(f) Financial assistance If the plan sponsor of an insolvent plan for which the resource benefit level is above the level of basic benefits anticipates that, for any month in an insolvency year, the plan will not have funds sufficient to pay basic benefits, the plan sponsor may apply for financial assistance from the Pension Benefit Guaranty Corporation under section 4261 of the Employee Retirement Income Security Act of 1974. A plan sponsor who has determined a resource benefit level for an insolvency year which is below the level of basic benefits shall apply for financial assistance from the Pension Benefit Guaranty Corporation under section 4261 of the Employee Retirement Income Security Act of 1974.

(g) Financial assistance Any amount of any financial assistance from the Pension Benefit Guaranty Corporation to any plan, and any repayment of such amount, shall be taken into account under this subpart in such manner as determined by the Secretary.

(h) Subsections (a) and (c) shall not apply to a plan that, for the plan year, is operating under section 432(e)(9), regarding benefit suspensions by certain multiemployer plans in critical and declining status.

§ 419 Treatment of funded welfare benefit plans

(a) General rule Contributions paid or accrued by an employer to a welfare benefit fund— shall not be deductible under this chapter, but if they would otherwise be deductible, shall (subject to the limitation of subsection (b)) be deductible under this section for the taxable year in which paid.

(b) Limitation The amount of the deduction allowable under subsection (a)(2) for any taxable year shall not exceed the welfare benefit fund’s qualified cost for the taxable year.

(c) Qualified cost For purposes of this section— Except as otherwise provided in this subsection, the term “qualified cost” means, with respect to any taxable year, the sum of— the qualified direct cost for such taxable year, and subject to the limitation of section 419A(b), any addition to a qualified asset account for the taxable year. In the case of any welfare benefit fund, the qualified cost for any taxable year shall be reduced by such fund’s after-tax income for such taxable year. The term “qualified direct cost” means, with respect to any taxable year, the aggregate amount (including administrative expenses) which would have been allowable as a deduction to the employer with respect to the benefits provided during the taxable year, if— such benefits were provided directly by the employer, and the employer used the cash receipts and disbursements method of accounting. For purposes of subparagraph (A), a benefit shall be treated as provided when such benefit would be includible in the gross income of the employee if provided directly by the employer (or would be so includible but for any provision of this chapter excluding such benefit from gross income). In determining qualified direct costs with respect to any child care facility for purposes of subparagraph (A), in lieu of depreciation the adjusted basis of such facility shall be allowable as a deduction ratably over a period of 60 months beginning with the month in which the facility is placed in service. The term “child care facility” means any tangible property which qualifies under regulations prescribed by the Secretary as a child care center primarily for children of employees of the employer; except that such term shall not include any property— not of a character subject to depreciation; or located outside the United States. The term “after-tax income” means, with respect to any taxable year, the gross income of the welfare benefit fund reduced by the sum of— the deductions allowed by this chapter which are directly connected with the production of such gross income, and the tax imposed by this chapter on the fund for the taxable year. In determining the gross income of any welfare benefit fund— contributions and other amounts received from employees shall be taken into account, but contributions from the employer shall not be taken into account. No item may be taken into account more than once in determining the qualified cost of any welfare benefit fund.

(d) Carryover of excess contributions If— the amount of the contributions paid (or deemed paid under this subsection) by the employer during any taxable year to a welfare benefit fund, exceeds the limitation of subsection (b), such excess shall be treated as an amount paid by the employer to such fund during the succeeding taxable year.

(e) Welfare benefit fund For purposes of this section— The term “welfare benefit fund” means any fund— which is part of a plan of an employer, and through which the employer provides welfare benefits to employees or their beneficiaries. The term “welfare benefit” means any benefit other than a benefit with respect to which— section 83(h) applies, section 404 applies (determined without regard to section 404(b)(2)), or section 404A applies. The term “fund” means— any organization described in paragraph (7), (9), or (17) of section 501(c), any trust, corporation, or other organization not exempt from the tax imposed by this chapter, and to the extent provided in regulations, any account held for an employer by any person. Notwithstanding paragraph (3)(C), the term “fund” shall not include amounts held by an insurance company pursuant to an insurance contract if— such contract is a life insurance contract described in section 264(a)(1), or such contract is a qualified nonguaranteed contract. For purposes of this paragraph, the term “qualified nonguaranteed contract” means any insurance contract (including a reasonable premium stabilization reserve held thereunder) if— there is no guarantee of a renewal of such contract, and other than insurance protection, the only payments to which the employer or employees are entitled are experience rated refunds or policy dividends which are not guaranteed and which are determined by factors other than the amount of welfare benefits paid to (or on behalf of) the employees of the employer or their beneficiaries. In the case of any qualified nonguaranteed contract, subparagraph (A) shall not apply unless the amount of any experience rated refund or policy dividend payable to an employer with respect to a policy year is treated by the employer as received or accrued in the taxable year in which the policy year ends.

(f) Method of contributions, etc., having the effect of a plan If— there is no plan, but there is a method or arrangement of employer contributions or benefits which has the effect of a plan, this section shall apply as if there were a plan.

(g) Extension to plans for independent contractors If any fund would be a welfare benefit fund (as modified by subsection (f)) but for the fact that there is no employee-employer relationship— this section shall apply as if there were such a relationship, and any reference in this section to the employer shall be treated as a reference to the person for whom services are provided, and any reference in this section to an employee shall be treated as a reference to the person providing the services.

§ 419A Qualified asset account; limitation on additions to account

(a) General rule For purposes of this subpart and section 512, the term “qualified asset account” means any account consisting of assets set aside to provide for the payment of— disability benefits, medical benefits, SUB or severance pay benefits, or life insurance benefits.

(b) Limitation on additions to account No addition to any qualified asset account may be taken into account under section 419(c)(1)(B) to the extent such addition results in the amount in such account exceeding the account limit.

(c) Account limit For purposes of this section— Except as otherwise provided in this subsection, the account limit for any qualified asset account for any taxable year is the amount reasonably and actuarially necessary to fund— claims incurred but unpaid (as of the close of such taxable year) for benefits referred to in subsection (a), and administrative costs with respect to such claims. The account limit for any taxable year may include a reserve funded over the working lives of the covered employees and actuarially determined on a level basis (using assumptions that are reasonable in the aggregate) as necessary for— post-retirement medical benefits to be provided to covered employees (determined on the basis of current medical costs), or post-retirement life insurance benefits to be provided to covered employees. The account limit for any taxable year with respect to SUB or severance pay benefits is 75 percent of the average annual qualified direct costs for SUB or severance pay benefits for any 2 of the immediately preceding 7 taxable years (as selected by the fund). In the case of any new plan for which SUB or severance pay benefits are not available to any key employee, the Secretary shall, by regulations, provide for an interim amount to be taken into account under paragraph (1). For purposes of paragraph (1), disability benefits payable to any individual shall not be taken into account to the extent such benefits are payable at an annual rate in excess of the lower of— 75 percent of such individual’s average compensation for his high 3 years (within the meaning of section 415(b)(3)), or the limitation in effect under section 415(b)(1)(A). For purposes of paragraph (3), any SUB or severance pay benefit payable to any individual shall not be taken into account to the extent such benefit is payable at an annual rate in excess of 150 percent of the limitation in effect under section 415(c)(1)(A). Unless there is an actuarial certification of the account limit determined under this subsection for any taxable year, the account limit for such taxable year shall not exceed the sum of the safe harbor limits for such taxable year. In the case of short-term disability benefits, the safe harbor limit for any taxable year is 17.5 percent of the qualified direct costs (other than insurance premiums) for the immediately preceding taxable year with respect to such benefits. In the case of medical benefits, the safe harbor limit for any taxable year is 35 percent of the qualified direct costs (other than insurance premiums) for the immediately preceding taxable year with respect to medical benefits. In the case of SUB or severance pay benefits, the safe harbor limit for any taxable year is the amount determined under paragraph (3). In the case of any long-term disability benefit or life insurance benefit, the safe harbor limit for any taxable year shall be the amount prescribed by regulations. An applicable account limit for any taxable year may include a reserve in an amount not to exceed 35 percent of the sum of— the qualified direct costs, and the change in claims incurred but unpaid, for such taxable year with respect to medical benefits (other than post-retirement medical benefits). For purposes of this subsection, the term “applicable account limit” means an account limit for a qualified asset account with respect to medical benefits provided through a plan maintained by a bona fide association (as defined in section 2791(d)(3) of the Public Health Service Act ( 42 U.S.C. 300gg–91(d)(3) )).

(d) Requirement of separate accounts for post-retirement medical or life insurance benefits provided to key employees In the case of any employee who is a key employee— a separate account shall be established for any medical benefits or life insurance benefits provided with respect to such employee after retirement, and medical benefits and life insurance benefits provided with respect to such employee after retirement may only be paid from such separate account. The requirements of this paragraph shall apply to the first taxable year for which a reserve is taken into account under subsection (c)(2) and to all subsequent taxable years. For purposes of section 415, any amount attributable to medical benefits allocated to an account established under paragraph (1) shall be treated as an annual addition to a defined contribution plan for purposes of section 415(c). Subparagraph (B) of section 415(c)(1) shall not apply to any amount treated as an annual addition under the preceding sentence. For purposes of this section, the term “key employee” means any employee who, at any time during the plan year or any preceding plan year, is or was a key employee as defined in section 416(i).

(e) Special limitations on reserves for medical benefits or life insurance benefits provided to retired employees No reserve may be taken into account under subsection (c)(2) for post-retirement medical benefits or life insurance benefits to be provided to covered employees unless the plan meets the requirements of section 505(b) with respect to such benefits (whether or not such requirements apply to such plan). The preceding sentence shall not apply to any plan maintained pursuant to an agreement between employee representatives and 1 or more employers if the Secretary finds that such agreement is a collective bargaining agreement and that post-retirement medical benefits or life insurance benefits were the subject of good faith bargaining between such employee representatives and such employer or employers. Life insurance benefits shall not be taken into account under subsection (c)(2) to the extent the aggregate amount of such benefits to be provided with respect to the employee exceeds $50,000.

(f) Definitions and other special rules For purposes of this section— The term “SUB or severance pay benefit” means— any supplemental unemployment compensation benefit (as defined in section 501(c)(17)(D)), and any severance pay benefit. The term “medical benefit” means a benefit which consists of the providing (directly or through insurance) of medical care (as defined in section 213(d)). The term “life insurance benefit” includes any other death benefit. For purposes of this section, the amount of the qualified asset account shall be the value of the assets in such account (as determined under regulations). No account limits shall apply in the case of any qualified asset account under a separate welfare benefit fund— under a collective bargaining agreement, or an employee pay-all plan under section 501(c)(9) if— such plan has at least 50 employees (determined without regard to subsection (h)(1)), and no employee is entitled to a refund with respect to amounts in the fund, other than a refund based on the experience of the entire fund. This subpart shall not apply in the case of any welfare benefit fund which is part of a 10 or more employer plan. The preceding sentence shall not apply to any plan which maintains experience-rating arrangements with respect to individual employers. For purposes of subparagraph (A), the term “10 or more employer plan” means a plan— to which more than 1 employer contributes, and to which no employer normally contributes more than 10 percent of the total contributions contributed under the plan by all employers. The account limit for any of the first 4 taxable years to which this section applies shall be increased by the applicable percentage of any existing excess reserves. For purposes of subparagraph (A)— In the case of: The applicable percentage is: The first taxable year to which this section applies 80 The second taxable year to which this section applies 60 The third taxable year to which this section applies 40 The fourth taxable year to which this section applies 20. For purposes of computing the increase under subparagraph (A) for any taxable year, the term “existing excess reserve” means the excess (if any) of— the amount of assets set aside at the close of the first taxable year ending after July 18, 1984 , for purposes described in subsection (a), over the account limit determined under this section (without regard to this paragraph) for the taxable year for which such increase is being computed. This paragraph shall apply only to a welfare benefit fund which, as of July 18, 1984 , had assets set aside for purposes described in subsection (a).

(g) Employer taxed on income of welfare benefit fund in certain cases In the case of any welfare benefit fund which is not an organization described in paragraph (7), (9), or (17) of section 501(c), the employer shall include in gross income for any taxable year an amount equal to such fund’s deemed unrelated income for the fund’s taxable year ending within the employer’s taxable year. For purposes of paragraph (1), the deemed unrelated income of any welfare benefit fund shall be the amount which would have been its unrelated business taxable income under section 512(a)(3) if such fund were an organization described in paragraph (7), (9), or (17) of section 501(c). If any amount is included in the gross income of an employer for any taxable year under paragraph (1) with respect to any welfare benefit fund— the amount of the tax imposed by this chapter which is attributable to the amount so included shall be treated as a contribution paid to such welfare benefit fund on the last day of such taxable year, and the tax so attributable shall be treated as imposed on the fund for purposes of section 419(c)(4)(A).

(h) Aggregation rules For purposes of this subpart— For purposes of subsections (c)(4), (d)(2), and (e)(2), all welfare benefit funds of an employer shall be treated as 1 fund. For purposes of this section (other than the provisions specified in subparagraph (A)), at the election of the employer, 2 or more welfare benefit funds of such employer may (to the extent not inconsistent with the purposes of this subpart and section 512) be treated as 1 fund. Rules similar to the rules of subsections (b), (c), (m), and (n) of section 414 shall apply.

(i) Regulations The Secretary shall prescribe such regulations as may be appropriate to carry out the purposes of this subpart. Such regulations may provide that the plan administrator of any welfare benefit fund which is part of a plan to which more than 1 employer contributes shall submit such information to the employers contributing to the fund as may be necessary to enable the employers to comply with the provisions of this section.

§ 420 Transfers of excess pension assets to retiree health accounts

(a) General rule If there is a qualified transfer of any excess pension assets of a defined benefit plan to a health benefits account, or an applicable life insurance account, which is part of such plan— a trust which is part of such plan shall not be treated as failing to meet the requirements of subsection (a) or (h) of section 401 solely by reason of such transfer (or any other action authorized under this section), no amount shall be includible in the gross income of the employer maintaining the plan solely by reason of such transfer, such transfer shall not be treated— as an employer reversion for purposes of section 4980, or as a prohibited transaction for purposes of section 4975, and the limitations of subsection (d) shall apply to such employer.

(b) Qualified transfer For purposes of this section— The term “qualified transfer” means a transfer— of excess pension assets of a defined benefit plan to a health benefits account, or an applicable life insurance account, which is part of such plan, which does not contravene any other provision of law, and with respect to which the following requirements are met in connection with the plan— the use requirements of subsection (c)(1), the vesting requirements of subsection (c)(2), and the minimum cost requirements of subsection (c)(3). No more than 1 transfer with respect to any plan during a taxable year may be treated as a qualified transfer for purposes of this section. If there is a transfer from a defined benefit plan to both a health benefits account and an applicable life insurance account during any taxable year, such transfers shall be treated as 1 transfer for purposes of this paragraph. The amount of excess pension assets which may be transferred to an account in a qualified transfer shall not exceed the amount which is reasonably estimated to be the amount the employer maintaining the plan will pay (whether directly or through reimbursement) out of such account during the taxable year of the transfer for qualified current retiree liabilities. No transfer made after December 31, 2032 , shall be treated as a qualified transfer.

(c) Requirements of plans transferring assets Any assets transferred to a health benefits account, or an applicable life insurance account, in a qualified transfer (and any income allocable thereto) shall be used only to pay qualified current retiree liabilities (other than liabilities of key employees not taken into account under subsection (e)(1)(E)) for the taxable year of the transfer (whether directly or through reimbursement). In the case of a qualified future transfer or collectively bargained transfer to which subsection (f) applies, any assets so transferred may also be used to pay liabilities described in subsection (f)(2)(C). Any assets transferred to a health benefits account, or an applicable life insurance account, in a qualified transfer (and any income allocable thereto) which are not used as provided in subparagraph (A) shall be transferred out of the account to the transferor plan. Any amount transferred out of an account under clause (i)— shall not be includible in the gross income of the employer for such taxable year, but shall be treated as an employer reversion for purposes of section 4980 (without regard to subsection (d) thereof). For purposes of this section, any amount paid out of a health benefits account, or an applicable life insurance account, shall be treated as paid first out of the assets and income described in subparagraph (A). The requirements of this paragraph are met if the plan provides that the accrued pension benefits of any participant or beneficiary under the plan become nonforfeitable in the same manner which would be required if the plan had terminated immediately before the qualified transfer (or in the case of a participant who separated during the 1-year period ending on the date of the transfer, immediately before such separation). The requirements of this paragraph are met if each group health plan or arrangement under which applicable health benefits are provided, and each group-term life insurance plan under which applicable life insurance benefits are provided, provides that the applicable employer cost for each taxable year during the cost maintenance period shall not be less than the higher of the applicable employer costs for each of the 2 taxable years immediately preceding the taxable year of the qualified transfer or, in the case of a transfer which involves a plan maintained by an employer described in subsection (f)(2)(E)(i)(III), if the plan meets the requirements of subsection (f)(2)(D)(i)(II). For purposes of this paragraph, the term “applicable employer cost” means, with respect to any taxable year, the amount determined by dividing— the qualified current retiree liabilities of the employer for such taxable year determined— separately with respect to applicable health benefits and applicable life insurance benefits, without regard to any reduction under subsection (e)(1)(B), and in the case of a taxable year in which there was no qualified transfer, in the same manner as if there had been such a transfer at the end of the taxable year, by the number of individuals to whom coverage was provided during such taxable year for the benefits with respect to which the determination under clause (i) is made. An employer may elect to have this paragraph applied separately for applicable health benefits with respect to individuals eligible for benefits under title XVIII of the Social Security Act at any time during the taxable year and with respect to individuals not so eligible, and separately for applicable life insurance benefits with respect to individuals age 65 or older at any time during the taxable year and with respect to individuals under age 65 during the taxable year. For purposes of this paragraph, the term “cost maintenance period” means the period of 5 taxable years (7 taxable years in the case of a transfer to which subsection (e)(7) applies) beginning with the taxable year in which the qualified transfer occurs. If a taxable year is in two or more overlapping cost maintenance periods, this paragraph shall be applied by taking into account the highest applicable employer cost required to be provided under subparagraph (A) for such taxable year. The Secretary shall prescribe such regulations as may be necessary to prevent an employer who significantly reduces retiree health coverage or retiree life insurance coverage, as the case may be, during the cost maintenance period from being treated as satisfying the minimum cost requirement of this subsection. An eligible employer shall not be treated as failing to meet the requirements of this paragraph for any taxable year if, in lieu of any reduction of retiree health coverage permitted under the regulations prescribed under clause (i), the employer reduces applicable employer cost by an amount not in excess of the reduction in costs which would have occurred if the employer had made the maximum permissible reduction in retiree health coverage under such regulations. In applying such regulations to any subsequent taxable year, any reduction in applicable employer cost under this clause shall be treated as if it were an equivalent reduction in retiree health coverage. For purposes of subclause (I), an employer shall be treated as an eligible employer for any taxable year if, for the preceding taxable year, the qualified current retiree liabilities of the employer with respect to applicable health benefits were at least 5 percent of the gross receipts of the employer. For purposes of this subclause, the rules of paragraphs (2), (3)(B), and (3)(C) of section 448(c) shall apply in determining the amount of an employer’s gross receipts.

(d) Limitations on employer For purposes of this title— No deduction shall be allowed— for the transfer of any amount to a health benefits account, or an applicable life insurance account, in a qualified transfer (or any retransfer to the plan under subsection (c)(1)(B)), for qualified current retiree liabilities paid out of the assets (and income) described in subsection (c)(1), or for any amounts to which subparagraph (B) does not apply and which are paid for qualified current retiree liabilities for the taxable year to the extent such amounts are not greater than the excess (if any) of— the amount determined under subparagraph (A) (and income allocable thereto), over the amount determined under subparagraph (B). An employer may not contribute any amount to a health benefits account or welfare benefit fund (as defined in section 419(e)(1)) with respect to qualified current retiree liabilities for which transferred assets are required to be used under subsection (c)(1).

(e) Definition and special rules For purposes of this section— For purposes of this section— The term “qualified current retiree liabilities” means, with respect to any taxable year, the aggregate amounts (including administrative expenses) which would have been allowable as a deduction to the employer for such taxable year with respect to applicable health benefits and applicable life insurance benefits provided during such taxable year if— such benefits were provided directly by the employer, and the employer used the cash receipts and disbursements method of accounting. For purposes of the preceding sentence, the rule of section 419(c)(3)(B) shall apply. The amount determined under subparagraph (A) shall be reduced by the amount (determined separately for applicable health benefits and applicable life insurance benefits) which bears the same ratio to such amount as— the value (as of the close of the plan year preceding the year of the qualified transfer) of the assets in all health benefits accounts or applicable life insurance accounts or welfare benefit funds (as defined in section 419(e)(1)) set aside to pay for the qualified current retiree liability, bears to the present value of the qualified current retiree liabilities for all plan years (determined without regard to this subparagraph). The term “applicable health benefits” means health benefits or coverage which are provided to— retired employees who, immediately before the qualified transfer, are entitled to receive such benefits by reason of retirement and who are entitled to pension benefits under the plan, and their spouses and dependents. The term “applicable life insurance benefits” means group-term life insurance coverage provided to retired employees who, immediately before the qualified transfer, are entitled to receive such coverage by reason of retirement and who are entitled to pension benefits under the plan, but only to the extent that such coverage is provided under a policy for retired employees and the cost of such coverage is excludable from the retired employee’s gross income under section 79. If an employee is a key employee (within the meaning of section 416(i)(1)) with respect to any plan year ending in a taxable year, such employee shall not be taken into account in computing qualified current retiree liabilities for such taxable year or in calculating applicable employer cost under subsection (c)(3)(B). The term “excess pension assets” means the excess (if any) of— the lesser of— the fair market value of the plan’s assets (reduced by the prefunding balance and funding standard carryover balance determined under section 430(f)), or the value of plan assets as determined under section 430(g)(3) after reduction under section 430(f), over 125 percent of the sum of the funding target and the target normal cost determined under section 430 for such plan year. The term “health benefits account” means an account established and maintained under section 401(h). The term “applicable life insurance account” means a separate account established and maintained for amounts transferred under this section for qualified current retiree liabilities based on premiums for applicable life insurance benefits. In the case of a qualified transfer, any assets so transferred shall not, for purposes of this section and sections 430 and 433, be treated as assets in the plan. In the case of a multiemployer plan, this section shall be applied to any such plan— by treating any reference in this section to an employer as a reference to all employers maintaining the plan (or, if appropriate, the plan sponsor), and in accordance with such modifications of this section (and the provisions of this title relating to this section) as the Secretary determines appropriate to reflect the fact the plan is not maintained by a single employer. In the case of a transfer of an amount which is not more than 1.75 percent of the amount determined under paragraph (2)(A) by a plan which meets the requirements of subparagraph (B), paragraph (2)(B) shall be applied by substituting “110 percent” for “125 percent”. A plan is described in this subparagraph if, as of any valuation date in each of the 2 plan years immediately preceding the plan year in which the transfer occurs, the amount determined under paragraph (2)(A) exceeded 110 percent of the sum of the funding target and the target normal cost determined under section 430 for each such plan year.

(f) Qualified transfers to cover future retiree costs and collectively bargained retiree benefits An employer maintaining a defined benefit plan (other than a multiemployer plan) may, in lieu of a qualified transfer, elect for any taxable year to have the plan make— a qualified future transfer, or a collectively bargained transfer. Except as provided in this subsection, a qualified future transfer and a collectively bargained transfer shall be treated for purposes of this title and the Employee Retirement Income Security Act of 1974 as if it were a qualified transfer. For purposes of this subsection— The terms “qualified future transfer” and “collectively bargained transfer” mean a transfer which meets all of the requirements for a qualified transfer, except that— the determination of excess pension assets shall be made under subparagraph (B), the limitation on the amount transferred shall be determined under subparagraph (C), the minimum cost requirements of subsection (c)(3) shall be modified as provided under subparagraph (D), and in the case of a collectively bargained transfer, the requirements of subparagraph (E) shall be met with respect to the transfer. In determining excess pension assets for purposes of this subsection, subsection (e)(2)(B) shall be applied by substituting “120 percent” for “125 percent”. In determining excess pension assets for purposes of a collectively bargained transfer, subsection (e)(7) shall not apply. If, as of any valuation date of any plan year in the transfer period, the amount determined under subsection (e)(2)(B) (after application of clause (i)) exceeds the amount determined under subsection (e)(2)(A), either— the employer maintaining the plan shall make contributions to the plan in an amount not less than the amount required to reduce such excess to zero as of such date, or there is transferred from the health benefits account or applicable life insurance account, as the case may be, to the plan an amount not less than the amount required to reduce such excess to zero as of such date. Notwithstanding subsection (b)(3), the amount of the excess pension assets which may be transferred— in the case of a qualified future transfer shall be equal to the sum of— if the transfer period includes the taxable year of the transfer, the amount determined under subsection (b)(3) for such taxable year, plus in the case of all other taxable years in the transfer period, the sum of the qualified current retiree liabilities which the plan reasonably estimates, in accordance with guidance issued by the Secretary, will be incurred for each of such years, and in the case of a collectively bargained transfer, shall not exceed the amount which is reasonably estimated, in accordance with the provisions of the collective bargaining agreement and generally accepted accounting principles, to be the amount the employer maintaining the plan will pay (whether directly or through reimbursement) out of such account during the collectively bargained cost maintenance period for collectively bargained retiree liabilities. The requirements of subsection (c)(3) shall be treated as met if— in the case of a qualified future transfer, each group health plan or arrangement under which applicable health benefits are provided, and each group-term life insurance plan or arrangement under which applicable life insurance benefits are provided, provides applicable health benefits or applicable life insurance benefits, as the case may be, during the period beginning with the first year of the transfer period and ending with the last day of the 4th year (the 6th year in the case of a transfer to which subsection (e)(7) applies) following the transfer period such that the annual average amount of the applicable employer cost during such period is not less than the applicable employer cost determined under subsection (c)(3)(A) with respect to the transfer, and in the case of a collectively bargained transfer, each collectively bargained plan under which collectively bargained health benefits or collectively bargained life insurance benefits are provided provides that the collectively bargained employer cost for each taxable year during the collectively bargained cost maintenance period shall not be less than the amount specified by the collective bargaining agreement. An employer may elect, in lieu of the requirements of clause (i)(I), to meet the requirements of subsection (c)(3) with respect to applicable health benefits or applicable life insurance benefits by meeting the requirements of such subsection (as in effect before the amendments made by section 535 of the Tax Relief Extension Act of 1999) for each of the years described in the period under clause (i)(I). Such election may be made separately with respect to applicable health benefits and applicable life insurance benefits. In the case of an election with respect to applicable life insurance benefits, the first sentence of this clause shall be applied as if subsection (c)(3) as in effect before the amendments made by such Act applied to such benefits. For purposes of this subparagraph, the term “collectively bargained employer cost” means the average cost per covered individual of providing collectively bargained health benefits, collectively bargained life insurance benefits, or both, as the case may be, as determined in accordance with the applicable collective bargaining agreement. Such agreement may provide for an appropriate reduction in the collectively bargained employer cost to take into account any portion of the collectively bargained health benefits, collectively bargained life insurance benefits, or both, as the case may be, that is provided or financed by a government program or other source. A collectively bargained transfer shall only include a transfer which— is made in accordance with a collective bargaining agreement, before the transfer, the employer designates, in a written notice delivered to each employee organization that is a party to the collective bargaining agreement, as a collectively bargained transfer in accordance with this section, and involves a defined benefit plan maintained by an employer which, in its taxable year ending in 2005, provided health benefits or coverage to retirees and their spouses and dependents under all of the health benefit plans maintained by the employer, but only if the aggregate cost (including administrative expenses) of such benefits or coverage which would have been allowable as a deduction to the employer (if such benefits or coverage had been provided directly by the employer and the employer used the cash receipts and disbursements method of accounting) is at least 5 percent of the gross receipts of the employer (determined in accordance with the last sentence of subsection (c)(3)(E)(ii)(II)) for such taxable year, or a plan maintained by a successor to such employer. Any assets transferred to a health benefits account, or an applicable life insurance account, in a collectively bargained transfer (and any income allocable thereto) shall be used only to pay collectively bargained retiree liabilities (other than liabilities of key employees not taken into account under paragraph (6)(B)(iii)) for the taxable year of the transfer or for any subsequent taxable year during the collectively bargained cost maintenance period (whether directly or through reimbursement). In applying subsection (b)(3) to any subsequent transfer during a taxable year in a transfer period or collectively bargained cost maintenance period, qualified current retiree liabilities shall be reduced by any such liabilities taken into account with respect to the qualified future transfer or collectively bargained transfer to which such period relates. In the case of a collectively bargained transfer— the limitation under subsection (d)(1)(C) shall not apply, and notwithstanding subsection (d)(2), an employer may contribute an amount to a health benefits account or welfare benefit fund (as defined in section 419(e)(1)) with respect to collectively bargained retiree liabilities for which transferred assets are required to be used under subsection (c)(1)(B), and the deductibility of any such contribution shall be governed by the limits applicable to the deductibility of contributions to a welfare benefit fund under a collective bargaining agreement (as determined under section 419A(f)(5)(A)) without regard to whether such contributions are made to a health benefits account or welfare benefit fund and without regard to the provisions of section 404 or the other provisions of this section. The Secretary shall provide rules to ensure that the application of this paragraph does not result in a deduction being allowed more than once for the same contribution or for 2 or more contributions or expenditures relating to the same collectively bargained retiree liabilities. For purposes of this subsection, the term “transfer period” means, with respect to any transfer, a period of consecutive taxable years (not less than 2) specified in the election under paragraph (1) which begins and ends during the 10-taxable-year period beginning with the taxable year of the transfer. For purposes of this subsection— The term “collectively bargained cost maintenance period” means, with respect to each covered retiree and his covered spouse and dependents, the shorter of— the remaining lifetime of such covered retiree and, in the case of a transfer to a health benefits account, his covered spouse and dependents, or the period of coverage provided by the collectively bargained plan (determined as of the date of the collectively bargained transfer) with respect to such covered retiree and, in the case of a transfer to a health benefits account, his covered spouse and dependents. The term “collectively bargained retiree liabilities” means the present value, as of the beginning of a taxable year and determined in accordance with the applicable collective bargaining agreement, of all collectively bargained health benefits, and collectively bargained life insurance benefits, (including administrative expenses) for such taxable year and all subsequent taxable years during the collectively bargained cost maintenance period. The amount determined under clause (i) shall be reduced by the value (as of the close of the plan year preceding the year of the collectively bargained transfer) of the assets in all health benefits accounts, applicable life insurance accounts, or welfare benefit funds (as defined in section 419(e)(1)) set aside to pay for the collectively bargained retiree liabilities. The preceding sentence shall be applied separately for collectively bargained health benefits and collectively bargained life insurance benefits. If an employee is a key employee (within the meaning of section 416(i)(1)) with respect to any plan year ending in a taxable year, such employee shall not be taken into account in computing collectively bargained retiree liabilities for such taxable year or in calculating collectively bargained employer cost under subsection (c)(3)(C). The term “collectively bargained health benefits” means health benefits or coverage— which are provided to retired employees who, immediately before the collectively bargained transfer, are entitled to receive such benefits by reason of retirement and who are entitled to pension benefits under the plan, and their spouses and dependents, and if specified by the provisions of the collective bargaining agreement governing the collectively bargained transfer, which will be provided at retirement to employees who are not retired employees at the time of the transfer and who are entitled to receive such benefits and who are entitled to pension benefits under the plan, and their spouses and dependents. The term “collectively bargained life insurance benefits” means, with respect to any collectively bargained transfer— applicable life insurance benefits which are provided to retired employees who, immediately before the transfer, are entitled to receive such benefits by reason of retirement, and if specified by the provisions of the collective bargaining agreement governing the transfer, applicable life insurance benefits which will be provided at retirement to employees who are not retired employees at the time of the transfer. The term “collectively bargained plan” means a group health plan or arrangement for retired employees and their spouses and dependents, or a group-term life insurance plan or arrangement for retired employees, that is maintained pursuant to 1 or more collective bargaining agreements. In the case of an employer maintaining a plan which has made a qualified future transfer under this subsection, such employer may, not later than December 31, 2021 , elect to terminate the transfer period with respect to such transfer effective as of any taxable year specified by the taxpayer that begins after the date of such election. Any assets transferred to a health benefits account, or an applicable life insurance account, in a qualified future transfer (and any income allocable thereto) which are not used as of the effective date of the election to terminate the transfer period with respect to such transfer under subparagraph (A), shall be transferred out of the account to the transferor plan within a reasonable period of time. The transfer required by this subparagraph shall be treated as an employer reversion for purposes of section 4980 (other than subsection (d) thereof), unless before the end of the 5-year period beginning after the original transfer period an equivalent amount is transferred back to such health benefits account, or applicable life insurance account, as the case may be. Any such transfer back pursuant to the preceding sentence may be made without regard to section 401(h)(1). The requirements of subsection (c)(3) and paragraph (2)(D) shall apply with respect to a qualified future transfer without regard to any election under subparagraph (A) with respect to such transfer. The requirements of paragraph (2)(B) shall apply without regard to any such election, and clause (i) thereof shall be applied by substituting “100 percent” for “120 percent” during the original transfer period. In the case of a plan with respect to which there is an excess described in paragraph (2)(B)(ii) as of the valuation date of the plan year in the last year of the original transfer period, paragraph (2)(B) shall apply for 5 years after the original transfer period in the same manner as during a transfer period by substituting the applicable percentage for “120 percent” in clause (i) thereof. For purposes of this subparagraph, the applicable percentage shall be determined under the following table: For the valuation date of the plan year in the following year after the original transfer period: The applicable percentage is: 1st 104 percent 2nd 108 percent 3rd 112 percent 4th 116 percent 5th 120 percent If, as of the valuation date of any plan year in the first 4 years after the original transfer period with respect to a qualified future transfer, there would be no excess determined under this subparagraph were the applicable percentage 120 percent, then this subparagraph shall cease to apply with respect to the plan. For purposes of this paragraph, the term “original transfer period” means the transfer period under this subsection with respect to a qualified future transfer determined without regard to the election under subparagraph (A).

(g) Segment rates determined without pension stabilization For purposes of this section, section 430 shall be applied without regard to subsection (h)(2)(C)(iv) thereof.

§ 421 General rules

(a) Effect of qualifying transfer If a share of stock is transferred to an individual in a transfer in respect of which the requirements of section 422(a) or 423(a) are met— no income shall result at the time of the transfer of such share to the individual upon his exercise of the option with respect to such share; no deduction under section 162 (relating to trade or business expenses) shall be allowable at any time to the employer corporation, a parent or subsidiary corporation of such corporation, or a corporation issuing or assuming a stock option in a transaction to which section 424(a) applies, with respect to the share so transferred; and no amount other than the price paid under the option shall be considered as received by any of such corporations for the share so transferred.

(b) Effect of disqualifying disposition If the transfer of a share of stock to an individual pursuant to his exercise of an option would otherwise meet the requirements of section 422(a) or 423(a) except that there is a failure to meet any of the holding period requirements of section 422(a)(1) or 423(a)(1), then any increase in the income of such individual or deduction from the income of his employer corporation for the taxable year in which such exercise occurred attributable to such disposition, shall be treated as an increase in income or a deduction from income in the taxable year of such individual or of such employer corporation in which such disposition occurred. No amount shall be required to be deducted and withheld under chapter 24 with respect to any increase in income attributable to a disposition described in the preceding sentence.

(c) Exercise by estate If an option to which this part applies is exercised after the death of the employee by the estate of the decedent, or by a person who acquired the right to exercise such option by bequest or inheritance or by reason of the death of the decedent, the provisions of subsection (a) shall apply to the same extent as if the option had been exercised by the decedent, except that— the holding period and employment requirements of sections 422(a) and 423(a) shall not apply, and any transfer by the estate of stock acquired shall be considered a disposition of such stock for purposes of section 423(c). If an amount is required to be included under section 423(c) in gross income of the estate of the deceased employee or of a person described in paragraph (1), there shall be allowed to the estate or such person a deduction with respect to the estate tax attributable to the inclusion in the taxable estate of the deceased employee of the net value for estate tax purposes of the option. For this purpose, the deduction shall be determined under section 691(c) as if the option acquired from the deceased employee were an item of gross income in respect of the decedent under section 691 and as if the amount includible in gross income under section 423(c) were an amount included in gross income under section 691 in respect of such item of gross income. In the case of a share of stock acquired by the exercise of an option to which paragraph (1) applies— the basis of such share shall include so much of the basis of the option as is attributable to such share; except that the basis of such share shall be reduced by the excess (if any) of (i) the amount which would have been includible in gross income under section 423(c) if the employee had exercised the option on the date of his death and had held the share acquired pursuant to such exercise at the time of his death, over (ii) the amount which is includible in gross income under such section; and the last sentence of section 423(c) shall apply only to the extent that the amount includible in gross income under such section exceeds so much of the basis of the option as is attributable to such share.

(d) Certain sales to comply with conflict-of-interest requirements If— a share of stock is transferred to an eligible person (as defined in section 1043(b)(1)) pursuant to such person’s exercise of an option to which this part applies, and such share is disposed of by such person pursuant to a certificate of divestiture (as defined in section 1043(b)(2)), such disposition shall be treated as meeting the requirements of section 422(a)(1) or 423(a)(1), whichever is applicable.

§ 422 Incentive stock options

(a) In general Section 421(a) shall apply with respect to the transfer of a share of stock to an individual pursuant to his exercise of an incentive stock option if— no disposition of such share is made by him within 2 years from the date of the granting of the option nor within 1 year after the transfer of such share to him, and at all times during the period beginning on the date of the granting of the option and ending on the day 3 months before the date of such exercise, such individual was an employee of either the corporation granting such option, a parent or subsidiary corporation of such corporation, or a corporation or a parent or subsidiary corporation of such corporation issuing or assuming a stock option in a transaction to which section 424(a) applies.

(b) Incentive stock option For purposes of this part, the term “incentive stock option” means an option granted to an individual for any reason connected with his employment by a corporation, if granted by the employer corporation or its parent or subsidiary corporation, to purchase stock of any of such corporations, but only if— the option is granted pursuant to a plan which includes the aggregate number of shares which may be issued under options and the employees (or class of employees) eligible to receive options, and which is approved by the stockholders of the granting corporation within 12 months before or after the date such plan is adopted; such option is granted within 10 years from the date such plan is adopted, or the date such plan is approved by the stockholders, whichever is earlier; such option by its terms is not exercisable after the expiration of 10 years from the date such option is granted; the option price is not less than the fair market value of the stock at the time such option is granted; such option by its terms is not transferable by such individual otherwise than by will or the laws of descent and distribution, and is exercisable, during his lifetime, only by him; and such individual, at the time the option is granted, does not own stock possessing more than 10 percent of the total combined voting power of all classes of stock of the employer corporation or of its parent or subsidiary corporation. Such term shall not include any option if (as of the time the option is granted) the terms of such option provide that it will not be treated as an incentive stock option. Such term shall not include any option if an election is made under section 83(i) with respect to the stock received in connection with the exercise of such option.

(c) Special rules If a share of stock is transferred pursuant to the exercise by an individual of an option which would fail to qualify as an incentive stock option under subsection (b) because there was a failure in an attempt, made in good faith, to meet the requirement of subsection (b)(4), the requirement of subsection (b)(4) shall be considered to have been met. To the extent provided in regulations by the Secretary, a similar rule shall apply for purposes of subsection (d). If— an individual who has acquired a share of stock by the exercise of an incentive stock option makes a disposition of such share within either of the periods described in subsection (a)(1), and such disposition is a sale or exchange with respect to which a loss (if sustained) would be recognized to such individual, then the amount which is includible in the gross income of such individual, and the amount which is deductible from the income of his employer corporation, as compensation attributable to the exercise of such option shall not exceed the excess (if any) of the amount realized on such sale or exchange over the adjusted basis of such share. If an insolvent individual holds a share of stock acquired pursuant to his exercise of an incentive stock option, and if such share is transferred to a trustee, receiver, or other similar fiduciary in any proceeding under title 11 or any other similar insolvency proceeding, neither such transfer, nor any other transfer of such share for the benefit of his creditors in such proceeding, shall constitute a disposition of such share for purposes of subsection (a)(1). An option which meets the requirements of subsection (b) shall be treated as an incentive stock option even if— the employee may pay for the stock with stock of the corporation granting the option, the employee has a right to receive property at the time of exercise of the option, or the option is subject to any condition not inconsistent with the provisions of subsection (b). Subparagraph (B) shall apply to a transfer of property (other than cash) only if section 83 applies to the property so transferred. Subsection (b)(6) shall not apply if at the time such option is granted the option price is at least 110 percent of the fair market value of the stock subject to the option and such option by its terms is not exercisable after the expiration of 5 years from the date such option is granted. For purposes of subsection (a)(2), in the case of an employee who is disabled (within the meaning of section 22(e)(3)), the 3-month period of subsection (a)(2) shall be 1 year. For purposes of this section, the fair market value of stock shall be determined without regard to any restriction other than a restriction which, by its terms, will never lapse.

**(d) $100, 000 p erye a r l imi t a t i o n * * T o t h ee x t e n tt ha tt h e a gg re g a t e f ai r ma r k e t v a l u eo f s t oc k w i t h res p ec tt o w hi c hin ce n t i v es t oc k o pt i o n s (d e t er min e d w i t h o u t re g a r d t o t hi ss u b sec t i o n) a ree x erc i s ab l e f or t h e 1 s tt im e b y an y in d i v i d u a l d u r in g an yc a l e n d a rye a r (u n d er a llpl an so f t h e in d i v i d u a l ’ se m pl oyercor p or a t i o nan d i t s p a re n t an d s u b s i d ia rycor p or a t i o n s) e x cee d s$ 100,000, such options shall be treated as options which are not incentive stock options. Paragraph (1) shall be applied by taking options into account in the order in which they were granted. For purposes of paragraph (1), the fair market value of any stock shall be determined as of the time the option with respect to such stock is granted.

[§ 422A Renumbered § 422]

§ 423 Employee stock purchase plans

(a) General rule Section 421(a) shall apply with respect to the transfer of a share of stock to an individual pursuant to his exercise of an option granted under an employee stock purchase plan (as defined in subsection (b)) if— no disposition of such share is made by him within 2 years after the date of the granting of the option nor within 1 year after the transfer of such share to him; and at all times during the period beginning with the date of the granting of the option and ending on the day 3 months before the date of such exercise, he is an employee of the corporation granting such option, a parent or subsidiary corporation of such corporation, or a corporation or a parent or subsidiary corporation of such corporation issuing or assuming a stock option in a transaction to which section 424(a) applies.

(b) Employee stock purchase plan For purposes of this part, the term “employee stock purchase plan” means a plan which meets the following requirements: the plan provides that options are to be granted only to employees of the employer corporation or of its parent or subsidiary corporation to purchase stock in any such corporation; such plan is approved by the stockholders of the granting corporation within 12 months before or after the date such plan is adopted; under the terms of the plan, no employee can be granted an option if such employee, immediately after the option is granted, owns stock possessing 5 percent or more of the total combined voting power or value of all classes of stock of the employer corporation or of its parent or subsidiary corporation. For purposes of this paragraph, the rules of section 424(d) shall apply in determining the stock ownership of an individual, and stock which the employee may purchase under outstanding options shall be treated as stock owned by the employee; under the terms of the plan, options are to be granted to all employees of any corporation whose employees are granted any of such options by reason of their employment by such corporation, except that there may be excluded— employees who have been employed less than 2 years, employees whose customary employment is 20 hours or less per week, employees whose customary employment is for not more than 5 months in any calendar year, and highly compensated employees (within the meaning of section 414(q)); under the terms of the plan, all employees granted such options shall have the same rights and privileges, except that the amount of stock which may be purchased by any employee under such option may bear a uniform relationship to the total compensation, or the basic or regular rate of compensation, of employees, the plan may provide that no employee may purchase more than a maximum amount of stock fixed under the plan, and the rules of section 83(i) shall apply in determining which employees have a right to make an election under such section; under the terms of the plan, the option price is not less than the lesser of— an amount equal to 85 percent of the fair market value of the stock at the time such option is granted, or an amount which under the terms of the option may not be less than 85 percent of the fair market value of the stock at the time such option is exercised; under the terms of the plan, such option cannot be exercised after the expiration of— 5 years from the date such option is granted if, under the terms of such plan, the option price is to be not less than 85 percent of the fair market value of such stock at the time of the exercise of the option, or 27 months from the date such option is granted, if the option price is not determinable in the manner described in subparagraph (A); under the terms of the plan, no employee may be granted an option which permits his rights to purchase stock under all such plans of his employer corporation and its parent and subsidiary corporations to accrue at a rate which exceeds $25, 000 o ff ai r ma r k e t v a l u eo f s u c h s t oc k (d e t er min e d a tt h e t im es u c h o pt i o ni s g r an t e d) f ore a c h c a l e n d a rye a r in w hi c h s u c h o pt i o ni so u t s t an d in g a t an y t im e . F or p u r p oseso f t hi s p a r a g r a p h — t h er i g h tt o p u rc ha ses t oc k u n d er an o pt i o na ccr u es w h e n t h eo pt i o n (or an y p or t i o n t h ereo f) f i rs t b eco m ese x erc i s ab l e d u r in g t h ec a l e n d a rye a r; t h er i g h tt o p u rc ha ses t oc k u n d er an o pt i o na ccr u es a tt h er a t e p ro v i d e d in t h eo pt i o n, b u t inn oc a se ma ys u c h r a t ee x cee d$ 25,000 of fair market value of such stock (determined at the time such option is granted) for any one calendar year; and a right to purchase stock which has accrued under one option granted pursuant to the plan may not be carried over to any other option; and under the terms of the plan, such option is not transferable by such individual otherwise than by will or the laws of descent and distribution, and is exercisable, during his lifetime, only by him. For purposes of paragraphs (3) to (9), inclusive, where additional terms are contained in an offering made under a plan, such additional terms shall, with respect to options exercised under such offering, be treated as a part of the terms of such plan.

(c) Special rule where option price is between 85 percent and 100 percent of value of stock If the option price of a share of stock acquired by an individual pursuant to a transfer to which subsection (a) applies was less than 100 percent of the fair market value of such share at the time such option was granted, then, in the event of any disposition of such share by him which meets the holding period requirements of subsection (a), or in the event of his death (whenever occurring) while owning such share, there shall be included as compensation (and not as gain upon the sale or exchange of a capital asset) in his gross income, for the taxable year in which falls the date of such disposition or for the taxable year closing with his death, whichever applies, an amount equal to the lesser of— the excess of the fair market value of the share at the time of such disposition or death over the amount paid for the share under the option, or the excess of the fair market value of the share at the time the option was granted over the option price. If the option price is not fixed or determinable at the time the option is granted, then for purposes of this subsection, the option price shall be determined as if the option were exercised at such time. In the case of the disposition of such share by the individual, the basis of the share in his hands at the time of such disposition shall be increased by an amount equal to the amount so includible in his gross income. No amount shall be required to be deducted and withheld under chapter 24 with respect to any amount treated as compensation under this subsection.

(d) Coordination with qualified equity grants An option for which an election is made under section 83(i) with respect to the stock received in connection with its exercise shall not be considered as granted pursuant an employee stock purchase plan.

§ 424 Definitions and special rules

(a) Corporate reorganizations, liquidations, etc. For purposes of this part, the term “issuing or assuming a stock option in a transaction to which section 424(a) applies” means a substitution of a new option for the old option, or an assumption of the old option, by an employer corporation, or a parent or subsidiary of such corporation, by reason of a corporate merger, consolidation, acquisition of property or stock, separation, reorganization, or liquidation, if— the excess of the aggregate fair market value of the shares subject to the option immediately after the substitution or assumption over the aggregate option price of such shares is not more than the excess of the aggregate fair market value of all shares subject to the option immediately before such substitution or assumption over the aggregate option price of such shares, and the new option or the assumption of the old option does not give the employee additional benefits which he did not have under the old option. For purposes of this subsection, the parent-subsidiary relationship shall be determined at the time of any such transaction under this subsection.

(b) Acquisition of new stock For purposes of this part, if stock is received by an individual in a distribution to which section 305, 354, 355, 356, or 1036 (or so much of section 1031 as relates to section 1036) applies, and such distribution was made with respect to stock transferred to him upon his exercise of the option, such stock shall be considered as having been transferred to him on his exercise of such option. A similar rule shall be applied in the case of a series of such distributions.

(c) Disposition Except as provided in paragraphs (2), (3), and (4), for purposes of this part, the term “disposition” includes a sale, exchange, gift, or a transfer of legal title, but does not include— a transfer from a decedent to an estate or a transfer by bequest or inheritance; an exchange to which section 354, 355, 356, or 1036 (or so much of section 1031 as relates to section 1036) applies; or a mere pledge or hypothecation. The acquisition of a share of stock in the name of the employee and another jointly with the right of survivorship or a subsequent transfer of a share of stock into such joint ownership shall not be deemed a disposition, but a termination of such joint tenancy (except to the extent such employee acquires ownership of such stock) shall be treated as a disposition by him occurring at the time such joint tenancy is terminated. If— there is a transfer of statutory option stock in connection with the exercise of any incentive stock option, and the applicable holding period requirements (under section 422(a)(1) or 423(a)(1)) are not met before such transfer, then no section referred to in subparagraph (B) of paragraph (1) shall apply to such transfer. For purpose of subparagraph (A), the term “statutory option stock” means any stock acquired through the exercise of an incentive stock option or an option granted under an employee stock purchase plan. In the case of any transfer described in subsection (a) of section 1041— such transfer shall not be treated as a disposition for purposes of this part, and the same tax treatment under this part with respect to the transferred property shall apply to the transferee as would have applied to the transferor.

(d) Attribution of stock ownership For purposes of this part, in applying the percentage limitations of sections 422(b)(6) and 423(b)(3)— the individual with respect to whom such limitation is being determined shall be considered as owning the stock owned, directly or indirectly, by or for his brothers and sisters (whether by the whole or half blood), spouse, ancestors, and lineal descendants; and stock owned, directly or indirectly, by or for a corporation, partnership, estate, or trust, shall be considered as being owned proportionately by or for its shareholders, partners, or beneficiaries.

(e) Parent corporation For purposes of this part, the term “parent corporation” means any corporation (other than the employer corporation) in an unbroken chain of corporations ending with the employer corporation if, at the time of the granting of the option, each of the corporations other than the employer corporation owns stock possessing 50 percent or more of the total combined voting power of all classes of stock in one of the other corporations in such chain.

(f) Subsidiary corporation For purposes of this part, the term “subsidiary corporation” means any corporation (other than the employer corporation) in an unbroken chain of corporations beginning with the employer corporation if, at the time of the granting of the option, each of the corporations other than the last corporation in the unbroken chain owns stock possessing 50 percent or more of the total combined voting power of all classes of stock in one of the other corporations in such chain.

(g) Special rule for applying subsections (e) and (f) In applying subsections (e) and (f) for purposes of sections 422(a)(2) and 423(a)(2), there shall be substituted for the term “employer corporation” wherever it appears in subsections (e) and (f) the term “grantor corporation” or the term “corporation issuing or assuming a stock option in a transaction to which section 424(a) applies”, as the case may be.

(h) Modification, extension, or renewal of option For purposes of this part, if the terms of any option to purchase stock are modified, extended, or renewed, such modification, extension, or renewal shall be considered as the granting of a new option. In the case of the transfer of stock pursuant to the exercise of an option to which section 423 applies and which has been so modified, extended, or renewed, the fair market value of such stock at the time of the granting of the option shall be considered as whichever of the following is the highest— the fair market value of such stock on the date of the original granting of the option, the fair market value of such stock on the date of the making of such modification, extension, or renewal, or the fair market value of such stock at the time of the making of any intervening modification, extension, or renewal. The term “modification” means any change in the terms of the option which gives the employee additional benefits under the option, but such term shall not include a change in the terms of the option— attributable to the issuance or assumption of an option under subsection (a); to permit the option to qualify under section 423(b)(9); or in the case of an option not immediately exercisable in full, to accelerate the time at which the option may be exercised.

(i) Stockholder approval For purposes of this part, if the grant of an option is subject to approval by stockholders, the date of grant of the option shall be determined as if the option had not been subject to such approval.

(j) Cross references For provisions requiring the reporting of certain acts with respect to a qualified stock option, an incentive stock option, options granted under employer stock purchase plans, or a restricted stock option, see section 6039.

[§ 425 Renumbered § 424]

§ 430 Minimum funding standards for single-employer defined benefit pension plans

(a) Minimum required contribution For purposes of this section and section 412(a)(2)(A), except as provided in subsection (f), the term “minimum required contribution” means, with respect to any plan year of a defined benefit plan which is not a multiemployer plan— in any case in which the value of plan assets of the plan (as reduced under subsection (f)(4)(B)) is less than the funding target of the plan for the plan year, the sum of— the target normal cost of the plan for the plan year, the shortfall amortization charge (if any) for the plan for the plan year determined under subsection (c), and the waiver amortization charge (if any) for the plan for the plan year as determined under subsection (e); in any case in which the value of plan assets of the plan (as reduced under subsection (f)(4)(B)) equals or exceeds the funding target of the plan for the plan year, the target normal cost of the plan for the plan year reduced (but not below zero) by such excess.

(b) Target normal cost For purposes of this section: Except as provided in subsection (i)(2) with respect to plans in at-risk status, the term “target normal cost” means, for any plan year, the excess of— the sum of— the present value of all benefits which are expected to accrue or to be earned under the plan during the plan year, plus the amount of plan-related expenses expected to be paid from plan assets during the plan year, over the amount of mandatory employee contributions expected to be made during the plan year. For purposes of this subsection, if any benefit attributable to services performed in a preceding plan year is increased by reason of any increase in compensation during the current plan year, the increase in such benefit shall be treated as having accrued during the current plan year.

(c) Shortfall amortization charge For purposes of this section, the shortfall amortization charge for a plan for any plan year is the aggregate total (not less than zero) of the shortfall amortization installments for such plan year with respect to any shortfall amortization base which has not been fully amortized under this subsection. For purposes of paragraph (1)— The shortfall amortization installments are the amounts necessary to amortize the shortfall amortization base of the plan for any plan year in level annual installments over the 7-plan-year period beginning with such plan year. The shortfall amortization installment for any plan year in the 7-plan-year period under subparagraph (A) with respect to any shortfall amortization base is the annual installment determined under subparagraph (A) for that year for that base. In determining any shortfall amortization installment under this paragraph, the plan sponsor shall use the segment rates determined under subparagraph (C) of subsection (h)(2), applied under rules similar to the rules of subparagraph (B) of subsection (h)(2). If a plan sponsor elects to apply this subparagraph with respect to the shortfall amortization base of a plan for any eligible plan year (in this subparagraph and paragraph (7) referred to as an “election year”), then, notwithstanding subparagraphs (A) and (B)— the shortfall amortization installments with respect to such base shall be determined under clause (ii) or (iii), whichever is specified in the election, and the shortfall amortization installment for any plan year in the 9-plan-year period described in clause (ii) or the 15-plan-year period described in clause (iii), respectively, with respect to such shortfall amortization base is the annual installment determined under the applicable clause for that year for that base. The shortfall amortization installments determined under this clause are— in the case of the first 2 plan years in the 9-plan-year period beginning with the election year, interest on the shortfall amortization base of the plan for the election year (determined using the effective interest rate for the plan for the election year), and in the case of the last 7 plan years in such 9-plan-year period, the amounts necessary to amortize the remaining balance of the shortfall amortization base of the plan for the election year in level annual installments over such last 7 plan years (using the segment rates under subparagraph (C) for the election year). The shortfall amortization installments determined under this subparagraph are the amounts necessary to amortize the shortfall amortization base of the plan for the election year in level annual installments over the 15-plan-year period beginning with the election year (using the segment rates under subparagraph (C) for the election year). The plan sponsor of a plan may elect to have this subparagraph apply to not more than 2 eligible plan years with respect to the plan, except that in the case of a plan described in section 106 of the Pension Protection Act of 2006, the plan sponsor may only elect to have this subparagraph apply to a plan year beginning in 2011. Such election shall specify whether the amortization schedule under clause (ii) or (iii) shall apply to an election year, except that if a plan sponsor elects to have this subparagraph apply to 2 eligible plan years, the plan sponsor must elect the same schedule for both years. Such election shall be made at such time, and in such form and manner, as shall be prescribed by the Secretary, and may be revoked only with the consent of the Secretary. The Secretary shall, before granting a revocation request, provide the Pension Benefit Guaranty Corporation an opportunity to comment on the conditions applicable to the treatment of any portion of the election year shortfall amortization base that remains unamortized as of the revocation date. For purposes of this subparagraph, the term “eligible plan year” means any plan year beginning in 2008, 2009, 2010, or 2011, except that a plan year shall only be treated as an eligible plan year if the due date under subsection (j)(1) for the payment of the minimum required contribution for such plan year occurs on or after the date of the enactment of this subparagraph. A plan sponsor of a plan who makes an election under clause (i) shall— give notice of the election to participants and beneficiaries of the plan, and inform the Pension Benefit Guaranty Corporation of such election in such form and manner as the Director of the Pension Benefit Guaranty Corporation may prescribe. For increases in required contributions in cases of excess compensation or extraordinary dividends or stock redemptions, see paragraph (7). For purposes of this section, the shortfall amortization base of a plan for a plan year is— the funding shortfall of such plan for such plan year, minus the present value (determined using the segment rates determined under subparagraph (C) of subsection (h)(2), applied under rules similar to the rules of subparagraph (B) of subsection (h)(2)) of the aggregate total of the shortfall amortization installments and waiver amortization installments which have been determined for such plan year and any succeeding plan year with respect to the shortfall amortization bases and waiver amortization bases of the plan for any plan year preceding such plan year. For purposes of this section, the funding shortfall of a plan for any plan year is the excess (if any) of— the funding target of the plan for the plan year, over the value of plan assets of the plan (as reduced under subsection (f)(4)(B)) for the plan year which are held by the plan on the valuation date. In any case in which the value of plan assets of the plan (as reduced under subsection (f)(4)(A)) is equal to or greater than the funding target of the plan for the plan year, the shortfall amortization base of the plan for such plan year shall be zero. In any case in which the funding shortfall of a plan for a plan year is zero, for purposes of determining the shortfall amortization charge for such plan year and succeeding plan years, the shortfall amortization bases for all preceding plan years (and all shortfall amortization installments determined with respect to such bases) shall be reduced to zero. If there is an installment acceleration amount with respect to a plan for any plan year in the restriction period with respect to an election year under paragraph (2)(D), then the shortfall amortization installment otherwise determined and payable under such paragraph for such plan year shall, subject to the limitation under subparagraph (B), be increased by such amount. Subject to rules prescribed by the Secretary, if a shortfall amortization installment with respect to any shortfall amortization base for an election year is required to be increased for any plan year under subparagraph (A)— such increase shall not result in the amount of such installment exceeding the present value of such installment and all succeeding installments with respect to such base (determined without regard to such increase but after application of clause (ii)), and subsequent shortfall amortization installments with respect to such base shall, in reverse order of the otherwise required installments, be reduced to the extent necessary to limit the present value of such subsequent shortfall amortization installments (after application of this paragraph) to the present value of the remaining unamortized shortfall amortization base. For purposes of this paragraph— The term “installment acceleration amount” means, with respect to any plan year in a restriction period with respect to an election year, the sum of— the aggregate amount of excess employee compensation determined under subparagraph (D) with respect to all employees for the plan year, plus the aggregate amount of extraordinary dividends and redemptions determined under subparagraph (E) for the plan year. The installment acceleration amount for any plan year shall not exceed the excess (if any) of— the sum of the shortfall amortization installments for the plan year and all preceding plan years in the amortization period elected under paragraph (2)(D) with respect to the shortfall amortization base with respect to an election year, determined without regard to paragraph (2)(D) and this paragraph, over the sum of the shortfall amortization installments for such plan year and all such preceding plan years, determined after application of paragraph (2)(D) (and in the case of any preceding plan year, after application of this paragraph). If the installment acceleration amount for any plan year (determined without regard to clause (ii)) exceeds the limitation under clause (ii), then, subject to subclause (II), such excess shall be treated as an installment acceleration amount with respect to the succeeding plan year. If any amount treated as an installment acceleration amount under subclause (I) or this subclause with respect any succeeding plan year, when added to other installment acceleration amounts (determined without regard to clause (ii)) with respect to the plan year, exceeds the limitation under clause (ii), the portion of such amount representing such excess shall be treated as an installment acceleration amount with respect to the next succeeding plan year. No amount shall be carried under subclause (I) or (II) to a plan year which begins after the first plan year following the last plan year in the restriction period (or after the second plan year following such last plan year in the case of an election year with respect to which 15-year amortization was elected under paragraph (2)(D)). For purposes of applying subclause (II), installment acceleration amounts for the plan year (determined without regard to any carryover under this clause) shall be applied first against the limitation under clause (ii) and then carryovers to such plan year shall be applied against such limitation on a first-in, first-out basis. For purposes of this paragraph— The term “excess employee compensation” means, with respect to any employee for any plan year, the excess (if any) of— the aggregate amount includible in income under this chapter for remuneration during the calendar year in which such plan year begins for services performed by the employee for the plan sponsor (whether or not performed during such calendar year), over 1,000, such increase shall be rounded to the next lowest multiple of $1,000. The amount determined under this subparagraph for any plan year is the excess (if any) of the sum of the dividends declared during the plan year by the plan sponsor plus the aggregate amount paid for the redemption of stock of the plan sponsor redeemed during the plan year over the greater of— the adjusted net income (within the meaning of section 4043 of the Employee Retirement Income Security Act of 1974) of the plan sponsor for the preceding plan year, determined without regard to any reduction by reason of interest, taxes, depreciation, or amortization, or in the case of a plan sponsor that determined and declared dividends in the same manner for at least 5 consecutive years immediately preceding such plan year, the aggregate amount of dividends determined and declared for such plan year using such manner. For purposes of clause (i), there shall only be taken into account dividends declared, and redemptions occurring, after February 28, 2010 . Dividends paid by one member of a controlled group (as defined in section 412(d)(3)) to another member of such group shall not be taken into account under clause (i). Redemptions that are made pursuant to a plan maintained with respect to employees, or that are made on account of the death, disability, or termination of employment of an employee or shareholder, shall not be taken into account under clause (i). Dividends and redemptions with respect to applicable preferred stock shall not be taken into account under clause (i) to the extent that dividends accrue with respect to such stock at a specified rate in all events and without regard to the plan sponsor’s income, and interest accrues on any unpaid dividends with respect to such stock. For purposes of subclause (I), the term “applicable preferred stock” means preferred stock which was issued before March 1, 2010 (or which was issued after such date and is held by an employee benefit plan subject to the provisions of title I of the Employee Retirement Income Security Act of 1974). For purposes of this paragraph— The term “plan sponsor” includes any member of the plan sponsor’s controlled group (as defined in section 412(d)(3)). The term “restriction period” means, with respect to any election year— except as provided in subclause (II), the 3-year period beginning with the election year (or, if later, the first plan year beginning after December 31, 2009 ), and if the plan sponsor elects 15-year amortization for the shortfall amortization base for the election year, the 5-year period beginning with the election year (or, if later, the first plan year beginning after December 31, 2009 ). If a plan sponsor makes elections under paragraph (2)(D) with respect to 2 or more plans, the Secretary shall provide rules for the application of this paragraph to such plans, including rules for the ratable allocation of any installment acceleration amount among such plans on the basis of each plan’s relative reduction in the plan’s shortfall amortization installment for the first plan year in the amortization period described in subparagraph (A) (determined without regard to this paragraph). The Secretary shall prescribe rules for the application of paragraph (2)(D) and this paragraph in any case where there is a merger or acquisition involving a plan sponsor making the election under paragraph (2)(D). With respect to plan years beginning after December 31, 2021 (or, at the election of the plan sponsor, plan years beginning after December 31, 2018 , December 31, 2019 , or December 31, 2020 )— the shortfall amortization bases for all plan years preceding the first plan year beginning after December 31, 2021 (or after whichever earlier date is elected pursuant to this paragraph), and all shortfall amortization installments determined with respect to such bases, shall be reduced to zero, and subparagraphs (A) and (B) of paragraph (2) shall each be applied by substituting “15-plan-year period” for “7-plan-year period”.

(d) Rules relating to funding target For purposes of this section— Except as provided in subsection (i)(1) with respect to plans in at-risk status, the funding target of a plan for a plan year is the present value of all benefits accrued or earned under the plan as of the beginning of the plan year. The “funding target attainment percentage” of a plan for a plan year is the ratio (expressed as a percentage) which— the value of plan assets for the plan year (as reduced under subsection (f)(4)(B)), bears to the funding target of the plan for the plan year (determined without regard to subsection (i)(1)).

(e) Waiver amortization charge The waiver amortization charge (if any) for a plan for any plan year is the aggregate total of the waiver amortization installments for such plan year with respect to the waiver amortization bases for each of the 5 preceding plan years. For purposes of paragraph (1)— The waiver amortization installments are the amounts necessary to amortize the waiver amortization base of the plan for any plan year in level annual installments over a period of 5 plan years beginning with the succeeding plan year. The waiver amortization installment for any plan year in the 5-year period under subparagraph (A) with respect to any waiver amortization base is the annual installment determined under subparagraph (A) for that year for that base. In determining any waiver amortization installment under this subsection, the plan sponsor shall use the segment rates determined under subparagraph (C) of subsection (h)(2), applied under rules similar to the rules of subparagraph (B) of subsection (h)(2). The waiver amortization base of a plan for a plan year is the amount of the waived funding deficiency (if any) for such plan year under section 412(c). In any case in which the funding shortfall of a plan for a plan year is zero, for purposes of determining the waiver amortization charge for such plan year and succeeding plan years, the waiver amortization bases for all preceding plan years (and all waiver amortization installments determined with respect to such bases) shall be reduced to zero.

(f) Reduction of minimum required contribution by prefunding balance and funding standard carryover balance The plan sponsor of a defined benefit plan which is not a multiemployer plan may elect to maintain a prefunding balance. In the case of a defined benefit plan (other than a multiemployer plan) described in clause (ii), the plan sponsor may elect to maintain a funding standard carryover balance, until such balance is reduced to zero. A plan is described in this clause if the plan— was in effect for a plan year beginning in 2007, and had a positive balance in the funding standard account under section 412(b) as in effect for such plan year and determined as of the end of such plan year. A prefunding balance and a funding standard carryover balance maintained pursuant to this paragraph— shall be available for crediting against the minimum required contribution, pursuant to an election under paragraph (3), shall be applied as a reduction in the amount treated as the value of plan assets for purposes of this section, to the extent provided in paragraph (4), and may be reduced at any time, pursuant to an election under paragraph (5). Except as provided in subparagraphs (B) and (C), in the case of any plan year in which the plan sponsor elects to credit against the minimum required contribution for the current plan year all or a portion of the prefunding balance or the funding standard carryover balance for the current plan year (not in excess of such minimum required contribution), the minimum required contribution for the plan year shall be reduced as of the first day of the plan year by the amount so credited by the plan sponsor. For purposes of the preceding sentence, the minimum required contribution shall be determined after taking into account any waiver under section 412(c). To the extent that any plan has a funding standard carryover balance greater than zero, no amount of the prefunding balance of such plan may be credited under this paragraph in reducing the minimum required contribution. The preceding provisions of this paragraph shall not apply for any plan year if the ratio (expressed as a percentage) which— the value of plan assets for the preceding plan year (as reduced under paragraph (4)(C)), bears to the funding target of the plan for the preceding plan year (determined without regard to subsection (i)(1)), is less than 80 percent. In the case of plan years beginning in 2008, the ratio under this subparagraph may be determined using such methods of estimation as the Secretary may prescribe. For purposes of applying subparagraph (C) for plan years beginning after August 31, 2009 , and before September 1, 2011 , the ratio determined under such subparagraph for the preceding plan year of a plan shall be the greater of— such ratio, as determined without regard to this subsection, or the ratio for such plan for the plan year beginning after August 31, 2007 and before September 1, 2008 , as determined under rules prescribed by the Secretary. In the case of a plan for which the valuation date is not the first day of the plan year— clause (i) shall apply to plan years beginning after December 31, 2007 , and before January 1, 2010 , and clause (i)(II) shall apply based on the last plan year beginning before September 1, 2007 , as determined under rules prescribed by the Secretary. This subparagraph shall not apply to any plan unless such plan is maintained exclusively by one or more organizations described in section 501(c)(3). In the case of any plan maintaining a prefunding balance or a funding standard carryover balance pursuant to this subsection, the amount treated as the value of plan assets shall be deemed to be such amount, reduced as provided in the following subparagraphs: For purposes of subsection (c)(5), the value of plan assets is deemed to be such amount, reduced by the amount of the prefunding balance, but only if an election under paragraph (3) applying any portion of the prefunding balance in reducing the minimum required contribution is in effect for the plan year. For purposes of subsections (a), (c)(4)(B), and (d)(2)(A), the value of plan assets is deemed to be such amount, reduced by the amount of the prefunding balance and the funding standard carryover balance. For purposes of subsection (c)(4)(B), the value of plan assets shall not be deemed to be reduced for a plan year by the amount of the specified balance if, with respect to such balance, there is in effect for a plan year a binding written agreement with the Pension Benefit Guaranty Corporation which provides that such balance is not available to reduce the minimum required contribution for the plan year. For purposes of the preceding sentence, the term “specified balance” means the prefunding balance or the funding standard carryover balance, as the case may be. For purposes of paragraph (3)(C)(i) of this subsection, the value of plan assets is deemed to be such amount, reduced by the amount of the prefunding balance. The plan sponsor may elect to reduce by any amount the balance of the prefunding balance and the funding standard carryover balance for any plan year (but not below zero). Such reduction shall be effective prior to any determination of the value of plan assets for such plan year under this section and application of the balance in reducing the minimum required contribution for such plan for such plan year pursuant to an election under paragraph (2). To the extent that any plan has a funding standard carryover balance greater than zero, no election may be made under subparagraph (A) with respect to the prefunding balance. A prefunding balance maintained by a plan shall consist of a beginning balance of zero, increased and decreased to the extent provided in subparagraphs (B) and (C), and adjusted further as provided in paragraph (8). As of the first day of each plan year beginning after 2008, the prefunding balance of a plan shall be increased by the amount elected by the plan sponsor for the plan year. Such amount shall not exceed the excess (if any) of— the aggregate total of employer contributions to the plan for the preceding plan year, over— the minimum required contribution for such preceding plan year. Any excess contributions under clause (i) shall be properly adjusted for interest accruing for the periods between the first day of the current plan year and the dates on which the excess contributions were made, determined by using the effective interest rate for the preceding plan year and by treating contributions as being first used to satisfy the minimum required contribution. The excess described in clause (i) with respect to any preceding plan year shall be reduced (but not below zero) by the amount of contributions an employer would be required to make under subsection (b), (c), or (e) of section 436 to avoid a benefit limitation which would otherwise be imposed under such paragraph for the preceding plan year. Any contribution which may be taken into account in satisfying the requirements of more than 1 of such paragraphs shall be taken into account only once for purposes of this clause. The prefunding balance of a plan shall be decreased (but not below zero) by— as of the first day of each plan year after 2008, the amount of such balance credited under paragraph (2) (if any) in reducing the minimum required contribution of the plan for the preceding plan year, and as of the time specified in paragraph (5)(A), any reduction in such balance elected under paragraph (5). A funding standard carryover balance maintained by a plan shall consist of a beginning balance determined under subparagraph (B), decreased to the extent provided in subparagraph (C), and adjusted further as provided in paragraph (8). The beginning balance of the funding standard carryover balance shall be the positive balance described in paragraph (1)(B)(ii)(II). The funding standard carryover balance of a plan shall be decreased (but not below zero) by— as of the first day of each plan year after 2008, the amount of such balance credited under paragraph (2) (if any) in reducing the minimum required contribution of the plan for the preceding plan year, and as of the time specified in paragraph (5)(A), any reduction in such balance elected under paragraph (5). In determining the prefunding balance or the funding standard carryover balance of a plan as of the first day of the plan year, the plan sponsor shall, in accordance with regulations prescribed by the Secretary, adjust such balance to reflect the rate of return on plan assets for the preceding plan year. Notwithstanding subsection (g)(3), such rate of return shall be determined on the basis of fair market value and shall properly take into account, in accordance with such regulations, all contributions, distributions, and other plan payments made during such period. Elections under this subsection shall be made at such times, and in such form and manner, as shall be prescribed in regulations of the Secretary.

(g) Valuation of plan assets and liabilities Except as otherwise provided under this subsection, all determinations under this section for a plan year shall be made as of the valuation date of the plan for such plan year. For purposes of this section— Except as provided in subparagraph (B), the valuation date of a plan for any plan year shall be the first day of the plan year. If, on each day during the preceding plan year, a plan had 100 or fewer participants, the plan may designate any day during the plan year as its valuation date for such plan year and succeeding plan years. For purposes of this subparagraph, all defined benefit plans (other than multiemployer plans) maintained by the same employer (or any member of such employer’s controlled group) shall be treated as 1 plan, but only participants with respect to such employer or member shall be taken into account. For purposes of this paragraph— In the case of the first plan year of any plan, subparagraph (B) shall apply to such plan by taking into account the number of participants that the plan is reasonably expected to have on days during such first plan year. Any reference in subparagraph (B) to an employer shall include a reference to any predecessor of such employer. For purposes of this section— Except as provided in subparagraph (B), the value of plan assets shall be the fair market value of the assets. A plan may determine the value of plan assets on the basis of the averaging of fair market values, but only if such method— is permitted under regulations prescribed by the Secretary, does not provide for averaging of such values over more than the period beginning on the last day of the 25th month preceding the month in which the valuation date occurs and ending on the valuation date (or a similar period in the case of a valuation date which is not the 1st day of a month), and does not result in a determination of the value of plan assets which, at any time, is lower than 90 percent or greater than 110 percent of the fair market value of such assets at such time. Any such averaging shall be adjusted for contributions, distributions, and expected earnings (as determined by the plan’s actuary on the basis of an assumed earnings rate specified by the actuary but not in excess of the third segment rate applicable under subsection (h)(2)(C)(iii)), as specified by the Secretary. For purposes of determining the value of assets under paragraph (3)— If— an employer makes any contribution to the plan after the valuation date for the plan year in which the contribution is made, and the contribution is for a preceding plan year, the contribution shall be taken into account as an asset of the plan as of the valuation date, except that in the case of any plan year beginning after 2008, only the present value (determined as of the valuation date) of such contribution may be taken into account. For purposes of the preceding sentence, present value shall be determined using the effective interest rate for the preceding plan year to which the contribution is properly allocable. If any contributions for any plan year are made to or under the plan during the plan year but before the valuation date for the plan year, the assets of the plan as of the valuation date shall not include— such contributions, and interest on such contributions for the period between the date of the contributions and the valuation date, determined by using the effective interest rate for the plan year.

(h) Actuarial assumptions and methods Subject to this subsection, the determination of any present value or other computation under this section shall be made on the basis of actuarial assumptions and methods— each of which is reasonable (taking into account the experience of the plan and reasonable expectations), and which, in combination, offer the actuary’s best estimate of anticipated experience under the plan. For purposes of this section, the term “effective interest rate” means, with respect to any plan for any plan year, the single rate of interest which, if used to determine the present value of the plan’s accrued or earned benefits referred to in subsection (d)(1), would result in an amount equal to the funding target of the plan for such plan year. For purposes of determining the funding target and target normal cost of a plan for any plan year, the interest rate used in determining the present value of the benefits of the plan shall be— in the case of benefits reasonably determined to be payable during the 5-year period beginning on the valuation date for the plan year, the first segment rate with respect to the applicable month, in the case of benefits reasonably determined to be payable during the 15-year period beginning at the end of the period described in clause (i), the second segment rate with respect to the applicable month, and in the case of benefits reasonably determined to be payable after the period described in clause (ii), the third segment rate with respect to the applicable month. For purposes of this paragraph— The term “first segment rate” means, with respect to any month, the single rate of interest which shall be determined by the Secretary for such month on the basis of the corporate bond yield curve for such month, taking into account only that portion of such yield curve which is based on bonds maturing during the 5-year period commencing with such month. The term “second segment rate” means, with respect to any month, the single rate of interest which shall be determined by the Secretary for such month on the basis of the corporate bond yield curve for such month, taking into account only that portion of such yield curve which is based on bonds maturing during the 15-year period beginning at the end of the period described in clause (i). The term “third segment rate” means, with respect to any month, the single rate of interest which shall be determined by the Secretary for such month on the basis of the corporate bond yield curve for such month, taking into account only that portion of such yield curve which is based on bonds maturing during periods beginning after the period described in clause (ii). If a segment rate described in clause (i), (ii), or (iii) with respect to any applicable month (determined without regard to this clause) is less than the applicable minimum percentage, or more than the applicable maximum percentage, of the average of the segment rates described in such clause for years in the 25-year period ending with September 30 of the calendar year preceding the calendar year in which the plan year begins, then the segment rate described in such clause with respect to the applicable month shall be equal to the applicable minimum percentage or the applicable maximum percentage of such average, whichever is closest. The Secretary shall determine such average on an annual basis and may prescribe equivalent rates for years in any such 25-year period for which the rates described in any such clause are not available. Notwithstanding anything in this subclause, if the average of the first, second, or third segment rate for any 25-year period is less than 5 percent, such average shall be deemed to be 5 percent. For purposes of subclause (I), the applicable minimum percentage and the applicable maximum percentage for a plan year beginning in a calendar year shall be determined in accordance with the following table: If the calendar year is: The applicable minimum percentage is: The applicable maximum percentage is: Any year in the period starting in 2012 and ending in 2019 90% 110% Any year in the period starting in 2020 and ending in 2030 95% 105% 2031 90% 110% 2032 85% 115% 2033 80% 120% 2034 75% 125% After 2034 70% 130%. For purposes of this paragraph— The term “corporate bond yield curve” means, with respect to any month, a yield curve which is prescribed by the Secretary for such month and which reflects the average, for the 24-month period ending with the month preceding such month, of monthly yields on investment grade corporate bonds with varying maturities and that are in the top 3 quality levels available. Solely for purposes of determining the minimum required contribution under this section, the plan sponsor may, in lieu of the segment rates determined under subparagraph (C), elect to use interest rates under the corporate bond yield curve. For purposes of the preceding sentence such curve shall be determined without regard to the 24-month averaging described in clause (i). Such election, once made, may be revoked only with the consent of the Secretary. For purposes of this paragraph, the term “applicable month” means, with respect to any plan for any plan year, the month which includes the valuation date of such plan for such plan year or, at the election of the plan sponsor, any of the 4 months which precede such month. Any election made under this subparagraph shall apply to the plan year for which the election is made and all succeeding plan years, unless the election is revoked with the consent of the Secretary. The Secretary shall publish for each month the corporate bond yield curve (and the corporate bond yield curve reflecting the modification described in section 417(e)(3)(D) for such month) and each of the rates determined under subparagraph (C) and the averages determined under subparagraph (C)(iv) for such month. The Secretary shall also publish a description of the methodology used to determine such yield curve and such rates which is sufficiently detailed to enable plans to make reasonable projections regarding the yield curve and such rates for future months based on the plan’s projection of future interest rates. Except as provided in subparagraph (C) or (D), the Secretary shall by regulation prescribe mortality tables to be used in determining any present value or making any computation under this section. Such tables shall be based on the actual experience of pension plans and projected trends in such experience. In prescribing such tables, the Secretary shall take into account results of available independent studies of mortality of individuals covered by pension plans. The Secretary shall (at least every 10 years) make revisions in any table in effect under subparagraph (A) to reflect the actual experience of pension plans and projected trends in such experience. Upon request by the plan sponsor and approval by the Secretary, a mortality table which meets the requirements of clause (iii) shall be used in determining any present value or making any computation under this section during the period of consecutive plan years (not to exceed 10) specified in the request. Notwithstanding clause (i), a mortality table described in clause (i) shall cease to be in effect as of the earliest of— the date on which there is a significant change in the participants in the plan by reason of a plan spinoff or merger or otherwise, or the date on which the plan actuary determines that such table does not meet the requirements of clause (iii). A mortality table meets the requirements of this clause if— there is a sufficient number of plan participants, and the pension plans have been maintained for a sufficient period of time, to have credible information necessary for purposes of subclause (II), and such table reflects the actual experience of the pension plans maintained by the sponsor and projected trends in general mortality experience. Except as provided by the Secretary, a plan sponsor may not use a mortality table under this subparagraph for any plan maintained by the plan sponsor unless— a separate mortality table is established and used under this subparagraph for each other plan maintained by the plan sponsor and if the plan sponsor is a member of a controlled group, each member of the controlled group, and the requirements of clause (iii) are met separately with respect to the table so established for each such plan, determined by only taking into account the participants of such plan, the time such plan has been in existence, and the actual experience of such plan. The plan sponsor shall submit a mortality table to the Secretary for approval under this subparagraph at least 7 months before the 1st day of the period described in clause (i). Any mortality table submitted to the Secretary for approval under this subparagraph shall be treated as in effect as of the 1st day of the period described in clause (i) unless the Secretary, during the 180-day period beginning on the date of such submission, disapproves of such table and provides the reasons that such table fails to meet the requirements of clause (iii). The 180-day period shall be extended upon mutual agreement of the Secretary and the plan sponsor. Notwithstanding subparagraph (A)— The Secretary shall establish mortality tables which may be used (in lieu of the tables under subparagraph (A)) under this subsection for individuals who are entitled to benefits under the plan on account of disability. The Secretary shall establish separate tables for individuals whose disabilities occur in plan years beginning before January 1, 1995 , and for individuals whose disabilities occur in plan years beginning on or after such date. In the case of disabilities occurring in plan years beginning after December 31, 1994 , the tables under clause (i) shall apply only with respect to individuals described in such subclause who are disabled within the meaning of title II of the Social Security Act and the regulations thereunder. The Secretary shall (at least every 10 years) make revisions in any table in effect under clause (i) to reflect the actual experience of pension plans and projected trends in such experience. For purposes of determining any present value or making any computation under this section, there shall be taken into account— the probability that future benefit payments under the plan will be made in the form of optional forms of benefits provided under the plan (including lump sum distributions, determined on the basis of the plan’s experience and other related assumptions), and any difference in the present value of such future benefit payments resulting from the use of actuarial assumptions, in determining benefit payments in any such optional form of benefits, which are different from those specified in this subsection. No actuarial assumption used to determine the funding target for a plan to which this paragraph applies may be changed without the approval of the Secretary. This paragraph shall apply to a plan only if— the plan is a defined benefit plan (other than a multiemployer plan) to which title IV of the Employee Retirement Income Security Act of 1974 applies, the aggregate unfunded vested benefits as of the close of the preceding plan year (as determined under section 4006(a)(3)(E)(iii) of the Employee Retirement Income Security Act of 1974) of such plan and all other plans maintained by the contributing sponsors (as defined in section 4001(a)(13) of such Act) and members of such sponsors’ controlled groups (as defined in section 4001(a)(14) of such Act) which are covered by title IV (disregarding plans with no unfunded vested benefits) exceed $50, 000, 000, an d t h ec han g e ina ss u m pt i o n s (d e t er min e d a f t er t akin g in t o a cco u n t an yc han g es inin t eres t r a t e an d m or t a l i t y t ab l e) res u lt s ina d ecre a se in t h e f u n d in g s h or t f a ll o f t h e pl an f or t h ec u rre n tpl an ye a r t ha t e x cee d s$ 50,000,000, or that exceeds $5,000,000 and that is 5 percent or more of the funding target of the plan before such change.

(i) Special rules for at-risk plans In the case of a plan which is in at-risk status for a plan year, the funding target of the plan for the plan year shall be equal to the sum of— the present value of all benefits accrued or earned under the plan as of the beginning of the plan year, as determined by using the additional actuarial assumptions described in subparagraph (B), and in the case of a plan which also has been in at-risk status for at least 2 of the 4 preceding plan years, a loading factor determined under subparagraph (C). The actuarial assumptions described in this subparagraph are as follows: All employees who are not otherwise assumed to retire as of the valuation date but who will be eligible to elect benefits during the plan year and the 10 succeeding plan years shall be assumed to retire at the earliest retirement date under the plan but not before the end of the plan year for which the at-risk funding target and at-risk target normal cost are being determined. All employees shall be assumed to elect the retirement benefit available under the plan at the assumed retirement age (determined after application of clause (i)) which would result in the highest present value of benefits. The loading factor applied with respect to a plan under this paragraph for any plan year is the sum of— $700, times the number of participants in the plan, plus 4 percent of the funding target (determined without regard to this paragraph) of the plan for the plan year. In the case of a plan which is in at-risk status for a plan year, the target normal cost of the plan for such plan year shall be equal to the sum of— the excess of— the sum of— the present value of all benefits which are expected to accrue or to be earned under the plan during the plan year, determined using the additional actuarial assumptions described in paragraph (1)(B), plus the amount of plan-related expenses expected to be paid from plan assets during the plan year, over the amount of mandatory employee contributions expected to be made during the plan year, plus in the case of a plan which also has been in at-risk status for at least 2 of the 4 preceding plan years, a loading factor equal to 4 percent of the amount determined under subsection (b)(1)(A)(i) with respect to the plan for the plan year. In no event shall— the at-risk funding target be less than the funding target, as determined without regard to this subsection, or the at-risk target normal cost be less than the target normal cost, as determined without regard to this subsection. For purposes of this subsection— A plan is in at-risk status for a plan year if— the funding target attainment percentage for the preceding plan year (determined under this section without regard to this subsection) is less than 80 percent, and the funding target attainment percentage for the preceding plan year (determined under this section by using the additional actuarial assumptions described in paragraph (1)(B) in computing the funding target) is less than 70 percent. In the case of plan years beginning in 2008, 2009, and 2010, subparagraph (A)(i) shall be applied by substituting the following percentages for “80 percent”: 65 percent in the case of 2008. 70 percent in the case of 2009. 75 percent in the case of 2010. In the case of plan years beginning in 2008, the funding target attainment percentage for the preceding plan year under subparagraph (A) may be determined using such methods of estimation as the Secretary may provide. For purposes of subparagraph (A)(ii), the additional actuarial assumptions described in paragraph (1)(B) shall not be taken into account with respect to any employee if— such employee is employed by a specified automobile manufacturer, such employee is offered a substantial amount of additional cash compensation, substantially enhanced retirement benefits under the plan, or materially reduced employment duties on the condition that by a specified date (not later than December 31, 2010 ) the employee retires (as defined under the terms of the plan), such offer is made during 2006 and pursuant to a bona fide retirement incentive program and requires, by the terms of the offer, that such offer can be accepted not later than a specified date (not later than December 31, 2006 ), and such employee does not elect to accept such offer before the specified date on which the offer expires. For purposes of clause (i), the term “specified automobile manufacturer” means— any manufacturer of automobiles, and any manufacturer of automobile parts which supplies such parts directly to a manufacturer of automobiles and which, after a transaction or series of transactions ending in 1999, ceased to be a member of a controlled group which included such manufacturer of automobiles. In any case in which a plan which is in at-risk status for a plan year has been in such status for a consecutive period of fewer than 5 plan years, the applicable amount of the funding target and of the target normal cost shall be, in lieu of the amount determined without regard to this paragraph, the sum of— the amount determined under this section without regard to this subsection, plus the transition percentage for such plan year of the excess of the amount determined under this subsection (without regard to this paragraph) over the amount determined under this section without regard to this subsection. For purposes of subparagraph (A), the transition percentage shall be determined in accordance with the following table: If the consecutive number of years (including the plan year) the plan is in at-risk status is— The transition percentage is— 1 20 2 40 3 60 4 80. For purposes of this paragraph, plan years beginning before 2008 shall not be taken into account. If, on each day during the preceding plan year, a plan had 500 or fewer participants, the plan shall not be treated as in at-risk status for the plan year. For purposes of this paragraph, all defined benefit plans (other than multiemployer plans) maintained by the same employer (or any member of such employer’s controlled group) shall be treated as 1 plan, but only participants with respect to such employer or member shall be taken into account and the rules of subsection (g)(2)(C) shall apply.

(j) Payment of minimum required contributions For purposes of this section, the due date for any payment of any minimum required contribution for any plan year shall be 8½ months after the close of the plan year. Any payment required under paragraph (1) for a plan year that is made on a date other than the valuation date for such plan year shall be adjusted for interest accruing for the period between the valuation date and the payment date, at the effective rate of interest for the plan for such plan year. In any case in which the plan has a funding shortfall for the preceding plan year, the employer maintaining the plan shall make the required installments under this paragraph and if the employer fails to pay the full amount of a required installment for the plan year, then the amount of interest charged under paragraph (2) on the underpayment for the period of underpayment shall be determined by using a rate of interest equal to the rate otherwise used under paragraph (2) plus 5 percentage points. In the case of plan years beginning in 2008, the funding shortfall for the preceding plan year may be determined using such methods of estimation as the Secretary may provide. For purposes of subparagraph (A)— The amount of the underpayment shall be the excess of— the required installment, over the amount (if any) of the installment contributed to or under the plan on or before the due date for the installment. The period for which any interest is charged under this paragraph with respect to any portion of the underpayment shall run from the due date for the installment to the date on which such portion is contributed to or under the plan. For purposes of clause (i)(II), contributions shall be credited against unpaid required installments in the order in which such installments are required to be paid. For purposes of this paragraph— There shall be 4 required installments for each plan year. The due dates for required installments are set forth in the following table: In the case of the following required installment: The due date is: 1st April 15 2nd July 15 3rd October 15 4th January 15 of the following year. For purposes of this paragraph— The amount of any required installment shall be 25 percent of the required annual payment. For purposes of clause (i), the term “required annual payment” means the lesser of— 90 percent of the minimum required contribution (determined without regard to this subsection) to the plan for the plan year under this section, or 100 percent of the minimum required contribution (determined without regard to this subsection or to any waiver under section 412(c)) to the plan for the preceding plan year. Subclause (II) shall not apply if the preceding plan year referred to in such clause was not a year of 12 months. In applying this paragraph to a plan year beginning on any date other than January 1, there shall be substituted for the months specified in this paragraph, the months which correspond thereto. This subparagraph shall be applied to plan years of less than 12 months in accordance with regulations prescribed by the Secretary. The Secretary shall prescribe regulations for the application of this paragraph in the case of a plan which has a valuation date other than the first day of the plan year. Subparagraph (D) shall be applied without regard to any increase under subsection (c)(7). A plan to which this paragraph applies shall be treated as failing to pay the full amount of any required installment under paragraph (3) to the extent that the value of the liquid assets paid in such installment is less than the liquidity shortfall (whether or not such liquidity shortfall exceeds the amount of such installment required to be paid but for this paragraph). This paragraph shall apply to a plan (other than a plan described in subsection (g)(2)(B)) which— is required to pay installments under paragraph (3) for a plan year, and has a liquidity shortfall for any quarter during such plan year. For purposes of paragraph (3)(A), any portion of an installment that is treated as not paid under subparagraph (A) shall continue to be treated as unpaid until the close of the quarter in which the due date for such installment occurs. If the amount of any required installment is increased by reason of subparagraph (A), in no event shall such increase exceed the amount which, when added to prior installments for the plan year, is necessary to increase the funding target attainment percentage of the plan for the plan year (taking into account the expected increase in funding target due to benefits accruing or earned during the plan year) to 100 percent. For purposes of this paragraph— The term “liquidity shortfall” means, with respect to any required installment, an amount equal to the excess (as of the last day of the quarter for which such installment is made) of— the base amount with respect to such quarter, over the value (as of such last day) of the plan’s liquid assets. The term “base amount” means, with respect to any quarter, an amount equal to 3 times the sum of the adjusted disbursements from the plan for the 12 months ending on the last day of such quarter. If the amount determined under subclause (I) exceeds an amount equal to 2 times the sum of the adjusted disbursements from the plan for the 36 months ending on the last day of the quarter and an enrolled actuary certifies to the satisfaction of the Secretary that such excess is the result of nonrecurring circumstances, the base amount with respect to such quarter shall be determined without regard to amounts related to those nonrecurring circumstances. The term “disbursements from the plan” means all disbursements from the trust, including purchases of annuities, payments of single sums and other benefits, and administrative expenses. The term “adjusted disbursements” means disbursements from the plan reduced by the product of— the plan’s funding target attainment percentage for the plan year, and the sum of the purchases of annuities, payments of single sums, and such other disbursements as the Secretary shall provide in regulations. The term “liquid assets” means cash, marketable securities, and such other assets as specified by the Secretary in regulations. The term “quarter” means, with respect to any required installment, the 3-month period preceding the month in which the due date for such installment occurs. The Secretary may prescribe such regulations as are necessary to carry out this paragraph.

(k) Imposition of lien where failure to make required contributions In the case of a plan to which this subsection applies (as provided under paragraph (2)), if— any person fails to make a contribution payment required by section 412 and this section before the due date for such payment, and the unpaid balance of such payment (including interest), when added to the aggregate unpaid balance of all preceding such payments for which payment was not made before the due date (including interest), exceeds $1,000,000, then there shall be a lien in favor of the plan in the amount determined under paragraph (3) upon all property and rights to property, whether real or personal, belonging to such person and any other person who is a member of the same controlled group of which such person is a member. This subsection shall apply to a defined benefit plan (other than a multiemployer plan) covered under section 4021 of the Employee Retirement Income Security Act of 1974 for any plan year for which the funding target attainment percentage (as defined in subsection (d)(2)) of such plan is less than 100 percent. For purposes of paragraph (1), the amount of the lien shall be equal to the aggregate unpaid balance of contribution payments required under this section and section 412 for which payment has not been made before the due date. A person committing a failure described in paragraph (1) shall notify the Pension Benefit Guaranty Corporation of such failure within 10 days of the due date for the required contribution payment. The lien imposed by paragraph (1) shall arise on the due date for the required contribution payment and shall continue until the last day of the first plan year in which the plan ceases to be described in paragraph (1)(B). Such lien shall continue to run without regard to whether such plan continues to be described in paragraph (2) during the period referred to in the preceding sentence. Any amount with respect to which a lien is imposed under paragraph (1) shall be treated as taxes due and owing the United States and rules similar to the rules of subsections (c), (d), and (e) of section 4068 of the Employee Retirement Income Security Act of 1974 shall apply with respect to a lien imposed by subsection (a) and the amount with respect to such lien. Any lien created under paragraph (1) may be perfected and enforced only by the Pension Benefit Guaranty Corporation, or at the direction of the Pension Benefit Guaranty Corporation, by the contributing sponsor (or any member of the controlled group of the contributing sponsor). For purposes of this subsection— The term “contribution payment” means, in connection with a plan, a contribution payment required to be made to the plan, including any required installment under paragraphs (3) and (4) of subsection (j). The terms “due date” and “required installment” have the meanings given such terms by subsection (j). The term “controlled group” means any group treated as a single employer under subsections (b), (c), (m), and ( o ) of section 414.

(l) Qualified transfers to health benefit accounts In the case of a qualified transfer (as defined in section 420), any assets so transferred shall not, for purposes of this section, be treated as assets in the plan.

(m) Special rules for community newspaper plans An eligible newspaper plan sponsor of a plan under which no participant has had the participant’s accrued benefit increased (whether because of service or compensation) after April 2, 2019 , may elect to have the alternative standards described in paragraph (4) apply to such plan. The term “eligible newspaper plan sponsor” means the plan sponsor of— any community newspaper plan, or any other plan sponsored, as of April 2, 2019 , by a member of the same controlled group of a plan sponsor of a community newspaper plan if such member is in the trade or business of publishing 1 or more newspapers. An election under paragraph (1) shall be made at such time and in such manner as prescribed by the Secretary. Such election, once made with respect to a plan year, shall apply to all subsequent plan years unless revoked with the consent of the Secretary. The alternative standards described in this paragraph are the following: Notwithstanding subsection (h)(2)(C) and except as provided in clause (ii), the first, second, and third segment rates in effect for any month for purposes of this section shall be 8 percent. Notwithstanding subsection (h)(2), for purposes of determining the funding target and normal cost of a plan for any plan year, the present value of any benefits accrued or earned under the plan for a plan year with respect to which an election under paragraph (1) is in effect shall be determined on the basis of the United States Treasury obligation yield curve for the day that is the valuation date of such plan for such plan year. For purposes of this subsection, the term “United States Treasury obligation yield curve” means, with respect to any day, a yield curve which shall be prescribed by the Secretary for such day on interest-bearing obligations of the United States. The shortfall amortization bases determined under subsection (c)(3) for all plan years preceding the first plan year to which the election under paragraph (1) applies (and all shortfall amortization installments determined with respect to such bases) shall be reduced to zero under rules similar to the rules of subsection (c)(6). Notwithstanding subsection (c)(3), the shortfall amortization base for the first plan year to which the election under paragraph (1) applies shall be the funding shortfall of such plan for such plan year (determined using the interest rates as modified under subparagraph (A)). Subparagraphs (A) and (B) of subsection (c)(2) shall be applied by substituting “30-plan-year” for “7-plan-year” each place it appears. The election under subparagraph (D) of subsection (c)(2) shall not apply to any plan year to which the election under paragraph (1) applies. Subsection (i) shall not apply. For purposes of this subsection— The term “community newspaper plan” means any plan to which this section applies maintained as of December 31, 2018 , by an employer which— maintains the plan on behalf of participants and beneficiaries with respect to employment in the trade or business of publishing 1 or more newspapers which were published by the employer at any time during the 11-year period ending on December 20, 2019 , is not a company the stock of which is publicly traded (on a stock exchange or in an over-the-counter market), and is not controlled, directly or indirectly, by such a company, or is controlled, directly or indirectly, during the entire 30-year period ending on December 20, 2019 , by individuals who are members of the same family, and does not publish or distribute a daily newspaper that is carrier-distributed in printed form in more than 5 States, and is controlled, directly or indirectly— by 1 or more persons residing primarily in a State in which the community newspaper has been published on newsprint or carrier-distributed, during the entire 30-year period ending on December 20, 2019 , by individuals who are members of the same family, by 1 or more trusts, the sole trustees of which are persons described in subclause (I) or (II), or by a combination of persons described in subclause (I), (II), or (III). The term “newspaper” does not include any newspaper (determined without regard to this subparagraph) to which any of the following apply: Is not in general circulation. Is published (on newsprint or electronically) less frequently than 3 times per week. Has not ever been regularly published on newsprint. Does not have a bona fide list of paid subscribers. A person shall be treated as controlled by another person if such other person possesses, directly or indirectly, the power to direct or cause the direction and management of such person (including the power to elect a majority of the members of the board of directors of such person) through the ownership of voting securities. For purposes of this subsection, the term “controlled group” means all persons treated as a single employer under subsection (b), (c), (m), or ( o ) of section 414 as of December 20, 2019 .

§ 431 Minimum funding standards for multiemployer plans

(a) In general For purposes of section 412, the accumulated funding deficiency of a multiemployer plan for any plan year is the amount, determined as of the end of the plan year, equal to the excess (if any) of the total charges to the funding standard account of the plan for all plan years (beginning with the first plan year for which this part applies to the plan) over the total credits to such account for such years.

(b) Funding standard account Each multiemployer plan to which this part applies shall establish and maintain a funding standard account. Such account shall be credited and charged solely as provided in this section. For a plan year, the funding standard account shall be charged with the sum of— the normal cost of the plan for the plan year, the amounts necessary to amortize in equal annual installments (until fully amortized)— in the case of a plan which comes into existence on or after January 1, 2008 , the unfunded past service liability under the plan on the first day of the first plan year to which this section applies, over a period of 15 plan years, separately, with respect to each plan year, the net increase (if any) in unfunded past service liability under the plan arising from plan amendments adopted in such year, over a period of 15 plan years, separately, with respect to each plan year, the net experience loss (if any) under the plan, over a period of 15 plan years, and separately, with respect to each plan year, the net loss (if any) resulting from changes in actuarial assumptions used under the plan, over a period of 15 plan years, the amount necessary to amortize each waived funding deficiency (within the meaning of section 412(c)(3)) for each prior plan year in equal annual installments (until fully amortized) over a period of 15 plan years, the amount necessary to amortize in equal annual installments (until fully amortized) over a period of 5 plan years any amount credited to the funding standard account under section 412(b)(3)(D) (as in effect on the day before the date of the enactment of the Pension Protection Act of 2006), and the amount necessary to amortize in equal annual installments (until fully amortized) over a period of 20 years the contributions which would be required to be made under the plan but for the provisions of section 412(c)(7)(A)(i)(I) (as in effect on the day before the date of the enactment of the Pension Protection Act of 2006). For a plan year, the funding standard account shall be credited with the sum of— the amount considered contributed by the employer to or under the plan for the plan year, the amount necessary to amortize in equal annual installments (until fully amortized)— separately, with respect to each plan year, the net decrease (if any) in unfunded past service liability under the plan arising from plan amendments adopted in such year, over a period of 15 plan years, separately, with respect to each plan year, the net experience gain (if any) under the plan, over a period of 15 plan years, and separately, with respect to each plan year, the net gain (if any) resulting from changes in actuarial assumptions used under the plan, over a period of 15 plan years, the amount of the waived funding deficiency (within the meaning of section 412(c)(3)) for the plan year, and in the case of a plan year for which the accumulated funding deficiency is determined under the funding standard account if such plan year follows a plan year for which such deficiency was determined under the alternative minimum funding standard under section 412(g) (as in effect on the day before the date of the enactment of the Pension Protection Act of 2006), the excess (if any) of any debit balance in the funding standard account (determined without regard to this subparagraph) over any debit balance in the alternative minimum funding standard account. In the case of any amount amortized under section 412(b) (as in effect on the day before the date of the enactment of the Pension Protection Act of 2006) over any period beginning with a plan year beginning before 2008 in lieu of the amortization described in paragraphs (2)(B) and (3)(B), such amount shall continue to be amortized under such section as so in effect. Under regulations prescribed by the Secretary, amounts required to be amortized under paragraph (2) or paragraph (3), as the case may be— may be combined into one amount under such paragraph to be amortized over a period determined on the basis of the remaining amortization period for all items entering into such combined amount, and may be offset against amounts required to be amortized under the other such paragraph, with the resulting amount to be amortized over a period determined on the basis of the remaining amortization periods for all items entering into whichever of the two amounts being offset is the greater. The funding standard account (and items therein) shall be charged or credited (as determined under regulations prescribed by the Secretary of the Treasury) with interest at the appropriate rate consistent with the rate or rates of interest used under the plan to determine costs. For purposes of this part— Any amount received by a multiemployer plan in payment of all or part of an employer’s withdrawal liability under part 1 of subtitle E of title IV of the Employee Retirement Income Security Act of 1974 shall be considered an amount contributed by the employer to or under the plan. The Secretary may prescribe by regulation additional charges and credits to a multiemployer plan’s funding standard account to the extent necessary to prevent withdrawal liability payments from being unduly reflected as advance funding for plan liabilities. If a multiemployer plan is not in reorganization in the plan year but was in reorganization in the immediately preceding plan year, any balance in the funding standard account at the close of such immediately preceding plan year— shall be eliminated by an offsetting credit or charge (as the case may be), but shall be taken into account in subsequent plan years by being amortized in equal annual installments (until fully amortized) over 30 plan years. The preceding sentence shall not apply to the extent of any accumulated funding deficiency under section 4243(a) of such Act as of the end of the last plan year that the plan was in reorganization. Any amount paid by a plan during a plan year to the Pension Benefit Guaranty Corporation pursuant to section 4222 of such Act or to a fund exempt under section 501(c)(22) pursuant to section 4223 of such Act shall reduce the amount of contributions considered received by the plan for the plan year. Any amount paid by an employer pending a final determination of the employer’s withdrawal liability under part 1 of subtitle E of title IV of such Act and subsequently refunded to the employer by the plan shall be charged to the funding standard account in accordance with regulations prescribed by the Secretary. If an election is in effect under section 412(b)(7)(F) (as in effect on the day before the date of the enactment of the Pension Protection Act of 2006) for any plan year, the funding standard account shall be charged in the plan year to which the portion of the net experience loss deferred by such election was deferred with the amount so deferred (and paragraph (2)(B)(iii) shall not apply to the amount so charged). Any amount of any financial assistance from the Pension Benefit Guaranty Corporation to any plan, and any repayment of such amount, shall be taken into account under this section and section 412 in such manner as is determined by the Secretary. To the extent that any plan amendment increases the unfunded past service liability under the plan by reason of an increase in benefits which are not payable as a life annuity but are payable under the terms of the plan for a period that does not exceed 14 years from the effective date of the amendment, paragraph (2)(B)(ii) shall be applied separately with respect to such increase in unfunded past service liability by substituting the number of years of the period during which such benefits are payable for “15”. Notwithstanding any other provision of this subsection— A multiemployer plan with respect to which the solvency test under subparagraph (C) is met may treat the portion of any experience loss or gain attributable to net investment losses incurred in either or both of the first two plan years ending after August 31, 2008 , as an item separate from other experience losses, to be amortized in equal annual installments (until fully amortized) over the period— beginning with the plan year in which such portion is first recognized in the actuarial value of assets, and ending with the last plan year in the 30-plan year period beginning with the plan year in which such net investment loss was incurred. If this subparagraph applies for any plan year— no extension of the amortization period under clause (i) shall be allowed under subsection (d), and if an extension was granted under subsection (d) for any plan year before the election to have this subparagraph apply to the plan year, such extension shall not result in such amortization period exceeding 30 years. For purposes of this subparagraph— Net investment losses shall be determined in the manner prescribed by the Secretary on the basis of the difference between actual and expected returns (including any difference attributable to any criminally fraudulent investment arrangement). The determination as to whether an arrangement is a criminally fraudulent investment arrangement shall be made under rules substantially similar to the rules prescribed by the Secretary for purposes of section 165. A multiemployer plan with respect to which the solvency test under subparagraph (C) is met may change its asset valuation method in a manner which— spreads the difference between expected and actual returns for either or both of the first 2 plan years ending after August 31, 2008 , over a period of not more than 10 years, provides that for either or both of the first 2 plan years beginning after August 31, 2008 , the value of plan assets at any time shall not be less than 80 percent or greater than 130 percent of the fair market value of such assets at such time, or makes both changes described in subclauses (I) and (II) to such method. If this subparagraph applies for any plan year— the Secretary shall not treat the asset valuation method of the plan as unreasonable solely because of the changes in such method described in clause (i), and such changes shall be deemed approved by the Secretary under section 302(d)(1) of the Employee Retirement Income Security Act of 1974 and section 412(d)(1). If this subparagraph and subparagraph (A) both apply for any plan year, the plan shall treat any reduction in unfunded accrued liability resulting from the application of this subparagraph as a separate experience amortization base, to be amortized in equal annual installments (until fully amortized) over a period of 30 plan years rather than the period such liability would otherwise be amortized over. The solvency test under this paragraph is met only if the plan actuary certifies that the plan is projected to have sufficient assets to timely pay expected benefits and anticipated expenditures over the amortization period, taking into account the changes in the funding standard account under this paragraph. If subparagraph (A) or (B) apply to a multiemployer plan for any plan year, then, in addition to any other applicable restrictions on benefit increases, a plan amendment increasing benefits may not go into effect during either of the 2 plan years immediately following such plan year unless— the plan actuary certifies that— any such increase is paid for out of additional contributions not allocated to the plan immediately before the application of this paragraph to the plan, and the plan’s funded percentage and projected credit balances for such 2 plan years are reasonably expected to be at least as high as such percentage and balances would have been if the benefit increase had not been adopted, or the amendment is required as a condition of qualification under part I of subchapter D or to comply with other applicable law. A plan sponsor of a plan to which this paragraph applies shall— give notice of such application to participants and beneficiaries of the plan, and inform the Pension Benefit Guaranty Corporation of such application in such form and manner as the Director of the Pension Benefit Guaranty Corporation may prescribe. A multiemployer plan with respect to which the solvency test under subparagraph (C) is met as of February 29, 2020 , may elect to apply this paragraph (without regard to whether such plan previously elected the application of this paragraph)— by substituting “ February 29, 2020 ” for “ August 31, 2008 ” each place it appears in subparagraphs (A)(i), (B)(i)(I), and (B)(i)(II), by inserting “and other losses related to the virus SARS–CoV–2 or coronavirus disease 2019 (COVID–19) (including experience losses related to reductions in contributions, reductions in employment, and deviations from anticipated retirement rates, as determined by the plan sponsor)” after “net investment losses” in subparagraph (A)(i), and by substituting “this subparagraph or subparagraph (A)” for “this subparagraph and subparagraph (A) both” in subparagraph (B)(iii). The preceding sentence shall not apply to a plan to which special financial assistance is granted under section 4262 of the Employee Retirement Income Security Act of 1974. For purposes of the application of this subparagraph, the Secretary shall rely on the plan sponsor’s calculations of plan losses unless such calculations are clearly erroneous.

(c) Additional rules For purposes of this part, normal costs, accrued liability, past service liabilities, and experience gains and losses shall be determined under the funding method used to determine costs under the plan. For purposes of this part, the value of the plan’s assets shall be determined on the basis of any reasonable actuarial method of valuation which takes into account fair market value and which is permitted under regulations prescribed by the Secretary. The value of a bond or other evidence of indebtedness which is not in default as to principal or interest may, at the election of the plan administrator, be determined on an amortized basis running from initial cost at purchase to par value at maturity or earliest call date. Any election under this subparagraph shall be made at such time and in such manner as the Secretary shall by regulations provide, shall apply to all such evidences of indebtedness, and may be revoked only with the consent of the Secretary. For purposes of this section, all costs, liabilities, rates of interest, and other factors under the plan shall be determined on the basis of actuarial assumptions and methods— each of which is reasonable (taking into account the experience of the plan and reasonable expectations), and which, in combination, offer the actuary’s best estimate of anticipated experience under the plan. For purposes of this section, if— a change in benefits under the Social Security Act or in other retirement benefits created under Federal or State law, or a change in the definition of the term “wages” under section 3121, or a change in the amount of such wages taken into account under regulations prescribed for purposes of section 401(a)(5), results in an increase or decrease in accrued liability under a plan, such increase or decrease shall be treated as an experience loss or gain. If, as of the close of a plan year, a plan would (without regard to this paragraph) have an accumulated funding deficiency in excess of the full funding limitation— the funding standard account shall be credited with the amount of such excess, and all amounts described in subparagraphs (B), (C), and (D) of subsection (b)(2) and subparagraph (B) of subsection (b)(3) which are required to be amortized shall be considered fully amortized for purposes of such subparagraphs. For purposes of paragraph (5), the term “full-funding limitation” means the excess (if any) of— the accrued liability (including normal cost) under the plan (determined under the entry age normal funding method if such accrued liability cannot be directly calculated under the funding method used for the plan), over the lesser of— the fair market value of the plan’s assets, or the value of such assets determined under paragraph (2). In no event shall the full-funding limitation determined under subparagraph (A) be less than the excess (if any) of— 90 percent of the current liability of the plan (including the expected increase in current liability due to benefits accruing during the plan year), over the value of the plan’s assets determined under paragraph (2). For purposes of clause (i), assets shall not be reduced by any credit balance in the funding standard account. For purposes of this paragraph, unless otherwise provided by the plan, the accrued liability under a multiemployer plan shall not include benefits which are not nonforfeitable under the plan after the termination of the plan (taking into consideration section 411(d)(3)). For purposes of this paragraph— The term “current liability” means all liabilities to employees and their beneficiaries under the plan. For purposes of clause (i), any benefit contingent on an event other than— age, service, compensation, death, or disability, or an event which is reasonably and reliably predictable (as determined by the Secretary), shall not be taken into account until the event on which the benefit is contingent occurs. The rate of interest used to determine current liability under this paragraph shall be the rate of interest determined under subparagraph (E). In the case of plan years beginning before the first plan year to which the first tables prescribed under subclause (II) apply, the mortality table used in determining current liability under this paragraph shall be the table prescribed by the Secretary which is based on the prevailing commissioners’ standard table (described in section 807(d)(5)(A)) 1 used to determine reserves for group annuity contracts issued on January 1, 1993 . The Secretary may by regulation prescribe for plan years beginning after December 31, 1999 , mortality tables to be used in determining current liability under this subsection. Such tables shall be based upon the actual experience of pension plans and projected trends in such experience. In prescribing such tables, the Secretary shall take into account results of available independent studies of mortality of individuals covered by pension plans. Notwithstanding clause (iv)— The Secretary shall establish mortality tables which may be used (in lieu of the tables under clause (iv)) to determine current liability under this subsection for individuals who are entitled to benefits under the plan on account of disability. The Secretary shall establish separate tables for individuals whose disabilities occur in plan years beginning before January 1, 1995 , and for individuals whose disabilities occur in plan years beginning on or after such date. In the case of disabilities occurring in plan years beginning after December 31, 1994 , the tables under subclause (I) shall apply only with respect to individuals described in such subclause who are disabled within the meaning of title II of the Social Security Act and the regulations thereunder. The Secretary shall periodically (at least every 5 years) review any tables in effect under this subparagraph and shall, to the extent such Secretary determines necessary, by regulation update the tables to reflect the actual experience of pension plans and projected trends in such experience. For purposes of determining a plan’s current liability for purposes of this paragraph— If any rate of interest used under the plan under subsection (b)(6) to determine cost is not within the permissible range, the plan shall establish a new rate of interest within the permissible range. For purposes of this subparagraph— Except as provided in subclause (II), the term “permissible range” means a rate of interest which is not more than 5 percent above, and not more than 10 percent below, the weighted average of the rates of interest on 30-year Treasury securities during the 4-year period ending on the last day before the beginning of the plan year. If the Secretary finds that the lowest rate of interest permissible under subclause (I) is unreasonably high, the Secretary may prescribe a lower rate of interest, except that such rate may not be less than 80 percent of the average rate determined under such subclause. Notwithstanding paragraph (3)(A), the interest rate used under the plan shall be— determined without taking into account the experience of the plan and reasonable expectations, but consistent with the assumptions which reflect the purchase rates which would be used by insurance companies to satisfy the liabilities under the plan. For purposes of this section, a determination of experience gains and losses and a valuation of the plan’s liability shall be made not less frequently than once every year, except that such determination shall be made more frequently to the extent required in particular cases under regulations prescribed by the Secretary. Except as provided in clause (ii), the valuation referred to in subparagraph (A) shall be made as of a date within the plan year to which the valuation refers or within one month prior to the beginning of such year. The valuation referred to in subparagraph (A) may be made as of a date within the plan year prior to the year to which the valuation refers if, as of such date, the value of the assets of the plan are not less than 100 percent of the plan’s current liability (as defined in paragraph (6)(D) without regard to clause (iv) thereof). Information under clause (ii) shall, in accordance with regulations, be actuarially adjusted to reflect significant differences in participants. A change in funding method to use a prior year valuation, as provided in clause (ii), may not be made unless as of the valuation date within the prior plan year, the value of the assets of the plan are not less than 125 percent of the plan’s current liability (as defined in paragraph (6)(D) without regard to clause (iv) thereof). For purposes of this section, any contributions for a plan year made by an employer after the last day of such plan year, but not later than two and one-half months after such day, shall be deemed to have been made on such last day. For purposes of this subparagraph, such two and one-half month period may be extended for not more than six months under regulations prescribed by the Secretary.

(d) Extension of amortization periods for multiemployer plans If the plan sponsor of a multiemployer plan— submits to the Secretary an application for an extension of the period of years required to amortize any unfunded liability described in any clause of subsection (b)(2)(B) or described in subsection (b)(4), and includes with the application a certification by the plan’s actuary described in subparagraph (B), the Secretary shall extend the amortization period for the period of time (not in excess of 5 years) specified in the application. Such extension shall be in addition to any extension under paragraph (2). A certification with respect to a multiemployer plan is described in this subparagraph if the plan’s actuary certifies that, based on reasonable assumptions— absent the extension under subparagraph (A), the plan would have an accumulated funding deficiency in the current plan year or any of the 9 succeeding plan years, the plan sponsor has adopted a plan to improve the plan’s funding status, the plan is projected to have sufficient assets to timely pay expected benefits and anticipated expenditures over the amortization period as extended, and the notice required under paragraph (3)(A) has been provided. If the plan sponsor of a multiemployer plan submits to the Secretary an application for an extension of the period of years required to amortize any unfunded liability described in any clause of subsection (b)(2)(B) or described in subsection (b)(4), the Secretary may extend the amortization period for a period of time (not in excess of 10 years reduced by the number of years of any extension under paragraph (1) with respect to such unfunded liability) if the Secretary makes the determination described in subparagraph (B). Such extension shall be in addition to any extension under paragraph (1). The Secretary may grant an extension under subparagraph (A) if the Secretary determines that— such extension would carry out the purposes of the Pension Protection Act of 2006 and would provide adequate protection for participants under the plan and their beneficiaries, and the failure to permit such extension would— result in a substantial risk to the voluntary continuation of the plan, or a substantial curtailment of pension benefit levels or employee compensation, and be adverse to the interests of plan participants in the aggregate. The Secretary shall act upon any application for an extension under this paragraph within 180 days of the submission of such application. If the Secretary rejects the application for an extension under this paragraph, the Secretary shall provide notice to the plan detailing the specific reasons for the rejection, including references to the criteria set forth above. The Secretary shall, before granting an extension under this subsection, require each applicant to provide evidence satisfactory to such Secretary that the applicant has provided notice of the filing of the application for such extension to each affected party (as defined in section 4001(a)(21) of the Employee Retirement Income Security Act of 1974) with respect to the affected plan. Such notice shall include a description of the extent to which the plan is funded for benefits which are guaranteed under title IV of such Act and for benefit liabilities. The Secretary shall consider any relevant information provided by a person to whom notice was given under paragraph (1).

§ 432 Additional funding rules for multiemployer plans in endangered status or critical status

(a) General rule For purposes of this part, in the case of a multiemployer plan in effect on July 16, 2006 — if the plan is in endangered status— the plan sponsor shall adopt and implement a funding improvement plan in accordance with the requirements of subsection (c), and the requirements of subsection (d) shall apply during the funding plan adoption period and the funding improvement period, if the plan is in critical status— the plan sponsor shall adopt and implement a rehabilitation plan in accordance with the requirements of subsection (e), and the requirements of subsection (f) shall apply during the rehabilitation plan adoption period and the rehabilitation period, if the plan is in critical and declining status— the requirements of paragraph (2) shall apply to the plan; and the plan sponsor may, by plan amendment, suspend benefits in accordance with the requirements of subsection (e)(9), and if the plan is an eligible multiemployer plan which is applying for or receiving special financial assistance under section 4262 of the Employee Retirement Income Security Act of 1974, the requirements of subsection (k) shall apply to the plan.

(b) Determination of endangered and critical status For purposes of this section— A multiemployer plan is in endangered status for a plan year if, as determined by the plan actuary under paragraph (3), the plan is not in critical status for the plan year and is not described in paragraph (5), and, as of the beginning of the plan year, either— the plan’s funded percentage for such plan year is less than 80 percent, or the plan has an accumulated funding deficiency for such plan year, or is projected to have such an accumulated funding deficiency for any of the 6 succeeding plan years, taking into account any extension of amortization periods under section 431(d). For purposes of this section, a plan shall be treated as in seriously endangered status for a plan year if the plan is described in both subparagraphs (A) and (B). A multiemployer plan is in critical status for a plan year if, as determined by the plan actuary under paragraph (3), the plan is described in 1 or more of the following subparagraphs as of the beginning of the plan year: A plan is described in this subparagraph if— the funded percentage of the plan is less than 65 percent, and the sum of— the fair market value of plan assets, plus the present value of the reasonably anticipated employer contributions for the current plan year and each of the 6 succeeding plan years, assuming that the terms of all collective bargaining agreements pursuant to which the plan is maintained for the current plan year continue in effect for succeeding plan years, is less than the present value of all nonforfeitable benefits projected to be payable under the plan during the current plan year and each of the 6 succeeding plan years (plus administrative expenses for such plan years). A plan is described in this subparagraph if— the plan has an accumulated funding deficiency for the current plan year, not taking into account any extension of amortization periods under section 431(d), or the plan is projected to have an accumulated funding deficiency for any of the 3 succeeding plan years (4 succeeding plan years if the funded percentage of the plan is 65 percent or less), not taking into account any extension of amortization periods under section 431(d). A plan is described in this subparagraph if— the plan’s normal cost for the current plan year, plus interest (determined at the rate used for determining costs under the plan) for the current plan year on the amount of unfunded benefit liabilities under the plan as of the last date of the preceding plan year, exceeds the present value of the reasonably anticipated employer and employee contributions for the current plan year, the present value, as of the beginning of the current plan year, of nonforfeitable benefits of inactive participants is greater than the present value of nonforfeitable benefits of active participants, and the plan has an accumulated funding deficiency for the current plan year, or is projected to have such a deficiency for any of the 4 succeeding plan years, not taking into account any extension of amortization periods under section 431(d). A plan is described in this subparagraph if the sum of— the fair market value of plan assets, plus the present value of the reasonably anticipated employer contributions for the current plan year and each of the 4 succeeding plan years, assuming that the terms of all collective bargaining agreements pursuant to which the plan is maintained for the current plan year continue in effect for succeeding plan years, is less than the present value of all benefits projected to be payable under the plan during the current plan year and each of the 4 succeeding plan years (plus administrative expenses for such plan years). Not later than the 90th day of each plan year of a multiemployer plan, the plan actuary shall certify to the Secretary and to the plan sponsor— whether or not the plan is in endangered status for such plan year, or would be in endangered status for such plan year but for paragraph (5), whether or not the plan is or will be in critical status for such plan year or for any of the succeeding 5 plan years, and whether or not the plan is or will be in critical and declining status for such plan year, and in the case of a plan which is in a funding improvement or rehabilitation period, whether or not the plan is making the scheduled progress in meeting the requirements of its funding improvement or rehabilitation plan. Except as provided in clause (iv), in making the determinations and projections under this subsection, the plan actuary shall make projections required for the current and succeeding plan years of the current value of the assets of the plan and the present value of all liabilities to participants and beneficiaries under the plan for the current plan year as of the beginning of such year. The actuary’s projections shall be based on reasonable actuarial estimates, assumptions, and methods that, except as provided in clause (iii), offer the actuary’s best estimate of anticipated experience under the plan. The projected present value of liabilities as of the beginning of such year shall be determined based on the most recent of either— the actuarial statement required under section 103(d) of the Employee Retirement Income Security Act of 1974 with respect to the most recently filed annual report, or the actuarial valuation for the preceding plan year. Any actuarial projection of plan assets shall assume— reasonably anticipated employer contributions for the current and succeeding plan years, assuming that the terms of the one or more collective bargaining agreements pursuant to which the plan is maintained for the current plan year continue in effect for succeeding plan years, or that employer contributions for the most recent plan year will continue indefinitely, but only if the plan actuary determines there have been no significant demographic changes that would make such assumption unreasonable. Any projection of activity in the industry or industries covered by the plan, including future covered employment and contribution levels, shall be based on information provided by the plan sponsor, which shall act reasonably and in good faith. Clauses (i) and (ii) (other than the 2nd sentence of clause (i)) may be disregarded by a plan actuary in the case of any certification of whether a plan will be in critical status in a succeeding plan year, except that a plan sponsor may not elect to be in critical status for a plan year under paragraph (4) in any case in which the certification upon which such election would be based is made without regard to such clauses. In determining whether a plan is in critical and declining status as described in subsection (e)(9), clauses (i), (ii), and (iii) shall apply, except that— if reasonable, the plan actuary shall assume that each contributing employer in compliance continues to comply through the end of the rehabilitation period or such later time as provided in subsection (e)(3)(A)(ii) with the terms of the rehabilitation plan that correspond to the schedule adopted or imposed under subsection (e), and the plan actuary shall take into account any suspensions of benefits described in subsection (e)(9) adopted in a prior plan year that are still in effect. Any failure of the plan’s actuary to certify the plan’s status under this subsection by the date specified in subparagraph (A) shall be treated for purposes of section 502(c)(2) of the Employee Retirement Income Security Act of 1974 as a failure or refusal by the plan administrator to file the annual report required to be filed with the Secretary under section 101(b)(1) of such Act. In any case in which it is certified under subparagraph (A) that a multiemployer plan is or will be in endangered or critical status for a plan year or in which a plan sponsor elects to be in critical status for a plan year under paragraph (4), the plan sponsor shall, not later than 30 days after the date of the certification, provide notification of the endangered or critical status to the participants and beneficiaries, the bargaining parties, the Pension Benefit Guaranty Corporation, and the Secretary of Labor. In any case in which a plan sponsor elects to be in critical status for a plan year under paragraph (4), the plan sponsor shall notify the Secretary of such election not later than 30 days after the date of such certification or such other time as the Secretary may prescribe by regulations or other guidance. If it is certified under subparagraph (A) that a multiemployer plan is or will be in critical status, the plan sponsor shall include in the notice under clause (i) an explanation of the possibility that— adjustable benefits (as defined in subsection (e)(8)) may be reduced, and such reductions may apply to participants and beneficiaries whose benefit commencement date is on or after the date such notice is provided for the first plan year in which the plan is in critical status. In the case of a multiemployer plan that would be in endangered status but for paragraph (5), the plan sponsor shall provide notice to the bargaining parties and the Pension Benefit Guaranty Corporation that the plan would be in endangered status but for such paragraph. The Secretary, in consultation with the Secretary of Labor, shall prescribe a model notice that a multiemployer plan may use to satisfy the requirements under clauses (ii) and (iii). In any case in which it is certified under subparagraph (A)(i) that a multiemployer plan will be in critical status for any of 5 succeeding plan years (but not for the current plan year) and the plan sponsor of such plan has not made an election to be in critical status for the plan year under paragraph (4), the plan sponsor shall, not later than 30 days after the date of the certification, provide notification of the projected critical status to the Pension Benefit Guaranty Corporation. Notwithstanding paragraph (2) and subject to paragraph (3)(B)(iv)— the plan sponsor of a multiemployer plan that is not in critical status for a plan year but that is projected by the plan actuary, pursuant to the determination under paragraph (3), to be in critical status in any of the succeeding 5 plan years may, not later than 30 days after the date of the certification under paragraph (3)(A), elect to be in critical status effective for the current plan year, the plan year in which the plan sponsor elects to be in critical status under subparagraph (A) shall be treated for purposes of this section as the first year in which the plan is in critical status, regardless of the date on which the plan first satisfies the criteria for critical status under paragraph (2), and a plan that is in critical status under this paragraph shall not emerge from critical status except in accordance with subsection (e)(4)(B). A plan is described in this paragraph if— as part of the actuarial certification of endangered status under paragraph (3)(A) for the plan year, the plan actuary certifies that the plan is projected to no longer be described in either paragraph (1)(A) or paragraph (1)(B) as of the end of the tenth plan year ending after the plan year to which the certification relates, and the plan was not in critical or endangered status for the immediately preceding plan year. For purposes of this section, a plan in critical status shall be treated as in critical and declining status if the plan is described in one or more of subparagraphs (A), (B), (C), and (D) of paragraph (2) and the plan is projected to become insolvent within the meaning of section 418E during the current plan year or any of the 14 succeeding plan years (19 succeeding plan years if the plan has a ratio of inactive participants to active participants that exceeds 2 to 1 or if the funded percentage of the plan is less than 80 percent). If an eligible multiemployer plan receiving special financial assistance under section 4262 of the Employee Retirement Income Security Act of 1974 meets the requirements of subsection (k)(2), notwithstanding the preceding paragraphs of this subsection, the plan shall be deemed to be in critical status for plan years beginning with the plan year in which the effective date for such assistance occurs and ending with the last plan year ending in 2051.

(c) Funding improvement plan must be adopted for multiemployer plans in endangered status In any case in which a multiemployer plan is in endangered status for a plan year, the plan sponsor, in accordance with this subsection— shall adopt a funding improvement plan not later than 240 days following the required date for the actuarial certification of endangered status under subsection (b)(3)(A), and within 30 days after the adoption of the funding improvement plan— shall provide to the bargaining parties 1 or more schedules showing revised benefit structures, revised contribution structures, or both, which, if adopted, may reasonably be expected to enable the multiemployer plan to meet the applicable benchmarks in accordance with the funding improvement plan, including— one proposal for reductions in the amount of future benefit accruals necessary to achieve the applicable benchmarks, assuming no amendments increasing contributions under the plan (other than amendments increasing contributions necessary to achieve the applicable benchmarks after amendments have reduced future benefit accruals to the maximum extent permitted by law), and one proposal for increases in contributions under the plan necessary to achieve the applicable benchmarks, assuming no amendments reducing future benefit accruals under the plan, and may, if the plan sponsor deems appropriate, prepare and provide the bargaining parties with additional information relating to contribution rates or benefit reductions, alternative schedules, or other information relevant to achieving the applicable benchmarks in accordance with the funding improvement plan. For purposes of this section, the term “applicable benchmarks” means the requirements applicable to the multiemployer plan under paragraph (3) (as modified by paragraph (5)). Paragraph (1) shall not apply to a plan year if such year is in a funding plan adoption period or funding improvement period by reason of the plan being in endangered status for a preceding plan year. For purposes of this section, such preceding plan year shall be the initial determination year with respect to the funding improvement plan to which it relates. For purposes of this section— A funding improvement plan is a plan which consists of the actions, including options or a range of options to be proposed to the bargaining parties, formulated to provide, based on reasonably anticipated experience and reasonable actuarial assumptions, for the attainment by the plan during the funding improvement period of the following requirements: The plan’s funded percentage as of the close of the funding improvement period equals or exceeds a percentage equal to the sum of— such percentage as of the beginning of the first plan year for which the plan is certified to be in endangered status pursuant to paragraph (b)(3), plus 33 percent of the difference between 100 percent and the percentage under subclause (I). No accumulated funding deficiency for the last plan year during the funding improvement period (taking into account any extension of amortization periods under section 431(d)). In the case of a plan in seriously endangered status, except as provided in paragraph (5), subparagraph (A)(i)(II) shall be applied by substituting “20 percent” for “33 percent”. For purposes of this section— The funding improvement period for any funding improvement plan adopted pursuant to this subsection is the 10-year period beginning on the first day of the first plan year of the multiemployer plan beginning after the earlier of— the second anniversary of the date of the adoption of the funding improvement plan, or the expiration of the collective bargaining agreements in effect on the due date for the actuarial certification of endangered status for the initial determination year under subsection (b)(3)(A) and covering, as of such due date, at least 75 percent of the active participants in such multiemployer plan. In the case of a plan in seriously endangered status, except as provided in paragraph (5), subparagraph (A) shall be applied by substituting “15-year period” for “10-year period”. If the plan’s actuary certifies under subsection (b)(3)(A) for a plan year in any funding plan adoption period or funding improvement period that the plan is no longer in endangered status and is not in critical status, the funding plan adoption period or funding improvement period, whichever is applicable, shall end as of the close of the preceding plan year. If the plan’s actuary certifies under subsection (b)(3)(A) for a plan year in any funding plan adoption period or funding improvement period that the plan is in critical status, the funding plan adoption period or funding improvement period, whichever is applicable, shall end as of the close of the plan year preceding the first plan year in the rehabilitation period with respect to such status. If the plan’s actuary certifies under subsection (b)(3)(A) for the first plan year following the close of the period described in subparagraph (A) that the plan is in endangered status, the provisions of this subsection and subsection (d) shall be applied as if such first plan year were an initial determination year, except that the plan may not be amended in a manner inconsistent with the funding improvement plan in effect for the preceding plan year until a new funding improvement plan is adopted. If the funded percentage of a plan in seriously endangered status was more than 70 percent as of the beginning of the initial determination year— paragraphs (3)(B) and (4)(B) shall apply only if the plan’s actuary certifies, within 30 days after the certification under subsection (b)(3)(A) for the initial determination year, that, based on the terms of the plan and the collective bargaining agreements in effect at the time of such certification, the plan is not projected to meet the requirements of paragraph (3)(A) (without regard to paragraphs (3)(B) and (4)(B)), and if there is a certification under clause (i), the plan may, in formulating its funding improvement plan, only take into account the rules of paragraph (3)(B) and (4)(B) for plan years in the funding improvement period beginning on or before the date on which the last of the collective bargaining agreements described in paragraph (4)(A)(ii) expires. Notwithstanding subparagraph (A)(ii), if, for any plan year ending after the date described in subparagraph (A)(ii), the plan actuary certifies (at the time of the annual certification under subsection (b)(3)(A) for such plan year) that, based on the terms of the plan and collective bargaining agreements in effect at the time of that annual certification, the plan is not projected to be able to meet the requirements of paragraph (3)(A) (without regard to paragraphs (3)(B) and (4)(B)), paragraphs (3)(B) and (4)(B) shall continue to apply for such year. The plan sponsor shall annually update the funding improvement plan and shall file the update with the plan’s annual report under section 104 of the Employee Retirement Income Security Act of 1974. The plan sponsor shall annually update any schedule of contribution rates provided under this subsection to reflect the experience of the plan. A schedule of contribution rates provided by the plan sponsor and relied upon by bargaining parties in negotiating a collective bargaining agreement shall remain in effect for the duration of that collective bargaining agreement. If— a collective bargaining agreement providing for contributions under a multiemployer plan that was in effect at the time the plan entered endangered status expires, and after receiving one or more schedules from the plan sponsor under paragraph (1)(B), the bargaining parties with respect to such agreement fail to adopt a contribution schedule with terms consistent with the funding improvement plan and a schedule from the plan sponsor, the plan sponsor shall implement the schedule described in paragraph (1)(B)(i)(I) beginning on the date specified in subparagraph (C). If— a collective bargaining agreement providing for contributions under a multiemployer plan in accordance with a schedule provided by the plan sponsor pursuant to a funding improvement plan (or imposed under subparagraph (A)) expires while the plan is still in endangered status, and after receiving one or more updated schedules from the plan sponsor under paragraph (6)(B), the bargaining parties with respect to such agreement fail to adopt a contribution schedule with terms consistent with the updated funding improvement plan and a schedule from the plan sponsor, then the contribution schedule applicable under the expired collective bargaining agreement, as updated and in effect on the date the collective bargaining agreement expires, shall be implemented by the plan sponsor beginning on the date specified in subparagraph (C). The date specified in this subparagraph is the date which is 180 days after the date on which the collective bargaining agreement described in subparagraph (A) or (B) expires. For purposes of this section, the term “funding plan adoption period” means the period beginning on the date of the certification under subsection (b)(3)(A) for the initial determination year and ending on the day before the first day of the funding improvement period.

(d) Rules for operation of plan during adoption and improvement periods A plan may not be amended after the date of the adoption of a funding improvement plan under subsection (c) so as to be inconsistent with the funding improvement plan. A plan may not be amended after the date of the adoption of a funding improvement plan under subsection (c) so as to increase benefits, including future benefit accruals, unless the plan actuary certifies that such increase is paid for out of additional contributions not contemplated by the funding improvement plan, and, after taking into account the benefit increase, the multiemployer plan still is reasonably expected to meet the applicable benchmark on the schedule contemplated in the funding improvement plan. During the period beginning on the date of the certification under subsection (b)(3)(A) for the initial determination year and ending on the date of the adoption of a funding improvement plan— the plan sponsor may not accept a collective bargaining agreement or participation agreement with respect to the multiemployer plan that provides for— a reduction in the level of contributions for any participants, a suspension of contributions with respect to any period of service, or any new direct or indirect exclusion of younger or newly hired employees from plan participation, and no amendment of the plan which increases the liabilities of the plan by reason of any increase in benefits, any change in the accrual of benefits, or any change in the rate at which benefits become nonforfeitable under the plan may be adopted unless the amendment is required as a condition of qualification under part I of subchapter D of chapter 1 or to comply with other applicable law.

(e) Rehabilitation plan must be adopted for multiemployer plans in critical status In any case in which a multiemployer plan is in critical status for a plan year, the plan sponsor, in accordance with this subsection— shall adopt a rehabilitation plan not later than 240 days following the required date for the actuarial certification of critical status under subsection (b)(3)(A), and within 30 days after the adoption of the rehabilitation plan— shall provide to the bargaining parties 1 or more schedules showing revised benefit structures, revised contribution structures, or both, which, if adopted, may reasonably be expected to enable the multiemployer plan to emerge from critical status in accordance with the rehabilitation plan, and may, if the plan sponsor deems appropriate, prepare and provide the bargaining parties with additional information relating to contribution rates or benefit reductions, alternative schedules, or other information relevant to emerging from critical status in accordance with the rehabilitation plan. The schedule or schedules described in subparagraph (B)(i) shall reflect reductions in future benefit accruals and adjustable benefits, and increases in contributions, that the plan sponsor determines are reasonably necessary to emerge from critical status. One schedule shall be designated as the default schedule and such schedule shall assume that there are no increases in contributions under the plan other than the increases necessary to emerge from critical status after future benefit accruals and other benefits (other than benefits the reduction or elimination of which are not permitted under section 411(d)(6)) have been reduced to the maximum extent permitted by law. Paragraph (1) shall not apply to a plan year if such year is in a rehabilitation plan adoption period or rehabilitation period by reason of the plan being in critical status for a preceding plan year. For purposes of this section, such preceding plan year shall be the initial critical year with respect to the rehabilitation plan to which it relates. For purposes of this section— A rehabilitation plan is a plan which consists of— actions, including options or a range of options to be proposed to the bargaining parties, formulated, based on reasonably anticipated experience and reasonable actuarial assumptions, to enable the plan to cease to be in critical status by the end of the rehabilitation period and may include reductions in plan expenditures (including plan mergers and consolidations), reductions in future benefit accruals or increases in contributions, if agreed to by the bargaining parties, or any combination of such actions, or if the plan sponsor determines that, based on reasonable actuarial assumptions and upon exhaustion of all reasonable measures, the plan can not reasonably be expected to emerge from critical status by the end of the rehabilitation period, reasonable measures to emerge from critical status at a later time or to forestall possible insolvency (within the meaning of section 4245 of the Employee Retirement Income Security Act of 1974). A rehabilitation plan must provide annual standards for meeting the requirements of such rehabilitation plan. Such plan shall also include the schedules required to be provided under paragraph (1)(B)(i) and if clause (ii) applies, shall set forth the alternatives considered, explain why the plan is not reasonably expected to emerge from critical status by the end of the rehabilitation period, and specify when, if ever, the plan is expected to emerge from critical status in accordance with the rehabilitation plan. The plan sponsor shall annually update the rehabilitation plan and shall file the update with the plan’s annual report under section 104 of the Employee Retirement Income Security Act of 1974. The plan sponsor shall annually update any schedule of contribution rates provided under this subsection to reflect the experience of the plan. A schedule of contribution rates provided by the plan sponsor and relied upon by bargaining parties in negotiating a collective bargaining agreement shall remain in effect for the duration of that collective bargaining agreement. If— a collective bargaining agreement providing for contributions under a multiemployer plan that was in effect at the time the plan entered critical status expires, and after receiving one or more schedules from the plan sponsor under paragraph (1)(B), the bargaining parties with respect to such agreement fail to adopt a contribution schedule with terms consistent with the rehabilitation plan and a schedule from the plan sponsor under paragraph (1)(B)(i), the plan sponsor shall implement the schedule described in the last sentence of paragraph (1) beginning on the date specified in clause (iii). If— a collective bargaining agreement providing for contributions under a multiemployer plan in accordance with a schedule provided by the plan sponsor pursuant to a rehabilitation plan (or imposed under subparagraph (C)(i)) expires while the plan is still in critical status, and after receiving one or more updated schedules from the plan sponsor under subparagraph (B)(ii), the bargaining parties with respect to such agreement fail to adopt a contribution schedule with terms consistent with the updated rehabilitation plan and a schedule from the plan sponsor, then the contribution schedule applicable under the expired collective bargaining agreement, as updated and in effect on the date the collective bargaining agreement expires, shall be implemented by the plan sponsor beginning on the date specified in clause (iii). The date specified in this subparagraph is the date which is 180 days after the date on which the collective bargaining agreement described in clause (ii) or (iii) expires. For purposes of this section— The rehabilitation period for a plan in critical status is the 10-year period beginning on the first day of the first plan year of the multiemployer plan following the earlier of— the second anniversary of the date of the adoption of the rehabilitation plan, or the expiration of the collective bargaining agreements in effect on the due date for the actuarial certification of critical status for the initial critical year under subsection (a)(1) and covering, as of such date at least 75 percent of the active participants in such multiemployer plan. If a plan emerges from critical status as provided under subparagraph (B) before the end of such 10-year period, the rehabilitation period shall end with the plan year preceding the plan year for which the determination under subparagraph (B) is made. A plan in critical status shall remain in such status until a plan year for which the plan actuary certifies, in accordance with subsection (b)(3)(A), that— the plan is not described in one or more of the subparagraphs in subsection (b)(2) as of the beginning of the plan year, the plan is not projected to have an accumulated funding deficiency for the plan year or any of the 9 succeeding plan years, without regard to the use of the shortfall method but taking into account any extension of amortization periods under section 431(d)(2) or section 412(e) (as in effect prior to the enactment of the Pension Protection Act of 2006), and the plan is not projected to become insolvent within the meaning of section 418E for any of the 30 succeeding plan years. Notwithstanding clause (i), a plan in critical status that has an automatic extension of amortization periods under section 431(d)(1) shall no longer be in critical status if the plan actuary certifies for a plan year, in accordance with subsection (b)(3)(A), that— the plan is not projected to have an accumulated funding deficiency for the plan year or any of the 9 succeeding plan years, without regard to the use of the shortfall method but taking into account any extension of amortization periods under section 431(d)(1), and the plan is not projected to become insolvent within the meaning of section 418E for any of the 30 succeeding plan years, regardless of whether the plan is described in one or more of the subparagraphs in subsection (b)(2) as of the beginning of the plan year. A plan that emerges from critical status under subclause (I) shall not reenter critical status for any subsequent plan year unless— the plan is projected to have an accumulated funding deficiency for the plan year or any of the 9 succeeding plan years, without regard to the use of the shortfall method but taking into account any extension of amortization periods under section 431(d), or the plan is projected to become insolvent within the meaning of section 418E for any of the 30 succeeding plan years. For purposes of this section, the term “rehabilitation plan adoption period” means the period beginning on the date of the certification under subsection (b)(3)(A) for the initial critical year and ending on the day before the first day of the rehabilitation period. Any reduction in the rate of future accruals under the default schedule described in the last sentence of paragraph (1) shall not reduce the rate of future accruals below— a monthly benefit (payable as a single life annuity commencing at the participant’s normal retirement age) equal to 1 percent of the contributions required to be made with respect to a participant, or the equivalent standard accrual rate for a participant or group of participants under the collective bargaining agreements in effect as of the first day of the initial critical year, or if lower, the accrual rate under the plan on such first day. The equivalent standard accrual rate shall be determined by the plan sponsor based on the standard or average contribution base units which the plan sponsor determines to be representative for active participants and such other factors as the plan sponsor determines to be relevant. Nothing in this paragraph shall be construed as limiting the ability of the plan sponsor to prepare and provide the bargaining parties with alternative schedules to the default schedule that establish lower or higher accrual and contribution rates than the rates otherwise described in this paragraph. Each employer otherwise obligated to make a contribution for the initial critical year shall be obligated to pay to the plan for such year a surcharge equal to 5 percent of the contribution otherwise required under the applicable collective bargaining agreement (or other agreement pursuant to which the employer contributes). For each succeeding plan year in which the plan is in critical status for a consecutive period of years beginning with the initial critical year, the surcharge shall be 10 percent of the contribution otherwise so required. The surcharges under subparagraph (A) shall be due and payable on the same schedule as the contributions on which the surcharges are based. Any failure to make a surcharge payment shall be treated as a delinquent contribution under section 515 of the Employee Retirement Income Security Act of 1974 and shall be enforceable as such. The surcharge under this paragraph shall cease to be effective with respect to employees covered by a collective bargaining agreement (or other agreement pursuant to which the employer contributes), beginning on the effective date of a collective bargaining agreement (or other such agreement) that includes terms consistent with a schedule presented by the plan sponsor under paragraph (1)(B)(i), as modified under subparagraph (B) of paragraph (3). The surcharge under this paragraph shall not apply to an employer until 30 days after the employer has been notified by the plan sponsor that the plan is in critical status and that the surcharge is in effect. Notwithstanding any provision of a plan to the contrary, the amount of any surcharge under this paragraph shall not be the basis for any benefit accrual under the plan. Notwithstanding section 411(d)(6), the plan sponsor shall, subject to the notice requirement under subparagraph (C), make any reductions to adjustable benefits which the plan sponsor deems appropriate, based upon the outcome of collective bargaining over the schedule or schedules provided under paragraph (1)(B)(i). Except in the case of adjustable benefits described in clause (iv)(III), the plan sponsor of a plan in critical status shall not reduce adjustable benefits of any participant or beneficiary whose benefit commencement date is before the date on which the plan provides notice to the participant or beneficiary under subsection (b)(3)(D) for the initial critical year. The plan sponsor shall include in the schedules provided to the bargaining parties an allowance for funding the benefits of participants with respect to whom contributions are not currently required to be made, and shall reduce their benefits to the extent permitted under this title and considered appropriate by the plan sponsor based on the plan’s then current overall funding status. For purposes of this paragraph, the term “adjustable benefit” means— benefits, rights, and features under the plan, including post-retirement death benefits, 60-month guarantees, disability benefits not yet in pay status, and similar benefits, any early retirement benefit or retirement-type subsidy (within the meaning of section 411(d)(6)(B)(i)) and any benefit payment option (other than the qualified joint and survivor annuity), and benefit increases that would not be eligible for a guarantee under section 4022A of the Employee Retirement Income Security Act of 1974 on the first day of initial critical year because the increases were adopted (or, if later, took effect) less than 60 months before such first day. Except as provided in subparagraph (A)(iv)(III), nothing in this paragraph shall be construed to permit a plan to reduce the level of a participant’s accrued benefit payable at normal retirement age. No reduction may be made to adjustable benefits under subparagraph (A) unless notice of such reduction has been given at least 30 days before the general effective date of such reduction for all participants and beneficiaries to— plan participants and beneficiaries, each employer who has an obligation to contribute (within the meaning of section 4212(a) of the Employee Retirement Income Security Act of 1974) under the plan, and each employee organization which, for purposes of collective bargaining, represents plan participants employed by such an employer. The notice under clause (i) shall contain— sufficient information to enable participants and beneficiaries to understand the effect of any reduction on their benefits, including an estimate (on an annual or monthly basis) of any affected adjustable benefit that a participant or beneficiary would otherwise have been eligible for as of the general effective date described in clause (i), and information as to the rights and remedies of plan participants and beneficiaries as well as how to contact the Department of Labor for further information and assistance where appropriate. Any notice under clause (i)— shall be provided in a form and manner prescribed in regulations of the Secretary, in consultation with the Secretary of Labor, shall be written in a manner so as to be understood by the average plan participant, and may be provided in written, electronic, or other appropriate form to the extent such form is reasonably accessible to persons to whom the notice is required to be provided. The Secretary shall in the regulations prescribed under subclause (I) establish a model notice that a plan sponsor may use to meet the requirements of this subparagraph. Notwithstanding section 411(d)(6) and subject to subparagraphs (B) through (I), the plan sponsor of a plan in critical and declining status may, by plan amendment, suspend benefits which the sponsor deems appropriate. For purposes of this subsection, the term “suspension of benefits” means the temporary or permanent reduction of any current or future payment obligation of the plan to any participant or beneficiary under the plan, whether or not in pay status at the time of the suspension of benefits. Any suspension of benefits made under subparagraph (A) shall remain in effect until the earlier of when the plan sponsor provides benefit improvements in accordance with subparagraph (E) or the suspension of benefits expires by its own terms. The plan shall not be liable for any benefit payments not made as a result of a suspension of benefits under this paragraph. For purposes of this paragraph, all references to suspensions of benefits, increases in benefits, or resumptions of suspended benefits with respect to participants shall also apply with respect to benefits of beneficiaries or alternative payees of participants. In the case of a plan with 10,000 or more participants, not later than 60 days prior to the plan sponsor submitting an application to suspend benefits, the plan sponsor shall select a participant of the plan in pay status to act as a retiree representative. The retiree representative shall advocate for the interests of the retired and deferred vested participants and beneficiaries of the plan throughout the suspension approval process. The plan shall provide for reasonable expenses by the retiree representative, including reasonable legal and actuarial support, commensurate with the plan’s size and funded status. Duties performed pursuant to subclause (I) shall not be subject to section 4975. The preceding sentence shall not apply to those duties associated with an application to suspend benefits pursuant to subparagraph (G) that are performed by the retiree representative who is also a plan trustee. The plan sponsor of a plan in critical and declining status for a plan year may suspend benefits only if the following conditions are met: Taking into account the proposed suspensions of benefits (and, if applicable, a proposed partition of the plan under section 4233 of the Employee Retirement Income Security Act of 1974), the plan actuary certifies that the plan is projected to avoid insolvency within the meaning of section 418E, assuming the suspensions of benefits continue until the suspensions of benefits expire by their own terms or if no such expiration date is set, indefinitely. The plan sponsor determines, in a written record to be maintained throughout the period of the benefit suspension, that the plan is still projected to become insolvent unless benefits are suspended under this paragraph, although all reasonable measures to avoid insolvency have been taken (and continue to be taken during the period of the benefit suspension). In its determination, the plan sponsor may take into account factors including the following: Current and past contribution levels. Levels of benefit accruals (including any prior reductions in the rate of benefit accruals). Prior reductions (if any) of adjustable benefits. Prior suspensions (if any) of benefits under this subsection. The impact on plan solvency of the subsidies and ancillary benefits available to active participants. Compensation levels of active participants relative to employees in the participants’ industry generally. Competitive and other economic factors facing contributing employers. The impact of benefit and contribution levels on retaining active participants and bargaining groups under the plan. The impact of past and anticipated contribution increases under the plan on employer attrition and retention levels. Measures undertaken by the plan sponsor to retain or attract contributing employers. Any suspensions of benefits made by a plan sponsor pursuant to this paragraph shall be subject to the following limitations: The monthly benefit of any participant or beneficiary may not be reduced below 110 percent of the monthly benefit which is guaranteed by the Pension Benefit Guaranty Corporation under section 4022A of the Employee Retirement Income Security Act of 1974 on the date of the suspension. In the case of a participant or beneficiary who has attained 75 years of age as of the effective date of the suspension, not more than the applicable percentage of the maximum suspendable benefits of such participant or beneficiary may be suspended under this paragraph. For purposes of subclause (I), the maximum suspendable benefits of a participant or beneficiary is the portion of the benefits of such participant or beneficiary that would be suspended pursuant to this paragraph without regard to this clause; For purposes of subclause (I), the applicable percentage is a percentage equal to the quotient obtained by dividing— the number of months during the period beginning with the month after the month in which occurs the effective date of the suspension and ending with the month during which the participant or beneficiary attains the age of 80, by 60 months. No benefits based on disability (as defined under the plan) may be suspended under this paragraph. Any suspensions of benefits, in the aggregate (and, if applicable, considered in combination with a partition of the plan under section 4233 of the Employee Retirement Income Security Act of 1974), shall be reasonably estimated to achieve, but not materially exceed, the level that is necessary to avoid insolvency. In any case in which a suspension of benefits with respect to a plan is made in combination with a partition of the plan under section 4233 of the Employee Retirement Income Security Act of 1974, the suspension of benefits may not take effect prior to the effective date of such partition. Any suspensions of benefits shall be equitably distributed across the participant and beneficiary population, taking into account factors, with respect to participants and beneficiaries and their benefits, that may include one or more of the following: Age and life expectancy. Length of time in pay status. Amount of benefit. Type of benefit: survivor, normal retirement, early retirement. Extent to which participant or beneficiary is receiving a subsidized benefit. Extent to which participant or beneficiary has received post-retirement benefit increases. History of benefit increases and reductions. Years to retirement for active employees. Any discrepancies between active and retiree benefits. Extent to which active participants are reasonably likely to withdraw support for the plan, accelerating employer withdrawals from the plan and increasing the risk of additional benefit reductions for participants in and out of pay status. Extent to which benefits are attributed to service with an employer that failed to pay its full withdrawal liability. In the case of a plan that includes the benefits described in clause (III), benefits suspended under this paragraph shall— first, be applied to the maximum extent permissible to benefits attributable to a participant’s service for an employer which withdrew from the plan and failed to pay (or is delinquent with respect to paying) the full amount of its withdrawal liability under section 4201(b)(1) of the Employee Retirement Income Security Act of 1974 or an agreement with the plan, second, except as provided by subclause (III), be applied to all other benefits that may be suspended under this paragraph, and third, be applied to benefits under a plan that are directly attributable to a participant’s service with any employer which has, prior to the date of enactment of the Multiemployer Pension Reform Act of 2014— withdrawn from the plan in a complete withdrawal under section 4203 of the Employee Retirement Income Security Act of 1974 and has paid the full amount of the employer’s withdrawal liability under section 4201(b)(1) of such Act or an agreement with the plan, and pursuant to a collective bargaining agreement, assumed liability for providing benefits to participants and beneficiaries of the plan under a separate, single-employer plan sponsored by the employer, in an amount equal to any amount of benefits for such participants and beneficiaries reduced as a result of the financial status of the plan. The plan sponsor may, in its sole discretion, provide benefit improvements while any suspension of benefits under the plan remains in effect, except that the plan sponsor may not increase the liabilities of the plan by reason of any benefit improvement for any participant or beneficiary not in pay status by the first day of the plan year for which the benefit improvement takes effect, unless— such action is accompanied by equitable benefit improvements in accordance with clause (ii) for all participants and beneficiaries whose benefit commencement dates were before the first day of the plan year for which the benefit improvement for such participant or beneficiary not in pay status took effect; and the plan actuary certifies that after taking into account such benefits improvements the plan is projected to avoid insolvency indefinitely under section 418E. The projected value of the total liabilities for benefit improvements for participants and beneficiaries not in pay status by the date of the first day of the plan year in which the benefit improvements are proposed to take effect, as determined as of such date, may not exceed the projected value of the liabilities arising from benefit improvements for participants and beneficiaries with benefit commencement dates prior to the first day of such plan year, as so determined. The plan sponsor shall equitably distribute any increase in total liabilities for benefit improvements in clause (i) to some or all of the participants and beneficiaries whose benefit commencement date is before the date of the first day of the plan year in which the benefit improvements are proposed to take effect, taking into account the relevant factors described in subparagraph (D)(vi) and the extent to which the benefits of the participants and beneficiaries were suspended. The plan sponsor may increase liabilities of the plan through a resumption of benefits for participants and beneficiaries in pay status only if the plan sponsor equitably distributes the value of resumed benefits to some or all of the participants and beneficiaries in pay status, taking into account the relevant factors described in subparagraph (D)(vi). This subparagraph shall not apply to a resumption of suspended benefits or plan amendment which increases liabilities with respect to participants and beneficiaries not in pay status by the first day of the plan year in which the benefit improvements took effect which— the Secretary of the Treasury, in consultation with the Pension Benefit Guaranty Corporation and the Secretary of Labor, determines to be reasonable and which provides for only de minimis increases in the liabilities of the plan, or is required as a condition of qualification under part I of subchapter D of chapter 1 of subtitle A or to comply with other applicable law, as determined by the Secretary of the Treasury. Except for resumptions of suspended benefits described in clause (iii), the limitations on benefit improvements while a suspension of benefits is in effect under this paragraph shall be in addition to any other applicable limitations on increases in benefits imposed on a plan. For purposes of this subparagraph, the term “benefit improvement” means, with respect to a plan, a resumption of suspended benefits, an increase in benefits, an increase in the rate at which benefits accrue, or an increase in the rate at which benefits become nonforfeitable under the plan. No suspension of benefits may be made pursuant to this paragraph unless notice of such proposed suspension has been given by the plan sponsor concurrently with an application for approval of such suspension submitted under subparagraph (G) to the Secretary of the Treasury to— such plan participants and beneficiaries who may be contacted by reasonable efforts, each employer who has an obligation to contribute (within the meaning of section 4212(a) of the Employee Retirement Income Security Act of 1974) under the plan, and each employee organization which, for purposes of collective bargaining, represents plan participants employed by such an employer. The notice under clause (i) shall contain— sufficient information to enable participants and beneficiaries to understand the effect of any suspensions of benefits, including an individualized estimate (on an annual or monthly basis) of such effect on each participant or beneficiary, a description of the factors considered by the plan sponsor in designing the benefit suspensions, a statement that the application for approval of any suspension of benefits shall be available on the website of the Department of the Treasury and that comments on such application will be accepted, information as to the rights and remedies of plan participants and beneficiaries, if applicable, a statement describing the appointment of a retiree representative, the date of appointment of such representative, identifying information about the retiree representative (including whether the representative is a plan trustee), and how to contact such representative, and information on how to contact the Department of the Treasury for further information and assistance where appropriate. Any notice under clause (i)— shall be provided in a form and manner prescribed in guidance by the Secretary of the Treasury, in consultation with the Pension Benefit Guaranty Corporation and the Secretary of Labor, notwithstanding any other provision of law, shall be written in a manner so as to be understood by the average plan participant, and may be provided in written, electronic, or other appropriate form to the extent such form is reasonably accessible to persons to whom the notice is required to be provided. Any notice provided under clause (i) shall fulfill the requirement for notice of a significant reduction in benefits described in section 4980F. The Secretary of the Treasury, in consultation with the Pension Benefit Guaranty Corporation and the Secretary of Labor, shall in the guidance prescribed under clause (iii)(I) establish a model notice that a plan sponsor may use to meet the requirements of this subparagraph. The plan sponsor of a plan in critical and declining status for a plan year that seeks to suspend benefits must submit an application to the Secretary of the Treasury for approval of the suspensions of benefits. If the plan sponsor submits an application for approval of the suspensions, the Secretary of the Treasury shall approve, in consultation with the Pension Benefit Guaranty Corporation and the Secretary of Labor, the application upon finding that the plan is eligible for the suspensions and has satisfied the criteria of subparagraphs (C), (D), (E), and (F). Not later than 30 days after receipt of the application under clause (i), the Secretary of the Treasury, in consultation with the Pension Benefit Guaranty Corporation and the Secretary of Labor, shall publish a notice in the Federal Register soliciting comments from contributing employers, employee organizations, and participants and beneficiaries of the plan for which an application was made and other interested parties. The application for approval of the suspension of benefits shall be published on the website of the Department of the Treasury. The Secretary of the Treasury, in consultation with the Pension Benefit Guaranty Corporation and the Secretary of Labor, shall approve or deny any application for suspensions of benefits under this paragraph within 225 days after the submission of such application. An application for suspension of benefits shall be deemed approved unless, within such 225 days, the Secretary of the Treasury notifies the plan sponsor that it has failed to satisfy one or more of the criteria described in this paragraph. If the Secretary of the Treasury, in consultation with the Pension Benefit Guaranty Corporation and the Secretary of Labor, rejects a plan sponsor’s application, the Secretary of the Treasury shall provide notice to the plan sponsor detailing the specific reasons for the rejection, including reference to the specific requirement not satisfied. Approval or denial by the Secretary of the Treasury, in consultation with the Pension Benefit Guaranty Corporation and the Secretary of Labor, of an application shall be treated as final agency action for purposes of section 704 of title 5 , United States Code. In evaluating whether the plan sponsor has met the criteria specified in clause (ii) of subparagraph (C), the Secretary of the Treasury, in consultation with the Pension Benefit Guaranty Corporation and the Secretary of Labor, shall review the plan sponsor’s consideration of factors under such clause. In evaluating the plan sponsor’s application, the Secretary of the Treasury shall accept the plan sponsor’s determinations unless it concludes, in consultation with the Pension Benefit Guaranty Corporation and the Secretary of Labor, that the plan sponsor’s determinations were clearly erroneous. No suspension of benefits may take effect pursuant to this paragraph prior to a vote of the participants of the plan with respect to the suspension. Not later than 30 days after approval of the suspension by the Secretary of the Treasury, in consultation with the Pension Benefit Guaranty Corporation and the Secretary of Labor, under subparagraph (G), the Secretary of the Treasury, in consultation with the Pension Benefit Guaranty Corporation and the Secretary of Labor, shall administer a vote of participants and beneficiaries of the plan. Except as provided in clause (v), the suspension shall go into effect following the vote unless a majority of all participants and beneficiaries of the plan vote to reject the suspension. The plan sponsor may submit a new suspension application to the Secretary of the Treasury for approval in any case in which a suspension is prohibited from taking effect pursuant to a vote under this subparagraph. The plan sponsor shall provide a ballot for the vote (subject to approval by the Secretary of the Treasury, in consultation with the Pension Benefit Guaranty Corporation and the Secretary of Labor) that includes the following: A statement from the plan sponsor in support of the suspension. A statement in opposition to the suspension compiled from comments received pursuant to subparagraph (G)(ii). A statement that the suspension has been approved by the Secretary of the Treasury, in consultation with the Pension Benefit Guaranty Corporation and the Secretary of Labor. A statement that the plan sponsor has determined that the plan will become insolvent unless the suspension takes effect. A statement that insolvency of the plan could result in benefits lower than benefits paid under the suspension. A statement that insolvency of the Pension Benefit Guaranty Corporation would result in benefits lower than benefits paid in the case of plan insolvency. It is the sense of Congress that, depending on the size and resources of the plan and geographic distribution of the plan’s participants, the plan sponsor should take such steps as may be necessary to inform participants about proposed benefit suspensions through in-person meetings, telephone or internet-based communications, mailed information, or by other means. Not later than 14 days after a vote under this subparagraph rejecting a suspension, the Secretary of the Treasury, in consultation with the Pension Benefit Guaranty Corporation and the Secretary of Labor, shall determine whether the plan is a systemically important plan. If the Secretary of the Treasury, in consultation with the Pension Benefit Guaranty Corporation and the Secretary of Labor, determines that the plan is a systemically important plan, not later than the end of the 90-day period beginning on the date the results of the vote are certified, the Secretary of the Treasury shall, notwithstanding such adverse vote— permit the implementation of the suspension proposed by the plan sponsor; or permit the implementation of a modification by the Secretary of the Treasury, in consultation with the Pension Benefit Guaranty Corporation and the Secretary of Labor, of such suspension (so long as the plan is projected to avoid insolvency within the meaning of section 4245 of the Employee Retirement Income Security Act of 1974 under such modification). Not later than 30 days after a determination by the Secretary of the Treasury, in consultation with the Pension Benefit Guaranty Corporation and the Secretary of Labor, that the plan is systemically important, the Participant and Plan Sponsor Advocate selected under section 4004 of the Employee Retirement Income Security Act of 1974 may submit recommendations to the Secretary of the Treasury with respect to the suspension or any revisions to the suspension. For purposes of this subparagraph, a systemically important plan is a plan with respect to which the Pension Benefit Guaranty Corporation projects the present value of projected financial assistance payments exceeds $1, 000, 000, 000 i f s u s p e n s i o n s a re n o t im pl e m e n t e d . F orc a l e n d a rye a rs b e g innin g a f t er 2015, t h eres ha ll b es u b s t i t u t e df or t h e d o ll a r am o u n t s p ec i f i e d ini t e m (aa) anam o u n t e q u a lt o t h e p ro d u c t o f s u c h d o ll a r am o u n t an d a f r a c t i o n, t h e n u m er a t oro f w hi c hi s t h eco n t r ib u t i o nan d b e n e f i t ba se (d e t er min e d u n d ersec t i o n 230 o f t h e S oc ia lS ec u r i t y A c t) f or t h e p rece d in g c a l e n d a rye a r an d t h e d e n o mina t oro f w hi c hi ss u c h co n t r ib u t i o nan d b e n e f i t ba se f orc a l e n d a rye a r 2014. I f t h e am o u n t o t h er w i se d e t er min e d u n d er t hi s i t e mi s n o t am u lt i pl eo f$ 1,000,000, such amount shall be rounded to the next lowest multiple of $1,000,000. In any case in which a suspension goes into effect following a vote pursuant to clause (ii) (or following a determination under clause (v) that the plan is a systemically important plan), the Secretary of the Treasury, in consultation with the Pension Benefit Guaranty Corporation and the Secretary of Labor, shall issue a final authorization to suspend with respect to the suspension not later than 7 days after such vote (or, in the case of a suspension that goes into effect under clause (v), at a time sufficient to allow the implementation of the suspension prior to the end of the 90-day period described in clause (v)(I)). An action by the plan sponsor challenging the denial of an application for suspension of benefits by the Secretary of the Treasury, in consultation with the Pension Benefit Guaranty Corporation and the Secretary of Labor, may only be brought following such denial. An action challenging a suspension of benefits under this paragraph may only be brought following a final authorization to suspend by the Secretary of the Treasury, in consultation with the Pension Benefit Guaranty Corporation and the Secretary of Labor, under subparagraph (H)(vi). A court shall review an action challenging a suspension of benefits under this paragraph in accordance with section 706 of title 5 , United States Code. A court reviewing an action challenging a suspension of benefits under this paragraph may not grant a temporary injunction with respect to such suspension unless the court finds a clear and convincing likelihood that the plaintiff will prevail on the merits of the case. A participant or beneficiary affected by a benefit suspension under this paragraph shall not have a cause of action under this title. No action challenging a suspension of benefits following the final authorization to suspend or the denial of an application for suspension of benefits pursuant to this paragraph may be brought after one year after the earliest date on which the plaintiff acquired or should have acquired actual knowledge of the existence of such cause of action. A plan certified to be in critical and declining status pursuant to projections made under subsection (b)(3) for which a suspension of benefits has been made by the plan sponsor pursuant to this paragraph shall not emerge from critical status under paragraph (4)(B), until such time as— the plan is no longer certified to be in critical or endangered status under paragraphs (1) and (2) of subsection (b), and the plan is projected to avoid insolvency under section 418E.

(f) Rules for operation of plan during adoption and rehabilitation period A plan may not be amended after the date of the adoption of a rehabilitation plan under subsection (e) so as to be inconsistent with the rehabilitation plan. A plan may not be amended after the date of the adoption of a rehabilitation plan under subsection (e) so as to increase benefits, including future benefit accruals, unless the plan actuary certifies that such increase is paid for out of additional contributions not contemplated by the rehabilitation plan, and, after taking into account the benefit increase, the multiemployer plan still is reasonably expected to emerge from critical status by the end of the rehabilitation period on the schedule contemplated in the rehabilitation plan. Effective on the date the notice of certification of the plan’s critical status for the initial critical year under subsection (b)(3)(D) is sent, and notwithstanding section 411(d)(6), the plan shall not pay— any payment, in excess of the monthly amount paid under a single life annuity (plus any social security supplements described in the last sentence of section 411(a)(9)), to a participant or beneficiary whose annuity starting date (as defined in section 417(f)(2)) occurs after the date such notice is sent, any payment for the purchase of an irrevocable commitment from an insurer to pay benefits, and any other payment specified by the Secretary by regulations. Subparagraph (A) shall not apply to a benefit which under section 411(a)(11) may be immediately distributed without the consent of the participant or to any makeup payment in the case of a retroactive annuity starting date or any similar payment of benefits owed with respect to a prior period. During the period beginning on the date of the certification under subsection (b)(3)(A) for the initial critical year and ending on the date of the adoption of a rehabilitation plan— the plan sponsor may not accept a collective bargaining agreement or participation agreement with respect to the multiemployer plan that provides for— a reduction in the level of contributions for any participants, a suspension of contributions with respect to any period of service, or any new direct or indirect exclusion of younger or newly hired employees from plan participation, and no amendment of the plan which increases the liabilities of the plan by reason of any increase in benefits, any change in the accrual of benefits, or any change in the rate at which benefits become nonforfeitable under the plan may be adopted unless the amendment is required as a condition of qualification under part I of subchapter D of chapter 1 or to comply with other applicable law.

(g) Adjustments disregarded in withdrawal liability determination Any benefit reductions under subsection (e)(8) or (f), or benefit reductions or suspensions while in critical and declining status under subsection (e)(9), unless the withdrawal occurs more than ten years after the effective date of a benefit suspension by a plan in critical and declining status, shall be disregarded in determining a plan’s unfunded vested benefits for purposes of determining an employer’s withdrawal liability under section 4201 of the Employee Retirement Income Security Act of 1974. Any surcharges under subsection (e)(7) shall be disregarded in determining the allocation of unfunded vested benefits to an employer under section 4211 of the Employee Retirement Income Security Act of 1974 and in determining the highest contribution rate under section 4219(c) of such Act, except for purposes of determining the unfunded vested benefits attributable to an employer under section 4211(c)(4) of such Act or a comparable method approved under section 4211(c)(5) of such Act. Any increase in the contribution rate (or other increase in contribution requirements unless due to increased levels of work, employment, or periods for which compensation is provided) that is required or made in order to enable the plan to meet the requirement of the funding improvement plan or rehabilitation plan shall be disregarded in determining the allocation of unfunded vested benefits to an employer under section 4211 of such Act and in determining the highest contribution rate under section 4219(c) of such Act, except for purposes of determining the unfunded vested benefits attributable to an employer under section 4211(c)(4) of such Act or a comparable method approved under section 4211(c)(5) of such Act. For purposes of this paragraph, any increase in the contribution rate (or other increase in contribution requirements) shall be deemed to be required or made in order to enable the plan to meet the requirement of the funding improvement plan or rehabilitation plan except for increases in contribution requirements due to increased levels of work, employment, or periods for which compensation is provided or additional contributions are used to provide an increase in benefits, including an increase in future benefit accruals, permitted by subsection (d)(1)(B) or (f)(1)(B). In the case of increases in the contribution rate (or other increases in contribution requirements unless due to increased levels of work, employment, or periods for which compensation is provided) disregarded pursuant to paragraph (3), this subsection shall cease to apply as of the expiration date of the collective bargaining agreement in effect when the plan emerges from endangered or critical status. Notwithstanding the preceding sentence, once the plan emerges from critical or endangered status, increases in the contribution rate disregarded pursuant to paragraph (3) shall continue to be disregarded in determining the highest contribution rate under section 4219(c) of such Act for plan years during which the plan was in endangered or critical status. The Pension Benefit Guaranty Corporation shall prescribe simplified methods for the application of this subsection in determining withdrawal liability and payment amounts under section 4219(c) of such Act.

(h) Expedited resolution of plan sponsor decisions If, within 60 days of the due date for adoption of a funding improvement plan under subsection (c) or a rehabilitation plan under subsection (e), the plan sponsor of a plan in endangered status or a plan in critical status has not agreed on a funding improvement plan or rehabilitation plan, then any member of the board or group that constitutes the plan sponsor may require that the plan sponsor enter into an expedited dispute resolution procedure for the development and adoption of a funding improvement plan or rehabilitation plan.

(i) Nonbargained participation In the case of an employer that contributes to a multiemployer plan with respect to both employees who are covered by one or more collective bargaining agreements and employees who are not so covered, if the plan is in endangered status or in critical status, benefits of and contributions for the nonbargained employees, including surcharges on those contributions, shall be determined as if those nonbargained employees were covered under the first to expire of the employer’s collective bargaining agreements in effect when the plan entered endangered or critical status. In the case of an employer that contributes to a multiemployer plan only with respect to employees who are not covered by a collective bargaining agreement, this section shall be applied as if the employer were the bargaining party, and its participation agreement with the plan were a collective bargaining agreement with a term ending on the first day of the plan year beginning after the employer is provided the schedule or schedules described in subsections (c) and (e).

(j) Definitions; actuarial method For purposes of this section— The term “bargaining party” means— except as provided in clause (ii), an employer who has an obligation to contribute under the plan; or in the case of a plan described under section 404(c), or a continuation of such a plan, the association of employers that is the employer settlor of the plan; and an employee organization which, for purposes of collective bargaining, represents plan participants employed by an employer who has an obligation to contribute under the plan. The term “funded percentage” means the percentage equal to a fraction— the numerator of which is the value of the plan’s assets, as determined under section 431(c)(2), and the denominator of which is the accrued liability of the plan, determined using actuarial assumptions described in section 431(c)(3). The term “accumulated funding deficiency” has the meaning given such term in section 431(a). The term “active participant” means, in connection with a multiemployer plan, a participant who is in covered service under the plan. The term “inactive participant” means, in connection with a multiemployer plan, a participant, or the beneficiary or alternate payee of a participant, who— is not in covered service under the plan, and is in pay status under the plan or has a nonforfeitable right to benefits under the plan. A person is in pay status under a multiemployer plan if— at any time during the current plan year, such person is a participant or beneficiary under the plan and is paid an early, late, normal, or disability retirement benefit under the plan (or a death benefit under the plan related to a retirement benefit), or to the extent provided in regulations of the Secretary, such person is entitled to such a benefit under the plan. The term “obligation to contribute” has the meaning given such term under section 4212(a) of the Employee Retirement Income Security Act of 1974. Notwithstanding any other provision of this section, the actuary’s determinations with respect to a plan’s normal cost, actuarial accrued liability, and improvements in a plan’s funded percentage under this section shall be based upon the unit credit funding method (whether or not that method is used for the plan’s actuarial valuation). For purposes of this section, section 431, and section 4971(g): The term “plan sponsor” means, with respect to any multiemployer plan, the association, committee, joint board of trustees, or other similar group of representatives of the parties who establish or maintain the plan. In the case of a plan described in section 404(c) (or a continuation of such plan), such term means the bargaining parties described in paragraph (1). The term “benefit commencement date” means the annuity starting date (or in the case of a retroactive annuity starting date, the date on which benefit payments begin).

(k) Rules relating to eligible multiemployer plans In the case of an eligible multiemployer plan which applies for special financial assistance under section 4262 of such Act— 1 Such application shall be submitted in accordance with the requirements of such section, including any guidance issued thereunder by the Pension Benefit Guaranty Corporation. In the case of a plan for which a suspension of benefits has been approved under subsection (e)(9), the application shall describe the manner in which suspended benefits will be reinstated in accordance with paragraph (2)(A) and guidance issued by the Secretary if the plan receives special financial assistance. In determining the amount of special financial assistance to be specified in its application, an eligible multiemployer plan shall— use the interest rate used by the plan in its most recently completed certification of plan status before January 1, 2021 , provided that such interest rate does not exceed the interest rate limit, and for other assumptions, use the assumptions that the plan used in its most recently completed certification of plan status before January 1, 2021 , unless such assumptions are unreasonable. For purposes of clause (i), the interest rate limit is the rate specified in section 430(h)(2)(C)(iii) (disregarding modifications made under clause (iv) of such section) for the month in which the application for special financial assistance is filed by the eligible multiemployer plan or the 3 preceding months, with such specified rate increased by 200 basis points. If a plan determines that use of one or more prior assumptions is unreasonable, the plan may propose in its application to change such assumptions, provided that the plan discloses such changes in its application and describes why such assumptions are no longer reasonable. The plan may not propose a change to the interest rate otherwise required under this subsection for eligibility or financial assistance amount. In the case of a plan applying for special financial assistance under rules providing for temporary priority consideration, as provided in paragraph (4)(C), such plan’s application shall be submitted to the Secretary in addition to the Pension Benefit Guaranty Corporation. In the case of an eligible multiemployer plan receiving special financial assistance under section 4262 of the Employee Retirement Income Security Act of 1974— The plan shall— reinstate any benefits that were suspended under subsection (e)(9) or section 4245(a) of the Employee Retirement Income Security Act of 1974, effective as of the first month in which the effective date for the special financial assistance occurs, for participants and beneficiaries as of such month, and provide payments equal to the amount of benefits previously suspended to any participants or beneficiaries in pay status as of the effective date of the special financial assistance, payable, as determined by the plan— as a lump sum within 3 months of such effective date; or in equal monthly installments over a period of 5 years, commencing within 3 months of such effective date, with no adjustment for interest. Special financial assistance received by the plan may be used to make benefit payments and pay plan expenses. Such assistance shall be segregated from other plan assets, and shall be invested by the plan in investment-grade bonds or other investments as permitted by regulations or other guidance issued by the Pension Benefit Guaranty Corporation. The Pension Benefit Guaranty Corporation, in consultation with the Secretary, may impose, by regulation or other guidance, reasonable conditions on an eligible multiemployer plan receiving special financial assistance relating to increases in future accrual rates and any retroactive benefit improvements, allocation of plan assets, reductions in employer contribution rates, diversion of contributions and allocation of expenses to other benefit plans, and withdrawal liability. The Pension Benefit Guaranty Corporation shall not impose conditions on an eligible multiemployer plan as a condition of, or following receipt of, special financial assistance relating to— any prospective reduction in plan benefits (including benefits that may be adjusted pursuant to subsection (e)(8)), plan governance, including selection of, removal of, and terms of contracts with, trustees, actuaries, investment managers, and other service providers, or any funding rules relating to the plan. Special financial assistance received by the plan shall not be taken into account for determining contributions required under section 431. If the plan becomes insolvent within the meaning of section 418E after receiving special financial assistance, the plan shall be subject to all rules applicable to insolvent plans. The plan shall not be eligible to apply for a new suspension of benefits under subsection (e)(9)(G). For purposes of this section, a multiemployer plan is an eligible multiemployer plan if— the plan is in critical and declining status in any plan year beginning in 2020 through 2022, a suspension of benefits has been approved with respect to the plan under subsection (e)(9) as of the date of the enactment of this subsection; in any plan year beginning in 2020 through 2022, the plan is certified by the plan actuary to be in critical status, has a modified funded percentage of less than 40 percent, and has a ratio of active to inactive participants which is less than 2 to 3, or the plan became insolvent within the meaning of section 418E after December 16, 2014 , and has remained so insolvent and has not been terminated as of the date of enactment of this subsection. For purposes of subparagraph (A)(iii), the term “modified funded percentage” means the percentage equal to a fraction the numerator of which is current value of plan assets (as defined in section 3(26) of the Employee Retirement Income Security Act of 1974) and the denominator of which is current liabilities (as defined in section 431(c)(6)(D)). In prescribing the application process for eligible multiemployer plans to receive special financial assistance under section 4262 of the Employee Retirement Income Security Act of 1974 and reviewing applications of such plans, the Pension Benefit Guaranty Corporation shall coordinate with the Secretary in the following manner: In the case of a plan which has suspended benefits under subsection (e)(9)— in determining whether to approve the application, such corporation shall consult with the Secretary regarding the plan’s proposed method of reinstating benefits, as described in the plan’s application and in accordance with guidance issued by the Secretary, and such corporation shall consult with the Secretary regarding the amount of special financial assistance needed based on the projected funded status of the plan as of the last day of the plan year ending in 2051, whether the plan proposes to repay benefits over 5 years or as a lump sum, as required by paragraph (2)(A)(ii), and any other relevant factors, as determined by such corporation in consultation with the Secretary, to ensure the amount of assistance is sufficient to meet such requirement and is sufficient to pay benefits as required in section 4262(j)(1) of such Act. In the case of any plan which proposes in its application to change the assumptions used, as provided in paragraph (1)(C)(iii), such corporation shall consult with the Secretary regarding such proposed change in assumptions. If such corporation specifies in regulations or guidance that temporary priority consideration is available for plans which are insolvent within the meaning of section 418E or likely to become so insolvent or for plans which have suspended benefits under subsection (e)(9), or that availability is otherwise based on the funded status of the plan under this section, as permitted by section 4262(d) of such Act, such corporation shall consult with the Secretary regarding any granting of priority consideration to such plans.

§ 433 Minimum funding standards for CSEC plans

(a) General rule For purposes of section 412, the term “accumulated funding deficiency” for a CSEC plan means the excess of the total charges to the funding standard account for all plan years (beginning with the first plan year to which section 412 applies) over the total credits to such account for such years or, if less, the excess of the total charges to the alternative minimum funding standard account for such plan years over the total credits to such account for such years.

(b) Funding standard account Each plan to which this section applies shall establish and maintain a funding standard account. Such account shall be credited and charged solely as provided in this section. For a plan year, the funding standard account shall be charged with the sum of— the normal cost of the plan for the plan year, the amounts necessary to amortize in equal annual installments (until fully amortized)— in the case of a plan in existence on January 1, 1974 , the unfunded past service liability under the plan on the first day of the first plan year to which section 412 applies, over a period of 40 plan years, in the case of a plan which comes into existence after January 1, 1974 , but before the first day of the first plan year beginning after December 31, 2013 , the unfunded past service liability under the plan on the first day of the first plan year to which section 412 applies, over a period of 30 plan years, separately, with respect to each plan year, the net increase (if any) in unfunded past service liability under the plan arising from plan amendments adopted in such year, over a period of 15 plan years, separately, with respect to each plan year, the net experience loss (if any) under the plan, over a period of 5 plan years, and separately, with respect to each plan year, the net loss (if any) resulting from changes in actuarial assumptions used under the plan, over a period of 10 plan years, the amount necessary to amortize each waived funding deficiency (within the meaning of section 412(c)(3)) for each prior plan year in equal annual installments (until fully amortized) over a period of 5 plan years, the amount necessary to amortize in equal annual installments (until fully amortized) over a period of 5 plan years any amount credited to the funding standard account under paragraph (3)(D), and the amount necessary to amortize in equal annual installments (until fully amortized) over a period of 20 years the contributions which would be required to be made under the plan but for the provisions of section 412(c)(7)(A)(i)(I) (as in effect on the day before the enactment of the Pension Protection Act of 2006). For a plan year, the funding standard account shall be credited with the sum of— the amount considered contributed by the employer to or under the plan for the plan year, the amount necessary to amortize in equal annual installments (until fully amortized)— separately, with respect to each plan year, the net decrease (if any) in unfunded past service liability under the plan arising from plan amendments adopted in such year, over a period of 15 plan years, separately, with respect to each plan year, the net experience gain (if any) under the plan, over a period of 5 plan years, and separately, with respect to each plan year, the net gain (if any) resulting from changes in actuarial assumptions used under the plan, over a period of 10 plan years, the amount of the waived funding deficiency (within the meaning of section 412(c)(3)) for the plan year, and in the case of a plan year for which the accumulated funding deficiency is determined under the funding standard account if such plan year follows a plan year for which such deficiency was determined under the alternative minimum funding standard, the excess (if any) of any debit balance in the funding standard account (determined without regard to this subparagraph) over any debit balance in the alternative minimum funding standard account. Under regulations prescribed by the Secretary, amounts required to be amortized under paragraph (2) or paragraph (3), as the case may be— may be combined into one amount under such paragraph to be amortized over a period determined on the basis of the remaining amortization period for all items entering into such combined amount, and may be offset against amounts required to be amortized under the other such paragraph, with the resulting amount to be amortized over a period determined on the basis of the remaining amortization periods for all items entering into whichever of the two amounts being offset is the greater. Except as provided in subparagraph (B), the funding standard account (and items therein) shall be charged or credited (as determined under regulations prescribed by the Secretary) with interest at the appropriate rate consistent with the rate or rates of interest used under the plan to determine costs. The interest rate used for purposes of computing the amortization charge described in subsection (b)(2)(C) or for purposes of any arrangement under subsection (d) for any plan year shall be the greater of— 150 percent of the Federal mid-term rate (as in effect under section 1274 for the 1st month of such plan year), or the rate of interest determined under subparagraph (A). Amortization schedules for amounts described in paragraphs (2) and (3) that are in effect as of the last day of the last plan year beginning before January 1, 2014 , by reason of section 104 of the Pension Protection Act of 2006 shall remain in effect pursuant to their terms and this section, except that such amounts shall not be amortized again under this section.

(c) Special rules For purposes of this section, normal costs, accrued liability, past service liabilities, and experience gains and losses shall be determined under the funding method used to determine costs under the plan. For purposes of this section, the value of the plan’s assets shall be determined on the basis of any reasonable actuarial method of valuation which takes into account fair market value and which is permitted under regulations prescribed by the Secretary. The Secretary may by regulations provide that the value of any dedicated bond portfolio of a plan shall be determined by using the interest rate under section 412(b)(5) (as in effect on the day before the enactment of the Pension Protection Act of 2006). For purposes of this section, all costs, liabilities, rates of interest, and other factors under the plan shall be determined on the basis of actuarial assumptions and methods— each of which is reasonable (taking into account the experience of the plan and reasonable expectations), and which, in combination, offer the actuary’s best estimate of anticipated experience under the plan. For purposes of this section, if— a change in benefits under the Social Security Act or in other retirement benefits created under Federal or State law, or a change in the definition of the term “wages” under section 3121 or a change in the amount of such wages taken into account under regulations prescribed for purposes of section 401(a)(5), results in an increase or decrease in accrued liability under a plan, such increase or decrease shall be treated as an experience loss or gain. All funding methods available to CSEC plans under section 412 (as in effect on the day before the enactment of the Pension Protection Act of 2006) shall continue to be available under this section. If the funding method for a plan is changed, the new funding method shall become the funding method used to determine costs and liabilities under the plan only if the change is approved by the Secretary. If the plan year for a plan is changed, the new plan year shall become the plan year for the plan only if the change is approved by the Secretary. No actuarial assumption (other than the assumptions described in subsection (h)(3)) used to determine the current liability for a plan to which this subparagraph applies may be changed without the approval of the Secretary. This subparagraph shall apply to a plan only if— the plan is a CSEC plan, the aggregate unfunded vested benefits as of the close of the preceding plan year (as determined under section 4006(a)(3)(E)(iii) of the Employee Retirement Income Security Act of 1974) of such plan and all other plans maintained by the contributing sponsors (as defined in section 4001(a)(13) of such Act) and members of such sponsors’ controlled groups (as defined in section 4001(a)(14) of such Act) which are covered by title IV of such Act (disregarding plans with no unfunded vested benefits) exceed $50, 000, 000, an d t h ec han g e ina ss u m pt i o n s (d e t er min e d a f t er t akin g in t o a cco u n t an yc han g es inin t eres t r a t e an d m or t a l i t y t ab l e) res u lt s ina d ecre a se in t h e f u n d in g s h or t f a ll o f t h e pl an f or t h ec u rre n tpl an ye a r t ha t e x cee d s$ 50,000,000, or that exceeds $5,000,000 and that is 5 percent or more of the current liability of the plan before such change. If, as of the close of a plan year, a plan would (without regard to this paragraph) have an accumulated funding deficiency (determined without regard to the alternative minimum funding standard account permitted under subsection (e)) in excess of the full funding limitation— the funding standard account shall be credited with the amount of such excess, and all amounts described in paragraphs (2)(B), (C), and (D) and (3)(B) of subsection (b) which are required to be amortized shall be considered fully amortized for purposes of such paragraphs. For purposes of paragraph (6), the term “full-funding limitation” means the excess (if any) of— the accrued liability (including normal cost) under the plan (determined under the entry age normal funding method if such accrued liability cannot be directly calculated under the funding method used for the plan), over the lesser of— the fair market value of the plan’s assets, or the value of such assets determined under paragraph (2). In no event shall the full-funding limitation determined under subparagraph (A) be less than the excess (if any) of— 90 percent of the current liability (determined without regard to paragraph (4) of subsection (h)) of the plan (including the expected increase in such current liability due to benefits accruing during the plan year), over the value of the plan’s assets determined under paragraph (2). For purposes of clause (i), assets shall not be reduced by any credit balance in the funding standard account. For purposes of this section, a determination of experience gains and losses and a valuation of the plan’s liability shall be made not less frequently than once every year, except that such determination shall be made more frequently to the extent required in particular cases under regulations prescribed by the Secretary. Except as provided in clause (ii), the valuation referred to in subparagraph (A) shall be made as of a date within the plan year to which the valuation refers or within one month prior to the beginning of such year. The valuation referred to in subparagraph (A) may be made as of a date within the plan year prior to the year to which the valuation refers if, as of such date, the value of the assets of the plan are not less than 100 percent of the plan’s current liability. Information under clause (ii) shall, in accordance with regulations, be actuarially adjusted to reflect significant differences in participants. A change in funding method to use a prior year valuation, as provided in clause (ii), may not be made unless as of the valuation date within the prior plan year, the value of the assets of the plan are not less than 125 percent of the plan’s current liability. For purposes of this section, any contributions for a plan year made by an employer during the period— beginning on the day after the last day of such plan year, and ending on the day which is 8½ months after the close of the plan year, shall be deemed to have been made on such last day. In determining projected benefits, the funding method of a collectively bargained CSEC plan described in section 413(a) shall anticipate benefit increases scheduled to take effect during the term of the collective bargaining agreement applicable to the plan.

(d) Extension of amortization periods The period of years required to amortize any unfunded liability (described in any clause of subsection (b)(2)(B)) of any plan may be extended by the Secretary for a period of time (not in excess of 10 years) if the Secretary determines that such extension would carry out the purposes of the Employee Retirement Income Security Act of 1974 and provide adequate protection for participants under the plan and their beneficiaries, and if the Secretary determines that the failure to permit such extension would result in— a substantial risk to the voluntary continuation of the plan, or a substantial curtailment of pension benefit levels or employee compensation.

(e) Alternative minimum funding standard A CSEC plan which uses a funding method that requires contributions in all years not less than those required under the entry age normal funding method may maintain an alternative minimum funding standard account for any plan year. Such account shall be credited and charged solely as provided in this subsection. For a plan year the alternative minimum funding standard account shall be— charged with the sum of— the lesser of normal cost under the funding method used under the plan or normal cost determined under the unit credit method, the excess, if any, of the present value of accrued benefits under the plan over the fair market value of the assets, and an amount equal to the excess (if any) of credits to the alternative minimum standard account for all prior plan years over charges to such account for all such years, and credited with the amount considered contributed by the employer to or under the plan for the plan year. The alternative minimum funding standard account (and items therein) shall be charged or credited with interest in the manner provided under subsection (b)(5) with respect to the funding standard account.

(f) Quarterly contributions required If a CSEC plan which has a funded current liability percentage for the preceding plan year of less than 100 percent fails to pay the full amount of a required installment for the plan year, then the rate of interest charged to the funding standard account under subsection (b)(5) with respect to the amount of the underpayment for the period of the underpayment shall be equal to the greater of— 175 percent of the Federal mid-term rate (as in effect under section 1274 for the 1st month of such plan year), or the rate of interest used under the plan in determining costs. For purposes of paragraph (1)— The amount of the underpayment shall be the excess of— the required installment, over the amount (if any) of the installment contributed to or under the plan on or before the due date for the installment. The period for which interest is charged under this subsection with regard to any portion of the underpayment shall run from the due date for the installment to the date on which such portion is contributed to or under the plan (determined without regard to subsection (c)(9)). For purposes of subparagraph (A)(ii), contributions shall be credited against unpaid required installments in the order in which such installments are required to be paid. For purposes of this subsection— There shall be 4 required installments for each plan year. In the case of the following required installments: The due date is: 1st April 15 2nd July 15 3rd October 15 4th January 15 of the following year. For purposes of this subsection— The amount of any required installment shall be 25 percent of the required annual payment. For purposes of subparagraph (A), the term “required annual payment” means the lesser of— 90 percent of the amount required to be contributed to or under the plan by the employer for the plan year under section 412 (without regard to any waiver under subsection (c) thereof), or 100 percent of the amount so required for the preceding plan year. Clause (ii) shall not apply if the preceding plan year was not a year of 12 months. A plan to which this paragraph applies shall be treated as failing to pay the full amount of any required installment to the extent that the value of the liquid assets paid in such installment is less than the liquidity shortfall (whether or not such liquidity shortfall exceeds the amount of such installment required to be paid but for this paragraph). This paragraph shall apply to a CSEC plan other than a plan described in section 412( l )(6)(A) (as in effect on the day before the enactment of the Pension Protection Act of 2006) which— is required to pay installments under this subsection for a plan year, and has a liquidity shortfall for any quarter during such plan year. For purposes of paragraph (1), any portion of an installment that is treated as not paid under subparagraph (A) shall continue to be treated as unpaid until the close of the quarter in which the due date for such installment occurs. If the amount of any required installment is increased by reason of subparagraph (A), in no event shall such increase exceed the amount which, when added to prior installments for the plan year, is necessary to increase the funded current liability percentage (taking into account the expected increase in current liability due to benefits accruing during the plan year) to 100 percent. For purposes of this paragraph— The term “liquidity shortfall” means, with respect to any required installment, an amount equal to the excess (as of the last day of the quarter for which such installment is made) of the base amount with respect to such quarter over the value (as of such last day) of the plan’s liquid assets. The term “base amount” means, with respect to any quarter, an amount equal to 3 times the sum of the adjusted disbursements from the plan for the 12 months ending on the last day of such quarter. If the amount determined under subclause (I) exceeds an amount equal to 2 times the sum of the adjusted disbursements from the plan for the 36 months ending on the last day of the quarter and an enrolled actuary certifies to the satisfaction of the Secretary that such excess is the result of nonrecurring circumstances, the base amount with respect to such quarter shall be determined without regard to amounts related to those nonrecurring circumstances. The term “disbursements from the plan” means all disbursements from the trust, including purchases of annuities, payments of single sums and other benefits, and administrative expenses. The term “adjusted disbursements” means disbursements from the plan reduced by the product of— the plan’s funded current liability percentage for the plan year, and the sum of the purchases of annuities, payments of single sums, and such other disbursements as the Secretary shall provide in regulations. The term “liquid assets” means cash, marketable securities and such other assets as specified by the Secretary in regulations. The term “quarter” means, with respect to any required installment, the 3-month period preceding the month in which the due date for such installment occurs. The Secretary may prescribe such regulations as are necessary to carry out this paragraph. In applying this subsection to a plan year beginning on any date other than January 1, there shall be substituted for the months specified in this subsection, the months which correspond thereto. This subsection shall be applied to plan years of less than 12 months in accordance with regulations prescribed by the Secretary.

(g) Imposition of lien where failure to make required contributions In the case of a plan to which this section applies, if— any person fails to make a required installment under subsection (f) or any other payment required under this section before the due date for such installment or other payment, and the unpaid balance of such installment or other payment (including interest), when added to the aggregate unpaid balance of all preceding such installments or other payments for which payment was not made before the due date (including interest), exceeds $1,000,000, then there shall be a lien in favor of the plan in the amount determined under paragraph (3) upon all property and rights to property, whether real or personal, belonging to such person and any other person who is a member of the same controlled group of which such person is a member. This subsection shall apply to a CSEC plan for any plan year for which the funded current liability percentage of such plan is less than 100 percent. This subsection shall not apply to any plan to which section 4021 of the Employee Retirement Income Security Act of 1974 does not apply (as such section is in effect on the date of the enactment of the Retirement Protection Act of 1994). For purposes of paragraph (1), the amount of the lien shall be equal to the aggregate unpaid balance of required installments and other payments required under this section (including interest)— for plan years beginning after 1987, and for which payment has not been made before the due date. A person committing a failure described in paragraph (1) shall notify the Pension Benefit Guaranty Corporation of such failure within 10 days of the due date for the required installment or other payment. The lien imposed by paragraph (1) shall arise on the due date for the required installment or other payment and shall continue until the last day of the first plan year in which the plan ceases to be described in paragraph (1)(B). Such lien shall continue to run without regard to whether such plan continues to be described in paragraph (2) during the period referred to in the preceding sentence. Any amount with respect to which a lien is imposed under paragraph (1) shall be treated as taxes due and owing the United States and rules similar to the rules of subsections (c), (d), and (e) of section 4068 of the Employee Retirement Income Security Act of 1974 shall apply with respect to a lien imposed by subsection (a) and the amount with respect to such lien. Any lien created under paragraph (1) may be perfected and enforced only by the Pension Benefit Guaranty Corporation, or at the direction of the Pension Benefit Guaranty Corporation, by any contributing employer (or any member of the controlled group of the contributing employer). For purposes of this subsection— The terms “due date” and “required installment” have the meanings given such terms by subsection (f), except that in the case of a payment other than a required installment, the due date shall be the date such payment is required to be made under this section. The term “controlled group” means any group treated as a single employer under subsections (b), (c), (m), and ( o ) of section 414.

(h) Current liability For purposes of this section— The term “current liability” means all liabilities to employees and their beneficiaries under the plan. For purposes of paragraph (1), any unpredictable contingent event benefit shall not be taken into account until the event on which the benefit is contingent occurs. The term “unpredictable contingent event benefit” means any benefit contingent on an event other than— age, service, compensation, death, or disability, or an event which is reasonably and reliably predictable (as determined by the Secretary). The rate of interest used to determine current liability under this section shall be the third segment rate determined under section 430(h)(2)(C). The Secretary may by regulation prescribe mortality tables to be used in determining current liability under this subsection. Such tables shall be based upon the actual experience of pension plans and projected trends in such experience. In prescribing such tables, the Secretary shall take into account results of available independent studies of mortality of individuals covered by pension plans. The Secretary shall periodically (at least every 5 years) review any tables in effect under this subsection and shall, to the extent the Secretary determines necessary, by regulation update the tables to reflect the actual experience of pension plans and projected trends in such experience. Notwithstanding subparagraph (B)— In the case of plan years beginning after December 31, 1995 , the Secretary shall establish mortality tables which may be used (in lieu of the tables under subparagraph (B)) to determine current liability under this subsection for individuals who are entitled to benefits under the plan on account of disability. The Secretary shall establish separate tables for individuals whose disabilities occur in plan years beginning before January 1, 1995 , and for individuals whose disabilities occur in plan years beginning on or after such date. In the case of disabilities occurring in plan years beginning after December 31, 1994 , the tables under clause (i) shall apply only with respect to individuals described in such subclause who are disabled within the meaning of title II of the Social Security Act and the regulations thereunder. In the case of a participant to whom this paragraph applies, only the applicable percentage of the years of service before such individual became a participant shall be taken into account in computing the current liability of the plan. For purposes of this subparagraph, the applicable percentage shall be determined as follows: If the years of participation are: The applicable percentage is: 1 20 2 40 3 60 4 80 5 or more 100. This subparagraph shall apply to any participant who, at the time of becoming a participant— has not accrued any other benefit under any defined benefit plan (whether or not terminated) maintained by the employer or a member of the same controlled group of which the employer is a member, who first becomes a participant under the plan in a plan year beginning after December 31, 1987 , and has years of service greater than the minimum years of service necessary for eligibility to participate in the plan. An employer may elect not to have this subparagraph apply. Such an election, once made, may be revoked only with the consent of the Secretary.

(i) Funded current liability percentage For purposes of this section, the term “funded current liability percentage” means, with respect to any plan year, the percentage which— the value of the plan’s assets determined under subsection (c)(2), is of the current liability under the plan.

(j) Funding restoration status Notwithstanding any other provisions of this section— In the case of a CSEC plan that is in funding restoration status for a plan year, for purposes of section 412, the term “accumulated funding deficiency” means, for such plan year, the greater of— the amount described in subsection (a), or the excess of the normal cost of the plan for the plan year over the amount actually contributed to or under the plan for the plan year. In the case of a CSEC plan that uses a spread gain funding method, for purposes of this subsection, the term “normal cost” means normal cost as determined under the entry age normal funding method. In the case of a CSEC plan that is in funding restoration status for a plan year, no amendment to such plan may take effect during such plan year if such amendment has the effect of increasing liabilities of the plan by means of increases in benefits, establishment of new benefits, changing the rate of benefit accrual, or changing the rate at which benefits become nonforfeitable. This paragraph shall not apply to any plan amendment that is required to comply with any applicable law. This paragraph shall cease to apply with respect to any plan year, effective as of the first day of the plan year (or if later, the effective date of the amendment) upon payment by the plan sponsor of a contribution to the plan (in addition to any contribution required under this section without regard to this paragraph) in an amount equal to the increase in the funding liability of the plan attributable to the plan amendment. The sponsor of a CSEC plan shall establish a written funding restoration plan within 180 days of the receipt by the plan sponsor of a certification from the plan actuary that the plan is in funding restoration status for a plan year. Such funding restoration plan shall consist of actions that are calculated, based on reasonably anticipated experience and reasonable actuarial assumptions, to increase the plan’s funded percentage to 100 percent over a period that is not longer than the greater of 7 years or the shortest amount of time practicable. Such funding restoration plan shall take into account contributions required under this section (without regard to this paragraph). If a plan remains in funding restoration status for 2 or more years, such funding restoration plan shall be updated each year after the 1st such year within 180 days of receipt by the plan sponsor of a certification from the plan actuary that the plan remains in funding restoration status for the plan year. Not later than the 90th day of each plan year of a CSEC plan, the plan actuary shall certify to the plan sponsor whether or not the plan is in funding restoration status for the plan year, based on the plan’s funded percentage as of the beginning of the plan year. For this purpose, the actuary may conclusively rely on an estimate of— the plan’s funding liability, based on the funding liability of the plan for the preceding plan year and on reasonable actuarial estimates, assumptions, and methods, and the amount of any contributions reasonably anticipated to be made for the preceding plan year. Contributions described in subparagraph (B) shall be taken into account in determining the plan’s funded percentage as of the beginning of the plan year. For purposes of this subsection— A CSEC plan shall be treated as in funding restoration status for a plan year if the plan’s funded percentage as of the beginning of such plan year is less than 80 percent. The term “funded percentage” means the ratio (expressed as a percentage) which— the value of plan assets (as determined under subsection (c)(2)), bears to the plan’s funding liability. The term “funding liability” for a plan year means the present value of all benefits accrued or earned under the plan as of the beginning of the plan year, based on the assumptions used by the plan pursuant to this section, including the interest rate described in subsection (b)(5)(A) (without regard to subsection (b)(5)(B)). The term “spread gain funding method” has the meaning given such term under rules and forms issued by the Secretary. The term “plan sponsor” means, with respect to a CSEC plan, the association, committee, joint board of trustees, or other similar group of representatives of the parties who establish or maintain the plan.

§ 436 Funding-based limits on benefits and benefit accruals under single-employer plans

(a) General rule For purposes of section 401(a)(29), a defined benefit plan which is a single-employer plan (other than a CSEC plan) shall be treated as meeting the requirements of this section if the plan meets the requirements of subsections (b), (c), (d), and (e).

(b) Funding-based limitation on shutdown benefits and other unpredictable contingent event benefits under single-employer plans If a participant of a defined benefit plan which is a single-employer plan is entitled to an unpredictable contingent event benefit payable with respect to any event occurring during any plan year, the plan shall provide that such benefit may not be provided if the adjusted funding target attainment percentage for such plan year— is less than 60 percent, or would be less than 60 percent taking into account such occurrence. Paragraph (1) shall cease to apply with respect to any plan year, effective as of the first day of the plan year, upon payment by the plan sponsor of a contribution (in addition to any minimum required contribution under section 430) equal to— in the case of paragraph (1)(A), the amount of the increase in the funding target of the plan (under section 430) for the plan year attributable to the occurrence referred to in paragraph (1), and in the case of paragraph (1)(B), the amount sufficient to result in an adjusted funding target attainment percentage of 60 percent. For purposes of this subsection, the term “unpredictable contingent event benefit” means any benefit payable solely by reason of— a plant shutdown (or similar event, as determined by the Secretary), or an event other than the attainment of any age, performance of any service, receipt or derivation of any compensation, or occurrence of death or disability.

(c) Limitations on plan amendments increasing liability for benefits No amendment to a defined benefit plan which is a single-employer plan which has the effect of increasing liabilities of the plan by reason of increases in benefits, establishment of new benefits, changing the rate of benefit accrual, or changing the rate at which benefits become nonforfeitable may take effect during any plan year if the adjusted funding target attainment percentage for such plan year is— less than 80 percent, or would be less than 80 percent taking into account such amendment. Paragraph (1) shall cease to apply with respect to any plan year, effective as of the first day of the plan year (or if later, the effective date of the amendment), upon payment by the plan sponsor of a contribution (in addition to any minimum required contribution under section 430) equal to— in the case of paragraph (1)(A), the amount of the increase in the funding target of the plan (under section 430) for the plan year attributable to the amendment, and in the case of paragraph (1)(B), the amount sufficient to result in an adjusted funding target attainment percentage of 80 percent. Paragraph (1) shall not apply to any amendment which provides for an increase in benefits under a formula which is not based on a participant’s compensation, but only if the rate of such increase is not in excess of the contemporaneous rate of increase in average wages of participants covered by the amendment.

(d) Limitations on accelerated benefit distributions A defined benefit plan which is a single-employer plan shall provide that, in any case in which the plan’s adjusted funding target attainment percentage for a plan year is less than 60 percent, the plan may not pay any prohibited payment after the valuation date for the plan year. A defined benefit plan which is a single-employer plan shall provide that, during any period in which the plan sponsor is a debtor in a case under title 11, United States Code, or similar Federal or State law, the plan may not pay any prohibited payment. The preceding sentence shall not apply on or after the date on which the enrolled actuary of the plan certifies that the adjusted funding target attainment percentage of such plan (determined by not taking into account any adjustment of segment rates under section 430(h)(2)(C)(iv)) is not less than 100 percent. A defined benefit plan which is a single-employer plan shall provide that, in any case in which the plan’s adjusted funding target attainment percentage for a plan year is 60 percent or greater but less than 80 percent, the plan may not pay any prohibited payment after the valuation date for the plan year to the extent the amount of the payment exceeds the lesser of— 50 percent of the amount of the payment which could be made without regard to this section, or the present value (determined under guidance prescribed by the Pension Benefit Guaranty Corporation, using the interest and mortality assumptions under section 417(e)) of the maximum guarantee with respect to the participant under section 4022 of the Employee Retirement Income Security Act of 1974. The plan shall also provide that only 1 prohibited payment meeting the requirements of subparagraph (A) may be made with respect to any participant during any period of consecutive plan years to which the limitations under either paragraph (1) or (2) or this paragraph applies. For purposes of this subparagraph, a participant and any beneficiary on his behalf (including an alternate payee, as defined in section 414(p)(8)) shall be treated as 1 participant. If the accrued benefit of a participant is allocated to such an alternate payee and 1 or more other persons, the amount under subparagraph (A) shall be allocated among such persons in the same manner as the accrued benefit is allocated unless the qualified domestic relations order (as defined in section 414(p)(1)(A)) provides otherwise. This subsection shall not apply to any plan for any plan year if the terms of such plan (as in effect for the period beginning on September 1, 2005 , and ending with such plan year) provide for no benefit accruals with respect to any participant during such period. For purpose of this subsection, the term “prohibited payment” means— any payment, in excess of the monthly amount paid under a single life annuity (plus any social security supplements described in the last sentence of section 411(a)(9)), to a participant or beneficiary whose annuity starting date (as defined in section 417(f)(2)) occurs during any period a limitation under paragraph (1) or (2) is in effect, any payment for the purchase of an irrevocable commitment from an insurer to pay benefits, and any other payment specified by the Secretary by regulations. Such term shall not include the payment of a benefit which under section 411(a)(11) may be immediately distributed without the consent of the participant.

(e) Limitation on benefit accruals for plans with severe funding shortfalls A defined benefit plan which is a single-employer plan shall provide that, in any case in which the plan’s adjusted funding target attainment percentage for a plan year is less than 60 percent, benefit accruals under the plan shall cease as of the valuation date for the plan year. Paragraph (1) shall cease to apply with respect to any plan year, effective as of the first day of the plan year, upon payment by the plan sponsor of a contribution (in addition to any minimum required contribution under section 430) equal to the amount sufficient to result in an adjusted funding target attainment percentage of 60 percent.

(f) Rules relating to contributions required to avoid benefit limitations For purposes of this section, the adjusted funding target attainment percentage shall be determined by treating as an asset of the plan any security provided by a plan sponsor in a form meeting the requirements of subparagraph (B). The security required under subparagraph (A) shall consist of— a bond issued by a corporate surety company that is an acceptable surety for purposes of section 412 of the Employee Retirement Income Security Act of 1974, cash, or United States obligations which mature in 3 years or less, held in escrow by a bank or similar financial institution, or such other form of security as is satisfactory to the Secretary and the parties involved. Any security provided under subparagraph (A) may be perfected and enforced at any time after the earlier of— the date on which the plan terminates, if there is a failure to make a payment of the minimum required contribution for any plan year beginning after the security is provided, the due date for the payment under section 430(j), or if the adjusted funding target attainment percentage is less than 60 percent for a consecutive period of 7 years, the valuation date for the last year in the period. The security shall be released (and any amounts thereunder shall be refunded together with any interest accrued thereon) at such time as the Secretary may prescribe in regulations, including regulations for partial releases of the security by reason of increases in the adjusted funding target attainment percentage. No prefunding balance or funding standard carryover balance under section 430(f) may be used under subsection (b), (c), or (e) to satisfy any payment an employer may make under any such subsection to avoid or terminate the application of any limitation under such subsection. Subject to subparagraph (C), in any case in which a benefit limitation under subsection (b), (c), (d), or (e) would (but for this subparagraph and determined without regard to subsection (b)(2), (c)(2), or (e)(2)) apply to such plan for the plan year, the plan sponsor of such plan shall be treated for purposes of this title as having made an election under section 430(f) to reduce the prefunding balance or funding standard carryover balance by such amount as is necessary for such benefit limitation to not apply to the plan for such plan year. Subparagraph (A) shall not apply with respect to a benefit limitation for any plan year if the application of subparagraph (A) would not result in the benefit limitation not applying for such plan year. With respect to any benefit limitation under subsection (b), (c), or (e), subparagraph (A) shall only apply in the case of a plan maintained pursuant to 1 or more collective bargaining agreements between employee representatives and 1 or more employers.

(g) New plans Subsections (b), (c), and (e) shall not apply to a plan for the first 5 plan years of the plan. For purposes of this subsection, the reference in this subsection to a plan shall include a reference to any predecessor plan.

(h) Presumed underfunding for purposes of benefit limitations In any case in which a benefit limitation under subsection (b), (c), (d), or (e) has been applied to a plan with respect to the plan year preceding the current plan year, the adjusted funding target attainment percentage of the plan for the current plan year shall be presumed to be equal to the adjusted funding target attainment percentage of the plan for the preceding plan year until the enrolled actuary of the plan certifies the actual adjusted funding target attainment percentage of the plan for the current plan year. In any case in which no certification of the adjusted funding target attainment percentage for the current plan year is made with respect to the plan before the first day of the 10th month of such year, for purposes of subsections (b), (c), (d), and (e), such first day shall be deemed, for purposes of such subsection, to be the valuation date of the plan for the current plan year and the plan’s adjusted funding target attainment percentage shall be conclusively presumed to be less than 60 percent as of such first day. In any case in which— a benefit limitation under subsection (b), (c), (d), or (e) did not apply to a plan with respect to the plan year preceding the current plan year, but the adjusted funding target attainment percentage of the plan for such preceding plan year was not more than 10 percentage points greater than the percentage which would have caused such subsection to apply to the plan with respect to such preceding plan year, and as of the first day of the 4th month of the current plan year, the enrolled actuary of the plan has not certified the actual adjusted funding target attainment percentage of the plan for the current plan year, until the enrolled actuary so certifies, such first day shall be deemed, for purposes of such subsection, to be the valuation date of the plan for the current plan year and the adjusted funding target attainment percentage of the plan as of such first day shall, for purposes of such subsection, be presumed to be equal to 10 percentage points less than the adjusted funding target attainment percentage of the plan for such preceding plan year.

(i) Treatment of plan as of close of prohibited or cessation period For purposes of applying this title— Unless the plan provides otherwise, payments and accruals will resume effective as of the day following the close of the period for which any limitation of payment or accrual of benefits under subsection (d) or (e) applies. Nothing in this subsection shall be construed as affecting the plan’s treatment of benefits which would have been paid or accrued but for this section.

(j) Terms relating to funding target attainment percentage For purposes of this section— The term “funding target attainment percentage” has the same meaning given such term by section 430(d)(2). The term “adjusted funding target attainment percentage” means the funding target attainment percentage which is determined under paragraph (1) by increasing each of the amounts under subparagraphs (A) and (B) of section 430(d)(2) by the aggregate amount of purchases of annuities for employees other than highly compensated employees (as defined in section 414(q)) which were made by the plan during the preceding 2 plan years. In the case of a plan for any plan year, if the funding target attainment percentage is 100 percent or more (determined without regard to the reduction in the value of assets under section 430(f)(4)), the funding target attainment percentage for purposes of paragraphs (1) and (2) shall be determined without regard to such reduction.

(k) Secretarial authority for plans with alternate valuation date In the case of a plan which has designated a valuation date other than the first day of the plan year, the Secretary may prescribe rules for the application of this section which are necessary to reflect the alternate valuation date.

(l) Single-employer plan For purposes of this section, the term “single-employer plan” means a plan which is not a multiemployer plan.

§ 441 Period for computation of taxable income

(a) Computation of taxable income Taxable income shall be computed on the basis of the taxpayer’s taxable year.

(b) Taxable year For purposes of this subtitle, the term “taxable year” means— the taxpayer’s annual accounting period, if it is a calendar year or a fiscal year; the calendar year, if subsection (g) applies; the period for which the return is made, if a return is made for a period of less than 12 months; or in the case of a DISC filing a return for a period of at least 12 months, the period determined under subsection (h).

(c) Annual accounting period For purposes of this subtitle, the term “annual accounting period” means the annual period on the basis of which the taxpayer regularly computes his income in keeping his books.

(d) Calendar year For purposes of this subtitle, the term “calendar year” means a period of 12 months ending on December 31.

(e) Fiscal year For purposes of this subtitle, the term “fiscal year” means a period of 12 months ending on the last day of any month other than December. In the case of any taxpayer who has made the election provided by subsection (f) the term means the annual period (varying from 52 to 53 weeks) so elected.

(f) Election of year consisting of 52–53 weeks A taxpayer who, in keeping his books, regularly computes his income on the basis of an annual period which varies from 52 to 53 weeks and ends always on the same day of the week and ends always— on whatever date such same day of the week last occurs in a calendar month, or on whatever date such same day of the week falls which is nearest to the last day of a calendar month, may (in accordance with the regulations prescribed under paragraph (3)) elect to compute his taxable income for purposes of this subtitle on the basis of such annual period. This paragraph shall apply to taxable years ending after the date of the enactment of this title. In any case in which the effective date or the applicability of any provision of this title is expressed in terms of taxable years beginning, including, or ending with reference to a specified date which is the first or last day of a month, a taxable year described in paragraph (1) shall (except for purposes of the computation under section 15) be treated— as beginning with the first day of the calendar month beginning nearest to the first day of such taxable year, or as ending with the last day of the calendar month ending nearest to the last day of such taxable year, as the case may be. In the case of a change from or to a taxable year described in paragraph (1)— if such change results in a short period (within the meaning of section 443) of 359 days or more, or of less than 7 days, section 443(b) (relating to alternative tax computation) shall not apply; if such change results in a short period of less than 7 days, such short period shall, for purposes of this subtitle, be added to and deemed a part of the following taxable year; and if such change results in a short period to which subsection (b) of section 443 applies, the taxable income for such short period shall be placed on an annual basis for purposes of such subsection by multiplying the gross income for such short period (minus the deductions allowed by this chapter for the short period, but only the adjusted amount of the deductions for personal exemptions as described in section 443(c)) by 365, by dividing the result by the number of days in the short period, and the tax shall be the same part of the tax computed on the annual basis as the number of days in the short period is of 365 days. The Secretary may by regulation provide terms and conditions for the application of this subsection to a partnership, S corporation, or personal service corporation (within the meaning of section 441(i)(2)). The Secretary shall prescribe such regulations as he deems necessary for the application of this subsection.

(g) No books kept; no accounting period Except as provided in section 443 (relating to returns for periods of less than 12 months), the taxpayer’s taxable year shall be the calendar year if— the taxpayer keeps no books; the taxpayer does not have an annual accounting period; or the taxpayer has an annual accounting period, but such period does not qualify as a fiscal year.

(h) Taxable year of DISC’s For purposes of this subtitle, the taxable year of any DISC shall be the taxable year of that shareholder (or group of shareholders with the same 12-month taxable year) who has the highest percentage of voting power. If 2 or more shareholders (or groups) have the highest percentage of voting power under paragraph (1), the taxable year of the DISC shall be the same 12-month period as that of any such shareholder (or group). The Secretary shall prescribe regulations under which paragraphs (1) and (2) shall apply to a change of ownership of a corporation after the taxable year of the corporation has been determined under paragraph (1) or (2) only if such change is a substantial change of ownership. For purposes of this subsection, voting power shall be determined on the basis of total combined voting power of all classes of stock of the corporation entitled to vote.

(i) Taxable year of personal service corporations For purposes of this subtitle, the taxable year of any personal service corporation shall be the calendar year unless the corporation establishes, to the satisfaction of the Secretary, a business purpose for having a different period for its taxable year. For purposes of this paragraph, any deferral of income to shareholders shall not be treated as a business purpose. For purposes of this subsection, the term “personal service corporation” has the meaning given such term by section 269A(b)(1), except that section 269A(b)(2) shall be applied— by substituting “any” for “more than 10 percent”, and by substituting “any” for “50 percent or more in value” in section 318(a)(2)(C). A corporation shall not be treated as a personal service corporation unless more than 10 percent of the stock (by value) in such corporation is held by employee-owners (within the meaning of section 269A(b)(2), as modified by the preceding sentence). If a corporation is a member of an affiliated group filing a consolidated return, all members of such group shall be taken into account in determining whether such corporation is a personal service corporation.

§ 442 Change of annual accounting period

If a taxpayer changes his annual accounting period, the new accounting period shall become the taxpayer’s taxable year only if the change is approved by the Secretary. For purposes of this subtitle, if a taxpayer to whom section 441(g) applies adopts an annual accounting period (as defined in section 441(c)) other than a calendar year, the taxpayer shall be treated as having changed his annual accounting period. ( Aug. 16, 1954, ch. 736 , 68A Stat. 149 ; Pub. L. 94–455, title XIX, § 1906(b)(13)(A) , Oct. 4, 1976 , 90 Stat. 1834 .)

§ 443 Returns for a period of less than 12 months

(a) Returns for short period A return for a period of less than 12 months (referred to in this section as “short period”) shall be made under any of the following circumstances: When the taxpayer, with the approval of the Secretary, changes his annual accounting period. In such a case, the return shall be made for the short period beginning on the day after the close of the former taxable year and ending at the close of the day before the day designated as the first day of the new taxable year. When the taxpayer is in existence during only part of what would otherwise be his taxable year.

(b) Computation of tax on change of annual accounting period If a return is made under paragraph (1) of subsection (a), the taxable income for the short period shall be placed on an annual basis by multiplying the modified taxable income for such short period by 12, dividing the result by the number of months in the short period. The tax shall be the same part of the tax computed on the annual basis as the number of months in the short period is of 12 months. If the taxpayer applies for the benefits of this paragraph and establishes the amount of this taxable income for the 12-month period described in subparagraph (B), computed as if that period were a taxable year and under the law applicable to that year, then the tax for the short period, computed under paragraph (1), shall be reduced to the greater of the following: an amount which bears the same ratio to the tax computed on the taxable income for the 12-month period as the modified taxable income computed on the basis of the short period bears to the modified taxable income for the 12-month period; or the tax computed on the modified taxable income for the short period. The taxpayer (other than a taxpayer to whom subparagraph (B)(ii) applies) shall compute the tax and file his return without the application of this paragraph. The 12-month period referred to in subparagraph (A) shall be— the period of 12 months beginning on the first day of the short period, or the period of 12 months ending at the close of the last day of the short period, if at the end of the 12 months referred to in clause (i) the taxpayer is not in existence or (if a corporation) has theretofore disposed of substantially all of its assets. Application for the benefits of this paragraph shall be made in such manner and at such time as the regulations prescribed under subparagraph (D) may require; except that the time so prescribed shall not be later than the time (including extensions) for filing the return for the first taxable year which ends on or after the day which is 12 months after the first day of the short period. Such application, in case the return was filed without regard to this paragraph, shall be considered a claim for credit or refund with respect to the amount by which the tax is reduced under this paragraph. The Secretary shall prescribe such regulations as he deems necessary for the application of this paragraph. For purposes of this subsection the term “modified taxable income” means, with respect to any period, the gross income for such period minus the deductions allowed by this chapter for such period (but, in the case of a short period, only the adjusted amount of the deductions for personal exemptions).

(c) Adjustment in deduction for personal exemption In the case of a taxpayer other than a corporation, if a return is made for a short period by reason of subsection (a)(1) and if the tax is not computed under subsection (b)(2), then the exemptions allowed as a deduction under section 151 (and any deduction in lieu thereof) shall be reduced to amounts which bear the same ratio to the full exemptions as the number of months in the short period bears to 12.

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

(e) Cross references For inapplicability of subsection (b) in computing— Accumulated earnings tax, see section 536. Personal holding company tax, see section 546. The taxable income of a regulated investment company, see section 852(b)(2)(E). The taxable income of a real estate investment trust, see section 857(b)(2)(C). For returns for a period of less than 12 months in the case of a debtor’s election to terminate a taxable year, see section 1398(d)(2)(E).

§ 444 Election of taxable year other than required taxable year

(a) General rule Except as otherwise provided in this section, a partnership, S corporation, or personal service corporation may elect to have a taxable year other than the required taxable year.

(b) Limitations on taxable years which may be elected Except as provided in paragraphs (2) and (3), an election may be made under subsection (a) only if the deferral period of the taxable year elected is not longer than 3 months. Except as provided in paragraph (3), in the case of an entity changing a taxable year, an election may be made under subsection (a) only if the deferral period of the taxable year elected is not longer than the shorter of— 3 months, or the deferral period of the taxable year which is being changed. In the case of an entity’s 1st taxable year beginning after December 31, 1986 , an entity may elect a taxable year under subsection (a) which is the same as the entity’s last taxable year beginning in 1986. For purposes of this subsection, except as provided in regulations, the term “deferral period” means, with respect to any taxable year of the entity, the months between— the beginning of such year, and the close of the 1st required taxable year ending within such year.

(c) Effect of election If an entity makes an election under subsection (a), then— in the case of a partnership or S corporation, such entity shall make the payments required by section 7519, and in the case of a personal service corporation, such corporation shall be subject to the deduction limitations of section 280H.

(d) Elections An election under subsection (a) shall be made by the partnership, S corporation, or personal service corporation. Any election under subsection (a) shall remain in effect until the partnership, S corporation, or personal service corporation changes its taxable year or otherwise terminates such election. Any change to a required taxable year may be made without the consent of the Secretary. If an election is terminated under subparagraph (A) or paragraph (3)(A), the partnership, S corporation, or personal service corporation may not make another election under subsection (a). Except as otherwise provided in this paragraph— no election may be under subsection (a) with respect to any entity which is part of a tiered structure, and an election under subsection (a) with respect to any entity shall be terminated if such entity becomes part of a tiered structure. Subparagraph (A) shall not apply to any tiered structure which consists only of partnerships or S corporations (or both) all of which have the same taxable year.

(e) Required taxable year For purposes of this section, the term “required taxable year” means the taxable year determined under section 706(b), 1378, or 441(i) without taking into account any taxable year which is allowable by reason of business purposes. Solely for purposes of the preceding sentence, sections 706(b), 1378, and 441(i) shall be treated as in effect for taxable years beginning before January 1, 1987 .

(f) Personal service corporation For purposes of this section, the term “personal service corporation” has the meaning given to such term by section 441(i)(2).

(g) Regulations The Secretary shall prescribe such regulations as may be necessary to carry out the provisions of this section, including regulations to prevent the avoidance of subsection (b)(2)(B) or (d)(2)(B) through the change in form of an entity.

§ 446 General rule for methods of accounting

(a) General rule Taxable income shall be computed under the method of accounting on the basis of which the taxpayer regularly computes his income in keeping his books.

(b) Exceptions If no method of accounting has been regularly used by the taxpayer, or if the method used does not clearly reflect income, the computation of taxable income shall be made under such method as, in the opinion of the Secretary, does clearly reflect income.

(c) Permissible methods Subject to the provisions of subsections (a) and (b), a taxpayer may compute taxable income under any of the following methods of accounting— the cash receipts and disbursements method; an accrual method; any other method permitted by this chapter; or any combination of the foregoing methods permitted under regulations prescribed by the Secretary.

(d) Taxpayer engaged in more than one business A taxpayer engaged in more than one trade or business may, in computing taxable income, use a different method of accounting for each trade or business.

(e) Requirement respecting change of accounting method Except as otherwise expressly provided in this chapter, a taxpayer who changes the method of accounting on the basis of which he regularly computes his income in keeping his books shall, before computing his taxable income under the new method, secure the consent of the Secretary.

(f) Failure to request change of method of accounting If the taxpayer does not file with the Secretary a request to change the method of accounting, the absence of the consent of the Secretary to a change in the method of accounting shall not be taken into account— to prevent the imposition of any penalty, or the addition of any amount to tax, under this title, or to diminish the amount of such penalty or addition to tax.

§ 447 Method of accounting for corporations engaged in farming

(a) General rule Except as otherwise provided by law, the taxable income from farming of— a corporation engaged in the trade or business of farming, or a partnership engaged in the trade or business of farming, if a corporation is a partner in such partnership, shall be computed on an accrual method of accounting. This section shall not apply to the trade or business of operating a nursery or sod farm or to the raising or harvesting of trees (other than fruit and nut trees).

(b) Preproductive period expenses For rules requiring capitalization of certain preproductive period expenses, see section 263A.

(c) Exception for certain corporations For purposes of subsection (a), a corporation shall be treated as not being a corporation for any taxable year if it is— an S corporation, or a corporation which meets the gross receipts test of section 448(c) for such taxable year.

(d) Coordination with section 481 Any change in method of accounting made pursuant to this section shall be treated for purposes of section 481 as initiated by the taxpayer and made with the consent of the Secretary.

(e) Certain annual accrual accounting methods Notwithstanding subsection (a) or section 263A, if— for its 10 taxable years ending with its first taxable year beginning after December 31, 1975 , a corporation or qualified partnership used an annual accrual method of accounting with respect to its trade or business of farming, such corporation or qualified partnership raises crops which are harvested not less than 12 months after planting, and such corporation or qualified partnership has used such method of accounting for all taxable years intervening between its first taxable year beginning after December 31, 1975 , and the taxable year, such corporation or qualified partnership may continue to employ such method of accounting for the taxable year with respect to its qualified farming trade or business. For purposes of paragraph (1), the term “annual accrual method of accounting” means a method under which revenues, costs, and expenses are computed on an accrual method of accounting and the preproductive period expenses incurred during the taxable year are charged to harvested crops or deducted in determining the taxable income for such years. For purposes of this subsection, if— a corporation acquired substantially all the assets of a qualified farming trade or business from another corporation in a transaction in which no gain or loss was recognized to the transferor or transferee corporation, or a qualified partnership acquired substantially all the assets of a qualified farming trade or business from one of its partners in a transaction to which section 721 applies, the transferee corporation or qualified partnership shall be deemed to have computed its taxable income on an annual accrual method of accounting during the period for which the transferor corporation or partnership computed its taxable income from such trade or business on an annual accrual method. For purposes of this subsection— The term “qualified partnership” means a partnership which is engaged in a qualified farming trade or business and each of the partners of which is a corporation other than— an S corporation, or a personal holding company (within the meaning of section 542(a)). The term “qualified farming trade or business” means the trade or business of farming— sugar cane, any plant with a preproductive period (as defined in section 263A(e)(3)) of 2 years or less, and any other plant (other than any citrus or almond tree) if an election by the corporation under this subparagraph is in effect. In the case of a partnership and for purposes of paragraph (3)(A), subclauses (II) and (III) shall not apply. For purposes of paragraphs (1) and (2) of section 263A(e), any election under this subparagraph shall be treated as if it were an election under subsection (d)(3) of section 263A. Unless the Secretary otherwise consents, an election under this subparagraph may be made only for the corporation’s 1st taxable year which begins after December 31, 1986 , and during which the corporation engages in a farming business. Any such election, once made, may be revoked only with the consent of the Secretary.

“If— a farming syndicate (within the meaning of [former] section 464(c) of the Internal Revenue Code of 1954 [now 26 U.S.C. 461(k) ]) was in existence on December 31, 1975 , and such syndicate elects an accrual method of accounting (including the capitalization of preproductive period expenses described in section 447(b) of such Code) for a taxable year beginning before January 1, 1979 , then such election shall be treated as having been made with the consent of the Secretary of the Treasury or his delegate and, under regulations prescribed by the Secretary of the Treasury or his delegate, the net amount of the adjustments required by section 481(a) of such Code to be taken into account by the taxpayer in computing taxable income shall be taken into account in each of the 10 taxable years (or the remaining taxable years where there is a stated future life of less than 10 taxable years) beginning with the year of change.”

§ 448 Limitation on use of cash method of accounting

(a) General rule Except as otherwise provided in this section, in the case of a— C corporation, partnership which has a C corporation as a partner, or tax shelter, taxable income shall not be computed under the cash receipts and disbursements method of accounting.

(b) Exceptions Paragraphs (1) and (2) of subsection (a) shall not apply to any farming business. Paragraphs (1) and (2) of subsection (a) shall not apply to a qualified personal service corporation, and such a corporation shall be treated as an individual for purposes of determining whether paragraph (2) of subsection (a) applies to any partnership. Paragraphs (1) and (2) of subsection (a) shall not apply to any corporation or partnership for any taxable year if such entity (or any predecessor) meets the gross receipts test of subsection (c) for such taxable year.

(c) Gross receipts test For purposes of this section— A corporation or partnership meets the gross receipts test of this subsection for any taxable year if the average annual gross receipts of such entity for the 3-taxable-year period ending with the taxable year which precedes such taxable year does not exceed $25, 000, 000. A llp erso n s t re a t e d a s a s in g l ee m pl oyer u n d ers u b sec t i o n (a) or (b) o f sec t i o n 52 ors u b sec t i o n (m) or (o) o f sec t i o n 414 s ha ll b e t re a t e d a so n e p erso n f or p u r p oseso f p a r a g r a p h (1) . F or p u r p oseso f t hi ss u b sec t i o n — I f t h ee n t i t y w a s n o t in e x i s t e n ce f or t h ee n t i re 3 - ye a r p er i o d re f erre d t o in p a r a g r a p h (1), s u c h p a r a g r a p h s ha ll b e a ppl i e d o n t h e ba s i so f t h e p er i o dd u r in g w hi c h s u c h e n t i t y (or t r a d eor b u s in ess) w a s in e x i s t e n ce . G rossrece i pt s f or an y t a x ab l eye a ro f l ess t han 12 m o n t h ss ha ll b e ann u a l i ze d b y m u lt i pl y in g t h e g rossrece i pt s f or t h es h or tp er i o d b y 12 an dd i v i d in g t h eres u lt b y t h e n u mb ero f m o n t h s in t h es h or tp er i o d . G rossrece i pt s f or an y t a x ab l eye a rs ha ll b ere d u ce d b yre t u r n s an d a ll o w an ces ma d e d u r in g s u c h ye a r . A n yre f ere n ce in t hi ss u b sec t i o n t o an e n t i t ys ha ll in c l u d e a re f ere n ce t o an y p re d ecessoro f s u c h e n t i t y . I n t h ec a seo f an y t a x ab l eye a r b e g innin g a f t erDece mb er 31, 2018, t h e d o ll a r am o u n t in p a r a g r a p h (1) s ha ll b e in cre a se d b y anam o u n t e q u a lt o — s u c h d o ll a r am o u n t, m u lt i pl i e d b y t h ecos t - o f - l i v in g a d j u s t m e n t d e t er min e d u n d ersec t i o n 1 (f) (3) f or t h ec a l e n d a rye a r in w hi c h t h e t a x ab l eye a r b e g in s, b ys u b s t i t u t in g “ c a l e n d a rye a r 2017” f or “ c a l e n d a rye a r 2016” in s u b p a r a g r a p h (A) (ii) t h ereo f . I f an y am o u n t a s in cre a se d u n d er t h e p rece d in g se n t e n ce i s n o t am u lt i pl eo f$ 1,000,000, such amount shall be rounded to the nearest multiple of $1,000,000.

(d) Definitions and special rules For purposes of this section— The term “farming business” means the trade or business of farming (within the meaning of section 263A(e)(4)). The term “farming business” includes the raising, harvesting, or growing of trees to which section 263A(c)(5) applies. The term “qualified personal service corporation” means any corporation— substantially all of the activities of which involve the performance of services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, or consulting, and substantially all of the stock of which (by value) is held directly (or indirectly through 1 or more partnerships, S corporations, or qualified personal service corporations not described in paragraph (2) or (3) of subsection (a)) by— employees performing services for such corporation in connection with the activities involving a field referred to in subparagraph (A), retired employees who had performed such services for such corporation, the estate of any individual described in clause (i) or (ii), or any other person who acquired such stock by reason of the death of an individual described in clause (i) or (ii) (but only for the 2-year period beginning on the date of the death of such individual). To the extent provided in regulations which shall be prescribed by the Secretary, indirect holdings through a trust shall be taken into account under subparagraph (B). The term “tax shelter” has the meaning given such term by section 461(i)(3) (determined after application of paragraph (4) thereof). An S corporation shall not be treated as a tax shelter for purposes of this section merely by reason of being required to file a notice of exemption from registration with a State agency described in section 461(i)(3)(A), but only if there is a requirement applicable to all corporations offering securities for sale in the State that to be exempt from such registration the corporation must file such a notice. For purposes of paragraph (2)— community property laws shall be disregarded, stock held by a plan described in section 401(a) which is exempt from tax under section 501(a) shall be treated as held by an employee described in paragraph (2)(B)(i), and at the election of the common parent of an affiliated group (within the meaning of section 1504(a)), all members of such group may be treated as 1 taxpayer for purposes of paragraph (2)(B) if 90 percent or more of the activities of such group involve the performance of services in the same field described in paragraph (2)(A). In the case of any person using an accrual method of accounting with respect to amounts to be received for the performance of services by such person, such person shall not be required to accrue any portion of such amounts which (on the basis of such person’s experience) will not be collected if— such services are in fields referred to in paragraph (2)(A), or such person meets the gross receipts test of subsection (c) for all prior taxable years. This paragraph shall not apply to any amount if interest is required to be paid on such amount or there is any penalty for failure to timely pay such amount. The Secretary shall prescribe regulations to permit taxpayers to determine amounts referred to in subparagraph (A) using computations or formulas which, based on experience, accurately reflect the amount of income that will not be collected by such person. A taxpayer may adopt, or request consent of the Secretary to change to, a computation or formula that clearly reflects the taxpayer’s experience. A request under the preceding sentence shall be approved if such computation or formula clearly reflects the taxpayer’s experience. For purposes of this section, a trust subject to tax under section 511(b) shall be treated as a C corporation with respect to its activities constituting an unrelated trade or business. Any change in method of accounting made pursuant to this section shall be treated for purposes of section 481 as initiated by the taxpayer and made with the consent of the Secretary. The Secretary shall prescribe such regulations as may be necessary to prevent the use of related parties, pass-thru entities, or intermediaries to avoid the application of this section.

§ 451 General rule for taxable year of inclusion

(a) General rule The amount of any item of gross income shall be included in the gross income for the taxable year in which received by the taxpayer, unless, under the method of accounting used in computing taxable income, such amount is to be properly accounted for as of a different period.

(b) Inclusion not later than for financial accounting purposes In the case of a taxpayer the taxable income of which is computed under an accrual method of accounting, the all events test with respect to any item of gross income (or portion thereof) shall not be treated as met any later than when such item (or portion thereof) is taken into account as revenue in— an applicable financial statement of the taxpayer, or such other financial statement as the Secretary may specify for purposes of this subsection. This paragraph shall not apply to— a taxpayer which does not have a financial statement described in clause (i) or (ii) of subparagraph (A) for a taxable year, or any item of gross income in connection with a mortgage servicing contract. For purposes of this section, the all events test is met with respect to any item of gross income if all the events have occurred which fix the right to receive such income and the amount of such income can be determined with reasonable accuracy. Paragraph (1) shall not apply with respect to any item of gross income for which the taxpayer uses a special method of accounting provided under any other provision of this chapter, other than any provision of part V of subchapter P (except as provided in clause (ii) of paragraph (1)(B)). For purposes of this subsection, the term “applicable financial statement” means— a financial statement which is certified as being prepared in accordance with generally accepted accounting principles and which is— a 10–K (or successor form), or annual statement to shareholders, required to be filed by the taxpayer with the United States Securities and Exchange Commission, an audited financial statement of the taxpayer which is used for— credit purposes, reporting to shareholders, partners, or other proprietors, or to beneficiaries, or any other substantial nontax purpose, but only if there is no statement of the taxpayer described in clause (i), or filed by the taxpayer with any other Federal agency for purposes other than Federal tax purposes, but only if there is no statement of the taxpayer described in clause (i) or (ii), a financial statement which is made on the basis of international financial reporting standards and is filed by the taxpayer with an agency of a foreign government which is equivalent to the United States Securities and Exchange Commission and which has reporting standards not less stringent than the standards required by such Commission, but only if there is no statement of the taxpayer described in subparagraph (A), or a financial statement filed by the taxpayer with any other regulatory or governmental body specified by the Secretary, but only if there is no statement of the taxpayer described in subparagraph (A) or (B). For purposes of this subsection, in the case of a contract which contains multiple performance obligations, the allocation of the transaction price to each performance obligation shall be equal to the amount allocated to each performance obligation for purposes of including such item in revenue in the applicable financial statement of the taxpayer. For purposes of paragraph (1), if the financial results of a taxpayer are reported on the applicable financial statement (as defined in paragraph (3)) for a group of entities, such statement shall be treated as the applicable financial statement of the taxpayer.

(c) Treatment of advance payments A taxpayer which computes taxable income under the accrual method of accounting, and receives any advance payment during the taxable year, shall— except as provided in subparagraph (B), include such advance payment in gross income for such taxable year, or if the taxpayer elects the application of this subparagraph with respect to the category of advance payments to which such advance payment belongs, the taxpayer shall— to the extent that any portion of such advance payment is required under subsection (b) to be included in gross income in the taxable year in which such payment is received, so include such portion, and include the remaining portion of such advance payment in gross income in the taxable year following the taxable year in which such payment is received. Except as otherwise provided in this paragraph, the election under paragraph (1)(B) shall be made at such time, in such form and manner, and with respect to such categories of advance payments, as the Secretary may provide. An election under paragraph (1)(B) shall be effective for the taxable year with respect to which it is first made and for all subsequent taxable years, unless the taxpayer secures the consent of the Secretary to revoke such election. For purposes of this title, the computation of taxable income under an election made under paragraph (1)(B) shall be treated as a method of accounting. Except as otherwise provided by the Secretary, the election under paragraph (1)(B) shall not apply with respect to advance payments received by the taxpayer during a taxable year if such taxpayer ceases to exist during (or with the close of) such taxable year. For purposes of this subsection— The term “advance payment” means any payment— the full inclusion of which in the gross income of the taxpayer for the taxable year of receipt is a permissible method of accounting under this section (determined without regard to this subsection), any portion of which is included in revenue by the taxpayer in a financial statement described in clause (i) or (ii) of subsection (b)(1)(A) for a subsequent taxable year, and which is for goods, services, or such other items as may be identified by the Secretary for purposes of this clause. Except as otherwise provided by the Secretary, such term shall not include— rent, insurance premiums governed by subchapter L, payments with respect to financial instruments, payments with respect to warranty or guarantee contracts under which a third party is the primary obligor, payments subject to section 871(a), 881, 1441, or 1442, payments in property to which section 83 applies, and any other payment identified by the Secretary for purposes of this subparagraph. For purposes of this subsection, an item of gross income is received by the taxpayer if it is actually or constructively received, or if it is due and payable to the taxpayer. For purposes of this subsection, rules similar to subsection (b)(4) shall apply.

(d) Special rule in case of death In the case of the death of a taxpayer whose taxable income is computed under an accrual method of accounting, any amount accrued only by reason of the death of the taxpayer shall not be included in computing taxable income for the period in which falls the date of the taxpayer’s death.

(e) Special rule for employee tips For purposes of subsection (a), tips included in a written statement furnished an employer by an employee pursuant to section 6053(a) shall be deemed to be received at the time the written statement including such tips is furnished to the employer.

(f) Special rule for crop insurance proceeds or disaster payments In the case of insurance proceeds received as a result of destruction or damage to crops, a taxpayer reporting on the cash receipts and disbursements method of accounting may elect to include such proceeds in income for the taxable year following the taxable year of destruction or damage, if he establishes that, under his practice, income from such crops would have been reported in a following taxable year. For purposes of the preceding sentence, payments received under the Agricultural Act of 1949, as amended, or title II of the Disaster Assistance Act of 1988, as a result of (1) destruction or damage to crops caused by drought, flood, or any other natural disaster, or (2) the inability to plant crops because of such a natural disaster shall be treated as insurance proceeds received as a result of destruction or damage to crops. An election under this subsection for any taxable year shall be made at such time and in such manner as the Secretary prescribes.

(g) Special rule for proceeds from livestock sold on account of drought, flood, or other weather-related conditions In the case of income derived from the sale or exchange of livestock in excess of the number the taxpayer would sell if he followed his usual business practices, a taxpayer reporting on the cash receipts and disbursements method of accounting may elect to include such income for the taxable year following the taxable year in which such sale or exchange occurs if he establishes that, under his usual business practices, the sale or exchange would not have occurred in the taxable year in which it occurred if it were not for drought, flood, or other weather-related conditions, and that such conditions had resulted in the area being designated as eligible for assistance by the Federal Government. Paragraph (1) shall apply only to a taxpayer whose principal trade or business is farming (within the meaning of section 6420(c)(3)). If section 1033(e)(2) applies to a sale or exchange of livestock described in paragraph (1), the election under paragraph (1) shall be deemed valid if made during the replacement period described in such section.

(h) Special rule for utility services In the case of a taxpayer the taxable income of which is computed under an accrual method of accounting, any income attributable to the sale or furnishing of utility services to customers shall be included in gross income not later than the taxable year in which such services are provided to such customers. For purposes of this subsection— The term “utility services” includes— the providing of electrical energy, water, or sewage disposal, the furnishing of gas or steam through a local distribution system, telephone or other communication services, and the transporting of gas or steam by pipeline. The taxable year in which services are treated as provided to customers shall not, in any manner, be determined by reference to— the period in which the customers’ meters are read, or the period in which the taxpayer bills (or may bill) the customers for such service.

(i) Treatment of interest on frozen deposits in certain financial institutions In the case of interest credited during any calendar year on a frozen deposit in a qualified financial institution, the amount of such interest includible in the gross income of a qualified individual shall not exceed the sum of— the net amount withdrawn by such individual from such deposit during such calendar year, and the amount of such deposit which is withdrawable as of the close of the taxable year (determined without regard to any penalty for premature withdrawals of a time deposit). Any interest not included in gross income by reason of paragraph (1) shall be treated as credited in the next calendar year. No deduction shall be allowed to any qualified financial institution for interest not includible in gross income under paragraph (1) until such interest is includible in gross income. For purposes of this subsection, the term “frozen deposit” means any deposit if, as of the close of the calendar year, any portion of such deposit may not be withdrawn because of— the bankruptcy or insolvency of the qualified financial institution (or threat thereof), or any requirement imposed by the State in which such institution is located by reason of the bankruptcy or insolvency (or threat thereof) of 1 or more financial institutions in the State. For purposes of this subsection, the terms “qualified individual”, “qualified financial institution”, and “deposit” have the same respective meanings as when used in section 165( l ).

(j) Special rule for cash options for receipt of qualified prizes For purposes of this title, in the case of an individual on the cash receipts and disbursements method of accounting, a qualified prize option shall be disregarded in determining the taxable year for which any portion of the qualified prize is properly includible in gross income of the taxpayer. For purposes of this subsection— The term “qualified prize option” means an option which— entitles an individual to receive a single cash payment in lieu of receiving a qualified prize (or remaining portion thereof), and is exercisable not later than 60 days after such individual becomes entitled to the qualified prize. The term “qualified prize” means any prize or award which— is awarded as a part of a contest, lottery, jackpot, game, or other similar arrangement, does not relate to any past services performed by the recipient and does not require the recipient to perform any substantial future service, and is payable over a period of at least 10 years. The Secretary shall provide for the application of this subsection in the case of a partnership or other pass-through entity consisting entirely of individuals described in paragraph (1).

(k) Special rule for sales or dispositions to implement Federal Energy Regulatory Commission or State electric restructuring policy In the case of any qualifying electric transmission transaction for which the taxpayer elects the application of this section, qualified gain from such transaction shall be recognized— in the taxable year which includes the date of such transaction to the extent the amount realized from such transaction exceeds— the cost of exempt utility property which is purchased by the taxpayer during the 4-year period beginning on such date, reduced (but not below zero) by any portion of such cost previously taken into account under this subsection, and ratably over the 8-taxable year period beginning with the taxable year which includes the date of such transaction, in the case of any such gain not recognized under subparagraph (A). For purposes of this subsection, the term “qualified gain” means, with respect to any qualifying electric transmission transaction in any taxable year— any ordinary income derived from such transaction which would be required to be recognized under section 1245 or 1250 for such taxable year (determined without regard to this subsection), and any income derived from such transaction in excess of the amount described in subparagraph (A) which is required to be included in gross income for such taxable year (determined without regard to this subsection). For purposes of this subsection, the term “qualifying electric transmission transaction” means any sale or other disposition before January 1, 2008 (before January 1, 2021 , in the case of a qualified electric utility), of— property used in the trade or business of providing electric transmission services, or any stock or partnership interest in a corporation or partnership, as the case may be, whose principal trade or business consists of providing electric transmission services, but only if such sale or disposition is to an independent transmission company. For purposes of this subsection, the term “independent transmission company” means— an independent transmission provider approved by the Federal Energy Regulatory Commission, a person— who the Federal Energy Regulatory Commission determines in its authorization of the transaction under section 203 of the Federal Power Act ( 16 U.S.C. 824b ) or by declaratory order is not a market participant within the meaning of such Commission’s rules applicable to independent transmission providers, and whose transmission facilities to which the election under this subsection applies are under the operational control of a Federal Energy Regulatory Commission-approved independent transmission provider before the close of the period specified in such authorization, but not later than the date which is 4 years after the close of the taxable year in which the transaction occurs, or in the case of facilities subject to the jurisdiction of the Public Utility Commission of Texas— a person which is approved by that Commission as consistent with Texas State law regarding an independent transmission provider, or a political subdivision or affiliate thereof whose transmission facilities are under the operational control of a person described in clause (i). For purposes of this subsection: The term “exempt utility property” means property used in the trade or business of— generating, transmitting, distributing, or selling electricity, or producing, transmitting, distributing, or selling natural gas. Acquisition of control of a corporation shall be taken into account under this subsection with respect to a qualifying electric transmission transaction only if the principal trade or business of such corporation is a trade or business referred to in subparagraph (A). The term “exempt utility property” shall not include any property which is located outside the United States. For purposes of this subsection, the term “qualified electric utility” means a person that, as of the date of the qualifying electric transmission transaction, is vertically integrated, in that it is both— a transmitting utility (as defined in section 3(23) of the Federal Power Act ( 16 U.S.C. 796(23) )) with respect to the transmission facilities to which the election under this subsection applies, and an electric utility (as defined in section 3(22) of the Federal Power Act ( 16 U.S.C. 796(22) )). In the case of a corporation which is a member of an affiliated group filing a consolidated return, any exempt utility property purchased by another member of such group shall be treated as purchased by such corporation for purposes of applying paragraph (1)(A). If the taxpayer has made the election under paragraph (1) and any gain is recognized by such taxpayer as provided in paragraph (1)(B), then— the statutory period for the assessment of any deficiency, for any taxable year in which any part of the gain on the transaction is realized, attributable to such gain shall not expire prior to the expiration of 3 years from the date the Secretary is notified by the taxpayer (in such manner as the Secretary may by regulations prescribe) of the purchase of exempt utility property or of an intention not to purchase such property, and such deficiency may be assessed before the expiration of such 3-year period notwithstanding any law or rule of law which would otherwise prevent such assessment. For purposes of this subsection, the taxpayer shall be considered to have purchased any property if the unadjusted basis of such property is its cost within the meaning of section 1012. An election under paragraph (1) shall be made at such time and in such manner as the Secretary may require and, once made, shall be irrevocable. Section 453 shall not apply to any qualifying electric transmission transaction with respect to which an election to apply this subsection is made.

[§ 452 Repealed. June 15, 1955, ch. 143, § 1(a), 69 Stat. 134]

§ 453 Installment method

(a) General rule Except as otherwise provided in this section, income from an installment sale shall be taken into account for purposes of this title under the installment method.

(b) Installment sale defined For purposes of this section— The term “installment sale” means a disposition of property where at least 1 payment is to be received after the close of the taxable year in which the disposition occurs. The term “installment sale” does not include— Any dealer disposition (as defined in subsection ( l )). A disposition of personal property of a kind which is required to be included in the inventory of the taxpayer if on hand at the close of the taxable year.

(c) Installment method defined For purposes of this section, the term “installment method” means a method under which the income recognized for any taxable year from a disposition is that proportion of the payments received in that year which the gross profit (realized or to be realized when payment is completed) bears to the total contract price.

(d) Election out Subsection (a) shall not apply to any disposition if the taxpayer elects to have subsection (a) not apply to such disposition. Except as otherwise provided by regulations, an election under paragraph (1) with respect to a disposition may be made only on or before the due date prescribed by law (including extensions) for filing the taxpayer’s return of the tax imposed by this chapter for the taxable year in which the disposition occurs. Such an election shall be made in the manner prescribed by regulations. An election under paragraph (1) with respect to any disposition may be revoked only with the consent of the Secretary.

(e) Second dispositions by related persons If— any person disposes of property to a related person (hereinafter in this subsection referred to as the “first disposition”), and before the person making the first disposition receives all payments with respect to such disposition, the related person disposes of the property (hereinafter in this subsection referred to as the “second disposition”), then, for purposes of this section, the amount realized with respect to such second disposition shall be treated as received at the time of the second disposition by the person making the first disposition. Except in the case of marketable securities, paragraph (1) shall apply only if the date of the second disposition is not more than 2 years after the date of the first disposition. The running of the 2-year period set forth in subparagraph (A) shall be suspended with respect to any property for any period during which the related person’s risk of loss with respect to the property is substantially diminished by— the holding of a put with respect to such property (or similar property), the holding by another person of a right to acquire the property, or a short sale or any other transaction. The amount treated for any taxable year as received by the person making the first disposition by reason of paragraph (1) shall not exceed the excess of— the lesser of— the total amount realized with respect to any second disposition of the property occurring before the close of the taxable year, or the total contract price for the first disposition, over the sum of— the aggregate amount of payments received with respect to the first disposition before the close of such year, plus the aggregate amount treated as received with respect to the first disposition for prior taxable years by reason of this subsection. For purposes of this subsection, if the second disposition is not a sale or exchange, an amount equal to the fair market value of the property disposed of shall be substituted for the amount realized. If paragraph (1) applies for any taxable year, payments received in subsequent taxable years by the person making the first disposition shall not be treated as the receipt of payments with respect to the first disposition to the extent that the aggregate of such payments does not exceed the amount treated as received by reason of paragraph (1). For purposes of this subsection— Any sale or exchange of stock to the issuing corporation shall not be treated as a first disposition. A compulsory or involuntary conversion (within the meaning of section 1033) and any transfer thereafter shall not be treated as a second disposition if the first disposition occurred before the threat or imminence of the conversion. Any transfer after the earlier of— the death of the person making the first disposition, or the death of the person acquiring the property in the first disposition, and any transfer thereafter shall not be treated as a second disposition. This subsection shall not apply to a second disposition (and any transfer thereafter) if it is established to the satisfaction of the Secretary that neither the first disposition nor the second disposition had as one of its principal purposes the avoidance of Federal income tax. The period for assessing a deficiency with respect to a first disposition (to the extent such deficiency is attributable to the application of this subsection) shall not expire before the day which is 2 years after the date on which the person making the first disposition furnishes (in such manner as the Secretary may by regulations prescribe) a notice that there was a second disposition of the property to which this subsection may have applied. Such deficiency may be assessed notwithstanding the provisions of any law or rule of law which would otherwise prevent such assessment.

(f) Definitions and special rules For purposes of this section— Except for purposes of subsections (g) and (h), the term “related person” means— a person whose stock would be attributed under section 318(a) (other than paragraph (4) thereof) to the person first disposing of the property, or a person who bears a relationship described in section 267(b) to the person first disposing of the property. The term “marketable securities” means any security for which, as of the date of the disposition, there was a market on an established securities market or otherwise. Except as provided in paragraph (4), the term “payment” does not include the receipt of evidences of indebtedness of the person acquiring the property (whether or not payment of such indebtedness is guaranteed by another person). Receipt of a bond or other evidence of indebtedness which— is payable on demand, or is readily tradable, shall be treated as receipt of payment. For purposes of paragraph (4), the term “readily tradable” means a bond or other evidence of indebtedness which is issued— with interest coupons attached or in registered form (other than one in registered form which the taxpayer establishes will not be readily tradable in an established securities market), or in any other form designed to render such bond or other evidence of indebtedness readily tradable in an established securities market. In the case of any exchange described in section 1031(b)— the total contract price shall be reduced to take into account the amount of any property permitted to be received in such exchange without recognition of gain, the gross profit from such exchange shall be reduced to take into account any amount not recognized by reason of section 1031(b), and the term “payment”, when used in any provision of this section other than subsection (b)(1), shall not include any property permitted to be received in such exchange without recognition of gain. Similar rules shall apply in the case of an exchange which is described in section 356(a) and is not treated as a dividend. The term “depreciable property” means property of a character which (in the hands of the transferee) is subject to the allowance for depreciation provided in section 167. The term “payments to be received” includes— the aggregate amount of all payments which are not contingent as to amount, and the fair market value of any payments which are contingent as to amount.

(g) Sale of depreciable property to controlled entity In the case of an installment sale of depreciable property between related persons— subsection (a) shall not apply, for purposes of this title— except as provided in clause (ii), all payments to be received shall be treated as received in the year of the disposition, and in the case of any payments which are contingent as to the amount but with respect to which the fair market value may not be reasonably ascertained, the basis shall be recovered ratably, and the purchaser may not increase the basis of any property acquired in such sale by any amount before the time such amount is includible in the gross income of the seller. Paragraph (1) shall not apply if it is established to the satisfaction of the Secretary that the disposition did not have as one of its principal purposes the avoidance of Federal income tax. For purposes of this subsection, the term “related persons” has the meaning given to such term by section 1239(b), except that such term shall include 2 or more partnerships having a relationship to each other described in section 707(b)(1)(B).

(h) Use of installment method by shareholders in certain liquidations If, in a liquidation to which section 331 applies, the shareholder receives (in exchange for the shareholder’s stock) an installment obligation acquired in respect of a sale or exchange by the corporation during the 12-month period beginning on the date a plan of complete liquidation is adopted and the liquidation is completed during such 12-month period, then, for purposes of this section, the receipt of payments under such obligation (but not the receipt of such obligation) by the shareholder shall be treated as the receipt of payment for the stock. Subparagraph (A) shall not apply to an installment obligation acquired in respect of a sale or exchange of— stock in trade of the corporation, other property of a kind which would properly be included in the inventory of the corporation if on hand at the close of the taxable year, and property held by the corporation primarily for sale to customers in the ordinary course of its trade or business, unless such sale or exchange is to 1 person in 1 transaction and involves substantially all of such property attributable to a trade or business of the corporation. If the obligor of any installment obligation and the shareholder are married to each other or are related persons (within the meaning of section 1239(b)), to the extent such installment obligation is attributable to the disposition by the corporation of depreciable property— subparagraph (A) shall not apply to such obligation, and for purposes of this title, all payments to be received by the shareholder shall be deemed received in the year the shareholder receives the obligation. For purposes of subsection (e)(1)(A), disposition of property by the corporation shall be treated also as disposition of such property by the shareholder. For purposes of subparagraph (A), in the case of a controlling corporate shareholder (within the meaning of section 368(c)) of a selling corporation, an obligation acquired in respect of a sale or exchange by the selling corporation shall be treated as so acquired by such controlling corporate shareholder. The preceding sentence shall be applied successively to each controlling corporate shareholder above such controlling corporate shareholder. If— paragraph (1) applies with respect to any installment obligation received by a shareholder from a corporation, and by reason of the liquidation such shareholder receives property in more than 1 taxable year, then, on completion of the liquidation, basis previously allocated to property so received shall be reallocated for all such taxable years so that the shareholder’s basis in the stock of the corporation is properly allocated among all property received by such shareholder in such liquidation.

(i) Recognition of recapture income in year of disposition In the case of any installment sale of property to which subsection (a) applies— notwithstanding subsection (a), any recapture income shall be recognized in the year of the disposition, and any gain in excess of the recapture income shall be taken into account under the installment method. For purposes of paragraph (1), the term “recapture income” means, with respect to any installment sale, the aggregate amount which would be treated as ordinary income under section 1245 or 1250 (or so much of section 751 as relates to section 1245 or 1250) for the taxable year of the disposition if all payments to be received were received in the taxable year of disposition.

(j) Regulations The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the provisions of this section. The regulations prescribed under paragraph (1) shall include regulations providing for ratable basis recovery in transactions where the gross profit or the total contract price (or both) cannot be readily ascertained.

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

(l) Dealer dispositions For purposes of subsection (b)(2)(A)— The term “dealer disposition” means any of the following dispositions: Any disposition of personal property by a person who regularly sells or otherwise disposes of personal property of the same type on the installment plan. Any disposition of real property which is held by the taxpayer for sale to customers in the ordinary course of the taxpayer’s trade or business. The term “dealer disposition” does not include— The disposition on the installment plan of any property used or produced in the trade or business of farming (within the meaning of section 2032A(e)(4) or (5)). Any dispositions described in clause (ii) on the installment plan if the taxpayer elects to have paragraph (3) apply to any installment obligations which arise from such dispositions. An election under this paragraph shall not apply with respect to an installment obligation which is guaranteed by any person other than an individual. A disposition is described in this clause if it is a disposition in the ordinary course of the taxpayer’s trade or business to an individual of— a timeshare right to use or a timeshare ownership interest in residential real property for not more than 6 weeks per year, or a right to use specified campgrounds for recreational purposes, or any residential lot, but only if the taxpayer (or any related person) is not to make any improvements with respect to such lot. For purposes of subclause (I), a timeshare right to use (or timeshare ownership interest in) property held by the spouse, children, grandchildren, or parents of an individual shall be treated as held by such individual. Any carrying charges or interest with respect to a disposition described in subparagraph (A) or (B) which are added on the books of account of the seller to the established cash selling price of the property shall be included in the total contract price of the property and, if such charges or interest are not so included, any payments received shall be treated as applying first against such carrying charges or interest. In the case of any installment obligation to which paragraph (2)(B) applies, the tax imposed by this chapter for any taxable year for which payment is received on such obligation shall be increased by the amount of interest determined in the manner provided under subparagraph (B). The amount of interest referred to in subparagraph (A) for any taxable year shall be determined— on the amount of the tax for such taxable year which is attributable to the payments received during such taxable year on installment obligations to which this subsection applies, for the period beginning on the date of sale, and ending on the date such payment is received, and by using the applicable Federal rate under section 1274 (without regard to subsection (d)(2) thereof) in effect at the time of the sale compounded semiannually. For purposes of clause (i), the portion of any tax attributable to the receipt of any payment shall be determined without regard to any interest imposed under subparagraph (A). No interest shall be determined for any payment received in the taxable year of the disposition from which the installment obligation arises. Any amount payable under this paragraph shall be taken into account in computing the amount of any deduction allowable to the taxpayer for interest paid or accrued during such taxable year.

§ 453A Special rules for nondealers

(a) General rule In the case of an installment obligation to which this section applies— interest shall be paid on the deferred tax liability with respect to such obligation in the manner provided under subsection (c), and the pledging rules under subsection (d) shall apply.

(b) Installment obligations to which section applies This section shall apply to any obligation which arises from the disposition of any property under the installment method, but only if the sales price of such property exceeds $150, 000. F or p u r p oseso f s u b sec t i o n (a) (1), t hi ssec t i o n s ha ll a ppl y t o an o b l i g a t i o n d escr ib e d in p a r a g r a p h (1) a r i s in g d u r in g a t a x ab l eye a ro n l y i f — s u c h o b l i g a t i o ni so u t s t an d in g a so f t h ec l oseo f s u c h t a x ab l eye a r, an d t h e f a ce am o u n t o f a ll s u c h o b l i g a t i o n s h e l d b y t h e t a x p a yer w hi c ha rose d u r in g, an d a reo u t s t an d in g a so f t h ec l oseo f, s u c h t a x ab l eye a re x cee d s$ 5,000,000. Except as provided in regulations, all persons treated as a single employer under subsection (a) or (b) of section 52 shall be treated as one person for purposes of this paragraph and subsection (c)(4). An installment obligation shall not be treated as described in paragraph (1) if it arises from the disposition— by an individual of personal use property (within the meaning of section 1275(b)(3)), or of any property used or produced in the trade or business of farming (within the meaning of section 2032A(e)(4) or (5)). An installment obligation shall not be treated as described in paragraph (1) if it arises from a disposition described in section 453( l )(2)(B), but the provisions of section 453( l )(3) (relating to interest payments on timeshares and residential lots) shall apply to such obligation. For purposes of paragraph (1), all sales or exchanges which are part of the same transaction (or a series of related transactions) shall be treated as 1 sale or exchange.

(c) Interest on deferred tax liability If an obligation to which this section applies is outstanding as of the close of any taxable year, the tax imposed by this chapter for such taxable year shall be increased by the amount of interest determined in the manner provided under paragraph (2). For purposes of paragraph (1), the interest for any taxable year shall be an amount equal to the product of— the applicable percentage of the deferred tax liability with respect to such obligation, multiplied by the underpayment rate in effect under section 6621(a)(2) for the month with or within which the taxable year ends. For purposes of this section, the term “deferred tax liability” means, with respect to any taxable year, the product of— the amount of gain with respect to an obligation which has not been recognized as of the close of such taxable year, multiplied by the maximum rate of tax in effect under section 1 or 11, whichever is appropriate, for such taxable year. For purposes of applying the preceding sentence with respect to so much of the gain which, when recognized, will be treated as long-term capital gain, the maximum rate on net capital gain under section 1(h) shall be taken into account. For purposes of this subsection, the term “applicable percentage” means, with respect to obligations arising in any taxable year, the percentage determined by dividing— the portion of the aggregate face amount of such obligations outstanding as of the close of such taxable year in excess of $5,000,000, by the aggregate face amount of such obligations outstanding as of the close of such taxable year. Any amount payable under this subsection shall be taken into account in computing the amount of any deduction allowable to the taxpayer for interest paid or accrued during the taxable year. The Secretary shall prescribe such regulations as may be necessary to carry out the provisions of this subsection including regulations providing for the application of this subsection in the case of contingent payments, short taxable years, and pass-thru entities.

(d) Pledges, etc., of installment obligations For purposes of section 453, if any indebtedness (hereinafter in this subsection referred to as “secured indebtedness”) is secured by an installment obligation to which this section applies, the net proceeds of the secured indebtedness shall be treated as a payment received on such installment obligation as of the later of— the time the indebtedness becomes secured indebtedness, or the time the proceeds of such indebtedness are received by the taxpayer. The amount treated as received under paragraph (1) by reason of any secured indebtedness shall not exceed the excess (if any) of— the total contract price, over any portion of the total contract price received under the contract before the later of the times referred to in subparagraph (A) or (B) of paragraph (1) (including amounts previously treated as received under paragraph (1) but not including amounts not taken into account by reason of paragraph (3)). If any amount is treated as received under paragraph (1) with respect to any installment obligation, subsequent payments received on such obligation shall not be taken into account for purposes of section 453 to the extent that the aggregate of such subsequent payments does not exceed the aggregate amount treated as received under paragraph (1). For purposes of this subsection indebtedness is secured by an installment obligation to the extent that payment of principal or interest on such indebtedness is directly secured (under the terms of the indebtedness or any underlying arrangements) by any interest in such installment obligation. A payment shall be treated as directly secured by an interest in an installment obligation to the extent an arrangement allows the taxpayer to satisfy all or a portion of the indebtedness with the installment obligation.

(e) Regulations The Secretary shall prescribe such regulations as may be necessary to carry out the purposes of this section, including regulations— disallowing the use of the installment method in whole or in part for transactions in which the rules of this section otherwise would be avoided through the use of related persons, pass-thru entities, or intermediaries, and providing that the sale of an interest in a partnership or other pass-thru entity will be treated as a sale of the proportionate share of the assets of the partnership or other entity.

§ 453B Gain or loss on disposition of installment obligations

(a) General rule If an installment obligation is satisfied at other than its face value or distributed, transmitted, sold, or otherwise disposed of, gain or loss shall result to the extent of the difference between the basis of the obligation and— the amount realized, in the case of satisfaction at other than face value or a sale or exchange, or the fair market value of the obligation at the time of distribution, transmission, or disposition, in the case of the distribution, transmission, or disposition otherwise than by sale or exchange. any gain or loss so resulting shall be considered as resulting from the sale or exchange of the property in respect of which the installment obligation was received.

(b) Basis of obligation The basis of an installment obligation shall be the excess of the face value of the obligation over an amount equal to the income which would be returnable were the obligation satisfied in full.

(c) Special rule for transmission at death Except as provided in section 691 (relating to recipients of income in respect of decedents), this section shall not apply to the transmission of installment obligations at death.

(d) Exception for distributions to which section 337(a) applies Subsection (a) shall not apply to any distribution to which section 337(a) applies.

(e) Life insurance companies In the case of a disposition of an installment obligation by any person other than a life insurance company (as defined in section 816(a)) to such an insurance company or to a partnership of which such an insurance company is a partner, no provision of this subtitle providing for the nonrecognition of gain shall apply with respect to any gain resulting under subsection (a). If a corporation which is a life insurance company for the taxable year was (for the preceding taxable year) a corporation which was not a life insurance company, such corporation shall, for purposes of this subsection and subsection (a), be treated as having transferred to a life insurance company, on the last day of the preceding taxable year, all installment obligations which it held on such last day. A partnership of which a life insurance company becomes a partner shall, for purposes of this subsection and subsection (a), be treated as having transferred to a life insurance company, on the last day of the preceding taxable year of such partnership, all installment obligations which it holds at the time such insurance company becomes a partner. Paragraph (1) shall not apply to any transfer or deemed transfer of an installment obligation if the life insurance company elects (at such time and in such manner as the Secretary may by regulations prescribe) to determine its life insurance company taxable income— by returning the income on such installment obligation under the installment method prescribed in section 453, and as if such income were an item attributable to a noninsurance business. For purposes of this subsection, the term “noninsurance business” means any activity which is not an insurance business. For purposes of subparagraph (A), any activity which is not an insurance business shall be treated as an insurance business if— it is of a type traditionally carried on by life insurance companies for investment purposes, but only if the carrying on of such activity (other than in the case of real estate) does not constitute the active conduct of a trade or business, or it involves the performance of administrative services in connection with plans providing life insurance, pension, or accident and health benefits.

(f) Obligation becomes unenforceable For purposes of this section, if any installment obligation is canceled or otherwise becomes unenforceable— the obligation shall be treated as if it were disposed of in a transaction other than a sale or exchange, and if the obligor and obligee are related persons (within the meaning of section 453(f)(1)), the fair market value of the obligation shall be treated as not less than its face amount.

(g) Transfers between spouses or incident to divorce In the case of any transfer described in subsection (a) of section 1041 (other than a transfer in trust)— subsection (a) of this section shall not apply, and the same tax treatment with respect to the transferred installment obligation shall apply to the transferee as would have applied to the transferor.

(h) Certain liquidating distributions by S corporations If— an installment obligation is distributed by an S corporation in a complete liquidation, and receipt of the obligation is not treated as payment for the stock by reason of section 453(h)(1), then, except for purposes of any tax imposed by subchapter S, no gain or loss with respect to the distribution of the obligation shall be recognized by the distributing corporation. Under regulations prescribed by the Secretary, the character of the gain or loss to the shareholder shall be determined in accordance with the principles of section 1366(b).

[§ 453C Repealed. Pub. L. 100–203, title X, § 10202(a)(1), Dec. 22, 1987, 101 Stat. 1330–388]

§ 454 Obligations issued at discount

(a) Non-interest-bearing obligations issued at a discount If, in the case of a taxpayer owning any non-interest-bearing obligation issued at a discount and redeemable for fixed amounts increasing at stated intervals or owning an obligation described in paragraph (2) of subsection (c), the increase in the redemption price of such obligation occurring in the taxable year does not (under the method of accounting used in computing his taxable income) constitute income to him in such year, such taxpayer may, at his election made in his return for any taxable year, treat such increase as income received in such taxable year. If any such election is made with respect to any such obligation, it shall apply also to all such obligations owned by the taxpayer at the beginning of the first taxable year to which it applies and to all such obligations thereafter acquired by him and shall be binding for all subsequent taxable years, unless on application by the taxpayer the Secretary permits him, subject to such conditions as the Secretary deems necessary, to change to a different method. In the case of any such obligations owned by the taxpayer at the beginning of the first taxable year to which his election applies, the increase in the redemption price of such obligations occurring between the date of acquisition (or, in the case of an obligation described in paragraph (2) of subsection (c), the date of acquisition of the series E bond involved) and the first day of such taxable year shall also be treated as income received in such taxable year.

(b) Short-term obligations issued on discount basis In the case of any obligation— of the United States; or of a State or a possession of the United States, or any political subdivision of any of the foregoing, or of the District of Columbia, which is issued on a discount basis and payable without interest at a fixed maturity date not exceeding 1 year from the date of issue, the amount of discount at which such obligation is originally sold shall not be considered to accrue until the date on which such obligation is paid at maturity, sold, or otherwise disposed of.

(c) Matured United States savings bonds In the case of a taxpayer who— holds a series E United States savings bond at the date of maturity, and pursuant to regulations prescribed under chapter 31 of title 31 (A) retains his investment in such series E bond in an obligation of the United States, other than a current income obligation, or (B) exchanges such series E bond for another nontransferable obligation of the United States in an exchange upon which gain or loss is not recognized because of section 1037 (or so much of section 1031 as relates to section 1037), the increase in redemption value (to the extent not previously includible in gross income) in excess of the amount paid for such series E bond shall be includible in gross income in the taxable year in which the obligation is finally redeemed or in the taxable year of final maturity, whichever is earlier. This subsection shall not apply to a corporation, and shall not apply in the case of any taxable year for which the taxpayer’s taxable income is computed under an accrual method of accounting or for which an election made by the taxpayer under subsection (a) applies.

§ 455 Prepaid subscription income

(a) Year in which included Prepaid subscription income to which this section applies shall be included in gross income for the taxable years during which the liability described in subsection (d)(2) exists.

(b) Where taxpayer’s liability ceases In the case of any prepaid subscription income to which this section applies— If the liability described in subsection (d)(2) ends, then so much of such income as was not includible in gross income under subsection (a) for preceding taxable years shall be included in gross income for the taxable year in which the liability ends. If the taxpayer dies or ceases to exist, then so much of such income as was not includible in gross income under subsection (a) for preceding taxable years shall be included in gross income for the taxable year in which such death, or such cessation of existence, occurs.

(c) Prepaid subscription income to which this section applies This section shall apply to prepaid subscription income if and only if the taxpayer makes an election under this section with respect to the trade or business in connection with which such income is received. The election shall be made in such manner as the Secretary may by regulations prescribe. No election may be made with respect to a trade or business if in computing taxable income the cash receipts and disbursements method of accounting is used with respect to such trade or business. An election made under this section shall apply to all prepaid subscription income received in connection with the trade or business with respect to which the taxpayer has made the election; except that the taxpayer may, to the extent permitted under regulations prescribed by the Secretary, include in gross income for the taxable year of receipt the entire amount of any prepaid subscription income if the liability from which it arose is to end within 12 months after the date of receipt. An election made under this section shall not apply to any prepaid subscription income received before the first taxable year for which the election is made. A taxpayer may, with the consent of the Secretary, make an election under this section at any time. A taxpayer may, without the consent of the Secretary, make an election under this section for his first taxable year in which he receives prepaid subscription income in the trade or business. Such election shall be made not later than the time prescribed by law for filing the return for the taxable year (including extensions thereof) with respect to which such election is made. An election under this section shall be effective for the taxable year with respect to which it is first made and for all subsequent taxable years, unless the taxpayer secures the consent of the Secretary to the revocation of such election. For purposes of this title, the computation of taxable income under an election made under this section shall be treated as a method of accounting.

(d) Definitions For purposes of this section— The term “prepaid subscription income” means any amount (includible in gross income) which is received in connection with, and is directly attributable to, a liability which extends beyond the close of the taxable year in which such amount is received, and which is income from a subscription to a newspaper, magazine, or other periodical. The term “liability” means a liability to furnish or deliver a newspaper, magazine, or other periodical. Prepaid subscription income shall be treated as received during the taxable year for which it is includible in gross income under section 451 (without regard to this section).

(e) Deferral of income under established accounting procedures Notwithstanding the provisions of this section, any taxpayer who has, for taxable years prior to the first taxable year to which this section applies, reported his income under an established and consistent method or practice of accounting for prepaid subscription income (to which this section would apply if an election were made) may continue to report his income for taxable years to which this title applies in accordance with such method or practice.

§ 456 Prepaid dues income of certain membership organizations

(a) Year in which included Prepaid dues income to which this section applies shall be included in gross income for the taxable years during which the liability described in subsection (e)(2) exists.

(b) Where taxpayer’s liability ceases In the case of any prepaid dues income to which this section applies— If the liability described in subsection (e)(2) ends, then so much of such income as was not includible in gross income under subsection (a) for preceding taxable years shall be included in gross income for the taxable year in which the liability ends. If the taxpayer ceases to exist, then so much of such income as was not includible in gross income under subsection (a) for preceding taxable years shall be included in gross income for the taxable year in which such cessation of existence occurs.

(c) Prepaid dues income to which this section applies This section shall apply to prepaid dues income if and only if the taxpayer makes an election under this section with respect to the trade or business in connection with which such income is received. The election shall be made in such manner as the Secretary may by regulations prescribe. No election may be made with respect to a trade or business if in computing taxable income the cash receipts and disbursements method of accounting is used with respect to such trade or business. An election made under this section shall apply to all prepaid dues income received in connection with the trade or business with respect to which the taxpayer has made the election; except that the taxpayer may, to the extent permitted under regulations prescribed by the Secretary, include in gross income for the taxable year of receipt the entire amount of any prepaid dues income if the liability from which it arose is to end within 12 months after the date of receipt. Except as provided in subsection (d), and election made under this section shall not apply to any prepaid dues income received before the first taxable year for which the election is made. A taxpayer may, with the consent of the Secretary, make an election under this section at any time. A taxpayer may, without the consent of the Secretary, make an election under this section for its first taxable year in which it receives prepaid dues income in the trade or business. Such election shall be made not later than the time prescribed by law for filing the return for the taxable year (including extensions thereof) with respect to which such election is made. An election under this section shall be effective for the taxable year with respect to which it is first made and for all subsequent taxable years, unless the taxpayer secures the consent of the Secretary to the revocation of such election. For purposes of this title, the computation of taxable income under an election made under this section shall be treated as a method of accounting.

(d) Transitional rule If a taxpayer makes an election under this section with respect to prepaid dues income, such taxpayer shall include in gross income, for each taxable year to which such election applies, not only that portion of prepaid dues income received in such year otherwise includible in gross income for such year under this section, but shall also include in gross income for such year an additional amount equal to the amount of prepaid dues income received in the 3 taxable years preceding the first taxable year to which such election applies which would have been included in gross income in the taxable year had the election been effective 3 years earlier. A taxpayer who makes an election with respect to prepaid dues income, and who includes in gross income for any taxable year to which the election applies an additional amount computed under paragraph (1), shall be permitted to deduct, for such taxable year and for each of the 4 succeeding taxable years, an amount equal to one-fifth of such additional amount, but only to the extent that such additional amount was also included in the taxpayer’s gross income during any of the 3 taxable years preceding the first taxable year to which such election applies.

(e) Definitions For purposes of this section— The term “prepaid dues income” means any amount (includible in gross income) which is received by a membership organization in connection with, and is directly attributable to, a liability to render services or make available membership privileges over a period of time which extends beyond the close of the taxable year in which such amount is received. The term “liability” means a liability to render services or make available membership privileges over a period of time which does not exceed 36 months, which liability shall be deemed to exist ratably over the period of time that such services are required to be rendered, or that such membership privileges are required to be made available. The term “membership organization” means a corporation, association, federation, or other organization— organized without capital stock of any kind, and no part of the net earnings of which is distributable to any member. Prepaid dues income shall be treated as received during the taxable year for which it is includible in gross income under section 451 (without regard to this section).

§ 457 Deferred compensation plans of State and local governments and tax-exempt organizations

(a) Year of inclusion in gross income Any amount of compensation deferred under an eligible deferred compensation plan, and any income attributable to the amounts so deferred, shall be includible in gross income only for the taxable year in which such compensation or other income— is paid to the participant or other beneficiary, in the case of a plan of an eligible employer described in subsection (e)(1)(A), and is paid or otherwise made available to the participant or other beneficiary, in the case of a plan of an eligible employer described in subsection (e)(1)(B). To the extent provided in section 72(t)(9), section 72(t) shall apply to any amount includible in gross income under this subsection. In the case of a plan of an eligible employer described in subsection (e)(1)(A), to the extent provided in section 402( l ), paragraph (1) shall not apply to amounts otherwise includible in gross income under this subsection.

(b) Eligible deferred compensation plan defined For purposes of this section, the term “eligible deferred compensation plan” means a plan established and maintained by an eligible employer— in which only individuals who perform service for the employer may be participants, which provides that (except as provided in paragraph (3)) the maximum amount which may be deferred under the plan for the taxable year (other than rollover amounts) shall not exceed the lesser of— the applicable dollar amount, or 100 percent of the participant’s includible compensation, which may provide that, for 1 or more of the participant’s last 3 taxable years ending before he attains normal retirement age under the plan, the ceiling set forth in paragraph (2) shall be the lesser of— twice the dollar amount in effect under subsection (b)(2)(A), or the sum of— the plan ceiling established for purposes of paragraph (2) for the taxable year (determined without regard to this paragraph), plus so much of the plan ceiling established for purposes of paragraph (2) for taxable years before the taxable year as has not previously been used under paragraph (2) or this paragraph, which provides that compensation— in the case of an eligible employer described in subsection (e)(1)(A), will be deferred only if an agreement providing for such deferral has been entered into before the compensation is currently available to the individual, and in any other case, will be deferred for any calendar month only if an agreement providing for such deferral has been entered into before the beginning of such month, which meets the distribution requirements of subsection (d), and except as provided in subsection (g), which provides that— all amounts of compensation deferred under the plan, all property and rights purchased with such amounts, and all income attributable to such amounts, property, or rights, shall remain (until made available to the participant or other beneficiary) solely the property and rights of the employer (without being restricted to the provision of benefits under the plan), subject only to the claims of the employer’s general creditors. A plan which is established and maintained by an employer which is described in subsection (e)(1)(A) and which is administered in a manner which is inconsistent with the requirements of any of the preceding paragraphs shall be treated as not meeting the requirements of such paragraph as of the 1st plan year beginning more than 180 days after the date of notification by the Secretary of the inconsistency unless the employer corrects the inconsistency before the 1st day of such plan year. A plan which is established and maintained by an employer which is described in subsection (e)(1)(A) shall not be treated as failing to meet the requirements of this subsection solely because the plan, or another plan maintained by the employer which meets the requirements of section 401(a) or 403(b), provides for matching contributions on account of qualified student loan payments as described in section 401(m)(13).

(c) Limitation The maximum amount of the compensation of any one individual which may be deferred under subsection (a) during any taxable year shall not exceed the amount in effect under subsection (b)(2)(A) (as modified by any adjustment provided under subsection (b)(3)).

(d) Distribution requirements For purposes of subsection (b)(5), a plan meets the distribution requirements of this subsection if— under the plan amounts will not be made available to participants or beneficiaries earlier than— the calendar year in which the participant attains age 70½ (in the case of a plan maintained by an employer described in subsection (e)(1)(A), age 59½), when the participant has a severance from employment with the employer, when the participant is faced with an unforeseeable emergency (determined in the manner prescribed by the Secretary in regulations), except as may be otherwise provided by regulations, in the case of a plan maintained by an employer described in subsection (e)(1)(A), with respect to amounts invested in a lifetime income investment (as defined in section 401(a)(38)(B)(ii)), the date that is 90 days prior to the date that such lifetime income investment may no longer be held as an investment option under the plan, or as provided in section 401(a)(39), the plan meets the minimum distribution requirements of paragraph (2), in the case of a plan maintained by an employer described in subsection (e)(1)(A), the plan meets requirements similar to the requirements of section 401(a)(31), and except as may be otherwise provided by regulations, in the case of amounts described in subparagraph (A)(iv), such amounts will be distributed only in the form of a qualified distribution (as defined in section 401(a)(38)(B)(i)) or a qualified plan distribution annuity contract (as defined in section 401(a)(38)(B)(iv)). Any amount transferred in a direct trustee-to-trustee transfer in accordance with section 401(a)(31) shall not be includible in gross income for the taxable year of transfer. A plan meets the minimum distribution requirements of this paragraph if such plan meets the requirements of section 401(a)(9). An eligible deferred compensation plan of an employer described in subsection (e)(1)(A) shall not be treated as failing to meet the requirements of this subsection solely by reason of making a distribution described in subsection (e)(9)(A). In determining whether a distribution to a participant is made when the participant is faced with an unforeseeable emergency, the administrator of a plan maintained by an eligible employer described in subsection (e)(1)(A) may rely on a written certification by the participant that the distribution is— made when the participant is faced with an unforeseeable emergency of a type which is described in regulations prescribed by the Secretary as an unforeseeable emergency, and not in excess of the amount required to satisfy the emergency need, and that the participant has no alternative means reasonably available to satisfy such emergency need. The Secretary may provide by regulations for exceptions to the rule of the preceding sentence in cases where the plan administrator has actual knowledge to the contrary of the participant’s certification, and for procedures for addressing cases of participant misrepresentation.

(e) Other definitions and special rules For purposes of this section— The term “eligible employer” means— a State, political subdivision of a State, and any agency or instrumentality of a State or political subdivision of a State, and any other organization (other than a governmental unit) exempt from tax under this subtitle. The performance of service includes performance of service as an independent contractor and the person (or governmental unit) for whom such services are performed shall be treated as the employer. The term “participant” means an individual who is eligible to defer compensation under the plan. The term “beneficiary” means a beneficiary of the participant, his estate, or any other person whose interest in the plan is derived from the participant. The term “includible compensation” has the meaning given to the term “participant’s compensation” by section 415(c)(3). Compensation shall be taken into account at its present value. The amount of includible compensation shall be determined without regard to any community property laws. Gains from the disposition of property shall be treated as income attributable to such property. In the case of an eligible deferred compensation plan of an employer described in subsection (e)(1)(B)— The total amount payable to a participant under the plan shall not be treated as made available merely because the participant may elect to receive such amount (or the plan may distribute such amount without the participant’s consent) if— the portion of such amount which is not attributable to rollover contributions (as defined in section 411(a)(11)(D)) does not exceed the dollar limit under section 411(a)(11)(A), and such amount may be distributed only if— no amount has been deferred under the plan with respect to such participant during the 2-year period ending on the date of the distribution, and there has been no prior distribution under the plan to such participant to which this subparagraph applied. A plan shall not be treated as failing to meet the distribution requirements of subsection (d) by reason of a distribution to which this subparagraph applies. The total amount payable to a participant under the plan shall not be treated as made available merely because the participant may elect to defer commencement of distributions under the plan if— such election is made after amounts may be available under the plan in accordance with subsection (d)(1)(A) and before commencement of such distributions, and the participant may make only 1 such election. A participant shall not be required to include in gross income any portion of the entire amount payable to such participant solely by reason of the transfer of such portion from 1 eligible deferred compensation plan to another eligible deferred compensation plan. The following plans shall be treated as not providing for the deferral of compensation: Any bona fide vacation leave, sick leave, compensatory time, severance pay, disability pay, or death benefit plan. Any plan paying solely length of service awards to bona fide volunteers (or their beneficiaries) on account of qualified services performed by such volunteers. An individual shall be treated as a bona fide volunteer for purposes of subparagraph (A)(ii) if the only compensation received by such individual for performing qualified services is in the form of— reimbursement for (or a reasonable allowance for) reasonable expenses incurred in the performance of such services, or reasonable benefits (including length of service awards), and nominal fees for such services, customarily paid by eligible employers in connection with the performance of such services by volunteers. A plan shall not be treated as described in subparagraph (A)(ii) if the aggregate amount of length of service awards accruing with respect to any year of service for any bona fide volunteer exceeds $6, 000. I n t h ec a seo f t a x ab l eye a rs b e g innin g a f t erDece mb er 31, 2017, t h e S ecre t a rys ha ll a d j u s tt h e$ 6,000 amount under clause (ii) at the same time and in the same manner as under section 415(d), except that the base period shall be the calendar quarter beginning July 1, 2016 , and any increase under this paragraph that is not a multiple of $500 s ha ll b ero u n d e d t o t h e n e x tl o w es t m u lt i pl eo f$ 500. In the case of a plan described in subparagraph (A)(ii) which is a defined benefit plan (as defined in section 414(j)), the limitation under clause (ii) shall apply to the actuarial present value of the aggregate amount of length of service awards accruing with respect to any year of service. Such actuarial present value with respect to any year shall be calculated using reasonable actuarial assumptions and methods, assuming payment will be made under the most valuable form of payment under the plan with payment commencing at the later of the earliest age at which unreduced benefits are payable under the plan or the participant’s age at the time of the calculation. For purposes of this paragraph, the term “qualified services” means fire fighting and prevention services, emergency medical services, and ambulance services. If an applicable voluntary early retirement incentive plan— makes payments or supplements as an early retirement benefit, a retirement-type subsidy, or a benefit described in the last sentence of section 411(a)(9), and such payments or supplements are made in coordination with a defined benefit plan which is described in section 401(a) and includes a trust exempt from tax under section 501(a) and which is maintained by an eligible employer described in paragraph (1)(A) or by an education association described in clause (ii)(II), such applicable plan shall be treated for purposes of subparagraph (A)(i) as a bona fide severance pay plan with respect to such payments or supplements to the extent such payments or supplements could otherwise have been provided under such defined benefit plan (determined as if section 411 applied to such defined benefit plan). For purposes of this subparagraph, the term “applicable voluntary early retirement incentive plan” means a voluntary early retirement incentive plan maintained by— a local educational agency (as defined in section 8101 of the Elementary and Secondary Education Act of 1965), or an education association which principally represents employees of 1 or more agencies described in subclause (I) and which is described in section 501(c)(5) or (6) and exempt from tax under section 501(a). This section shall not apply to nonelective deferred compensation attributable to services not performed as an employee. For purposes of subparagraph (A), deferred compensation shall be treated as nonelective only if all individuals (other than those who have not satisfied any applicable initial service requirement) with the same relationship to the payor are covered under the same plan with no individual variations or options under the plan. The term “eligible employer” shall not include a church (as defined in section 3121(w)(3)(A)) or qualified church-controlled organization (as defined in section 3121(w)(3)(B)). Subsections (b)(2) and (c)(1) shall not apply to any qualified governmental excess benefit arrangement (as defined in section 415(m)(3)), and benefits provided under such an arrangement shall not be taken into account in determining whether any other plan is an eligible deferred compensation plan. The applicable dollar amount is $15, 000. I n t h ec a seo f t a x ab l eye a rs b e g innin g a f t erDece mb er 31, 2006, t h e S ecre t a rys ha ll a d j u s tt h e$ 15,000 amount under subparagraph (A) at the same time and in the same manner as under section 415(d), except that the base period shall be the calendar quarter beginning July 1, 2005 , and any increase under this paragraph which is not a multiple of $500 s ha ll b ero u n d e d t o t h e n e x tl o w es t m u lt i pl eo f$ 500. In the case of an eligible deferred compensation plan established and maintained by an employer described in subsection (e)(1)(A), if— any portion of the balance to the credit of an employee in such plan is paid to such employee in an eligible rollover distribution (within the meaning of section 402(c)(4)), the employee transfers any portion of the property such employee receives in such distribution to an eligible retirement plan described in section 402(c)(8)(B), and in the case of a distribution of property other than money, the amount so transferred consists of the property distributed, then such distribution (to the extent so transferred) shall not be includible in gross income for the taxable year in which paid. The rules of paragraphs (2) through (7), (9), and (11) of section 402(c) and section 402(f) shall apply for purposes of subparagraph (A). Rollovers under this paragraph shall be reported to the Secretary in the same manner as rollovers from qualified retirement plans (as defined in section 4974(c)). No amount shall be includible in gross income by reason of a direct trustee-to-trustee transfer to a defined benefit governmental plan (as defined in section 414(d)) if such transfer is— for the purchase of permissive service credit (as defined in section 415(n)(3)(A)) under such plan, or a repayment to which section 415 does not apply by reason of subsection (k)(3) thereof. In the case of an individual who is an eligible participant (as defined by section 414(v)) and who is a participant in an eligible deferred compensation plan of an employer described in paragraph (1)(A), subsections (b)(3) and (c) shall be applied by substituting for the amount otherwise determined under the applicable subsection the greater of— the sum of— the plan ceiling established for purposes of subsection (b)(2) (without regard to subsection (b)(3)), plus the lesser of any designated Roth contributions made by the participant to the plan or the applicable dollar amount for the taxable year determined under section 414(v)(2)(B)(i), or the amount determined under the applicable subsection (without regard to this paragraph).

(f) Tax treatment of participants where plan or arrangement of employer is not eligible In the case of a plan of an eligible employer providing for a deferral of compensation, if such plan is not an eligible deferred compensation plan, then— the compensation shall be included in the gross income of the participant or beneficiary for the 1st taxable year in which there is no substantial risk of forfeiture of the rights to such compensation, and the tax treatment of any amount made available under the plan to a participant or beneficiary shall be determined under section 72 (relating to annuities, etc.). Paragraph (1) shall not apply to— a plan described in section 401(a) which includes a trust exempt from tax under section 501(a), an annuity plan or contract described in section 403, that portion of any plan which consists of a transfer of property described in section 83, that portion of any plan which consists of a trust to which section 402(b) applies, a qualified governmental excess benefit arrangement described in section 415(m), and that portion of any applicable employment retention plan described in paragraph (4) with respect to any participant. For purposes of this subsection— The term “plan” includes any agreement or arrangement. The rights of a person to compensation are subject to a substantial risk of forfeiture if such person’s rights to such compensation are conditioned upon the future performance of substantial services by any individual. For purposes of paragraph (2)(F)— The portion of an applicable employment retention plan described in this paragraph with respect to any participant is that portion of the plan which provides benefits payable to the participant not in excess of twice the applicable dollar limit determined under subsection (e)(15). Paragraph (2)(F) shall only apply to the portion of the plan described in subparagraph (A) for years preceding the year in which such portion is paid or otherwise made available to the participant. A plan shall not be treated for purposes of this title as providing for the deferral of compensation for any year with respect to the portion of the plan described in subparagraph (A). The term “applicable employment retention plan” means an employment retention plan maintained by— a local educational agency (as defined in section 8101 of the Elementary and Secondary Education Act of 1965 ( 20 U.S.C. 7801 )), or an education association which principally represents employees of 1 or more agencies described in clause (i) and which is described in section 501(c)(5) or (6) and exempt from taxation under section 501(a). The term “employment retention plan” means a plan to pay, upon termination of employment, compensation to an employee of a local educational agency or education association described in subparagraph (C) for purposes of— retaining the services of the employee, or rewarding such employee for the employee’s service with 1 or more such agencies or associations.

(g) Governmental plans must maintain set-asides for exclusive benefit of participants A plan maintained by an eligible employer described in subsection (e)(1)(A) shall not be treated as an eligible deferred compensation plan unless all assets and income of the plan described in subsection (b)(6) are held in trust for the exclusive benefit of participants and their beneficiaries. For purposes of this title— a trust described in paragraph (1) shall be treated as an organization exempt from taxation under section 501(a), and notwithstanding any other provision of this title, amounts in the trust shall be includible in the gross income of participants and beneficiaries only to the extent, and at the time, provided in this section. For purposes of this subsection, custodial accounts and contracts described in section 401(f) shall be treated as trusts under rules similar to the rules under section 401(f). A plan described in paragraph (1) shall not be treated as an eligible deferred compensation plan unless such plan meets the requirements of section 401(a)(37).

§ 457A Nonqualified deferred compensation from certain tax indifferent parties

(a) In general Any compensation which is deferred under a nonqualified deferred compensation plan of a nonqualified entity shall be includible in gross income when there is no substantial risk of forfeiture of the rights to such compensation.

(b) Nonqualified entity For purposes of this section, the term “nonqualified entity” means— any foreign corporation unless substantially all of its income is— effectively connected with the conduct of a trade or business in the United States, or subject to a comprehensive foreign income tax, and any partnership unless substantially all of its income is allocated to persons other than— foreign persons with respect to whom such income is not subject to a comprehensive foreign income tax, and organizations which are exempt from tax under this title.

(c) Determinability of amounts of compensation If the amount of any compensation is not determinable at the time that such compensation is otherwise includible in gross income under subsection (a)— such amount shall be so includible in gross income when determinable, and the tax imposed under this chapter for the taxable year in which such compensation is includible in gross income shall be increased by the sum of— the amount of interest determined under paragraph (2), and an amount equal to 20 percent of the amount of such compensation. For purposes of paragraph (1)(B)(i), the interest determined under this paragraph for any taxable year is the amount of interest at the underpayment rate under section 6621 plus 1 percentage point on the underpayments that would have occurred had the deferred compensation been includible in gross income for the taxable year in which first deferred or, if later, the first taxable year in which such deferred compensation is not subject to a substantial risk of forfeiture.

(d) Other definitions and special rules For purposes of this section— The rights of a person to compensation shall be treated as subject to a substantial risk of forfeiture only if such person’s rights to such compensation are conditioned upon the future performance of substantial services by any individual. To the extent provided in regulations prescribed by the Secretary, if compensation is determined solely by reference to the amount of gain recognized on the disposition of an investment asset, such compensation shall be treated as subject to a substantial risk of forfeiture until the date of such disposition. For purposes of clause (i), the term “investment asset” means any single asset (other than an investment fund or similar entity)— acquired directly by an investment fund or similar entity, with respect to which such entity does not (nor does any person related to such entity) participate in the active management of such asset (or if such asset is an interest in an entity, in the active management of the activities of such entity), and substantially all of any gain on the disposition of which (other than such deferred compensation) is allocated to investors in such entity. Paragraph (3)(B) shall not apply to any compensation to which clause (i) applies. The term “comprehensive foreign income tax” means, with respect to any foreign person, the income tax of a foreign country if— such person is eligible for the benefits of a comprehensive income tax treaty between such foreign country and the United States, or such person demonstrates to the satisfaction of the Secretary that such foreign country has a comprehensive income tax. The term “nonqualified deferred compensation plan” has the meaning given such term under section 409A(d), except that such term shall include any plan that provides a right to compensation based on the appreciation in value of a specified number of equity units of the service recipient. Compensation shall not be treated as deferred for purposes of this section if the service provider receives payment of such compensation not later than 12 months after the end of the taxable year of the service recipient during which the right to the payment of such compensation is no longer subject to a substantial risk of forfeiture. In the case of a foreign corporation with income which is taxable under section 882, this section shall not apply to compensation which, had such compensation been paid in cash on the date that such compensation ceased to be subject to a substantial risk of forfeiture, would have been deductible by such foreign corporation against such income. Rules similar to the rules of paragraphs (5) and (6) of section 409A(d) shall apply.

(e) Regulations The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section, including regulations disregarding a substantial risk of forfeiture in cases where necessary to carry out the purposes of this section.

§ 458 Magazines, paperbacks, and records returned after the close of the taxable year

(a) Exclusion from gross income A taxpayer who is on an accrual method of accounting may elect not to include in the gross income for the taxable year the income attributable to the qualified sale of any magazine, paperback, or record which is returned to the taxpayer before the close of the merchandise return period.

(b) Definitions and special rules For purposes of this section— The term “magazine” includes any other periodical. The term “paperback” means any book which has a flexible outer cover and the pages of which are affixed directly to such outer cover. Such term does not include a magazine. The term “record” means a disc, tape, or similar object on which musical, spoken, or other sounds are recorded. If a taxpayer makes qualified sales of more than one category of merchandise in connection with the same trade or business, this section shall be applied as if the qualified sales of each such category were made in connection with a separate trade or business. For purposes of the preceding sentence, magazines, paperbacks, and records shall each be treated as a separate category of merchandise. A sale of a magazine, paperback, or record is a qualified sale if— at the time of sale, the taxpayer has a legal obligation to adjust the sales price of such magazine, paperback, or record if it is not resold, and the sales price of such magazine, paperback, or record is adjusted by the taxpayer because of a failure to resell it. The amount excluded under this section with respect to any qualified sale shall be the lesser of— the amount covered by the legal obligation described in paragraph (5)(A), or the amount of the adjustment agreed to by the taxpayer before the close of the merchandise return period. Except as provided in subparagraph (B), the term “merchandise return period” means, with respect to any taxable year— in the case of magazines, the period of 2 months and 15 days first occurring after the close of taxable year, or in the case of paperbacks and records, the period of 4 months and 15 days first occurring after the close of the taxable year. The taxpayer may select a shorter period than the applicable period set forth in subparagraph (A). Any change in the merchandise return period shall be treated as a change in the method of accounting. Under regulations prescribed by the Secretary, the taxpayer may substitute, for the physical return of magazines, paperbacks, or records required by subsection (a), certification or other evidence that the magazine, paperback, or record has not been resold and will not be resold if such evidence— is in the possession of the taxpayer at the close of the merchandise return period, and is satisfactory to the Secretary. A repurchase by the taxpayer shall be treated as an adjustment of the sales price rather than as a resale.

(c) Qualified sales to which section applies This section shall apply to qualified sales of magazines, paperbacks, or records, as the case may be, if and only if the taxpayer makes an election under this section with respect to the trade or business in connection with which such sales are made. An election under this section may be made without the consent of the Secretary. The election shall be made in such manner as the Secretary may by regulations prescribe and shall be made for any taxable year not later than the time prescribed by law for filing the return for such taxable year (including extensions thereof). An election made under this section shall apply to all qualified sales of magazines, paperbacks, or records, as the case may be, made in connection with the trade or business with respect to which the taxpayer has made the election. An election under this section shall be effective for the taxable year for which it is made and for all subsequent taxable years, unless the taxpayer secures the consent of the Secretary to the revocation of such election. Except to the extent inconsistent with the provisions of this section, for purposes of this subtitle, the computation of taxable income under an election made under this section shall be treated as a method of accounting.

(d) 5-year spread of transitional adjustments for magazines In applying section 481(c) with respect to any election under this section which applies to magazines, the period for taking into account any decrease in taxable income resulting from the application of section 481(a)(2) shall be the taxable year for which the election is made and the 4 succeeding taxable years.

(e) Suspense account for paperbacks and records In the case of any election under this section which applies to paperbacks or records, in lieu of applying section 481, the taxpayer shall establish a suspense account for the trade or business for the taxable year for which the election is made. The opening balance of the account described in paragraph (1) for the first taxable year to which the election applies shall be the largest dollar amount of returned merchandise which would have been taken into account under this section for any of the 3 immediately preceding taxable years if this section had applied to such preceding 3 taxable years. This paragraph and paragraph (3) shall be applied by taking into account only amounts attributable to the trade or business for which such account is established. At the close of each taxable year the suspense account shall be— reduced the excess (if any) of— the opening balance of the suspense account for the taxable year, over the amount excluded from gross income for the taxable year under subsection (a), or increased (but not in excess of the initial opening balance) by the excess (if any) of— the amount excluded from gross income for the taxable year under subsection (a), over the opening balance of the account for the taxable year. In the case of any reduction under paragraph (3)(A) in the account for the taxable year, an amount equal to such reduction shall be excluded from gross income for such taxable year. In the case of any increase under paragraph (3)(B) in the account for the taxable year, an amount equal to such increase shall be included in gross income for such taxable year. If the initial opening balance exceeds the dollar amount of returned merchandise which would have been taken into account under subsection (a) for the taxable year preceding the first taxable year for which the election is effective if this section had applied to such preceding taxable year, then an amount equal to the amount of such excess shall be included in gross income for such first taxable year. The application of this subsection with respect to a taxpayer which is a party to any transaction with respect to which there is nonrecognition of gain or loss to any party to the transaction by reason of subchapter C shall be determined under regulations prescribed by the Secretary.

§ 460 Special rules for long-term contracts

(a) Requirement that percentage of completion method be used In the case of any long-term contract, the taxable income from such contract shall be determined under the percentage of completion method (as modified by subsection (b)).

(b) Percentage of completion method Except as provided in paragraph (3), in the case of any long-term contract with respect to which the percentage of completion method is used— the percentage of completion shall be determined by comparing costs allocated to the contract under subsection (c) and incurred before the close of the taxable year with the estimated total contract costs, and upon completion of the contract (or, with respect to any amount properly taken into account after completion of the contract, when such amount is so properly taken into account), the taxpayer shall pay (or shall be entitled to receive) interest computed under the look-back method of paragraph (2). In the case of any long-term contract with respect to which the percentage of completion method is used, except for purposes of applying the look-back method of paragraph (2), any income under the contract (to the extent not previously includible in gross income) shall be included in gross income for the taxable year following the taxable year in which the contract was completed. For purposes of subtitle F (other than sections 6654 and 6655), any interest required to be paid by the taxpayer under subparagraph (B) shall be treated as an increase in the tax imposed by this chapter for the taxable year in which the contract is completed (or, in the case of interest payable with respect to any amount properly taken into account after completion of the contract, for the taxable year in which the amount is so properly taken into account). The interest computed under the look-back method of this paragraph shall be determined by— first, allocating income under the contract among taxable years before the year in which the contract is completed on the basis of the actual contract price and costs instead of the estimated contract price and costs, second, determining (solely for purposes of computing such interest) the overpayment or underpayment of tax for each taxable year referred to in subparagraph (A) which would result solely from the application of subparagraph (A), and then using the adjusted overpayment rate (as defined in paragraph (7)), compounded daily, on the overpayment or underpayment determined under subparagraph (B). For purposes of the preceding sentence, any amount properly taken into account after completion of the contract shall be taken into account by discounting (using the Federal mid-term rate determined under section 1274(d) as of the time such amount was properly taken into account) such amount to its value as of the completion of the contract. The taxpayer may elect with respect to any contract to have the preceding sentence not apply to such contract. In the case of any long-term contract, the Secretary may prescribe a simplified procedure for allocation of costs to such contract in lieu of the method of allocation under subsection (c). Paragraph (1)(B) shall not apply to any contract— the gross price of which (as of the completion of the contract) does not exceed the lesser of— $1,000,000, or 1 percent of the average annual gross receipts of the taxpayer for the 3 taxable years preceding the taxable year in which the contract was completed, and which is completed within 2 years of the contract commencement date. For purposes of this subparagraph, rules similar to the rules of subsections (e)(2) and (f)(3) shall apply. In the case of a pass-thru entity— the look-back method of paragraph (2) shall be applied at the entity level, in determining overpayments and underpayments for purposes of applying paragraph (2)(B)— any increase in the income under the contract for any taxable year by reason of the allocation under paragraph (2)(A) shall be treated as giving rise to an underpayment determined by applying the highest rate for such year to such increase, and any decrease in such income for any taxable year by reason of such allocation shall be treated as giving rise to an overpayment determined by applying the highest rate for such year to such decrease, and any interest required to be paid by the taxpayer under paragraph (2) shall be paid by such entity (and any interest entitled to be received by the taxpayer under paragraph (2) shall be paid to such entity). This paragraph shall not apply to any closely held pass-thru entity. This paragraph shall not apply to any contract unless substantially all of the income from such contract is from sources in the United States. For purposes of this paragraph— The term “highest rate” means— the highest rate of tax specified in section 11, or if at all times during the year involved more than 50 percent of the interests in the entity are held by individuals directly or through 1 or more other pass-thru entities, the highest rate of tax specified in section 1. The term “pass-thru entity” means any— partnership, S corporation, or trust. The term “closely held pass-thru entity” means any pass-thru entity if, at any time during any taxable year for which there is income under the contract, 50 percent or more (by value) of the beneficial interests in such entity are held (directly or indirectly) by or for 5 or fewer persons. For purposes of the preceding sentence, rules similar to the constructive ownership rules of section 1563(e) shall apply. In the case of any long-term contract with respect to which an election under this paragraph is in effect, the 10-percent method shall apply in determining the taxable income from such contract. For purposes of this paragraph— The 10-percent method is the percentage of completion method, modified so that any item which would otherwise be taken into account in computing taxable income with respect to a contract for any taxable year before the 10-percent year is taken into account in the 10-percent year. The term “10-percent year” means the 1st taxable year as of the close of which at least 10 percent of the estimated total contract costs have been incurred. An election under this paragraph shall apply to all long-term contracts of the taxpayer which are entered into during the taxable year in which the election is made or any subsequent taxable year. This paragraph shall not apply to any taxpayer which uses a simplified procedure for allocation of costs under paragraph (3)(A). The 10-percent method shall be taken into account for purposes of applying the look-back method of paragraph (2) to any taxpayer making an election under this paragraph. Paragraph (1)(B) shall not apply with respect to any taxable year (beginning after the taxable year in which the contract is completed) if— the cumulative taxable income (or loss) under the contract as of the close of such taxable year, is within 10 percent of the cumulative look-back taxable income (or loss) under the contract as of the close of the most recent taxable year to which paragraph (1)(B) applied (or would have applied but for subparagraph (B)). Paragraph (1)(B) shall not apply in any case to which it would otherwise apply if— the cumulative taxable income (or loss) under the contract as of the close of each prior contract year, is within 10 percent of the cumulative look-back income (or loss) under the contract as of the close of such prior contract year. For purposes of this paragraph— The term “contract year” means any taxable year for which income is taken into account under the contract. The look-back income (or loss) is the amount which would be the taxable income (or loss) under the contract if the allocation method set forth in paragraph (2)(A) were used in determining taxable income. The amounts taken into account after the completion of the contract shall be determined without regard to any discounting under the 2nd sentence of paragraph (2). This paragraph shall only apply if the taxpayer makes an election under this subparagraph. Unless revoked with the consent of the Secretary, such an election shall apply to all long-term contracts completed during the taxable year for which election is made or during any subsequent taxable year. The adjusted overpayment rate for any interest accrual period is the overpayment rate in effect under section 6621 for the calendar quarter in which such interest accrual period begins. For purposes of subparagraph (A), the term “interest accrual period” means the period— beginning on the day after the return due date for any taxable year of the taxpayer, and ending on the return due date for the following taxable year. For purposes of the preceding sentence, the term “return due date” means the date prescribed for filing the return of the tax imposed by this chapter (determined without regard to extensions).

(c) Allocation of costs to contract In the case of a long-term contract, all costs (including research and experimental costs) which directly benefit, or are incurred by reason of, the long-term contract activities of the taxpayer shall be allocated to such contract in the same manner as costs are allocated to extended period long-term contracts under section 451 and the regulations thereunder. In the case of a cost-plus long-term contract or a Federal long-term contract, any cost not allocated to such contract under paragraph (1) shall be allocated to such contract if such cost is identified by the taxpayer (or a related person), pursuant to the contract or Federal, State, or local law or regulation, as being attributable to such contract. Except as provided in subparagraphs (B) and (C), in the case of a long-term contract, interest costs shall be allocated to the contract in the same manner as interest costs are allocated to property produced by the taxpayer under section 263A(f). In applying section 263A(f) for purposes of subparagraph (A), the production period shall be the period— beginning on the later of— the contract commencement date, or in the case of a taxpayer who uses an accrual method with respect to long-term contracts, the date by which at least 5 percent of the total estimated costs (including design and planning costs) under the contract have been incurred, and ending on the contract completion date. In applying section 263A(f) for purposes of subparagraph (A), paragraph (1)(B)(iii) of such section shall be applied on a contract-by-contract basis; except that, in the case of a taxpayer described in subparagraph (B)(i)(II) of this paragraph, paragraph (1)(B)(iii) of section 263A(f) shall be applied on a property-by-property basis. This subsection shall not apply to any— independent research and development expenses, expenses for unsuccessful bids and proposals, and marketing, selling, and advertising expenses. For purposes of paragraph (4), the term “independent research and development expenses” means any expenses incurred in the performance of research or development, except that such term shall not include— any expenses which are directly attributable to a long-term contract in existence when such expenses are incurred, or any expenses under an agreement to perform research or development. Solely for purposes of determining the percentage of completion under subsection (b)(1)(A), the cost of qualified property shall be taken into account as a cost allocated to the contract as if subsection (k) of section 168 had not been enacted. For purposes of this paragraph, the term “qualified property” means property described in section 168(k)(2) which has a recovery period of 7 years or less.

(d) Federal long-term contract For purposes of this section— The term “Federal long-term contract” means any long-term contract— to which the United States (or any agency or instrumentality thereof) is a party, or which is a subcontract under a contract described in subparagraph (A). For purposes of paragraph (1), the rules of section 168(h)(2)(D) (relating to certain taxable entities not treated as instrumentalities) shall apply.

(e) Exception for certain construction contracts Subsections (a), (b), and (c)(1) and (2) shall not apply to— any residential construction contract, or any other construction contract entered into by a taxpayer (other than a tax shelter prohibited from using the cash receipts and disbursements method of accounting under section 448(a)(3))— who estimates (at the time such contract is entered into) that such contract will be completed within the 2-year period beginning on the contract commencement date of such contract, and who meets the gross receipts test of section 448(c) for the taxable year in which such contract is entered into. In the case of a residential construction contract with respect to which the requirements of clauses (i) and (ii) of subparagraph (B) (determined by substituting “3-year” for “2-year” in subparagraph (B)(i) for any residential construction contract which is not a home construction contract) are not met, section 263A shall apply notwithstanding subsection (c)(4) thereof. For purposes of paragraph (1)(B)(ii), in the case of any taxpayer which is not a corporation or a partnership, the gross receipts test of section 448(c) shall be applied in the same manner as if each trade or business of such taxpayer were a corporation or partnership. Any change in method of accounting made pursuant to paragraph (1)(B)(ii) shall be treated as initiated by the taxpayer and made with the consent of the Secretary. Such change shall be effected on a cut-off basis for all similarly classified contracts entered into on or after the year of change. For purposes of this subsection, the term “construction contract” means any contract for the building, construction, reconstruction, or rehabilitation of, or the installation of any integral component to, or improvements of, real property. For purposes of this subsection— The term “home construction contract” means any construction contract if 80 percent or more of the estimated total contract costs (as of the close of the taxable year in which the contract was entered into) are reasonably expected to be attributable to activities referred to in paragraph (3) with respect to— dwelling units (as defined in section 168(e)(2)(A)(ii)) contained in buildings containing 4 or fewer dwelling units (as so defined), and improvements to real property directly related to such dwelling units and located on the site of such dwelling units. For purposes of clause (i), each townhouse or rowhouse shall be treated as a separate building. The term “residential construction contract” means any contract which would be described in subparagraph (A) if clause (i) of such subparagraph reads as follows: dwelling units (as defined in section 168(e)(2)(A)(ii)), and”.

(f) Long-term contract For purposes of this section— The term “long-term contract” means any contract for the manufacture, building, installation, or construction of property if such contract is not completed within the taxable year in which such contract is entered into. A contract for the manufacture of property shall not be treated as a long-term contract unless such contract involves the manufacture of— any unique item of a type which is not normally included in the finished goods inventory of the taxpayer, or any item which normally requires more than 12 calendar months to complete (without regard to the period of the contract). For purposes of this subsection, under regulations prescribed by the Secretary— 2 or more contracts which are interdependent (by reason of pricing or otherwise) may be treated as 1 contract, and a contract which is properly treated as an aggregation of separate contracts may be so treated.

(g) Contract commencement date For purposes of this section, the term “contract commencement date” means, with respect to any contract, the first date on which any costs (other than bidding expenses or expenses incurred in connection with negotiating the contract) allocable to such contract are incurred.

(h) Regulations The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section, including regulations to prevent the use of related parties, pass-thru entities, intermediaries, options, or other similar arrangements to avoid the application of this section.

§ 461 General rule for taxable year of deduction

(a) General rule The amount of any deduction or credit allowed by this subtitle shall be taken for the taxable year which is the proper taxable year under the method of accounting used in computing taxable income.

(b) Special rule in case of death In the case of the death of a taxpayer whose taxable income is computed under an accrual method of accounting, any amount accrued as a deduction or credit only by reason of the death of the taxpayer shall not be allowed in computing taxable income for the period in which falls the date of the taxpayer’s death.

(c) Accrual of real property taxes If the taxable income is computed under an accrual method of accounting, then, at the election of the taxpayer, any real property tax which is related to a definite period of time shall be accrued ratably over that period. A taxpayer may, without the consent of the Secretary, make an election under this subsection for his first taxable year in which he incurs real property taxes. Such an election shall be made not later than the time prescribed by law for filing the return for such year (including extensions thereof). A taxpayer may, with the consent of the Secretary, make an election under this subsection at any time.

(d) Limitation on acceleration of accrual of taxes In the case of a taxpayer whose taxable income is computed under an accrual method of accounting, to the extent that the time for accruing taxes is earlier than it would be but for any action of any taxing jurisdiction taken after December 31, 1960 , then, under regulations prescribed by the Secretary, such taxes shall be treated as accruing at the time they would have accrued but for such action by such taxing jurisdiction. Under regulations prescribed by the Secretary, paragraph (1) shall be inapplicable to any item of tax to the extent that its application would (but for this paragraph) prevent all persons (including successors in interest) from ever taking such item into account.

(e) Dividends or interest paid on certain deposits or withdrawable accounts Except as provided in regulations prescribed by the Secretary, amounts paid to, or credited to the accounts of, depositors or holders of accounts as dividends or interest on their deposits or withdrawable accounts (if such amounts paid or credited are withdrawable on demand subject only to customary notice to withdraw) by a mutual savings bank not having capital stock represented by shares, a domestic building and loan association, or a cooperative bank shall not be allowed as a deduction for the taxable year to the extent such amounts are paid or credited for periods representing more than 12 months. Any such amount not allowed as a deduction as the result of the application of the preceding sentence shall be allowed as a deduction for such other taxable year as the Secretary determines to be consistent with the preceding sentence.

(f) Contested liabilities If— the taxpayer contests an asserted liability, the taxpayer transfers money or other property to provide for the satisfaction of the asserted liability, the contest with respect to the asserted liability exists after the time of the transfer, and but for the fact that the asserted liability is contested, a deduction would be allowed for the taxable year of the transfer (or for an earlier taxable year) determined after application of subsection (h), then the deduction shall be allowed for the taxable year of the transfer. This subsection shall not apply in respect of the deduction for income, war profits, and excess profits taxes imposed by the authority of any foreign country or possession of the United States.

(g) Prepaid interest If the taxable income of the taxpayer is computed under the cash receipts and disbursements method of accounting, interest paid by the taxpayer which, under regulations prescribed by the Secretary, is properly allocable to any period— with respect to which the interest represents a charge for the use or forbearance of money, and which is after the close of the taxable year in which paid, shall be charged to capital account and shall be treated as paid in the period to which so allocable. This subsection shall not apply to points paid in respect of any indebtedness incurred in connection with the purchase or improvement of, and secured by, the principal residence of the taxpayer to the extent that, under regulations prescribed by the Secretary, such payment of points is an established business practice in the area in which such indebtedness is incurred, and the amount of such payment does not exceed the amount generally charged in such area.

(h) Certain liabilities not incurred before economic performance For purposes of this title, in determining whether an amount has been incurred with respect to any item during any taxable year, the all events test shall not be treated as met any earlier than when economic performance with respect to such item occurs. Except as provided in regulations prescribed by the Secretary, the time when economic performance occurs shall be determined under the following principles: If the liability of the taxpayer arises out of— the providing of services to the taxpayer by another person, economic performance occurs as such person provides such services, the providing of property to the taxpayer by another person, economic performance occurs as the person provides such property, or the use of property by the taxpayer, economic performance occurs as the taxpayer uses such property. If the liability of the taxpayer requires the taxpayer to provide property or services, economic performance occurs as the taxpayer provides such property or services. If the liability of the taxpayer requires a payment to another person and— arises under any workers compensation act, or arises out of any tort, economic performance occurs as the payments to such person are made. Subparagraphs (A) and (B) shall not apply to any liability described in the preceding sentence. In the case of any other liability of the taxpayer, economic performance occurs at the time determined under regulations prescribed by the Secretary. Notwithstanding paragraph (1) an item shall be treated as incurred during any taxable year if— the all events test with respect to such item is met during such taxable year (determined without regard to paragraph (1)), economic performance with respect to such item occurs within the shorter of— a reasonable period after the close of such taxable year, or 8½ months after the close of such taxable year, such item is recurring in nature and the taxpayer consistently treats items of such kind as incurred in the taxable year in which the requirements of clause (i) are met, and either— such item is not a material item, or the accrual of such item in the taxable year in which the requirements of clause (i) are met results in a more proper match against income than accruing such item in the taxable year in which economic performance occurs. In making a determination under subparagraph (A)(iv), the treatment of such item on financial statements shall be taken into account. This paragraph shall not apply to any item described in subparagraph (C) of paragraph (2). For purposes of this subsection, the all events test is met with respect to any item if all events have occurred which determine the fact of liability and the amount of such liability can be determined with reasonable accuracy. This subsection shall not apply to any item for which a deduction is allowable under a provision of this title which specifically provides for a deduction for a reserve for estimated expenses.

(i) Special rules for tax shelters In the case of a tax shelter, economic performance shall be determined without regard to paragraph (3) of subsection (h). In the case of a tax shelter, economic performance with respect to amounts paid during the taxable year for drilling an oil or gas well shall be treated as having occurred within a taxable year if drilling of the well commences before the close of the 90th day after the close of the taxable year. In the case of a tax shelter which is a partnership, in applying section 704(d) to a deduction or loss for any taxable year attributable to an item which is deductible by reason of subparagraph (A), the term “cash basis” shall be substituted for the term “adjusted basis”. Under regulations prescribed by the Secretary, in the case of a tax shelter other than a partnership, the aggregate amount of the deductions allowable by reason of subparagraph (A) for any taxable year shall be limited in a manner similar to the limitation under clause (i). For purposes of subparagraph (B), a partner’s cash basis in a partnership shall be equal to the adjusted basis of such partner’s interest in the partnership, determined without regard to— any liability of the partnership, and any amount borrowed by the partner with respect to such partnership which— was arranged by the partnership or by any person who participated in the organization, sale, or management of the partnership (or any person related to such person within the meaning of section 465(b)(3)(C)), or was secured by any asset of the partnership. For purposes of this subsection, the term “tax shelter” means— any enterprise (other than a C corporation) if at any time interests in such enterprise have been offered for sale in any offering required to be registered with any Federal or State agency having the authority to regulate the offering of securities for sale, any syndicate (within the meaning of section 1256(e)(3)(B)), and any tax shelter (as defined in section 6662(d)(2)(C)(ii)). In the case of the trade or business of farming (as defined in section 464(e)), in determining whether an entity is a tax shelter, the definition of farming syndicate in subsection (k) shall be substituted for subparagraphs (A) and (B) of paragraph (3). For purposes of this subsection, the term “economic performance” has the meaning given such term by subsection (h).

(j) Limitation on excess farm losses of certain taxpayers If a taxpayer other than a C corporation receives any applicable subsidy for any taxable year, any excess farm loss of the taxpayer for the taxable year shall not be allowed. Any loss which is disallowed under paragraph (1) shall be treated as a deduction of the taxpayer attributable to farming businesses in the next taxable year. For purposes of this subsection, the term “applicable subsidy” means— any direct or counter-cyclical payment under title I of the Food, Conservation, and Energy Act of 2008, or any payment elected to be received in lieu of any such payment, or any Commodity Credit Corporation loan. For purposes of this subsection— The term “excess farm loss” means the excess of— the aggregate deductions of the taxpayer for the taxable year which are attributable to farming businesses of such taxpayer (determined without regard to whether or not such deductions are disallowed for such taxable year under paragraph (1)), over the sum of— the aggregate gross income or gain of such taxpayer for the taxable year which is attributable to such farming businesses, plus the threshold amount for the taxable year. The term “threshold amount” means, with respect to any taxable year, the greater of— $300, 000 ($ 150,000 in the case of married individuals filing separately), or the excess (if any) of the aggregate amounts described in subparagraph (A)(ii)(I) for the 5-consecutive taxable year period preceding the taxable year over the aggregate amounts described in subparagraph (A)(i) for such period. For purposes of clause (i)(II)— notwithstanding the disregard in subparagraph (A)(i) of any disallowance under paragraph (1), in the case of any loss which is carried forward under paragraph (2) from any taxable year, such loss (or any portion thereof) shall be taken into account for the first taxable year in which a deduction for such loss (or portion) is not disallowed by reason of this subsection, and the Secretary shall prescribe rules for the computation of the aggregate amounts described in such clause in cases where the filing status of the taxpayer is not the same for the taxable year and each of the taxable years in the period described in such clause. The term “farming business” has the meaning given such term in section 263A(e)(4). If, without regard to this clause, a taxpayer is engaged in a farming business with respect to any agricultural or horticultural commodity— the term “farming business” shall include any trade or business of the taxpayer of the processing of such commodity (without regard to whether the processing is incidental to the growing, raising, or harvesting of such commodity), and if the taxpayer is a member of a cooperative to which subchapter T applies, any trade or business of the cooperative described in subclause (I) shall be treated as the trade or business of the taxpayer. For purposes of subparagraph (A)(i), there shall not be taken into account any deduction for any loss arising by reason of fire, storm, or other casualty, or by reason of disease or drought, involving any farming business. In the case of a partnership or S corporation— this subsection shall be applied at the partner or shareholder level, and each partner’s or shareholder’s proportionate share of the items of income, gain, or deduction of the partnership or S corporation for any taxable year from farming businesses attributable to the partnership or S corporation, and of any applicable subsidies received by the partnership or S corporation during the taxable year, shall be taken into account by the partner or shareholder in applying this subsection to the taxable year of such partner or shareholder with or within which the taxable year of the partnership or S corporation ends. The Secretary may provide rules for the application of this paragraph to any other pass-thru entity to the extent necessary to carry out the provisions of this subsection. The Secretary may prescribe such additional reporting requirements as the Secretary determines appropriate to carry out the purposes of this subsection. This subsection shall be applied before the application of section 469.

(k) Farming syndicate defined For purposes of subsection (i)(4), the term “farming syndicate” means— a partnership or any other enterprise other than a corporation which is not an S corporation engaged in the trade or business of farming, if at any time interests in such partnership or enterprise have been offered for sale in any offering required to be registered with any Federal or State agency having authority to regulate the offering of securities for sale, or a partnership or any other enterprise other than a corporation which is not an S corporation engaged in the trade or business of farming, if more than 35 percent of the losses during any period are allocable to limited partners or limited entrepreneurs. For purposes of paragraph (1)(B), the following shall be treated as an interest which is not held by a limited partner or a limited entrepreneur: in the case of any individual who has actively participated (for a period of not less than 5 years) in the management of any trade or business of farming, any interest in a partnership or other enterprise which is attributable to such active participation, in the case of any individual whose principal residence is on a farm, any partnership or other enterprise engaged in the trade or business of farming such farm, in the case of any individual who is actively participating in the management of any trade or business of farming or who is an individual who is described in subparagraph (A) or (B), any participation in the further processing of livestock which was raised in such trade or business (or in the trade or business referred to in subparagraph (A) or (B)), in the case of an individual whose principal business activity involves active participation in the management of a trade or business of farming, any interest in any other trade or business of farming, and, any interest held by a member of the family (or a spouse of any such member) of a grandparent of an individual described in subparagraph (A), (B), (C), or (D) if the interest in the partnership or the enterprise is attributable to the active participation of the individual described in subparagraph (A), (B), (C), or (D). For purposes of subparagraph (A), where one farm is substituted for or added to another farm, both farms shall be treated as one farm. For purposes of subparagraph (E), the term “family” has the meaning given to such term by section 267(c)(4). For purposes of this subsection, the term “farming” has the meaning given to such term by section 464(e). For purposes of this subsection, the term “limited entrepreneur” means a person who— has an interest in an enterprise other than as a limited partner, and does not actively participate in the management of such enterprise.

(l) Limitation on excess business losses of noncorporate taxpayers In the case of a taxpayer other than a corporation— for any taxable year beginning after December 31, 2017 , and before January 1, 2027 , subsection (j) (relating to limitation on excess farm losses of certain taxpayers) shall not apply, and for any taxable year beginning after December 31, 2020 , and before January 1, 2027 , any excess business loss of the taxpayer for the taxable year shall not be allowed. Any loss which is disallowed under paragraph (1) shall be treated as a net operating loss for the taxable year for purposes of determining any net operating loss carryover under section 172(b) for subsequent taxable years. For purposes of this subsection— The term “excess business loss” means the excess (if any) of— the aggregate deductions of the taxpayer for the taxable year which are attributable to trades or businesses of such taxpayer (determined without regard to whether or not such deductions are disallowed for such taxable year under paragraph (1) and without regard to any deduction allowable under section 172 or 199A), over the sum of— the aggregate gross income or gain of such taxpayer for the taxable year which is attributable to such trades or businesses, plus $250, 000 (200 p erce n t o f s u c ham o u n t in t h ec a seo f aj o in t re t u r n) . S u c h e x cesss ha ll b e d e t er min e d w i t h o u t re g a r d t o an y d e d u c t i o n s, g ross in co m e, or g ain s a tt r ib u t ab l e t o an y t r a d eor b u s in esso f p er f or min g ser v i ces a s an e m pl oyee . De d u c t i o n s f or l osses f ro m s a l esore x c han g eso f c a p i t a l a sse t ss ha ll n o t b e t ak e nin t o a cco u n t u n d ers u b p a r a g r a p h (A) (i) . T h e am o u n t o f g ain s f ro m s a l esore x c han g eso f c a p i t a l a sse t s t ak e nin t o a cco u n t u n d ers u b p a r a g r a p h (A) (ii) s ha ll n o t e x cee d t h e l essero f — t h ec a p i t a l g ainn e t in co m e d e t er min e d b y t akin g in t o a cco u n t o n l y g ain s an d l osses a tt r ib u t ab l e t o a t r a d eor b u s in ess, or t h ec a p i t a l g ainn e t in co m e . I n t h ec a seo f an y t a x ab l eye a r b e g innin g a f t erDece mb er 31, 2025, t h e$ 250,000 amount in subparagraph (A)(ii)(II) shall be increased by an amount equal to— such dollar amount, multiplied by the cost-of-living adjustment determined under section 1(f)(3) for the calendar year in which the taxable year begins, determined by substituting “2024” for “2016” in subparagraph (A)(ii) thereof. If any amount as increased under the preceding sentence is not a multiple of $1, 000, s u c ham o u n t s ha ll b ero u n d e d t o t h e n e a res t m u lt i pl eo f$ 1,000. In the case of a partnership or S corporation— this subsection shall be applied at the partner or shareholder level, and each partner’s or shareholder’s allocable share of the items of income, gain, deduction, or loss of the partnership or S corporation for any taxable year from trades or businesses attributable to the partnership or S corporation shall be taken into account by the partner or shareholder in applying this subsection to the taxable year of such partner or shareholder with or within which the taxable year of the partnership or S corporation ends. For purposes of this paragraph, in the case of an S corporation, an allocable share shall be the shareholder’s pro rata share of an item. The Secretary shall prescribe such additional reporting requirements as the Secretary determines necessary to carry out the purposes of this subsection. This subsection shall be applied after the application of section 469.

“The amendments made by subsection (a) [amending this section and section 43 of the Internal Revenue Code of 1939] shall not apply to any transfer of money or other property described in subsection (a) made in a taxable year beginning before January 1, 1964 , if— no deduction has been allowed in respect of such transfer for any taxable year before the taxable year in which the contest with respect to such transfer is settled, and refund or credit of any overpayment which would result from the application of such amendments to such transfer is prevented by the operation of any law or rule of law. In the case of any transfer to which this subsection applies, the deduction shall be allowed for the taxable year in which the contest with respect to such transfer is settled.”

[§ 462 Repealed. June 15, 1955, ch. 143, § 1(b), 69 Stat. 134]

[§ 463 Repealed. Pub. L. 100–203, title X, § 10201(a), Dec. 22, 1987, 101 Stat. 1330–387]

§ 464 Limitations on deductions for certain farming expenses

(a) General rule In the case of any taxpayer to whom subsection (d) applies, a deduction (otherwise allowable under this chapter) for amounts paid for feed, seed, fertilizer, or other similar farm supplies shall only be allowed for the taxable year in which such feed, seed, fertilizer, or other supplies are actually used or consumed, or, if later, for the taxable year for which allowable as a deduction (determined without regard to this section).

(b) Certain poultry expenses In the case of any taxpayer to whom subsection (d) applies— the cost of poultry (including egg-laying hens and baby chicks) purchased for use in a trade or business (or both for use in a trade or business and for sale) shall be capitalized and deducted ratably over the lesser of 12 months or their useful life in the trade or business, and the cost of poultry purchased for sale shall be deducted for the taxable year in which the poultry is sold or otherwise disposed of.

(c) Exception Subsection (a) shall not apply to any amount paid for supplies which are on hand at the close of the taxable year on account of fire, storm, or other casualty, or on account of disease or drought.

(d) Certain persons prepaying 50 percent or more of certain farming expenses This subsection applies to any taxpayer for any taxable year if such taxpayer— does not use an accrual method of accounting, has excess prepaid farm supplies for the taxable year, and is not a qualified farm-related taxpayer. For purposes of this subsection, the term “qualified farm-related taxpayer” means any farm-related taxpayer if— the aggregate prepaid farm supplies for the 3 taxable years preceding the taxable year are less than 50 percent of, the aggregate deductible farming expenses (other than prepaid farm supplies) for such 3 taxable years, or the taxpayer has excess prepaid farm supplies for the taxable year by reason of any change in business operation directly attributable to extraordinary circumstances. For purposes of this paragraph, the term “farm-related taxpayer” means any taxpayer— whose principal residence (within the meaning of section 121) is on a farm, who has a principal occupation of farming, or who is a member of the family (within the meaning of section 461(k)(2)(E)) of a taxpayer described in clause (i) or (ii). For purposes of this subsection— The term “excess prepaid farm supplies” means the prepaid farm supplies for the taxable year to the extent the amount of such supplies exceeds 50 percent of the deductible farming expenses for the taxable year (other than prepaid farm supplies). The term “prepaid farm supplies” means any amounts which are described in subsection (a) or (b) and would be allowable for a subsequent taxable year under the rules of subsections (a) and (b). The term “deductible farming expenses” means any amount allowable as a deduction under this chapter (including any amount allowable as a deduction for depreciation or amortization) which is properly allocable to the trade or business of farming.

(e) Farming For purposes of this section, the term “farming” means the cultivation of land or the raising or harvesting of any agricultural or horticultural commodity including the raising, shearing, feeding, caring for, training, and management of animals. For purposes of the preceding sentence, trees (other than trees bearing fruit or nuts) shall not be treated as an agricultural or horticultural commodity.

§ 465 Deductions limited to amount at risk

(a) Limitation to amount at risk In the case of— an individual, and a C corporation with respect to which the stock ownership requirement of paragraph (2) of section 542(a) is met, engaged in an activity to which this section applies, any loss from such activity for the taxable year shall be allowed only to the extent of the aggregate amount with respect to which the taxpayer is at risk (within the meaning of subsection (b)) for such activity at the close of the taxable year. Any loss from an activity to which this section applies not allowed under this section for the taxable year shall be treated as a deduction allocable to such activity in the first succeeding taxable year. For purposes of paragraph (1)(B)— section 544(a)(2) shall be applied as if such section did not contain the phrase “or by or for his partner”; and sections 544(a)(4)(A) and 544(b)(1) shall be applied by substituting “the corporation meet the stock ownership requirements of section 542(a)(2)” for “the corporation a personal holding company”.

(b) Amounts considered at risk For purposes of this section, a taxpayer shall be considered at risk for an activity with respect to amounts including— the amount of money and the adjusted basis of other property contributed by the taxpayer to the activity, and amounts borrowed with respect to such activity (as determined under paragraph (2)). For purposes of this section, a taxpayer shall be considered at risk with respect to amounts borrowed for use in an activity to the extent that he— is personally liable for the repayment of such amounts, or has pledged property, other than property used in such activity, as security for such borrowed amount (to the extent of the net fair market value of the taxpayer’s interest in such property). No property shall be taken into account as security if such property is directly or indirectly financed by indebtedness which is secured by property described in paragraph (1). Except to the extent provided in regulations, for purposes of paragraph (1)(B), amounts borrowed shall not be considered to be at risk with respect to an activity if such amounts are borrowed from any person who has an interest in such activity or from a related person to a person (other than the taxpayer) having such an interest. Subparagraph (A) shall not apply to an interest as a creditor in the activity. In the case of amounts borrowed by a corporation from a shareholder, subparagraph (A) shall not apply to an interest as a shareholder. For purposes of this subsection, a person (hereinafter in this paragraph referred to as the “related person”) is related to any person if— the related person bears a relationship to such person specified in section 267(b) or section 707(b)(1), or the related person and such person are engaged in trades or business under common control (within the meaning of subsections (a) and (b) of section 52). For purposes of clause (i), in applying section 267(b) or 707(b)(1), “10 percent” shall be substituted for “50 percent”. Notwithstanding any other provision of this section, a taxpayer shall not be considered at risk with respect to amounts protected against loss through nonrecourse financing, guarantees, stop loss agreements, or other similar arrangements. If in any taxable year the taxpayer has a loss from an activity to which subsection (a) applies, the amount with respect to which a taxpayer is considered to be at risk (within the meaning of subsection (b)) in subsequent taxable years with respect to that activity shall be reduced by that portion of the loss which (after the application of subsection (a)) is allowable as a deduction. For purposes of this section— Notwithstanding any other provision of this subsection, in the case of an activity of holding real property, a taxpayer shall be considered at risk with respect to the taxpayer’s share of any qualified nonrecourse financing which is secured by real property used in such activity. For purposes of this paragraph, the term “qualified nonrecourse financing” means any financing— which is borrowed by the taxpayer with respect to the activity of holding real property, which is borrowed by the taxpayer from a qualified person or represents a loan from any Federal, State, or local government or instrumentality thereof, or is guaranteed by any Federal, State, or local government, except to the extent provided in regulations, with respect to which no person is personally liable for repayment, and which is not convertible debt. In the case of a partnership, a partner’s share of any qualified nonrecourse financing of such partnership shall be determined on the basis of the partner’s share of liabilities of such partnership incurred in connection with such financing (within the meaning of section 752). For purposes of this paragraph— The term “qualified person” has the meaning given such term by section 49(a)(1)(D)(iv). For purposes of clause (i), section 49(a)(1)(D)(iv) shall be applied without regard to subclause (I) thereof (relating to financing from related persons) if the financing from the related person is commercially reasonable and on substantially the same terms as loans involving unrelated persons. For purposes of this paragraph— The activity of holding real property includes the holding of personal property and the providing of services which are incidental to making real property available as living accommodations. The activity of holding real property shall not include the holding of mineral property.

(c) Activities to which section applies This section applies to any taxpayer engaged in the activity of— holding, producing, or distributing motion picture films or video tapes, farming (as defined in section 464(e)), leasing any section 1245 property (as defined in section 1245(a)(3)), exploring for, or exploiting, oil and gas resources, or exploring for, or exploiting, geothermal deposits (as defined in section 613(e)(2)) 1 as a trade or business or for the production of income. For purposes of this section— Except as provided in subparagraph (B), a taxpayer’s activity with respect to each— film or video tape, section 1245 property which is leased or held for leasing, farm, oil and gas property (as defined under section 614), or geothermal property (as defined under section 614), shall be treated as a separate activity. In the case of any partnership or S corporation, all activities with respect to section 1245 properties which— are leased or held for lease, and are placed in service in any taxable year of the partnership or S corporation, shall be treated as a single activity. Rules similar to the rules of subparagraphs (B) and (C) of paragraph (3) shall apply for purposes of this paragraph. This section also applies to each activity— engaged in by the taxpayer in carrying on a trade or business or for the production of income, and which is not described in paragraph (1). Except as provided in subparagraph (C), for purposes of this section, activities described in subparagraph (A) which constitute a trade or business shall be treated as one activity if— the taxpayer actively participates in the management of such trade or business, or such trade or business is carried on by a partnership or an S corporation and 65 percent or more of the losses for the taxable year is allocable to persons who actively participate in the management of the trade or business. The Secretary shall prescribe regulations under which activities described in subparagraph (A) shall be aggregated or treated as separate activities. In the case of an activity described in subparagraph (A), subsection (b)(3) shall apply only to the extent provided in regulations prescribed by the Secretary. In the case of a corporation described in subsection (a)(1)(B) actively engaged in equipment leasing— the activity of equipment leasing shall be treated as a separate activity, and subsection (a) shall not apply to losses from such activity. For purposes of subparagraph (A), a corporation shall not be considered to be actively engaged in equipment leasing unless 50 percent or more of the gross receipts of the corporation for the taxable year is attributable, under regulations prescribed by the Secretary, to equipment leasing. For purposes of subparagraph (A), the component members of a controlled group of corporations shall be treated as a single corporation. In the case of the component members of a qualified leasing group, paragraph (4) shall be applied— by substituting “80 percent” for “50 percent” in subparagraph (B) thereof, and as if paragraph (4) did not include subparagraph (C) thereof. For purposes of this paragraph, the term “qualified leasing group” means a controlled group of corporations which, for the taxable year and each of the 2 immediately preceding taxable years, satisfied each of the following 3 requirements: During the entire year, the group had at least 3 full-time employees substantially all of the services of whom were services directly related to the equipment leasing activity of the qualified leasing members. During the year, the qualified leasing members in the aggregate entered into at least 5 separate equipment leasing transactions. During the year, the qualified leasing members in the aggregate had at least 500,000 or 10 percent of the net worth of the corporation. For purposes of subclause (III), any contribution of property other than money shall be taken into account at its fair market value. For purposes of clause (iii) of subparagraph (C), there shall not be taken into account any deduction in respect of compensation for personal services rendered by any employee (other than a non-owner employee) of the taxpayer or any member of such employee’s family (within the meaning of section 318(a)(1)). For purposes of clause (iii) of subparagraph (C), in the case of a bank (as defined in section 581) or a financial institution to which section 591 applies— gross income shall be determined without regard to the exclusion of interest from gross income under section 103, and in addition to the deductions described in such clause, there shall also be taken into account the amount of the deductions which are allowable for amounts paid or credited to the accounts of depositors or holders of accounts as dividends or interest on their deposits or withdrawable accounts under section 163 or 591. Clause (iii) of subparagraph (C) shall not apply to any insurance business of a qualified life insurance company. For purposes of subclause (I), the term “insurance business” means any business which is not a noninsurance business (within the meaning of section 453B(e)(3)). For purposes of subclause (I), the term “qualified life insurance company” means any company which would be a life insurance company as defined in section 816 if unearned premiums were not taken into account under subsections (a)(2) and (c)(2) of section 816. For purposes of this paragraph— The term “non-owner employee” means any employee who does not own, at any time during the taxable year, more than 5 percent in value of the outstanding stock of the taxpayer. For purposes of the preceding sentence, section 318 shall apply, except that “5 percent” shall be substituted for “50 percent” in section 318(a)(2)(C). The term “excluded business” means— equipment leasing (as defined in paragraph (6)), and any business involving the use, exploitation, sale, lease, or other disposition of master sound recordings, motion picture films, video tapes, or tangible or intangible assets associated with literary, artistic, musical, or similar properties. A business involving the use, exploitation, sale, lease, or other disposition of property described in subclause (II) of clause (ii) shall not constitute an excluded business by reason of such subclause if the taxpayer is at risk with respect to all amounts paid or incurred (or chargeable to capital account) in such business. For purposes of subclause (II) of clause (ii), the provision of radio, television, cable television, or similar services pursuant to a license or franchise granted by the Federal Communications Commission or any other Federal, State, or local authority shall not constitute an excluded business by reason of such subclause. For purposes of this paragraph— Except as provided in subparagraph (G), the component members of an affiliated group of corporations shall be treated as a single taxpayer. The term “affiliated group of corporations” means an affiliated group (as defined in section 1504(a)) which files or is required to file consolidated income tax returns. The term “component member” means an includible corporation (as defined in section 1504) which is a member of the affiliated group. Nothing in this paragraph shall permit any loss of a member of an affiliated group to be used as an offset against the income of any other member of such group which is a personal holding company (as defined in section 542(a)) or a personal service corporation (as defined in section 269A(b) but determined by substituting “5 percent” for “10 percent” in section 269A(b)(2)).

(d) Definition of loss For purposes of this section, the term “loss” means the excess of the deductions allowable under this chapter for the taxable year (determined without regard to the first sentence of subsection (a)) and allocable to an activity to which this section applies over the income received or accrued by the taxpayer during the taxable year from such activity (determined without regard to subsection (e)(1)(A)).

(e) Recapture of losses where amount at risk is less than zero If zero exceeds the amount for which the taxpayer is at risk in any activity at the close of any taxable year— the taxpayer shall include in his gross income for such taxable year (as income from such activity) an amount equal to such excess, and an amount equal to the amount so included in gross income shall be treated as a deduction allocable to such activity for the first succeeding taxable year. The excess referred to in paragraph (1) shall not exceed— the aggregate amount of the reductions required by subsection (b)(5) with respect to the activity by reason of losses for all prior taxable years beginning after December 31, 1978 , reduced by the amounts previously included in gross income with respect to such activity under this subsection.

[§ 466 Repealed. Pub. L. 99–514, title VIII, § 823(a), Oct. 22, 1986, 100 Stat. 2373]

§ 467 Certain payments for the use of property or services

(a) Accrual method on present value basis In the case of the lessor or lessee under any section 467 rental agreement, there shall be taken into account for purposes of this title for any taxable year the sum of— the amount of the rent which accrues during such taxable year as determined under subsection (b), and interest for the year on the amounts which were taken into account under this subsection for prior taxable years and which are unpaid.

(b) Accrual of rental payments Except as provided in paragraph (2), the determination of the amount of the rent under any section 467 rental agreement which accrues during any taxable year shall be made— by allocating rents in accordance with the agreement, and by taking into account any rent to be paid after the close of the period in an amount determined under regulations which shall be based on present value concepts. In the case of any section 467 rental agreement to which this paragraph applies, the portion of the rent which accrues during any taxable year shall be that portion of the constant rental amount with respect to such agreement which is allocable to such taxable year. Paragraph (2) applies to any rental payment agreement if— such agreement is a disqualified leaseback or long-term agreement, or such agreement does not provide for the allocation referred to in paragraph (1)(A). For purposes of this subsection, the term “disqualified leaseback or long-term agreement” means any section 467 rental agreement if— such agreement is part of a leaseback transaction or such agreement is for a term in excess of 75 percent of the statutory recovery period for the property, and a principal purpose for providing increasing rents under the agreement is the avoidance of tax imposed by this subtitle. The Secretary shall prescribe regulations setting forth circumstances under which agreements will not be treated as disqualified leaseback or long-term agreements, including circumstances relating to— changes in amounts paid determined by reference to price indices, rents based on a fixed percentage of lessee receipts or similar amounts, reasonable rent holidays, or changes in amounts paid to unrelated 3rd parties.

(c) Recapture of prior understated inclusions under leaseback or long-term agreements If— the lessor under any section 467 rental agreement disposes of any property subject to such agreement during the term of such agreement, and such agreement is a leaseback or long-term agreement to which paragraph (2) of subsection (b) did not apply, the recapture amount shall be treated as ordinary income. Such gain shall be recognized notwithstanding any other provision of this subtitle. For purposes of paragraph (1), the term “recapture amount” means the lesser of— the prior understated inclusions, or the excess of the amount realized (or in the case of a disposition other than a sale, exchange, or involuntary conversion, the fair market value of the property) over the adjusted basis of such property. The amount determined under subparagraph (B) shall be reduced by the amount of any gain treated as ordinary income on the disposition under any other provision of this subtitle. For purposes of this subsection, the term “prior understated inclusion” means the excess (if any) of— the amount which would have been taken into account by the lessor under subsection (a) for periods before the disposition if subsection (b)(2) had applied to the agreement, over the amount taken into account under subsection (a) by the lessor for periods before the disposition. For purposes of this subsection, the term “leaseback or long-term agreement” means any agreement described in subsection (b)(4)(A). Under regulations prescribed by the Secretary— exceptions similar to the exceptions applicable under section 1245 or 1250 (whichever is appropriate) shall apply for purposes of this subsection, any transferee in a disposition excepted by reason of subparagraph (A) who has a transferred basis in the property shall be treated in the same manner as the transferor, and for purposes of sections 170(e) and 751(c), amounts treated as ordinary income under this section shall be treated in the same manner as amounts treated as ordinary income under section 1245 or 1250.

(d) Section 467 rental agreements Except as otherwise provided in this subsection, the term “section 467 rental agreements” means any rental agreement for the use of tangible property under which— there is at least one amount allocable to the use of property during a calendar year which is to be paid after the close of the calendar year following the calendar year in which such use occurs, or there are increases in the amount to be paid as rent under the agreement. This section shall not apply to any amount to be paid for the use of property if the sum of the following amounts does not exceed $250,000— the aggregate amount of payments received as consideration for such use of property, and the aggregate value of any other consideration to be received for such use of property. For purposes of the preceding sentence, rules similar to the rules of clauses (ii) and (iii) of section 1274(c)(4)(C) shall apply.

(e) Definitions For purposes of this section— The term “constant rental amount” means, with respect to any section 467 rental agreement, the amount which, if paid as of the close of each lease period under the agreement, would result in an aggregate present value equal to the present value of the aggregate payments required under the agreement. A transaction is a leaseback transaction if it involves a leaseback to any person who had an interest in such property at any time within 2 years before such leaseback (or to a related person). In the case of: The statutory recovery period is: 3-year property 3 years 5-year property 5 years 7-year property 7 years 10-year property 10 years 15-year and 20-year property 15 years Residential rental property and nonresidential real property 19 years Any railroad grading or tunnel bore 50 years. In the case of property to which section 168 does not apply, subparagraph (A) shall be applied as if section 168 applies to such property. For purposes of computing present value and interest under subsection (a)(2), the rate used shall be equal to 110 percent of the applicable Federal rate determined under section 1274(d) (compounded semiannually) which is in effect at the time the agreement is entered into with respect to debt instruments having a maturity equal to the term of the agreement. The term “related person” has the meaning given to such term by section 465(b)(3)(C). Except as provided in regulations prescribed by the Secretary, there shall not be taken into account in computing the term of any agreement for purposes of this section any extension which is solely at the option of the lessee.

(f) Comparable rules where agreement for decreasing payments Under regulations prescribed by the Secretary, rules comparable to the rules of this section shall also apply in the case of any agreement where the amount paid under the agreement for the use of property decreases during the term of the agreement.

(g) Comparable rules for services Under regulations prescribed by the Secretary, rules comparable to the rules of subsection (a)(2) shall also apply in the case of payments for services which meet requirements comparable to the requirements of subsection (d). The preceding sentence shall not apply to any amount to which section 404 or 404A (or any other provision specified in regulations) applies.

(h) Regulations The Secretary shall prescribe such regulations as may be appropriate to carry out the purposes of this section, including regulations providing for the application of this section in the case of contingent payments.

§ 468 Special rules for mining and solid waste reclamation and closing costs

(a) Establishment of reserves for reclamation and closing costs If a taxpayer elects the application of this section with respect to any mining or solid waste disposal property, the amount of any deduction for qualified reclamation or closing costs for any taxable year to which such election applies shall be equal to the current reclamation or closing costs allocable to— in the case of qualified reclamation costs, the portion of the reserve property which was disturbed during such taxable year, and in the case of qualified closing costs, the production from the reserve property during such taxable year. The opening balance of any reserve for its first taxable year shall be zero. A reserve shall be increased each taxable year by an amount equal to the amount of interest which would have been earned during such taxable year on the opening balance of such reserve for such taxable year if such interest were computed— at the Federal short-term rate or rates (determined under section 1274) in effect, and by compounding semiannually. Any amount paid by the taxpayer during any taxable year for qualified reclamation or closing costs allocable to portions of the reserve property for which the election under paragraph (1) was in effect shall be charged to the appropriate reserve as of the close of the taxable year. A reserve shall be increased each taxable year by the amount allowable as a deduction under paragraph (1) for such taxable year which is allocable to such reserve. There shall be allowed as a deduction for any taxable year the excess of— the amounts described in paragraph (2)(C) paid during such taxable year, over the closing balance of the reserve for such taxable year (determined without regard to paragraph (2)(C)). In the case of any reserve for qualified reclamation costs, there shall be included in gross income for any taxable year an amount equal to the excess of— the closing balance of the reserve for such taxable year, over the current reclamation costs of the taxpayer for all portions of the reserve property disturbed during any taxable year to which the election under paragraph (1) applies. In the case of any reserve for qualified closing costs, there shall be included in gross income for any taxable year an amount equal to the excess of— the closing balance of the reserve for such taxable year, over the current closing cost of the taxpayer with respect to the reserve property, determined as if all production with respect to the reserve property for any taxable year to which the election under paragraph (1) applies had occurred in such taxable year. This paragraph shall be applied after all adjustments to the reserve have been made for the taxable year. Proper inclusion in income shall be made upon— the revocation of an election under paragraph (1), or completion of the closing, or disposition of any portion, of a reserve property.

(b) Allocation for property where election not in effect for all taxable years If the election under subsection (a)(1) is not in effect for 1 or more taxable years in which the reserved property is disturbed (or production occurs), items with respect to the reserve property shall be allocated to the reserve in such manner as the Secretary may prescribe by regulations.

(c) Revocation of election; separate reserves The taxpayer may revoke an election under subsection (a)(1) with respect to any property. Such revocation, once made, shall be irrevocable. Any revocation under subparagraph (A) shall be made at such time and in such manner as the Secretary may prescribe. If a taxpayer makes an election under subsection (a)(1), the taxpayer shall establish with respect to the property for which the election was made— a separate reserve for qualified reclamation costs, and a separate reserve for qualified closing costs.

(d) Definitions and special rules relating to reclamation and closing costs For purposes of this section— The term “current reclamation costs” means the amount which the taxpayer would be required to pay for qualified reclamation costs if the reclamation activities were performed currently. The term “current closing costs” means the amount which the taxpayer would be required to pay for qualified closing costs if the closing activities were performed currently. Estimated closing costs shall— in the case of the closing of any mine site, be computed on the unit-of-production method of accounting, and in the case of the closing of any solid waste disposal site, be computed on the unit-of-capacity method. The term “qualified reclamation or closing costs” means any of the following expenses: Any expenses incurred for any land reclamation or closing activity which is conducted in accordance with a reclamation plan (including an amendment or modification thereof)— which— is submitted pursuant to the provisions of section 511 or 528 of the Surface Mining Control and Reclamation Act of 1977 (as in effect on January 1, 1984 ), and is part of a surface mining and reclamation permit granted under the provisions of title V of such Act (as so in effect), or which is submitted pursuant to any other Federal or State law which imposes surface mining reclamation and permit requirements substantially similar to the requirements imposed by title V of such Act (as so in effect). Any expenses incurred for any land reclamation or closing activity in connection with any solid waste disposal site which is conducted in accordance with any permit issued pursuant to— any provision of the Solid Waste Disposal Act (as in effect on January 1, 1984 ) requiring such activity, or any other Federal, State, or local law which imposes requirements substantially similar to the requirements imposed by the Solid Waste Disposal Act (as so in effect). Clause (i) shall not apply to that portion of any property which is disturbed after the property is listed in the national contingency plan established under section 105 of the Comprehensive Environmental Response, Compensation, and Liability Act of 1980. The term “property” has the meaning given such term by section 614. The term “reserve property” means any property with respect to which a reserve is established under subsection (a)(1).

§ 468A Special rules for nuclear decommissioning costs

(a) In general If the taxpayer elects the application of this section, there shall be allowed as a deduction for any taxable year the amount of payments made by the taxpayer to a Nuclear Decommissioning Reserve Fund (hereinafter referred to as the “Fund”) during such taxable year.

(b) Limitation on amounts paid into Fund The amount which a taxpayer may pay into the Fund for any taxable year shall not exceed the ruling amount applicable to such taxable year.

(c) Income and deductions of the taxpayer There shall be includible in the gross income of the taxpayer for any taxable year— any amount distributed from the Fund during such taxable year, other than any amount distributed to pay costs described in subsection (e)(4)(B), and except to the extent provided in regulations, amounts properly includible in gross income in the case of any deemed distribution under subsection (e)(6), any termination under subsection (e)(7), or the disposition of any interest in the nuclear powerplant. In addition to any deduction under subsection (a), there shall be allowable as a deduction for any taxable year the amount of the nuclear decommissioning costs with respect to which economic performance (within the meaning of section 461(h)(2)) occurs during such taxable year.

(d) Ruling amount For purposes of this section— No deduction shall be allowed for any payment to the Fund unless the taxpayer requests, and receives, from the Secretary a schedule of ruling amounts. For purposes of the preceding sentence, the taxpayer shall request a schedule of ruling amounts upon each renewal of the operating license of the nuclear powerplant. The term “ruling amount” means, with respect to any taxable year, the amount which the Secretary determines under paragraph (1) to be necessary to— fund the total nuclear decommissioning costs with respect to such power plant over the estimated useful life of such power plant, and prevent any excessive funding of such costs or the funding of such costs at a rate more rapid than level funding, taking into account such discount rates as the Secretary deems appropriate. The Secretary shall at least once during the useful life of the nuclear powerplant (or, more frequently, upon the request of the taxpayer) review, and revise if necessary, the schedule of ruling amounts determined under paragraph (1).

(e) Nuclear Decommissioning Reserve Fund Each taxpayer who elects the application of this section shall establish a Nuclear Decommissioning Reserve Fund with respect to each nuclear powerplant to which such election applies. There is hereby imposed on the gross income of the Fund for any taxable year a tax at the rate of 20 percent, except that— there shall not be included in the gross income of the Fund any payment to the Fund with respect to which a deduction is allowable under subsection (a), and there shall be allowed as a deduction to the Fund any amount paid by the Fund which is described in paragraph (4)(B) (other than an amount paid to the taxpayer) and which would be deductible under this chapter for purposes of determining the taxable income of a corporation. The tax imposed by subparagraph (A) shall be in lieu of any other taxation under this subtitle of the income from assets in the Fund. For purposes of subtitle F— the Fund shall be treated as if it were a corporation, and any tax imposed by this paragraph shall be treated as a tax imposed by section 11. Except as provided in subsection (f), the Fund shall not accept any payments (or other amounts) other than payments with respect to which a deduction is allowable under subsection (a). The Fund shall be used exclusively for— satisfying, in whole or in part, any liability of any person contributing to the Fund for the decommissioning of a nuclear powerplant (or unit thereof), to pay administrative costs (including taxes) and other incidental expenses of the Fund (including legal, accounting, actuarial, and trustee expenses) in connection with the operation of the Fund, and to the extent that a portion of the Fund is not currently needed for purposes described in subparagraph (A) or (B), making investments. Under regulations prescribed by the Secretary, for purposes of section 4951 (and so much of this title as relates to such section), the Fund shall be treated in the same manner as a trust described in section 501(c)(21). In any case in which the Fund violates any provision of this section or section 4951, the Secretary may disqualify such Fund from the application of this section. In any case to which this paragraph applies, the Fund shall be treated as having distributed all of its funds on the date such determination takes effect. Upon substantial completion of the nuclear decommissioning of the nuclear powerplant with respect to which a Fund relates, the taxpayer shall terminate such Fund.

(f) Transfers into qualified funds Notwithstanding subsection (b), any taxpayer maintaining a Fund to which this section applies with respect to a nuclear power plant may transfer into such Fund not more than an amount equal to the present value of the portion of the total nuclear decommissioning costs with respect to such nuclear power plant previously excluded for such nuclear power plant under subsection (d)(2)(A) as in effect immediately before the date of the enactment of this subsection. Except as provided in subparagraph (C), the deduction allowed by subsection (a) for any transfer permitted by this subsection shall be allowed ratably over the remaining estimated useful life (within the meaning of subsection (d)(2)(A)) of the nuclear power plant beginning with the taxable year during which the transfer is made. No deduction shall be allowed for any transfer under this subsection of an amount for which a deduction was previously allowed to the taxpayer (or a predecessor) or a corresponding amount was not included in gross income of the taxpayer (or a predecessor). For purposes of the preceding sentence, a ratable portion of each transfer shall be treated as being from previously deducted or excluded amounts to the extent thereof. If— any transfer permitted by this subsection is made to any Fund to which this section applies, and such Fund is transferred thereafter, any deduction under this subsection for taxable years ending after the date that such Fund is transferred shall be allowed to the transferor for the taxable year which includes such date. No gain or loss shall be recognized on any transfer described in paragraph (1). If appreciated property is transferred in a transfer described in paragraph (1), the amount of the deduction shall not exceed the adjusted basis of such property. Paragraph (1) shall not apply to any transfer unless the taxpayer requests from the Secretary a new schedule of ruling amounts in connection with such transfer. Notwithstanding any other provision of law, the taxpayer’s basis in any Fund to which this section applies shall not be increased by reason of any transfer permitted by this subsection.

(g) Nuclear powerplant For purposes of this section, the term “nuclear powerplant” includes any unit thereof.

(h) Time when payments deemed made For purposes of this section, a taxpayer shall be deemed to have made a payment to the Fund on the last day of a taxable year if such payment is made on account of such taxable year and is made within 2½ months after the close of such taxable year.

§ 468B Special rules for designated settlement funds

(a) In general For purposes of section 461(h), economic performance shall be deemed to occur as qualified payments are made by the taxpayer to a designated settlement fund.

(b) Taxation of designated settlement fund There is imposed on the gross income of any designated settlement fund for any taxable year a tax at a rate equal to the maximum rate in effect for such taxable year under section 1(e). For purposes of paragraph (1), gross income for any taxable year shall be reduced by the amount of any administrative costs (including State and local taxes) and other incidental expenses of the designated settlement fund (including legal, accounting, and actuarial expenses)— which are incurred in connection with the operation of the fund, and which would be deductible under this chapter for purposes of determining the taxable income of a corporation. No other deduction shall be allowed to the fund. In the case of any qualified payment made to the fund— the amount of such payment shall not be treated as income of the designated settlement fund, the basis of the fund in any property which constitutes a qualified payment shall be equal to the fair market value of such property at the time of payment, and the fund shall be treated as the owner of the property in the fund (and any earnings thereon). The tax imposed by paragraph (1) shall be in lieu of any other taxation under this subtitle of income from assets in the designated settlement fund. For purposes of subtitle F— a designated settlement fund shall be treated as a corporation, and any tax imposed by this subsection shall be treated as a tax imposed by section 11.

(c) Deductions not allowed for transfer of insurance amounts No deduction shall be allowable for any qualified payment by the taxpayer of any amounts received from the settlement of any insurance claim to the extent such amounts are excluded from the gross income of the taxpayer.

(d) Definitions For purposes of this section— The term “qualified payment” means any money or property which is transferred to any designated settlement fund pursuant to a court order, other than— any amount which may be transferred from the fund to the taxpayer (or any related person), or the transfer of any stock or indebtedness of the taxpayer (or any related person). The term “designated settlement fund” means any fund— which is established pursuant to a court order and which extinguishes completely the taxpayer’s tort liability with respect to claims described in subparagraph (D), with respect to which no amounts may be transferred other than in the form of qualified payments, which is administered by persons a majority of whom are independent of the taxpayer, which is established for the principal purpose of resolving and satisfying present and future claims against the taxpayer (or any related person or formerly related person) arising out of personal injury, death, or property damage, under the terms of which the taxpayer (or any related person) may not hold any beneficial interest in the income or corpus of the fund, and with respect to which an election is made under this section by the taxpayer. An election under this section shall be made at such time and in such manner as the Secretary shall by regulation prescribe. Such an election, once made, may be revoked only with the consent of the Secretary. The term “related person” means a person related to the taxpayer within the meaning of section 267(b).

(e) Nonapplicability of section This section (other than subsection (g)) shall not apply with respect to any liability of the taxpayer arising under any workers’ compensation Act or any contested liability of the taxpayer within the meaning of section 461(f).

(f) Other funds Except as provided in regulations, any payment in respect of a liability described in subsection (d)(2)(D) (and not described in subsection (e)) to a trust fund or escrow fund which is not a designated settlement fund shall not be treated as constituting economic performance.

(g) Clarification of taxation of certain funds Except as provided in paragraph (2), nothing in any provision of law shall be construed as providing that an escrow account, settlement fund, or similar fund is not subject to current income tax. The Secretary shall prescribe regulations providing for the taxation of any such account or fund whether as a grantor trust or otherwise. An escrow account, settlement fund, or similar fund shall be treated as beneficially owned by the United States and shall be exempt from taxation under this subtitle if— it is established pursuant to a consent decree entered by a judge of a United States District Court, it is created for the receipt of settlement payments as directed by a government entity for the sole purpose of resolving or satisfying one or more claims asserting liability under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, the authority and control over the expenditure of funds therein (including the expenditure of contributions thereto and any net earnings thereon) is with such government entity, and upon termination, any remaining funds will be disbursed to such government entity for use in accordance with applicable law. For purposes of this paragraph, the term “government entity” means the United States, any State or political subdivision thereof, the District of Columbia, any possession of the United States, and any agency or instrumentality of any of the foregoing.

§ 469 Passive activity losses and credits limited

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

(b) Disallowed loss or credit carried to next year Except as otherwise provided in this section, any loss or credit from an activity which is disallowed under subsection (a) shall be treated as a deduction or credit allocable to such activity in the next taxable year.

(c) Passive activity defined For purposes of this section— The term “passive activity” means any activity— which involves the conduct of any trade or business, and in which the taxpayer does not materially participate. Except as provided in paragraph (7), the term “passive activity” includes any rental activity. The term “passive activity” shall not include any working interest in any oil or gas property which the taxpayer holds directly or through an entity which does not limit the liability of the taxpayer with respect to such interest. If any taxpayer has any loss for any taxable year from a working interest in any oil or gas property which is treated as a loss which is not from a passive activity, then any net income from such property (or any property the basis of which is determined in whole or in part by reference to the basis of such property) for any succeeding taxable year shall be treated as income of the taxpayer which is not from a passive activity. If the preceding sentence applies to the net income from any property for any taxable year, any credits allowable under subpart B (other than section 27) or D of part IV of subchapter A for such taxable year which are attributable to such property shall be treated as credits not from a passive activity to the extent the amount of such credits does not exceed the regular tax liability of the taxpayer for the taxable year which is allocable to such net income. Paragraphs (2) and (3) shall be applied without regard to whether or not the taxpayer materially participates in the activity. For purposes of paragraph (1)(A), the term “trade or business” includes any activity involving research or experimentation (within the meaning of section 174). To the extent provided in regulations, for purposes of paragraph (1)(A), the term “trade or business” includes— any activity in connection with a trade or business, or any activity with respect to which expenses are allowable as a deduction under section 212. If this paragraph applies to any taxpayer for a taxable year— paragraph (2) shall not apply to any rental real estate activity of such taxpayer for such taxable year, and this section shall be applied as if each interest of the taxpayer in rental real estate were a separate activity. Notwithstanding clause (ii), a taxpayer may elect to treat all interests in rental real estate as one activity. Nothing in the preceding provisions of this subparagraph shall be construed as affecting the determination of whether the taxpayer materially participates with respect to any interest in a limited partnership as a limited partner. This paragraph shall apply to a taxpayer for a taxable year if— more than one-half of the personal services performed in trades or businesses by the taxpayer during such taxable year are performed in real property trades or businesses in which the taxpayer materially participates, and such taxpayer performs more than 750 hours of services during the taxable year in real property trades or businesses in which the taxpayer materially participates. In the case of a joint return, the requirements of the preceding sentence are satisfied if and only if either spouse separately satisfies such requirements. For purposes of the preceding sentence, activities in which a spouse materially participates shall be determined under subsection (h). For purposes of this paragraph, the term “real property trade or business” means any real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage trade or business. In the case of a closely held C corporation, the requirements of subparagraph (B) shall be treated as met for any taxable year if more than 50 percent of the gross receipts of such corporation for such taxable year are derived from real property trades or businesses in which the corporation materially participates. For purposes of subparagraph (B), personal services performed as an employee shall not be treated as performed in real property trades or businesses. The preceding sentence shall not apply if such employee is a 5-percent owner (as defined in section 416(i)(1)(B)) in the employer.

(d) Passive activity loss and credit defined For purposes of this section— The term “passive activity loss” means the amount (if any) by which— the aggregate losses from all passive activities for the taxable year, exceed the aggregate income from all passive activities for such year. The term “passive activity credit” means the amount (if any) by which— the sum of the credits from all passive activities allowable for the taxable year under— subpart D of part IV of subchapter A, or subpart B (other than section 27) of such part IV, exceeds the regular tax liability of the taxpayer for the taxable year allocable to all passive activities.

(e) Special rules for determining income or loss from a passive activity For purposes of this section— In determining the income or loss from any activity— There shall not be taken into account— any— gross income from interest, dividends, annuities, or royalties not derived in the ordinary course of a trade or business, expenses (other than interest) which are clearly and directly allocable to such gross income, and interest expense properly allocable to such gross income, and gain or loss not derived in the ordinary course of a trade or business which is attributable to the disposition of property— producing income of a type described in clause (i), or held for investment. For purposes of clause (ii), any interest in a passive activity shall not be treated as property held for investment. For purposes of subparagraph (A), any income, gain, or loss which is attributable to an investment of working capital shall be treated as not derived in the ordinary course of a trade or business. If a closely held C corporation (other than a personal service corporation) has net active income for any taxable year, the passive activity loss of such taxpayer for such taxable year (determined without regard to this paragraph)— shall be allowable as a deduction against net active income, and shall not be taken into account under subsection (a) to the extent so allowable as a deduction. A similar rule shall apply in the case of any passive activity credit of the taxpayer. For purposes of this paragraph, the term “net active income” means the taxable income of the taxpayer for the taxable year determined without regard to— any income or loss from a passive activity, and any item of gross income, expense, gain, or loss described in paragraph (1)(A). Earned income (within the meaning of section 911(d)(2)(A)) shall not be taken into account in computing the income or loss from a passive activity for any taxable year. For purposes of paragraphs (1) and (2), income from dividends shall be reduced by the amount of any dividends received deduction under section 243 or 245.

(f) Treatment of former passive activities For purposes of this section— If an activity is a former passive activity for any taxable year— any unused deduction allocable to such activity under subsection (b) shall be offset against the income from such activity for the taxable year, any unused credit allocable to such activity under subsection (b) shall be offset against the regular tax liability (computed after the application of paragraph (1)) allocable to such activity for the taxable year, and any such deduction or credit remaining after the application of subparagraphs (A) and (B) shall continue to be treated as arising from a passive activity. If a taxpayer ceases for any taxable year to be a closely held C corporation or personal service corporation, this section shall continue to apply to losses and credits to which this section applied for any preceding taxable year in the same manner as if such taxpayer continued to be a closely held C corporation or personal service corporation, whichever is applicable. The term “former passive activity” means any activity which, with respect to the taxpayer— is not a passive activity for the taxable year, but was a passive activity for any prior taxable year.

(g) Dispositions of entire interest in passive activity If during the taxable year a taxpayer disposes of his entire interest in any passive activity (or former passive activity), the following rules shall apply: If all gain or loss realized on such disposition is recognized, the excess of— any loss from such activity for such taxable year (determined after the application of subsection (b)), over any net income or gain for such taxable year from all other passive activities (determined after the application of subsection (b)), shall be treated as a loss which is not from a passive activity. If the taxpayer and the person acquiring the interest bear a relationship to each other described in section 267(b) or section 707(b)(1), then subparagraph (A) shall not apply to any loss of the taxpayer until the taxable year in which such interest is acquired (in a transaction described in subparagraph (A)) by another person who does not bear such a relationship to the taxpayer. To the extent provided in regulations, income or gain from the activity for preceding taxable years shall be taken into account under subparagraph (A)(ii) for the taxable year to the extent necessary to prevent the avoidance of this section. If an interest in the activity is transferred by reason of the death of the taxpayer— paragraph (1)(A) shall apply to losses described in paragraph (1)(A) to the extent such losses are greater than the excess (if any) of— the basis of such property in the hands of the transferee, over the adjusted basis of such property immediately before the death of the taxpayer, and any losses to the extent of the excess described in subparagraph (A) shall not be allowed as a deduction for any taxable year. In the case of an installment sale of an entire interest in an activity to which section 453 applies, paragraph (1) shall apply to the portion of such losses for each taxable year which bears the same ratio to all such losses as the gain recognized on such sale during such taxable year bears to the gross profit from such sale (realized or to be realized when payment is completed).

(h) Material participation defined For purposes of this section— A taxpayer shall be treated as materially participating in an activity only if the taxpayer is involved in the operations of the activity on a basis which is— regular, continuous, and substantial. Except as provided in regulations, no interest in a limited partnership as a limited partner shall be treated as an interest with respect to which a taxpayer materially participates. A taxpayer shall be treated as materially participating in any farming activity for a taxable year if paragraph (4) or (5) of section 2032A(b) would cause the requirements of section 2032A(b)(1)(C)(ii) to be met with respect to real property used in such activity if such taxpayer had died during the taxable year. A closely held C corporation or personal service corporation shall be treated as materially participating in an activity only if— 1 or more shareholders holding stock representing more than 50 percent (by value) of the outstanding stock of such corporation materially participate in such activity, or in the case of a closely held C corporation (other than a personal service corporation), the requirements of section 465(c)(7)(C) (without regard to clause (iv)) are met with respect to such activity. In determining whether a taxpayer materially participates, the participation of the spouse of the taxpayer shall be taken into account.

**(i) $25, 000 o ff se t f orre n t a l re a l es t a t e a c t i v i t i es * * I n t h ec a seo f an y na t u r a lp erso n, s u b sec t i o n (a) s ha ll n o t a ppl y t o t ha tp or t i o n o f t h e p a ss i v e a c t i v i t y l ossor t h e d e d u c t i o n e q u i v a l e n t (w i t hin t h e m e anin g o f s u b sec t i o n (j) (5)) o f t h e p a ss i v e a c t i v i t ycre d i t f or an y t a x ab l eye a r w hi c hi s a tt r ib u t ab l e t o a ll re n t a l re a l es t a t e a c t i v i t i es w i t h res p ec tt o w hi c h s u c hin d i v i d u a l a c t i v e l y p a r t i c i p a t e d in s u c h t a x ab l eye a r (an d i f an y p or t i o n o f s u c h l ossorcre d i t a rose inan o t h er t a x ab l eye a r, in s u c h o t h er t a x ab l eye a r) . T h e a gg re g a t e am o u n tt o w hi c h p a r a g r a p h (1) a ppl i es f or an y t a x ab l eye a rs ha ll n o t e x cee d$ 25,000. In the case of any taxpayer, the $25, 000 am o u n t u n d er p a r a g r a p h (2) s ha ll b ere d u ce d (b u t n o t b e l o w zero) b y 50 p erce n t o f t h e am o u n t b y w hi c h t h e a d j u s t e d g ross in co m eo f t h e t a x p a yer f or t h e t a x ab l eye a re x cee d s$ 100,000. In the case of any portion of the passive activity credit for any taxable year which is attributable to the rehabilitation credit determined under section 47, subparagraph (A) shall be applied by substituting “ $200, 000” f or “$ 100,000”. Subparagraph (A) shall not apply to any portion of the passive activity credit for any taxable year which is attributable to any credit determined under section 42. Paragraph (1) shall be applied for any taxable year— first, to the passive activity loss, second, to the portion of the passive activity credit to which subparagraph (B) and 1 (C) does not apply, third, to the portion of such credit to which subparagraph (B) applies, and then, to the portion of such credit to which subparagraph (C) applies. For purposes of this paragraph, adjusted gross income shall be determined without regard to— any amount includible in gross income under section 86, the amounts excludable from gross income under sections 85(c), 135, and 137, the amounts allowable as a deduction under sections 219, 221, and 250, and any passive activity loss or any loss allowable by reason of subsection (c)(7). In the case of taxable years of an estate ending less than 2 years after the date of the death of the decedent, this subsection shall apply to all rental real estate activities with respect to which such decedent actively participated before his death. For purposes of subparagraph (A), the $25, 000 am o u n t u n d er p a r a g r a p h (2) s ha ll b ere d u ce d b y t h e am o u n t o f t h ee x e m pt i o n u n d er p a r a g r a p h (1) (w i t h o u t re g a r d t o p a r a g r a p h (3)) a ll o w ab l e t o t h es u r v i v in g s p o u seo f t h e d ece d e n t f or t h e t a x ab l eye a re n d in g w i t h or w i t hin t h e t a x ab l eye a ro f t h ees t a t e . E x ce pt a s p ro v i d e d in s u b p a r a g r a p h (B), in t h ec a seo f an y ma rr i e d in d i v i d u a l f i l in g a se p a r a t ere t u r n, t hi ss u b sec t i o n s ha ll b e a ppl i e d b ys u b s t i t u t in g —“$ 12,500” for “ $25, 000” e a c h pl a ce i t a pp e a rs, “$ 50,000” for “ $100, 000” in p a r a g r a p h (3) (A), an d “$ 100,000” for “$200,000” in paragraph (3)(B). This subsection shall not apply to a taxpayer who— is a married individual filing a separate return for any taxable year, and does not live apart from his spouse at all times during such taxable year. An individual shall not be treated as actively participating with respect to any interest in any rental real estate activity for any period if, at any time during such period, such interest (including any interest of the spouse of the individual) is less than 10 percent (by value) of all interests in such activity. Paragraphs (1) and (4)(A) shall be applied without regard to the active participation requirement in the case of— any credit determined under section 42 for any taxable year, or any rehabilitation credit determined under section 47, 2 Except as provided in regulations, no interest as a limited partner in a limited partnership shall be treated as an interest with respect to which the taxpayer actively participates. In determining whether a taxpayer actively participates, the participation of the spouse of the taxpayer shall be taken into account.

(j) Other definitions and special rules For purposes of this section— The term “closely held C corporation” means any C corporation described in section 465(a)(1)(B). The term “personal service corporation” has the meaning given such term by section 269A(b)(1), except that section 269A(b)(2) shall be applied— by substituting “any” for “more than 10 percent”, and by substituting “any” for “50 percent or more in value” in section 318(a)(2)(C). A corporation shall not be treated as a personal service corporation unless more than 10 percent of the stock (by value) in such corporation is held by employee-owners (within the meaning of section 269A(b)(2), as modified by the preceding sentence). The term “regular tax liability” has the meaning given such term by section 26(b). The passive activity loss and the passive activity credit (and the $25,000 amount under subsection (i)) shall be allocated to activities, and within activities, on a pro rata basis in such manner as the Secretary may prescribe. The deduction equivalent of credits from a passive activity for any taxable year is the amount which (if allowed as a deduction) would reduce the regular tax liability for such taxable year by an amount equal to such credits. In the case of a disposition of any interest in a passive activity by gift— the basis of such interest immediately before the transfer shall be increased by the amount of any passive activity losses allocable to such interest with respect to which a deduction has not been allowed by reason of subsection (a), and such losses shall not be allowable as a deduction for any taxable year. The passive activity loss of a taxpayer shall be computed without regard to qualified residence interest (within the meaning of section 163(h)(3)). The term “rental activity” means any activity where payments are principally for the use of tangible property. For purposes of determining gain or loss from a disposition of any property to which subsection (g)(1) applies, the transferor may elect to increase the basis of such property immediately before the transfer by an amount equal to the portion of any unused credit allowable under this chapter which reduced the basis of such property for the taxable year in which such credit arose. If the taxpayer elects the application of this paragraph, such portion of the passive activity credit of such taxpayer shall not be allowed for any taxable year. If a passive activity involves the use of a dwelling unit to which section 280A(c)(5) applies for any taxable year, any income, deduction, gain, or loss allocable to such use shall not be taken into account for purposes of this section for such taxable year. Except as provided in regulations, all members of an affiliated group which files a consolidated return shall be treated as 1 corporation. If any interest in a passive activity is distributed by an estate or trust— the basis of such interest immediately before such distribution shall be increased by the amount of any passive activity losses allocable to such interest, and such losses shall not be allowable as a deduction for any taxable year.

(k) Separate application of section in case of publicly traded partnerships This section shall be applied separately with respect to items attributable to each publicly traded partnership (and subsection (i) shall not apply with respect to items attributable to any such partnership). The preceding sentence shall not apply to any credit determined under section 42, or any rehabilitation credit determined under section 47, attributable to a publicly traded partnership to the extent the amount of any such credits exceeds the regular tax liability attributable to income from such partnership. For purposes of this section, the term “publicly traded partnership” means any partnership if— interests in such partnership are traded on an established securities market, or interests in such partnership are readily tradable on a secondary market (or the substantial equivalent thereof). For purposes of subsection (g), a taxpayer shall not be treated as having disposed of his entire interest in an activity of a publicly traded partnership until he disposes of his entire interest in such partnership. For purposes of this section, a regulated investment company (as defined in section 851) holding an interest in a qualified publicly traded partnership (as defined in section 851(h)) shall be treated as a taxpayer described in subsection (a)(2) with respect to items attributable to such interest.

(l) Regulations The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out provisions of this section, including regulations— which specify what constitutes an activity, material participation, or active participation for purposes of this section, which provide that certain items of gross income will not be taken into account in determining income or loss from any activity (and the treatment of expenses allocable to such income), requiring net income or gain from a limited partnership or other passive activity to be treated as not from a passive activity, which provide for the determination of the allocation of interest expense for purposes of this section, and which deal with changes in marital status and changes between joint returns and separate returns.

“If— any amount was disallowed as a deduction under section 163(d) of the Internal Revenue Code of 1954 [now 1986] (as in effect on the day before the date of the enactment of the Reform Act [ Oct. 22, 1986 ]), such amount would (but for this paragraph) be treated as investment interest paid or accrued by the taxpayer in the taxpayer’s first taxable year beginning after December 31, 1986 , and the taxpayer makes an election under this paragraph at such time and in such manner as the Secretary of the Treasury or his delegate shall prescribe, to the extent such amount is attributable to an activity subject to the limitations of section 469 of the 1986 Code, such amount shall not be treated as investment interest but shall be treated as a deduction allocable to such activity for such first taxable year. [Former] Subsection (m) of section 469 of the 1986 Code and section 501(c)(2) of the Reform Act [ Pub. L. 99–514 , set out as an Effective Date note above] shall not apply to any amount so treated.”

§ 470 Limitation on deductions allocable to property used by governments or other tax-exempt entities

(a) Limitation on losses Except as otherwise provided in this section, a tax-exempt use loss for any taxable year shall not be allowed.

(b) Disallowed loss carried to next year Any tax-exempt use loss with respect to any tax-exempt use property which is disallowed under subsection (a) for any taxable year shall be treated as a deduction with respect to such property in the next taxable year.

(c) Definitions For purposes of this section— The term “tax-exempt use loss” means, with respect to any taxable year, the amount (if any) by which— the sum of— the aggregate deductions (other than interest) directly allocable to a tax-exempt use property, plus the aggregate deductions for interest properly allocable to such property, exceed the aggregate income from such property. The term “tax-exempt use property” has the meaning given to such term by section 168(h), except that such section shall be applied— without regard to paragraphs (1)(C) and (3) thereof, and as if section 197 intangible property (as defined in section 197), and property described in paragraph (1)(B) or (2) of section 167(f), were tangible property. Such term shall not include any property which would (but for this subparagraph) be tax-exempt use property solely by reason of section 168(h)(6). For treatment of partnerships as leases to which section 168(h) applies, see section 7701(e).

(d) Exception for certain leases This section shall not apply to any lease of property which meets the requirements of all of the following paragraphs: A lease of property meets the requirements of this paragraph if (at all times during the lease term) not more than an allowable amount of funds are— subject to any arrangement referred to in subparagraph (B), or set aside or expected to be set aside, to or for the benefit of the lessor or any lender, or to or for the benefit of the lessee to satisfy the lessee’s obligations or options under the lease. For purposes of clause (ii), funds shall be treated as set aside or expected to be set aside only if a reasonable person would conclude, based on the facts and circumstances, that such funds are set aside or expected to be set aside. The arrangements referred to in this subparagraph include a defeasance arrangement, a loan by the lessee to the lessor or any lender, a deposit arrangement, a letter of credit collateralized with cash or cash equivalents, a payment undertaking agreement, prepaid rent (within the meaning of the regulations under section 467), a sinking fund arrangement, a guaranteed investment contract, financial guaranty insurance, and any similar arrangement (whether or not such arrangement provides credit support). Except as otherwise provided in this subparagraph, the term “allowable amount” means an amount equal to 20 percent of the lessor’s adjusted basis in the property at the time the lease is entered into. To the extent provided in regulations, a higher percentage shall be permitted under clause (i) where necessary because of the credit-worthiness of the lessee. In no event may such regulations permit a percentage of more than 50 percent. If under the lease the lessee has the option to purchase the property for a fixed price or for other than the fair market value of the property (determined at the time of exercise), the allowable amount at the time such option may be exercised may not exceed 50 percent of the price at which such option may be exercised. The allowable amount shall be zero with respect to any arrangement which involves— a loan from the lessee to the lessor or a lender, any deposit received, letter of credit issued, or payment undertaking agreement entered into by a lender otherwise involved in the transaction, or in the case of a transaction which involves a lender, any credit support made available to the lessor in which any such lender does not have a claim that is senior to the lessor. For purposes of subclause (I), the term “loan” shall not include any amount treated as a loan under section 467 with respect to a section 467 rental agreement. A lease of property meets the requirements of this paragraph if— the lessor— has at the time the lease is entered into an unconditional at-risk equity investment (as determined by the Secretary) in the property of at least 20 percent of the lessor’s adjusted basis in the property as of that time, and maintains such investment throughout the term of the lease, and the fair market value of the property at the end of the lease term is reasonably expected to be equal to at least 20 percent of such basis. For purposes of subparagraph (A)(ii), the fair market value at the end of the lease term shall be reduced to the extent that a person other than the lessor bears a risk of loss in the value of the property. This paragraph shall not apply to any lease with a lease term of 5 years or less. A lease of property meets the requirements of this paragraph if there is no arrangement under which the lessee bears— any portion of the loss that would occur if the fair market value of the leased property were 25 percent less than its reasonably expected fair market value at the time the lease is terminated, or more than 50 percent of the loss that would occur if the fair market value of the leased property at the time the lease is terminated were zero. The Secretary may by regulations provide that the requirements of this paragraph are not met where the lessee bears more than a minimal risk of loss. This paragraph shall not apply to any lease with a lease term of 5 years or less. In the case of a lease— of property with a class life (as defined in section 168(i)(1)) of more than 7 years, other than fixed-wing aircraft and vessels, and under which the lessee has the option to purchase the property, the lease meets the requirements of this paragraph only if the purchase price under the option equals the fair market value of the property (determined at the time of exercise).

(e) Special rules In the case of any former tax-exempt use property— any deduction allowable under subsection (b) with respect to such property for any taxable year shall be allowed only to the extent of any net income (without regard to such deduction) from such property for such taxable year, and any portion of such unused deduction remaining after application of clause (i) shall be treated as a deduction allowable under subsection (b) with respect to such property in the next taxable year. For purposes of this subsection, the term “former tax-exempt use property” means any property which— is not tax-exempt use property for the taxable year, but was tax-exempt use property for any prior taxable year. If during the taxable year a taxpayer disposes of the taxpayer’s entire interest in tax-exempt use property (or former tax-exempt use property), rules similar to the rules of section 469(g) shall apply for purposes of this section. This section shall be applied before the application of section 469. Sections 1031(a) and 1033(a) shall not apply if— the exchanged or converted property is tax-exempt use property subject to a lease which was entered into before March 13, 2004 , and which would not have met the requirements of subsection (d) had such requirements been in effect when the lease was entered into, or the replacement property is tax-exempt use property subject to a lease which does not meet the requirements of subsection (d). In the case of property acquired by the lessor in a transaction to which section 1031 or 1033 applies, the adjusted basis of such property for purposes of this section shall be equal to the lesser of— the fair market value of the property as of the beginning of the lease term, or the amount which would be the lessor’s adjusted basis if such sections did not apply to such transaction.

(f) Other definitions For purposes of this section— The terms “lessor”, “lessee”, and “lender” each include any related party (within the meaning of section 197(f)(9)(C)(i)). The term “lease term” has the meaning given to such term by section 168(i)(3). The term “lender” means, with respect to any lease, a person that makes a loan to the lessor which is secured (or economically similar to being secured) by the lease or the leased property. The term “loan” includes any similar arrangement.

(g) Regulations The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section, including regulations which— allow in appropriate cases the aggregation of property subject to the same lease, and provide for the determination of the allocation of interest expense for purposes of this section.

§ 471 General rule for inventories

(a) General rule Whenever in the opinion of the Secretary the use of inventories is necessary in order clearly to determine the income of any taxpayer, inventories shall be taken by such taxpayer on such basis as the Secretary may prescribe as conforming as nearly as may be to the best accounting practice in the trade or business and as most clearly reflecting the income.

(b) Estimates of inventory shrinkage permitted A method of determining inventories shall not be treated as failing to clearly reflect income solely because it utilizes estimates of inventory shrinkage that are confirmed by a physical count only after the last day of the taxable year if— the taxpayer normally does a physical count of inventories at each location on a regular and consistent basis, and the taxpayer makes proper adjustments to such inventories and to its estimating methods to the extent such estimates are greater than or less than the actual shrinkage.

(c) Exemption for certain small businesses In the case of any taxpayer (other than a tax shelter prohibited from using the cash receipts and disbursements method of accounting under section 448(a)(3)) which meets the gross receipts test of section 448(c) for any taxable year— subsection (a) shall not apply with respect to such taxpayer for such taxable year, and the taxpayer’s method of accounting for inventory for such taxable year shall not be treated as failing to clearly reflect income if such method either— treats inventory as non-incidental materials and supplies, or conforms to such taxpayer’s method of accounting reflected in an applicable financial statement of the taxpayer with respect to such taxable year or, if the taxpayer does not have any applicable financial statement with respect to such taxable year, the books and records of the taxpayer prepared in accordance with the taxpayer’s accounting procedures. For purposes of this subsection, the term “applicable financial statement” has the meaning given the term in section 451(b)(3). In the case of any taxpayer which is not a corporation or a partnership, the gross receipts test of section 448(c) shall be applied in the same manner as if each trade or business of such taxpayer were a corporation or partnership. Any change in method of accounting made pursuant to this subsection shall be treated for purposes of section 481 as initiated by the taxpayer and made with the consent of the Secretary.

(d) Cross reference For rules relating to capitalization of direct and indirect costs of property, see section 263A.

§ 472 Last-in, first-out inventories

(a) Authorization A taxpayer may use the method provided in subsection (b) (whether or not such method has been prescribed under section 471) in inventorying goods specified in an application to use such method filed at such time and in such manner as the Secretary may prescribe. The change to, and the use of, such method shall be in accordance with such regulations as the Secretary may prescribe as necessary in order that the use of such method may clearly reflect income.

(b) Method applicable In inventorying goods specified in the application described in subsection (a), the taxpayer shall: Treat those remaining on hand at the close of the taxable year as being: First, those included in the opening inventory of the taxable year (in the order of acquisition) to the extent thereof; and second, those acquired in the taxable year; Inventory them at cost; and Treat those included in the opening inventory of the taxable year in which such method is first used as having been acquired at the same time and determine their cost by the average cost method.

(c) Condition Subsection (a) shall apply only if the taxpayer establishes to the satisfaction of the Secretary that the taxpayer has used no procedure other than that specified in paragraphs (1) and (3) of subsection (b) in inventorying such goods to ascertain the income, profit, or loss of the first taxable year for which the method described in subsection (b) is to be used, for the purpose of a report or statement covering such taxable year— to shareholders, partners, or other proprietors, or to beneficiaries, or for credit purposes.

(d) 3-year averaging for increases in inventory value The beginning inventory for the first taxable year for which the method described in subsection (b) is used shall be valued at cost. Any change in the inventory amount resulting from the application of the preceding sentence shall be taken into account ratably in each of the 3 taxable years beginning with the first taxable year for which the method described in subsection (b) is first used.

(e) Subsequent inventories If a taxpayer, having complied with subsection (a), uses the method described in subsection (b) for any taxable year, then such method shall be used in all subsequent taxable years unless— with the approval of the Secretary a change to a different method is authorized; or, the Secretary determines that the taxpayer has used for any such subsequent taxable year some procedure other than that specified in paragraph (1) of subsection (b) in inventorying the goods specified in the application to ascertain the income, profit, or loss of such subsequent taxable year for the purpose of a report or statement covering such taxable year (A) to shareholders, partners, or other proprietors, or beneficiaries, or (B) for credit purposes; and requires a change to a method different from that prescribed in subsection (b) beginning with such subsequent taxable year or any taxable year thereafter. If paragraph (1) or (2) of this subsection applies, the change to, and the use of, the different method shall be in accordance with such regulations as the Secretary may prescribe as necessary in order that the use of such method may clearly reflect income.

(f) Use of government price indexes in pricing inventory The Secretary shall prescribe regulations permitting the use of suitable published governmental indexes in such manner and circumstances as determined by the Secretary for purposes of the method described in subsection (b).

(g) Conformity rules applied on controlled group basis Except as otherwise provided in regulations, all members of the same group of financially related corporations shall be treated as 1 taxpayer for purposes of subsections (c) and (e)(2). For purposes of paragraph (1), the term “group of financially related corporations” means— any affiliated group as defined in section 1504 determined by substituting “50 percent” for “80 percent” each place it appears in section 1504(a) and without regard to section 1504(b), and any other group of corporations which consolidate or combine for purposes of financial statements.

§ 473 Qualified liquidations of LIFO inventories

(a) General rule If, for any liquidation year— there is a qualified liquidation of goods which the taxpayer inventories under the LIFO method, and the taxpayer elects to have the provisions of this section apply with respect to such liquidation, then the gross income of the taxpayer for such taxable year shall be adjusted as provided in subsection (b).

(b) Adjustment for replacements If the liquidated goods are replaced (in whole or in part) during any replacement year and such replacement is reflected in the closing inventory for such year, then the gross income for the liquidation year shall be— decreased by an amount equal to the excess of— the aggregate replacement cost of the liquidated goods so replaced during such year, over the aggregate cost of such goods reflected in the opening inventory of the liquidation year, or increased by an amount equal to the excess of— the aggregate cost reflected in such opening inventory of the liquidated goods so replaced during such year, over such aggregate replacement cost.

(c) Qualified liquidation defined For purposes of this section— The term “qualified liquidation” means— a decrease in the closing inventory of the liquidation year from the opening inventory of such year, but only if the taxpayer establishes to the satisfaction of the Secretary that such decrease is directly and primarily attributable to a qualified inventory interruption. The term “qualified inventory interruption” means a regulation, request, or interruption described in subparagraph (B) but only to the extent provided in the notice published pursuant to subparagraph (B). Whenever the Secretary, after consultation with the appropriate Federal officers, determines— that— any Department of Energy regulation or request with respect to energy supplies, or any embargo, international boycott, or other major foreign trade interruption, has made difficult or impossible the replacement during the liquidation year of any class of goods for any class of taxpayers, and that the application of this section to that class of goods and taxpayers is necessary to carry out the purposes of this section, he shall publish a notice of such determinations in the Federal Register, together with the period to be affected by such notice.

(d) Other definitions and special rules For purposes of this section— The term “liquidation year” means the taxable year in which occurs the qualified liquidation to which this section applies. The term “replacement year” means any taxable year in the replacement period; except that such term shall not include any taxable year after the taxable year in which replacement of the liquidated goods is completed. The term “replacement period” means the shorter of— the period of the 3 taxable years following the liquidation year, or the period specified by the Secretary in a notice published in the Federal Register with respect to that qualified inventory interruption. Any period specified by the Secretary under subparagraph (B) may be modified by the Secretary in a subsequent notice published in the Federal Register. The term “LIFO method” means the method of inventorying goods described in section 472. An election under subsection (a) shall be made subject to such conditions, and in such manner and form and at such time, as the Secretary may prescribe by regulation. An election under this section shall be irrevocable and shall be binding for the liquidation year and for all determinations for prior and subsequent taxable years insofar as such determinations are affected by the adjustments under this section.

(e) Replacement; inventory basis For purposes of this chapter— If the closing inventory of the taxpayer for any replacement year reflects an increase over the opening inventory of such goods for such year, the goods reflecting such increase shall be considered, in the order of their acquisition, as having been acquired in replacement of the goods most recently liquidated (whether or not in a qualified liquidation) and not previously replaced. In the case of any qualified liquidation, any goods considered under paragraph (1) as having been acquired in replacement of the goods liquidated in such liquidation shall be taken into purchases and included in the closing inventory of the taxpayer for the replacement year at the inventory cost basis of the goods replaced.

(f) Special rules for application of adjustments If— an adjustment is required under this section for any taxable year by reason of the replacement of liquidated goods during any replacement year, and the assessment of a deficiency, or the allowance of a credit or refund of an overpayment of tax attributable to such adjustment, for any taxable year, is otherwise prevented by the operation of any law or rule of law (other than section 7122, relating to compromises), then such deficiency may be assessed, or credit or refund allowed, within the period prescribed for assessing a deficiency or allowing a credit or refund for the replacement year if a notice for deficiency is mailed, or claim for refund is filed, within such period. Solely for purposes of determining interest on any overpayment or underpayment attributable to an adjustment made under this section, such overpayment or underpayment shall be treated as an overpayment or underpayment (as the case may be) for the replacement year.

(g) Coordination with section 472 The Secretary shall prescribe such regulations as may be necessary to coordinate the provisions of this section with the provisions of section 472.

§ 474 Simplified dollar-value LIFO method for certain small businesses

(a) General rule An eligible small business may elect to use the simplified dollar-value method of pricing inventories for purposes of the LIFO method.

(b) Simplified dollar-value method of pricing inventories For purposes of this section— The simplified dollar-value method of pricing inventories is a dollar-value method of pricing inventories under which— the taxpayer maintains a separate inventory pool for items in each major category in the applicable Government price index, and the adjustment for each such separate pool is based on the change from the preceding taxable year in the component of such index for the major category. The term “applicable Government price index” means— except as provided in subparagraph (B), the Producer Price Index published by the Bureau of Labor Statistics, or in the case of a retailer using the retail method, the Consumer Price Index published by the Bureau of Labor Statistics. The term “major category” means— in the case of the Producer Price Index, any of the 2-digit standard industrial classifications in the Producer Prices Data Report, or in the case of the Consumer Price Index, any of the general expenditure categories in the Consumer Price Index Detailed Report.

(c) Eligible small business For purposes of this section, a taxpayer is an eligible small business for any taxable year if the average annual gross receipts of the taxpayer for the 3 preceding taxable years do not exceed $5,000,000. For purposes of the preceding sentence, rules similar to the rules of section 448(c)(3) shall apply.

(d) Special rules For purposes of this section— In the case of a taxpayer which is a member of a controlled group, all persons which are component members of such group shall be treated as 1 taxpayer for purposes of determining the gross receipts of the taxpayer. For purposes of subparagraph (A), persons shall be treated as being component members of a controlled group if such persons would be treated as a single employer under section 52. The election under this section may be made without the consent of the Secretary. The election under this section shall apply— to the taxable year for which it is made, and to all subsequent taxable years for which the taxpayer is an eligible small business, unless the taxpayer secures the consent of the Secretary to the revocation of such election. The term “LIFO method” means the method provided by section 472(b). In the case of a year of change under this section— the inventory pools shall— in the case of the 1st taxable year to which such an election applies, be established in accordance with the major categories in the applicable Government price index, or in the case of the 1st taxable year after such election ceases to apply, be established in the manner provided by regulations under section 472; the aggregate dollar amount of the taxpayer’s inventory as of the beginning of the year of change shall be the same as the aggregate dollar value as of the close of the taxable year preceding the year of change, and the year of change shall be treated as a new base year in accordance with procedures provided by regulations under section 472. For purposes of this paragraph, the year of change under this section is— the 1st taxable year to which an election under this section applies, or in the case of a cessation of such an election, the 1st taxable year after such election ceases to apply.

§ 475 Mark to market accounting method for dealers in securities

(a) General rule Notwithstanding any other provision of this subpart, the following rules shall apply to securities held by a dealer in securities: Any security which is inventory in the hands of the dealer shall be included in inventory at its fair market value. In the case of any security which is not inventory in the hands of the dealer and which is held at the close of any taxable year— the dealer shall recognize gain or loss as if such security were sold for its fair market value on the last business day of such taxable year, and any gain or loss shall be taken into account for such taxable year. Proper adjustment shall be made in the amount of any gain or loss subsequently realized for gain or loss taken into account under the preceding sentence. The Secretary may provide by regulations for the application of this paragraph at times other than the times provided in this paragraph.

(b) Exceptions Subsection (a) shall not apply to— any security held for investment, any security described in subsection (c)(2)(C) which is acquired (including originated) by the taxpayer in the ordinary course of a trade or business of the taxpayer and which is not held for sale, and (ii) any obligation to acquire a security described in clause (i) if such obligation is entered into in the ordinary course of such trade or business and is not held for sale, and any security which is a hedge with respect to— a security to which subsection (a) does not apply, or a position, right to income, or a liability which is not a security in the hands of the taxpayer. To the extent provided in regulations, subparagraph (C) shall not apply to any security held by a person in its capacity as a dealer in securities. A security shall not be treated as described in subparagraph (A), (B), or (C) of paragraph (1), as the case may be, unless such security is clearly identified in the dealer’s records as being described in such subparagraph before the close of the day on which it was acquired, originated, or entered into (or such other time as the Secretary may by regulations prescribe). If a security ceases to be described in paragraph (1) at any time after it was identified as such under paragraph (2), subsection (a) shall apply to any changes in value of the security occurring after the cessation. To the extent provided in regulations, subparagraph (A) of paragraph (1) shall not apply to any security described in subparagraph (D) or (E) of subsection (c)(2) which is held by a dealer in such securities.

(c) Definitions For purposes of this section— The term “dealer in securities” means a taxpayer who— regularly purchases securities from or sells securities to customers in the ordinary course of a trade or business; or regularly offers to enter into, assume, offset, assign or otherwise terminate positions in securities with customers in the ordinary course of a trade or business. The term “security” means any— share of stock in a corporation; partnership or beneficial ownership interest in a widely held or publicly traded partnership or trust; note, bond, debenture, or other evidence of indebtedness; interest rate, currency, or equity notional principal contract; evidence of an interest in, or a derivative financial instrument in, any security described in subparagraph (A), (B), (C), or (D), or any currency, including any option, forward contract, short position, and any similar financial instrument in such a security or currency; and position which— is not a security described in subparagraph (A), (B), (C), (D), or (E), is a hedge with respect to such a security, and is clearly identified in the dealer’s records as being described in this subparagraph before the close of the day on which it was acquired or entered into (or such other time as the Secretary may by regulations prescribe). Subparagraph (E) shall not include any contract to which section 1256(a) applies. The term “hedge” means any position which manages the dealer’s risk of interest rate or price changes or currency fluctuations, including any position which is reasonably expected to become a hedge within 60 days after the acquisition of the position. Paragraph (2)(C) shall not include any nonfinancial customer paper. For purposes of subparagraph (A), the term “nonfinancial customer paper” means any receivable which— is a note, bond, debenture, or other evidence of indebtedness; arises out of the sale of nonfinancial goods or services by a person the principal activity of which is the selling or providing of nonfinancial goods or services; and is held by such person (or a person who bears a relationship to such person described in section 267(b) or 707(b)) at all times since issue.

(d) Special rules For purposes of this section— The rules of sections 263(g), 263A, and 1256(a) shall not apply to securities to which subsection (a) applies, and section 1091 shall not apply (and section 1092 shall apply) to any loss recognized under subsection (a). If a taxpayer— identifies any security under subsection (b)(2) as being described in subsection (b)(1) and such security is not so described, or fails under subsection (c)(2)(F)(iii) to identify any position which is described in subsection (c)(2)(F) (without regard to clause (iii) thereof) at the time such identification is required, the provisions of subsection (a) shall apply to such security or position, except that any loss under this section prior to the disposition of the security or position shall be recognized only to the extent of gain previously recognized under this section (and not previously taken into account under this paragraph) with respect to such security or position. Except as provided in subparagraph (B) or section 1236(b)— Any gain or loss with respect to a security under subsection (a)(2) shall be treated as ordinary income or loss. If— gain or loss is recognized with respect to a security before the close of the taxable year, and subsection (a)(2) would have applied if the security were held as of the close of the taxable year, such gain or loss shall be treated as ordinary income or loss. Subparagraph (A) shall not apply to any gain or loss which is allocable to a period during which— the security is described in subsection (b)(1)(C) (without regard to subsection (b)(2)), the security is held by a person other than in connection with its activities as a dealer in securities, or the security is improperly identified (within the meaning of subparagraph (A) or (B) of paragraph (2)).

(e) Election of mark to market for dealers in commodities In the case of a dealer in commodities who elects the application of this subsection, this section shall apply to commodities held by such dealer in the same manner as this section applies to securities held by a dealer in securities. For purposes of this subsection and subsection (f), the term “commodity” means— any commodity which is actively traded (within the meaning of section 1092(d)(1)); any notional principal contract with respect to any commodity described in subparagraph (A); any evidence of an interest in, or a derivative instrument in, any commodity described in subparagraph (A) or (B), including any option, forward contract, futures contract, short position, and any similar instrument in such a commodity; and any position which— is not a commodity described in subparagraph (A), (B), or (C), is a hedge with respect to such a commodity, and is clearly identified in the taxpayer’s records as being described in this subparagraph before the close of the day on which it was acquired or entered into (or such other time as the Secretary may by regulations prescribe). An election under this subsection may be made without the consent of the Secretary. Such an election, once made, shall apply to the taxable year for which made and all subsequent taxable years unless revoked with the consent of the Secretary.

(f) Election of mark to market for traders in securities or commodities In the case of a person who is engaged in a trade or business as a trader in securities and who elects to have this paragraph apply to such trade or business— such person shall recognize gain or loss on any security held in connection with such trade or business at the close of any taxable year as if such security were sold for its fair market value on the last business day of such taxable year, and any gain or loss shall be taken into account for such taxable year. Proper adjustment shall be made in the amount of any gain or loss subsequently realized for gain or loss taken into account under the preceding sentence. The Secretary may provide by regulations for the application of this subparagraph at times other than the times provided in this subparagraph. Subparagraph (A) shall not apply to any security— which is established to the satisfaction of the Secretary as having no connection to the activities of such person as a trader, and which is clearly identified in such person’s records as being described in clause (i) before the close of the day on which it was acquired, originated, or entered into (or such other time as the Secretary may by regulations prescribe). If a security ceases to be described in clause (i) at any time after it was identified as such under clause (ii), subparagraph (A) shall apply to any changes in value of the security occurring after the cessation. Any security to which subparagraph (A) applies and which was acquired in the normal course of the taxpayer’s activities as a trader in securities shall not be taken into account in applying section 1259 to any position to which subparagraph (A) does not apply. Rules similar to the rules of subsections (b)(4) and (d) shall apply to securities held by a person in any trade or business with respect to which an election under this paragraph is in effect. Subsection (d)(3) shall not apply under the preceding sentence for purposes of applying sections 1402 and 7704. In the case of a person who is engaged in a trade or business as a trader in commodities and who elects to have this paragraph apply to such trade or business, paragraph (1) shall apply to commodities held by such trader in connection with such trade or business in the same manner as paragraph (1) applies to securities held by a trader in securities. The elections under paragraphs (1) and (2) may be made separately for each trade or business and without the consent of the Secretary. Such an election, once made, shall apply to the taxable year for which made and all subsequent taxable years unless revoked with the consent of the Secretary.

(g) Regulatory authority The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section, including rules— to prevent the use of year-end transfers, related parties, or other arrangements to avoid the provisions of this section, to provide for the application of this section to any security which is a hedge which cannot be identified with a specific security, position, right to income, or liability, and to prevent the use by taxpayers of subsection (c)(4) to avoid the application of this section to a receivable that is inventory in the hands of the taxpayer (or a person who bears a relationship to the taxpayer described in section 267(b) or 707(b)).

§ 481 Adjustments required by changes in method of accounting

(a) General rule In computing the taxpayer’s taxable income for any taxable year (referred to in this section as the “year of the change”)— if such computation is under a method of accounting different from the method under which the taxpayer’s taxable income for the preceding taxable year was computed, then there shall be taken into account those adjustments which are determined to be necessary solely by reason of the change in order to prevent amounts from being duplicated or omitted, except there shall not be taken into account any adjustment in respect of any taxable year to which this section does not apply unless the adjustment is attributable to a change in the method of accounting initiated by the taxpayer.

(b) Limitation on tax where adjustments are substantial If— the method of accounting from which the change is made was used by the taxpayer in computing his taxable income for the 2 taxable years preceding the year of the change, and the increase in taxable income for the year of the change which results solely by reason of the adjustments required by subsection (a)(2) exceeds $3, 000, t h e n t h e t a xu n d er t hi sc ha pt er a tt r ib u t ab l e t os u c hin cre a se in t a x ab l e in co m es ha ll n o t b e g re a t er t han t h e a gg re g a t e in cre a se in t h e t a x es u n d er t hi sc ha pt er (or u n d er t h ecorres p o n d in g p ro v i s i o n so f p r i orre v e n u e l a w s) w hi c h w o u l d res u lt i f o n e - t hi r d o f s u c hin cre a se in t a x ab l e in co m e w ere in c l u d e d in t a x ab l e in co m e f or t h eye a ro f t h ec han g e an d o n e - t hi r d o f s u c hin cre a se w ere in c l u d e df ore a c h o f t h e 2 p rece d in g t a x ab l eye a rs . I f — t h e in cre a se in t a x ab l e in co m e f or t h eye a ro f t h ec han g e w hi c h res u lt sso l e l y b yre a so n o f t h e a d j u s t m e n t sre q u i re d b ys u b sec t i o n (a) (2) e x cee d s$ 3,000, and the taxpayer establishes his taxable income (under the new method of accounting) for one or more taxable years consecutively preceding the taxable year of the change for which the taxpayer in computing taxable income used the method of accounting from which the change is made, then the tax under this chapter attributable to such increase in taxable income shall not be greater than the net increase in the taxes under this chapter (or under the corresponding provisions of prior revenue laws) which would result if the adjustments required by subsection (a)(2) were allocated to the taxable year or years specified in subparagraph (B) to which they are properly allocable under the new method of accounting and the balance of the adjustments required by subsection (a)(2) was allocated to the taxable year of the change. For purposes of this subsection— There shall be taken into account the increase or decrease in tax for any taxable year preceding the year of the change to which no adjustment is allocated under paragraph (1) or (2) but which is affected by a net operating loss (as defined in section 172) or by a capital loss carryback or carryover (as defined in section 1212), determined with reference to taxable years with respect to which adjustments under paragraph (1) or (2) are allocated. The increase or decrease in the tax for any taxable year for which an assessment of any deficiency, or a credit or refund of any overpayment, is prevented by any law or rule of law, shall be determined by reference to the tax previously determined (within the meaning of section 1314(a)) for such year.

(c) Adjustments under regulations In the case of any change described in subsection (a), the taxpayer may, in such manner and subject to such conditions as the Secretary may by regulations prescribe, take the adjustments required by subsection (a)(2) into account in computing the tax imposed by this chapter for the taxable year or years permitted under such regulations.

(d) Adjustments attributable to conversion from S corporation to C corporation In the case of an eligible terminated S corporation, any adjustment required by subsection (a)(2) which is attributable to such corporation’s revocation described in paragraph (2)(A)(ii) shall be taken into account ratably during the 6-taxable year period beginning with the year of change. For purposes of this subsection, the term “eligible terminated S corporation” means any C corporation— which— was an S corporation on the day before the date of the enactment of the Tax Cuts and Jobs Act, and during the 2-year period beginning on the date of such enactment makes a revocation of its election under section 1362(a), and the owners of the stock of which, determined on the date such revocation is made, are the same owners (and in identical proportions) as on the date of such enactment.

§ 482 Allocation of income and deductions among taxpayers

In any case of two or more organizations, trades, or businesses (whether or not incorporated, whether or not organized in the United States, and whether or not affiliated) owned or controlled directly or indirectly by the same interests, the Secretary may distribute, apportion, or allocate gross income, deductions, credits, or allowances between or among such organizations, trades, or businesses, if he determines that such distribution, apportionment, or allocation is necessary in order to prevent evasion of taxes or clearly to reflect the income of any of such organizations, trades, or businesses. In the case of any transfer (or license) of intangible property (within the meaning of section 367(d)(4)), the income with respect to such transfer or license shall be commensurate with the income attributable to the intangible. For purposes of this section, the Secretary shall require the valuation of transfers of intangible property (including intangible property transferred with other property or services) on an aggregate basis or the valuation of such a transfer on the basis of the realistic alternatives to such a transfer, if the Secretary determines that such basis is the most reliable means of valuation of such transfers. ( Aug. 16, 1954, ch. 736 , 68A Stat. 162 ; Pub. L. 94–455, title XIX, § 1906(b)(13)(A) , Oct. 4, 1976 , 90 Stat. 1834 ; Pub. L. 99–514, title XII, § 1231(e)(1) , Oct. 22, 1986 , 100 Stat. 2562 ; Pub. L. 115–97, title I, § 14221(b)(2) , Dec. 22, 2017 , 131 Stat. 2219 ; Pub. L. 115–141, div. U, title IV, § 401(d)(1)(D)(viii)(III) , Mar. 23, 2018 , 132 Stat. 1207 .)

§ 483 Interest on certain deferred payments

(a) Amount constituting interest For purposes of this title, in the case of any payment— under any contract for the sale or exchange of any property, and to which this section applies, there shall be treated as interest that portion of the total unstated interest under such contract which, as determined in a manner consistent with the method of computing interest under section 1272(a), is properly allocable to such payment.

(b) Total unstated interest For purposes of this section, the term “total unstated interest” means, with respect to a contract for the sale or exchange of property, an amount equal to the excess of— the sum of the payments to which this section applies which are due under the contract, over the sum of the present values of such payments and the present values of any interest payments due under the contract. For purposes of the preceding sentence, the present value of a payment shall be determined under the rules of section 1274(b)(2) using a discount rate equal to the applicable Federal rate determined under section 1274(d).

(c) Payments to which subsection (a) applies Except as provided in subsection (d), this section shall apply to any payment on account of the sale or exchange of property which constitutes part or all of the sales price and which is due more than 6 months after the date of such sale or exchange under a contract— under which some or all of the payments are due more than 1 year after the date of such sale or exchange, and under which there is total unstated interest. For purposes of this section, a debt instrument of the purchaser which is given in consideration for the sale or exchange of property shall not be treated as a payment, and any payment due under such debt instrument shall be treated as due under the contract for the sale or exchange. For purposes of this subsection, the term “debt instrument” has the meaning given such term by section 1275(a)(1).

(d) Exceptions and limitations This section shall not apply to any debt instrument for which an issue price is determined under section 1273(b) (other than paragraph (4) thereof) or section 1274. This section shall not apply to any payment on account of the sale or exchange of property if it can be determined at the time of such sale or exchange that the sales price cannot exceed $3,000. In the case of the purchaser, the tax treatment of amounts paid on account of the sale or exchange of property shall be made without regard to this section if any such amounts are treated under section 163(b) as if they included interest. In the case of any transfer described in section 1235(a) (relating to sale or exchange of patents), this section shall not apply to any amount contingent on the productivity, use, or disposition of the property transferred.

(e) Maximum rate of interest on certain transfers of land between related parties In the case of any qualified sale, the discount rate used in determining the total unstated interest rate under subsection (b) shall not exceed 6 percent, compounded semiannually. For purposes of this subsection, the term “qualified sale” means any sale or exchange of land by an individual to a member of such individual’s family (within the meaning of section 267(c)(4)). Paragraph (1) shall not apply to any qualified sale between individuals made during any calendar year to the extent that the sales price for such sale (when added to the aggregate sales price for prior qualified sales between such individuals during the calendar year) exceeds $500,000. Paragraph (1) shall not apply to any sale or exchange if any party to such sale or exchange is a nonresident alien individual.

(f) Regulations The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section including regulations providing for the application of this section in the case of— any contract for the sale or exchange of property under which the liability for, or the amount or due date of, a payment cannot be determined at the time of the sale or exchange, or any change in the liability for, or the amount or due date of, any payment (including interest) under a contract for the sale or exchange of property.

(g) Cross references For treatment of assumptions, see section l274(c)(4). For special rules for certain transactions where stated principal amount does not exceed $2,800,000, see section 1274A. For special rules in case of the borrower under certain loans for personal use, see section 1275(b).

§ 501 Exemption from tax on corporations, certain trusts, etc.

(a) Exemption from taxation An organization described in subsection (c) or (d) or section 401(a) shall be exempt from taxation under this subtitle unless such exemption is denied under section 502 or 503.

(b) Tax on unrelated business income and certain other activities An organization exempt from taxation under subsection (a) shall be subject to tax to the extent provided in parts II, III, and VI of this subchapter, but (notwithstanding parts II, III, and VI of this subchapter) shall be considered an organization exempt from income taxes for the purpose of any law which refers to organizations exempt from income taxes.

(c) List of exempt organizations The following organizations are referred to in subsection (a): Any corporation organized under Act of Congress which is an instrumentality of the United States but only if such corporation— is exempt from Federal income taxes— under such Act as amended and supplemented before July 18, 1984 , or under this title without regard to any provision of law which is not contained in this title and which is not contained in a revenue Act, or is described in subsection ( l ). Corporations organized for the exclusive purpose of holding title to property, collecting income therefrom, and turning over the entire amount thereof, less expenses, to an organization which itself is exempt under this section. Rules similar to the rules of subparagraph (G) of paragraph (25) shall apply for purposes of this paragraph. Corporations, and any community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment), or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder or individual, no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation (except as otherwise provided in subsection (h)), and which does not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office. Civic leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare, or local associations of employees, the membership of which is limited to the employees of a designated person or persons in a particular municipality, and the net earnings of which are devoted exclusively to charitable, educational, or recreational purposes. Subparagraph (A) shall not apply to an entity unless no part of the net earnings of such entity inures to the benefit of any private shareholder or individual. Labor, agricultural, or horticultural organizations. Business leagues, chambers of commerce, real-estate boards, boards of trade, or professional football leagues (whether or not administering a pension fund for football players), not organized for profit and no part of the net earnings of which inures to the benefit of any private shareholder or individual. Clubs organized for pleasure, recreation, and other nonprofitable purposes, substantially all of the activities of which are for such purposes and no part of the net earnings of which inures to the benefit of any private shareholder. Fraternal beneficiary societies, orders, or associations— operating under the lodge system or for the exclusive benefit of the members of a fraternity itself operating under the lodge system, and providing for the payment of life, sick, accident, or other benefits to the members of such society, order, or association or their dependents. Voluntary employees’ beneficiary associations providing for the payment of life, sick, accident, or other benefits to the members of such association or their dependents or designated beneficiaries, if no part of the net earnings of such association inures (other than through such payments) to the benefit of any private shareholder or individual. For purposes of providing for the payment of sick and accident benefits to members of such an association and their dependents, the term “dependent” shall include any individual who is a child (as defined in section 152(f)(1)) of a member who as of the end of the calendar year has not attained age 27. Domestic fraternal societies, orders, or associations, operating under the lodge system— the net earnings of which are devoted exclusively to religious, charitable, scientific, literary, educational, and fraternal purposes, and which do not provide for the payment of life, sick, accident, or other benefits. Teachers’ retirement fund associations of a purely local character, if— no part of their net earnings inures (other than through payment of retirement benefits) to the benefit of any private shareholder or individual, and the income consists solely of amounts received from public taxation, amounts received from assessments on the teaching salaries of members, and income in respect of investments. Benevolent life insurance associations of a purely local character, mutual ditch or irrigation companies, mutual or cooperative telephone companies, or like organizations; but only if 85 percent or more of the income consists of amounts collected from members for the sole purpose of meeting losses and expenses. In the case of a mutual or cooperative telephone company, subparagraph (A) shall be applied without taking into account any income received or accrued— from a nonmember telephone company for the performance of communication services which involve members of the mutual or cooperative telephone company, from qualified pole rentals, from the sale of display listings in a directory furnished to the members of the mutual or cooperative telephone company, or from the prepayment of a loan under section 306A, 306B, or 311 1 of the Rural Electrification Act of 1936 (as in effect on January 1, 1987 ). In the case of a mutual or cooperative electric company, subparagraph (A) shall be applied without taking into account any income received or accrued— from qualified pole rentals, or from any provision or sale of electric energy transmission services or ancillary services if such services are provided on a nondiscriminatory open access basis under an open access transmission tariff approved or accepted by FERC or under an independent transmission provider agreement approved or accepted by FERC (other than income received or accrued directly or indirectly from a member), from the provision or sale of electric energy distribution services or ancillary services if such services are provided on a nondiscriminatory open access basis to distribute electric energy not owned by the mutual or electric cooperative company— to end-users who are served by distribution facilities not owned by such company or any of its members (other than income received or accrued directly or indirectly from a member), or generated by a generation facility not owned or leased by such company or any of its members and which is directly connected to distribution facilities owned by such company or any of its members (other than income received or accrued directly or indirectly from a member), from any nuclear decommissioning transaction, or from any asset exchange or conversion transaction. For purposes of this paragraph, the term “qualified pole rental” means any rental of a pole (or other structure used to support wires) if such pole (or other structure)— is used by the telephone or electric company to support one or more wires which are used by such company in providing telephone or electric services to its members, and is used pursuant to the rental to support one or more wires (in addition to the wires described in clause (i)) for use in connection with the transmission by wire of electricity or of telephone or other communications. For purposes of the preceding sentence, the term “rental” includes any sale of the right to use the pole (or other structure). For purposes of subparagraph (C)(ii), the term “FERC” means— the Federal Energy Regulatory Commission, or in the case of any utility with respect to which all of the electricity generated, transmitted, or distributed by such utility is generated, transmitted, distributed, and consumed in the same State, the State agency of such State with the authority to regulate electric utilities. For purposes of subparagraph (C)(iv), the term “nuclear decommissioning transaction” means— any transfer into a trust, fund, or instrument established to pay any nuclear decommissioning costs if the transfer is in connection with the transfer of the mutual or cooperative electric company’s interest in a nuclear power plant or nuclear power plant unit, any distribution from any trust, fund, or instrument established to pay any nuclear decommissioning costs, or any earnings from any trust, fund, or instrument established to pay any nuclear decommissioning costs. For purposes of subparagraph (C)(v), the term “asset exchange or conversion transaction” means any voluntary exchange or involuntary conversion of any property related to generating, transmitting, distributing, or selling electric energy by a mutual or cooperative electric company, the gain from which qualifies for deferred recognition under section 1031 or 1033, but only if the replacement property acquired by such company pursuant to such section constitutes property which is used, or to be used, for— generating, transmitting, distributing, or selling electric energy, or producing, transmitting, distributing, or selling natural gas. In the case of a mutual or cooperative electric company described in this paragraph or an organization described in section 1381(a)(2)(C), income received or accrued from a load loss transaction shall be treated as an amount collected from members for the sole purpose of meeting losses and expenses. For purposes of clause (i), the term “load loss transaction” means any wholesale or retail sale of electric energy (other than to members) to the extent that the aggregate sales during the recovery period do not exceed the load loss mitigation sales limit for such period. For purposes of clause (ii), the load loss mitigation sales limit for the recovery period is the sum of the annual load losses for each year of such period. For purposes of clause (iii), a mutual or cooperative electric company’s annual load loss for each year of the recovery period is the amount (if any) by which— the megawatt hours of electric energy sold during such year to members of such electric company are less than the megawatt hours of electric energy sold during the base year to such members. For purposes of clause (iv)(II), the term “base year” means— the calendar year preceding the start-up year, or at the election of the mutual or cooperative electric company, the second or third calendar years preceding the start-up year. For purposes of this subparagraph, the recovery period is the 7-year period beginning with the start-up year. For purposes of this subparagraph, the start-up year is the first year that the mutual or cooperative electric company offers nondiscriminatory open access or the calendar year which includes the date of the enactment of this subparagraph, if later, at the election of such company. A company shall not fail to be treated as a mutual or cooperative electric company for purposes of this paragraph or as a corporation operating on a cooperative basis for purposes of section 1381(a)(2)(C) by reason of the treatment under clause (i). For purposes of subparagraph (A), in the case of a mutual or cooperative electric company, income received, or accrued, indirectly from a member shall be treated as an amount collected from members for the sole purpose of meeting losses and expenses. In the case of a mutual or cooperative electric company described in this paragraph or an organization described in section 1381(a)(2), income received or accrued in connection with an election under section 45J(e)(1) shall be treated as an amount collected from members for the sole purpose of meeting losses and expenses. In the case of a mutual or cooperative telephone or electric company described in this paragraph, subparagraph (A) shall be applied without taking into account any income received or accrued from— any grant, contribution, or assistance provided pursuant to the Robert T. Stafford Disaster Relief and Emergency Assistance Act or any similar grant, contribution, or assistance by any local, State, or regional governmental entity for the purpose of relief, recovery, or restoration from, or preparation for, a disaster or emergency, or any grant or contribution by any governmental entity (other than a contribution in aid of construction or any other contribution as a customer or potential customer) the purpose of which is substantially related to providing, constructing, restoring, or relocating electric, communication, broadband, internet, or other utility facilities or services. Cemetery companies owned and operated exclusively for the benefit of their members or which are not operated for profit; and any corporation chartered solely for the purpose of the disposal of bodies by burial or cremation which is not permitted by its charter to engage in any business not necessarily incident to that purpose and no part of the net earnings of which inures to the benefit of any private shareholder or individual. Credit unions without capital stock organized and operated for mutual purposes and without profit. Corporations or associations without capital stock organized before September 1, 1957 , and operated for mutual purposes and without profit for the purpose of providing reserve funds for, and insurance of shares or deposits in— domestic building and loan associations, cooperative banks without capital stock organized and operated for mutual purposes and without profit, mutual savings banks not having capital stock represented by shares, or mutual savings banks described in section 591(b). Corporations or associations organized before September 1, 1957 , and operated for mutual purposes and without profit for the purpose of providing reserve funds for associations or banks described in clause (i), (ii), or (iii) of subparagraph (B); but only if 85 percent or more of the income is attributable to providing such reserve funds and to investments. This subparagraph shall not apply to any corporation or association entitled to exemption under subparagraph (B). Insurance companies (as defined in section 816(a)) other than life (including interinsurers and reciprocal underwriters) if— the gross receipts for the taxable year do not exceed $600, 000, an d m ore t han 50 p erce n t o f s u c h g rossrece i pt sco n s i s t o f p re mi u m s, or in t h ec a seo f am u t u a l in s u r an ceco m p an y — t h e g rossrece i pt so f w hi c h f or t h e t a x ab l eye a r d o n o t e x cee d$ 150,000, and more than 35 percent of such gross receipts consist of premiums. Clause (ii) shall not apply to a company if any employee of the company, or a member of the employee’s family (as defined in section 2032A(e)(2)), is an employee of another company exempt from taxation by reason of this paragraph (or would be so exempt but for this sentence). For purposes of subparagraph (A), in determining whether any company or association is described in subparagraph (A), such company or association shall be treated as receiving during the taxable year amounts described in subparagraph (A) which are received during such year by all other companies or associations which are members of the same controlled group as the insurance company or association for which the determination is being made. For purposes of subparagraph (B), the term “controlled group” has the meaning given such term by section 831(b)(2)(B)(ii), 1 except that in applying section 831(b)(2)(B)(ii) 1 for purposes of this subparagraph, subparagraphs (B) and (C) of section 1563(b)(2) shall be disregarded. Corporations organized by an association subject to part IV of this subchapter or members thereof, for the purpose of financing the ordinary crop operations of such members or other producers, and operated in conjunction with such association. Exemption shall not be denied any such corporation because it has capital stock, if the dividend rate of such stock is fixed at not to exceed the legal rate of interest in the State of incorporation or 8 percent per annum, whichever is greater, on the value of the consideration for which the stock was issued, and if substantially all such stock (other than nonvoting preferred stock, the owners of which are not entitled or permitted to participate, directly or indirectly, in the profits of the corporation, on dissolution or otherwise, beyond the fixed dividends) is owned by such association, or members thereof; nor shall exemption be denied any such corporation because there is accumulated and maintained by it a reserve required by State law or a reasonable reserve for any necessary purpose. A trust or trusts forming part of a plan providing for the payment of supplemental unemployment compensation benefits, if— under the plan, it is impossible, at any time prior to the satisfaction of all liabilities, with respect to employees under the plan, for any part of the corpus or income to be (within the taxable year or thereafter) used for, or diverted to, any purpose other than the providing of supplemental unemployment compensation benefits, such benefits are payable to employees under a classification which is set forth in the plan and which is found by the Secretary not to be discriminatory in favor of employees who are highly compensated employees (within the meaning of section 414(q)), and such benefits do not discriminate in favor of employees who are highly compensated employees (within the meaning of section 414(q)). A plan shall not be considered discriminatory within the meaning of this clause merely because the benefits received under the plan bear a uniform relationship to the total compensation, or the basic or regular rate of compensation, of the employees covered by the plan. In determining whether a plan meets the requirements of subparagraph (A), any benefits provided under any other plan shall not be taken into consideration, except that a plan shall not be considered discriminatory— merely because the benefits under the plan which are first determined in a nondiscriminatory manner within the meaning of subparagraph (A) are then reduced by any sick, accident, or unemployment compensation benefits received under State or Federal law (or reduced by a portion of such benefits if determined in a nondiscriminatory manner), or merely because the plan provides only for employees who are not eligible to receive sick, accident, or unemployment compensation benefits under State or Federal law the same benefits (or a portion of such benefits if determined in a nondiscriminatory manner) which such employees would receive under such laws if such employees were eligible for such benefits, or merely because the plan provides only for employees who are not eligible under another plan (which meets the requirements of subparagraph (A)) of supplemental unemployment compensation benefits provided wholly by the employer the same benefits (or a portion of such benefits if determined in a nondiscriminatory manner) which such employees would receive under such other plan if such employees were eligible under such other plan, but only if the employees eligible under both plans would make a classification which would be nondiscriminatory within the meaning of subparagraph (A). A plan shall be considered to meet the requirements of subparagraph (A) during the whole of any year of the plan if on one day in each quarter it satisfies such requirements. The term “supplemental unemployment compensation benefits” means only— benefits which are paid to an employee because of his involuntary separation from the employment of the employer (whether or not such separation is temporary) resulting directly from a reduction in force, the discontinuance of a plant or operation, or other similar conditions, and sick and accident benefits subordinate to the benefits described in clause (i). Exemption shall not be denied under subsection (a) to any organization entitled to such exemption as an association described in paragraph (9) of this subsection merely because such organization provides for the payment of supplemental unemployment benefits (as defined in subparagraph (D)(i)). A trust or trusts created before June 25, 1959 , forming part of a plan providing for the payment of benefits under a pension plan funded only by contributions of employees, if— under the plan, it is impossible, at any time prior to the satisfaction of all liabilities with respect to employees under the plan, for any part of the corpus or income to be (within the taxable year or thereafter) used for, or diverted to, any purpose other than the providing of benefits under the plan, such benefits are payable to employees under a classification which is set forth in the plan and which is found by the Secretary not to be discriminatory in favor of employees who are highly compensated employees (within the meaning of section 414(q)), such benefits do not discriminate in favor of employees who are highly compensated employees (within the meaning of section 414(q)). A plan shall not be considered discriminatory within the meaning of this subparagraph merely because the benefits received under the plan bear a uniform relationship to the total compensation, or the basic or regular rate of compensation, of the employees covered by the plan, and in the case of a plan under which an employee may designate certain contributions as deductible— such contributions do not exceed the amount with respect to which a deduction is allowable under section 219(b)(3), requirements similar to the requirements of section 401(k)(3)(A)(ii) are met with respect to such elective contributions, such contributions are treated as elective deferrals for purposes of section 402(g), and the requirements of section 401(a)(30) are met. For purposes of subparagraph (D)(ii), rules similar to the rules of section 401(k)(8) shall apply. For purposes of section 4979, any excess contribution under clause (ii) shall be treated as an excess contribution under a cash or deferred arrangement. A post or organization of past or present members of the Armed Forces of the United States, or an auxiliary unit or society of, or a trust or foundation for, any such post or organization— organized in the United States or any of its possessions, at least 75 percent of the members of which are past or present members of the Armed Forces of the United States and substantially all of the other members of which are individuals who are cadets or are spouses, widows, widowers, ancestors, or lineal descendants of past or present members of the Armed Forces of the United States or of cadets, and no part of the net earnings of which inures to the benefit of any private shareholder or individual. Repealed. Pub. L. 113–295, div. A, title II, § 221(a)(19)(B)(iii) , Dec. 19, 2014 , 128 Stat. 4040 .] A trust or trusts established in writing, created or organized in the United States, and contributed to by any person (except an insurance company) if— the purpose of such trust or trusts is exclusively— to satisfy, in whole or in part, the liability of such person for, or with respect to, claims for compensation for disability or death due to pneumoconiosis under Black Lung Acts, to pay premiums for insurance exclusively covering such liability, to pay administrative and other incidental expenses of such trust in connection with the operation of the trust and the processing of claims against such person under Black Lung Acts, and to pay accident or health benefits for retired miners and their spouses and dependents (including administrative and other incidental expenses of such trust in connection therewith) or premiums for insurance exclusively covering such benefits; and no part of the assets of the trust may be used for, or diverted to, any purpose other than— the purposes described in clause (i), investment (but only to the extent that the trustee determines that a portion of the assets is not currently needed for the purposes described in clause (i)) in qualified investments, or payment into the Black Lung Disability Trust Fund established under section 9501, or into the general fund of the United States Treasury (other than in satisfaction of any tax or other civil or criminal liability of the person who established or contributed to the trust). No deduction shall be allowed under this chapter for any payment described in subparagraph (A)(i)(IV) from such trust. Payments described in subparagraph (A)(i)(IV) may be made from such trust during a taxable year only to the extent that the aggregate amount of such payments during such taxable year does not exceed the excess (if any), as of the close of the preceding taxable year, of— the fair market value of the assets of the trust, over 110 percent of the present value of the liability described in subparagraph (A)(i)(I) of such person. The determinations under the preceding sentence shall be made by an independent actuary using actuarial methods and assumptions (not inconsistent with the regulations prescribed under section 192(c)(1)(A)) each of which is reasonable and which are reasonable in the aggregate. For purposes of this paragraph: The term “Black Lung Acts” means part C of title IV of the Federal Mine Safety and Health Act of 1977, and any State law providing compensation for disability or death due to that pneumoconiosis. The term “qualified investments” means— public debt securities of the United States, obligations of a State or local government which are not in default as to principal or interest, and time or demand deposits in a bank (as defined in section 581) or an insured credit union (within the meaning of section 101(7) of the Federal Credit Union Act, 12 U.S.C. 1752(7) ) located in the United States. The term “miner” has the same meaning as such term has when used in section 402(d) of the Black Lung Benefits Act ( 30 U.S.C. 902(d) ). The term “incidental expenses” includes legal, accounting, actuarial, and trustee expenses. A trust created or organized in the United States and established in writing by the plan sponsors of multiemployer plans if— the purpose of such trust is exclusively— to pay any amount described in section 4223(c) or (h) of the Employee Retirement Income Security Act of 1974, and to pay reasonable and necessary administrative expenses in connection with the establishment and operation of the trust and the processing of claims against the trust, no part of the assets of the trust may be used for, or diverted to, any purpose other than— the purposes described in subparagraph (A), or the investment in securities, obligations, or time or demand deposits described in clause (ii) of paragraph (21)(D), such trust meets the requirements of paragraphs (2), (3), and (4) of section 4223(b), 4223(h), or, if applicable, section 4223(c) of the Employee Retirement Income Security Act of 1974, and the trust instrument provides that, on dissolution of the trust, assets of the trust may not be paid other than to plans which have participated in the plan or, in the case of a trust established under section 4223(h) of such Act, to plans with respect to which employers have participated in the fund. Any association organized before 1880 more than 75 percent of the members of which are present or past members of the Armed Forces and a principal purpose of which is to provide insurance and other benefits to veterans or their dependents. A trust described in section 4049 of the Employee Retirement Income Security Act of 1974 (as in effect on the date of the enactment of the Single-Employer Pension Plan Amendments Act of 1986). Any corporation or trust which— has no more than 35 shareholders or beneficiaries, has only 1 class of stock or beneficial interest, and is organized for the exclusive purposes of— acquiring real property and holding title to, and collecting income from, such property, and remitting the entire amount of income from such property (less expenses) to 1 or more organizations described in subparagraph (C) which are shareholders of such corporation or beneficiaries of such trust. For purposes of clause (iii), the term “real property” shall not include any interest as a tenant in common (or similar interest) and shall not include any indirect interest. A corporation or trust shall be described in subparagraph (A) without regard to whether the corporation or trust is organized by 1 or more organizations described in subparagraph (C). An organization is described in this subparagraph if such organization is— a qualified pension, profit sharing, or stock bonus plan that meets the requirements of section 401(a), a governmental plan (within the meaning of section 414(d)), the United States, any State or political subdivision thereof, or any agency or instrumentality of any of the foregoing, or any organization described in paragraph (3). A corporation or trust shall in no event be treated as described in subparagraph (A) unless such corporation or trust permits its shareholders or beneficiaries— to dismiss the corporation’s or trust’s investment adviser, following reasonable notice, upon a vote of the shareholders or beneficiaries holding a majority of interest in the corporation or trust, and to terminate their interest in the corporation or trust by either, or both, of the following alternatives, as determined by the corporation or trust: by selling or exchanging their stock in the corporation or interest in the trust (subject to any Federal or State securities law) to any organization described in subparagraph (C) so long as the sale or exchange does not increase the number of shareholders or beneficiaries in such corporation or trust above 35, or by having their stock or interest redeemed by the corporation or trust after the shareholder or beneficiary has provided 90 days notice to such corporation or trust. For purposes of this title— a corporation which is a qualified subsidiary shall not be treated as a separate corporation, and all assets, liabilities, and items of income, deduction, and credit of a qualified subsidiary shall be treated as assets, liabilities, and such items (as the case may be) of the corporation or trust described in subparagraph (A). For purposes of this subparagraph, the term “qualified subsidiary” means any corporation if, at all times during the period such corporation was in existence, 100 percent of the stock of such corporation is held by the corporation or trust described in subparagraph (A). For purposes of this subtitle, if any corporation which was a qualified subsidiary ceases to meet the requirements of clause (ii), such corporation shall be treated as a new corporation acquiring all of its assets (and assuming all of its liabilities) immediately before such cessation from the corporation or trust described in subparagraph (A) in exchange for its stock. For purposes of subparagraph (A), the term “real property” includes any personal property which is leased under, or in connection with, a lease of real property, but only if the rent attributable to such personal property (determined under the rules of section 856(d)(1)) for the taxable year does not exceed 15 percent of the total rent for the taxable year attributable to both the real and personal property leased under, or in connection with, such lease. An organization shall not be treated as failing to be described in this paragraph merely by reason of the receipt of any otherwise disqualifying income which is incidentally derived from the holding of real property. Clause (i) shall not apply if the amount of gross income described in such clause exceeds 10 percent of the organization’s gross income for the taxable year unless the organization establishes to the satisfaction of the Secretary that the receipt of gross income described in clause (i) in excess of such limitation was inadvertent and reasonable steps are being taken to correct the circumstances giving rise to such income. Any membership organization if— such organization is established by a State exclusively to provide coverage for medical care (as defined in section 213(d)) on a not-for-profit basis to individuals described in subparagraph (B) through— insurance issued by the organization, or a health maintenance organization under an arrangement with the organization, the only individuals receiving such coverage through the organization are individuals— who are residents of such State, and who, by reason of the existence or history of a medical condition— are unable to acquire medical care coverage for such condition through insurance or from a health maintenance organization, or are able to acquire such coverage only at a rate which is substantially in excess of the rate for such coverage through the membership organization, the composition of the membership in such organization is specified by such State, and no part of the net earnings of the organization inures to the benefit of any private shareholder or individual. A spouse and any qualifying child (as defined in section 24(c)) of an individual described in subparagraph (B) (without regard to this sentence) shall be treated as described in subparagraph (B). Any membership organization if— such organization is established before June 1, 1996 , by a State exclusively to reimburse its members for losses arising under workmen’s compensation acts, such State requires that the membership of such organization consist of— all persons who issue insurance covering workmen’s compensation losses in such State, and all persons and governmental entities who self-insure against such losses, and such organization operates as a non-profit organization by— returning surplus income to its members or workmen’s compensation policyholders on a periodic basis, and reducing initial premiums in anticipation of investment income. Any organization (including a mutual insurance company) if— such organization is created by State law and is organized and operated under State law exclusively to— provide workmen’s compensation insurance which is required by State law or with respect to which State law provides significant disincentives if such insurance is not purchased by an employer, and provide related coverage which is incidental to workmen’s compensation insurance, such organization must provide workmen’s compensation insurance to any employer in the State (for employees in the State or temporarily assigned out-of-State) which seeks such insurance and meets other reasonable requirements relating thereto, the State makes a financial commitment with respect to such organization either by extending the full faith and credit of the State to the initial debt of such organization or by providing the initial operating capital of such organization, and (II) in the case of periods after the date of enactment of this subparagraph, the assets of such organization revert to the State upon dissolution or State law does not permit the dissolution of such organization, and the majority of the board of directors or oversight body of such organization are appointed by the chief executive officer or other executive branch official of the State, by the State legislature, or by both. The National Railroad Retirement Investment Trust established under section 15(j) of the Railroad Retirement Act of 1974. A qualified nonprofit health insurance issuer (within the meaning of section 1322 of the Patient Protection and Affordable Care Act) which has received a loan or grant under the CO–OP program under such section, but only with respect to periods for which the issuer is in compliance with the requirements of such section and any agreement with respect to the loan or grant. Subparagraph (A) shall apply to an organization only if— the organization has given notice to the Secretary, in such manner as the Secretary may by regulations prescribe, that it is applying for recognition of its status under this paragraph, except as provided in section 1322(c)(4) of the Patient Protection and Affordable Care Act, no part of the net earnings of which inures to the benefit of any private shareholder or individual, no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation, and the organization does not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office.

(d) Religious and apostolic organizations The following organizations are referred to in subsection (a): Religious or apostolic associations or corporations, if such associations or corporations have a common treasury or community treasury, even if such associations or corporations engage in business for the common benefit of the members, but only if the members thereof include (at the time of filing their returns) in their gross income their entire pro rata shares, whether distributed or not, of the taxable income of the association or corporation for such year. Any amount so included in the gross income of a member shall be treated as a dividend received.

(e) Cooperative hospital service organizations For purposes of this title, an organization shall be treated as an organization organized and operated exclusively for charitable purposes, if— such organization is organized and operated solely— to perform, on a centralized basis, one or more of the following services which, if performed on its own behalf by a hospital which is an organization described in subsection (c)(3) and exempt from taxation under subsection (a), would constitute activities in exercising or performing the purpose or function constituting the basis for its exemption: data processing, purchasing (including the purchasing of insurance on a group basis), warehousing, billing and collection (including the purchase of patron accounts receivable on a recourse basis), food, clinical, industrial engineering, laboratory, printing, communications, record center, and personnel (including selection, testing, training, and education of personnel) services; and to perform such services solely for two or more hospitals each of which is— an organization described in subsection (c)(3) which is exempt from taxation under subsection (a), a constituent part of an organization described in subsection (c)(3) which is exempt from taxation under subsection (a) and which, if organized and operated as a separate entity, would constitute an organization described in subsection (c)(3), or owned and operated by the United States, a State, the District of Columbia, or a possession of the United States, or a political subdivision or an agency or instrumentality of any of the foregoing; such organization is organized and operated on a cooperative basis and allocates or pays, within 8½ months after the close of its taxable year, all net earnings to patrons on the basis of services performed for them; and if such organization has capital stock, all of such stock outstanding is owned by its patrons. For purposes of this title, any organization which, by reason of the preceding sentence, is an organization described in subsection (c)(3) and exempt from taxation under subsection (a), shall be treated as a hospital and as an organization referred to in section 170(b)(1)(A)(iii).

(f) Cooperative service organizations of operating educational organizations For purposes of this title, if an organization is— organized and operated solely to hold, commingle, and collectively invest and reinvest (including arranging for and supervising the performance by independent contractors of investment services related thereto) in stocks and securities, the moneys contributed thereto by each of the members of such organization, and to collect income therefrom and turn over the entire amount thereof, less expenses, to such members, organized and controlled by one or more such members, and comprised solely of members that are organizations described in clause (ii) or (iv) of section 170(b)(1)(A)— which are exempt from taxation under subsection (a), or the income of which is excluded from taxation under section 115, then such organization shall be treated as an organization organized and operated exclusively for charitable purposes.

(g) Definition of agricultural For purposes of subsection (c)(5), the term “agricultural” includes the art or science of cultivating land, harvesting crops or aquatic resources, or raising livestock.

(h) Expenditures by public charities to influence legislation In the case of an organization to which this subsection applies, exemption from taxation under subsection (a) shall be denied because a substantial part of the activities of such organization consists of carrying on propaganda, or otherwise attempting, to influence legislation, but only if such organization normally— makes lobbying expenditures in excess of the lobbying ceiling amount for such organization for each taxable year, or makes grass roots expenditures in excess of the grass roots ceiling amount for such organization for each taxable year. For purposes of this subsection— The term “lobbying expenditures” means expenditures for the purpose of influencing legislation (as defined in section 4911(d)). The lobbying ceiling amount for any organization for any taxable year is 150 percent of the lobbying nontaxable amount for such organization for such taxable year, determined under section 4911. The term “grass roots expenditures” means expenditures for the purpose of influencing legislation (as defined in section 4911(d) without regard to paragraph (1)(B) thereof). The grass roots ceiling amount for any organization for any taxable year is 150 percent of the grass roots nontaxable amount for such organization for such taxable year, determined under section 4911. This subsection shall apply to any organization which has elected (in such manner and at such time as the Secretary may prescribe) to have the provisions of this subsection apply to such organization and which, for the taxable year which includes the date the election is made, is described in subsection (c)(3) and— is described in paragraph (4), and is not a disqualified organization under paragraph (5). An organization is described in this paragraph if it is described in— section 170(b)(1)(A)(ii) (relating to educational institutions), section 170(b)(1)(A)(iii) (relating to hospitals and medical research organizations), section 170(b)(1)(A)(iv) (relating to organizations supporting government schools), section 170(b)(1)(A)(vi) (relating to organizations publicly supported by charitable contributions), section 170(b)(1)(A)(ix) (relating to agricultural research organizations), section 509(a)(2) (relating to organizations publicly supported by admissions, sales, etc.), or section 509(a)(3) (relating to organizations supporting certain types of public charities) except that for purposes of this subparagraph, section 509(a)(3) shall be applied without regard to the last sentence of section 509(a). For purposes of paragraph (3) an organization is a disqualified organization if it is— described in section 170(b)(1)(A)(i) (relating to churches), an integrated auxiliary of a church or of a convention or association of churches, or a member of an affiliated group of organizations (within the meaning of section 4911(f)(2)) if one or more members of such group is described in subparagraph (A) or (B). An election by an organization under this subsection shall be effective for all taxable years of such organization which— end after the date the election is made, and begin before the date the election is revoked by such organization (under regulations prescribed by the Secretary). With respect to any organization for a taxable year for which— such organization is a disqualified organization (within the meaning of paragraph (5)), or an election under this subsection is not in effect for such organization, nothing in this subsection or in section 4911 shall be construed to affect the interpretation of the phrase, “no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation,” under subsection (c)(3). For rules regarding affiliated organizations, see section 4911(f).

(i) Prohibition of discrimination by certain social clubs Notwithstanding subsection (a), an organization which is described in subsection (c)(7) shall not be exempt from taxation under subsection (a) for any taxable year if, at any time during such taxable year, the charter, bylaws, or other governing instrument, of such organization or any written policy statement of such organization contains a provision which provides for discrimination against any person on the basis of race, color, or religion. The preceding sentence to the extent it relates to discrimination on the basis of religion shall not apply to— an auxiliary of a fraternal beneficiary society if such society— is described in subsection (c)(8) and exempt from tax under subsection (a), and limits its membership to the members of a particular religion, or a club which in good faith limits its membership to the members of a particular religion in order to further the teachings or principles of that religion, and not to exclude individuals of a particular race or color.

(j) Special rules for certain amateur sports organizations In the case of a qualified amateur sports organization— the requirement of subsection (c)(3) that no part of its activities involve the provision of athletic facilities or equipment shall not apply, and such organization shall not fail to meet the requirements of subsection (c)(3) merely because its membership is local or regional in nature. For purposes of this subsection, the term “qualified amateur sports organization” means any organization organized and operated exclusively to foster national or international amateur sports competition if such organization is also organized and operated primarily to conduct national or international competition in sports or to support and develop amateur athletes for national or international competition in sports.

(k) Treatment of certain organizations providing child care For purposes of subsection (c)(3) of this section and sections 170(c)(2), 2055(a)(2), and 2522(a)(2), the term “educational purposes” includes the providing of care of children away from their homes if— substantially all of the care provided by the organization is for purposes of enabling individuals to be gainfully employed, and the services provided by the organization are available to the general public.

(l) Government corporations exempt under subsection (c)(1) For purposes of subsection (c)(1), the following organizations are described in this subsection: The Central Liquidity Facility established under title III of the Federal Credit Union Act ( 12 U.S.C. 1795 et seq.). The Resolution Trust Corporation established under section 21A 1 of the Federal Home Loan Bank Act. The Resolution Funding Corporation established under section 21B of the Federal Home Loan Bank Act. The Patient-Centered Outcomes Research Institute established under section 1181(b) of the Social Security Act.

(m) Certain organizations providing commercial-type insurance not exempt from tax An organization described in paragraph (3) or (4) of subsection (c) shall be exempt from tax under subsection (a) only if no substantial part of its activities consists of providing commercial-type insurance. In the case of an organization described in paragraph (3) or (4) of subsection (c) which is exempt from tax under subsection (a) after the application of paragraph (1) of this subsection— the activity of providing commercial-type insurance shall be treated as an unrelated trade or business (as defined in section 513), and in lieu of the tax imposed by section 511 with respect to such activity, such organization shall be treated as an insurance company for purposes of applying subchapter L with respect to such activity. For purposes of this subsection, the term “commercial-type insurance” shall not include— insurance provided at substantially below cost to a class of charitable recipients, incidental health insurance provided by a health maintenance organization of a kind customarily provided by such organizations, property or casualty insurance provided (directly or through an organization described in section 414(e)(3)(B)(ii)) by a church or convention or association of churches for such church or convention or association of churches, providing retirement or welfare benefits (or both) by a church or a convention or association of churches (directly or through an organization described in section 414(e)(3)(A) or 414(e)(3)(B)(ii)) for the employees (including employees described in section 414(e)(3)(B)) of such church or convention or association of churches or the beneficiaries of such employees, and charitable gift annuities. For purposes of this subsection, the issuance of annuity contracts shall be treated as providing insurance. For purposes of paragraph (3)(E), the term “charitable gift annuity” means an annuity if— a portion of the amount paid in connection with the issuance of the annuity is allowable as a deduction under section 170 or 2055, and the annuity is described in section 514(c)(5) (determined as if any amount paid in cash in connection with such issuance were property).

(n) Charitable risk pools For purposes of this title— a qualified charitable risk pool shall be treated as an organization organized and operated exclusively for charitable purposes, and subsection (m) shall not apply to a qualified charitable risk pool. For purposes of this subsection, the term “qualified charitable risk pool” means any organization— which is organized and operated solely to pool insurable risks of its members (other than risks related to medical malpractice) and to provide information to its members with respect to loss control and risk management, which is comprised solely of members that are organizations described in subsection (c)(3) and exempt from tax under subsection (a), and which meets the organizational requirements of paragraph (3). An organization (hereinafter in this subsection referred to as the “risk pool”) meets the organizational requirements of this paragraph if— such risk pool is organized as a nonprofit organization under State law provisions authorizing risk pooling arrangements for charitable organizations, such risk pool is exempt from any income tax imposed by the State (or will be so exempt after such pool qualifies as an organization exempt from tax under this title), such risk pool has obtained at least $1,000,000 in startup capital from nonmember charitable organizations, such risk pool is controlled by a board of directors elected by its members, and the organizational documents of such risk pool require that— each member of such pool shall at all times be an organization described in subsection (c)(3) and exempt from tax under subsection (a), any member which receives a final determination that it no longer qualifies as an organization described in subsection (c)(3) shall immediately notify the pool of such determination and the effective date of such determination, and each policy of insurance issued by the risk pool shall provide that such policy will not cover the insured with respect to events occurring after the date such final determination was issued to the insured. An organization shall not cease to qualify as a qualified charitable risk pool solely by reason of the failure of any of its members to continue to be an organization described in subsection (c)(3) if, within a reasonable period of time after such pool is notified as required under subparagraph (E)(ii), such pool takes such action as may be reasonably necessary to remove such member from such pool. For purposes of this subsection— The term “startup capital” means any capital contributed to, and any program-related investments (within the meaning of section 4944(c)) made in, the risk pool before such pool commences operations. The term “nonmember charitable organization” means any organization which is described in subsection (c)(3) and exempt from tax under subsection (a) and which is not a member of the risk pool and does not benefit (directly or indirectly) from the insurance coverage provided by the pool to its members.

(o) Treatment of hospitals participating in provider-sponsored organizations An organization shall not fail to be treated as organized and operated exclusively for a charitable purpose for purposes of subsection (c)(3) solely because a hospital which is owned and operated by such organization participates in a provider-sponsored organization (as defined in section 1855(d) of the Social Security Act), whether or not the provider-sponsored organization is exempt from tax. For purposes of subsection (c)(3), any person with a material financial interest in such a provider-sponsored organization shall be treated as a private shareholder or individual with respect to the hospital.

(p) Suspension of tax-exempt status of terrorist organizations The exemption from tax under subsection (a) with respect to any organization described in paragraph (2), and the eligibility of any organization described in paragraph (2) to apply for recognition of exemption under subsection (a), shall be suspended during the period described in paragraph (3). An organization is described in this paragraph if such organization is designated or otherwise individually identified— under section 212(a)(3)(B)(vi)(II) or 219 of the Immigration and Nationality Act as a terrorist organization or foreign terrorist organization, in or pursuant to an Executive order which is related to terrorism and issued under the authority of the International Emergency Economic Powers Act or section 5 of the United Nations Participation Act of 1945 for the purpose of imposing on such organization an economic or other sanction, or in or pursuant to an Executive order issued under the authority of any Federal law if— the organization is designated or otherwise individually identified in or pursuant to such Executive order as supporting or engaging in terrorist activity (as defined in section 212(a)(3)(B) of the Immigration and Nationality Act) or supporting terrorism (as defined in section 140(d)(2) of the Foreign Relations Authorization Act, Fiscal Years 1988 and 1989); and such Executive order refers to this subsection. With respect to any organization described in paragraph (2), the period of suspension— begins on the later of— the date of the first publication of a designation or identification described in paragraph (2) with respect to such organization, or the date of the enactment of this subsection, and ends on the first date that all designations and identifications described in paragraph (2) with respect to such organization are rescinded pursuant to the law or Executive order under which such designation or identification was made. No deduction shall be allowed under any provision of this title, including sections 170, 545(b)(2), 642(c), 2055, 2106(a)(2), and 2522, with respect to any contribution to an organization described in paragraph (2) during the period described in paragraph (3). Notwithstanding section 7428 or any other provision of law, no organization or other person may challenge a suspension under paragraph (1), a designation or identification described in paragraph (2), the period of suspension described in paragraph (3), or a denial of a deduction under paragraph (4) in any administrative or judicial proceeding relating to the Federal tax liability of such organization or other person. If— the tax exemption of any organization described in paragraph (2) is suspended under paragraph (1), each designation and identification described in paragraph (2) which has been made with respect to such organization is determined to be erroneous pursuant to the law or Executive order under which such designation or identification was made, and the erroneous designations and identifications result in an overpayment of income tax for any taxable year by such organization, credit or refund (with interest) with respect to such overpayment shall be made. If the credit or refund of any overpayment of tax described in subparagraph (A)(iii) is prevented at any time by the operation of any law or rule of law (including res judicata), such credit or refund may nevertheless be allowed or made if the claim therefor is filed before the close of the 1-year period beginning on the date of the last determination described in subparagraph (A)(ii). If the tax exemption of any organization is suspended under this subsection, the Internal Revenue Service shall update the listings of tax-exempt organizations and shall publish appropriate notice to taxpayers of such suspension and of the fact that contributions to such organization are not deductible during the period of such suspension.

(q) Special rules for credit counseling organizations An organization with respect to which the provision of credit counseling services is a substantial purpose shall not be exempt from tax under subsection (a) unless such organization is described in paragraph (3) or (4) of subsection (c) and such organization is organized and operated in accordance with the following requirements: The organization— provides credit counseling services tailored to the specific needs and circumstances of consumers, makes no loans to debtors (other than loans with no fees or interest) and does not negotiate the making of loans on behalf of debtors, provides services for the purpose of improving a consumer’s credit record, credit history, or credit rating only to the extent that such services are incidental to providing credit counseling services, and does not charge any separately stated fee for services for the purpose of improving any consumer’s credit record, credit history, or credit rating. The organization does not refuse to provide credit counseling services to a consumer due to the inability of the consumer to pay, the ineligibility of the consumer for debt management plan enrollment, or the unwillingness of the consumer to enroll in a debt management plan. The organization establishes and implements a fee policy which— requires that any fees charged to a consumer for services are reasonable, allows for the waiver of fees if the consumer is unable to pay, and except to the extent allowed by State law, prohibits charging any fee based in whole or in part on a percentage of the consumer’s debt, the consumer’s payments to be made pursuant to a debt management plan, or the projected or actual savings to the consumer resulting from enrolling in a debt management plan. At all times the organization has a board of directors or other governing body— which is controlled by persons who represent the broad interests of the public, such as public officials acting in their capacities as such, persons having special knowledge or expertise in credit or financial education, and community leaders, not more than 20 percent of the voting power of which is vested in persons who are employed by the organization or who will benefit financially, directly or indirectly, from the organization’s activities (other than through the receipt of reasonable directors’ fees or the repayment of consumer debt to creditors other than the credit counseling organization or its affiliates), and not more than 49 percent of the voting power of which is vested in persons who are employed by the organization or who will benefit financially, directly or indirectly, from the organization’s activities (other than through the receipt of reasonable directors’ fees). The organization does not own more than 35 percent of— the total combined voting power of any corporation (other than a corporation which is an organization described in subsection (c)(3) and exempt from tax under subsection (a)) which is in the trade or business of lending money, repairing credit, or providing debt management plan services, payment processing, or similar services, the profits interest of any partnership (other than a partnership which is an organization described in subsection (c)(3) and exempt from tax under subsection (a)) which is in the trade or business of lending money, repairing credit, or providing debt management plan services, payment processing, or similar services, and the beneficial interest of any trust or estate (other than a trust which is an organization described in subsection (c)(3) and exempt from tax under subsection (a)) which is in the trade or business of lending money, repairing credit, or providing debt management plan services, payment processing, or similar services. The organization receives no amount for providing referrals to others for debt management plan services, and pays no amount to others for obtaining referrals of consumers. In addition to the requirements under paragraph (1), an organization with respect to which the provision of credit counseling services is a substantial purpose and which is described in paragraph (3) of subsection (c) shall not be exempt from tax under subsection (a) unless such organization is organized and operated in accordance with the following requirements: The organization does not solicit contributions from consumers during the initial counseling process or while the consumer is receiving services from the organization. The aggregate revenues of the organization which are from payments of creditors of consumers of the organization and which are attributable to debt management plan services do not exceed the applicable percentage of the total revenues of the organization. For purposes of subparagraph (A)(ii), the applicable percentage is 50 percent. Notwithstanding clause (i), in the case of an organization with respect to which the provision of credit counseling services is a substantial purpose and which is described in paragraph (3) of subsection (c) and exempt from tax under subsection (a) on the date of the enactment of this subsection, the applicable percentage is— 80 percent for the first taxable year of such organization beginning after the date which is 1 year after the date of the enactment of this subsection, and 70 percent for the second such taxable year beginning after such date, and 60 percent for the third such taxable year beginning after such date. In addition to the requirements under paragraph (1), an organization with respect to which the provision of credit counseling services is a substantial purpose and which is described in paragraph (4) of subsection (c) shall not be exempt from tax under subsection (a) unless such organization notifies the Secretary, in such manner as the Secretary may by regulations prescribe, that it is applying for recognition as a credit counseling organization. For purposes of this subsection— The term “credit counseling services” means— the providing of educational information to the general public on budgeting, personal finance, financial literacy, saving and spending practices, and the sound use of consumer credit, the assisting of individuals and families with financial problems by providing them with counseling, or a combination of the activities described in clauses (i) and (ii). The term “debt management plan services” means services related to the repayment, consolidation, or restructuring of a consumer’s debt, and includes the negotiation with creditors of lower interest rates, the waiver or reduction of fees, and the marketing and processing of debt management plans.

(r) Additional requirements for certain hospitals A hospital organization to which this subsection applies shall not be treated as described in subsection (c)(3) unless the organization— meets the community health needs assessment requirements described in paragraph (3), meets the financial assistance policy requirements described in paragraph (4), meets the requirements on charges described in paragraph (5), and meets the billing and collection requirement described in paragraph (6). This subsection shall apply to— an organization which operates a facility which is required by a State to be licensed, registered, or similarly recognized as a hospital, and any other organization which the Secretary determines has the provision of hospital care as its principal function or purpose constituting the basis for its exemption under subsection (c)(3) (determined without regard to this subsection). If a hospital organization operates more than 1 hospital facility— the organization shall meet the requirements of this subsection separately with respect to each such facility, and the organization shall not be treated as described in subsection (c)(3) with respect to any such facility for which such requirements are not separately met. An organization meets the requirements of this paragraph with respect to any taxable year only if the organization— has conducted a community health needs assessment which meets the requirements of subparagraph (B) in such taxable year or in either of the 2 taxable years immediately preceding such taxable year, and has adopted an implementation strategy to meet the community health needs identified through such assessment. A community health needs assessment meets the requirements of this paragraph if such community health needs assessment— takes into account input from persons who represent the broad interests of the community served by the hospital facility, including those with special knowledge of or expertise in public health, and is made widely available to the public. An organization meets the requirements of this paragraph if the organization establishes the following policies: A written financial assistance policy which includes— eligibility criteria for financial assistance, and whether such assistance includes free or discounted care, the basis for calculating amounts charged to patients, the method for applying for financial assistance, in the case of an organization which does not have a separate billing and collections policy, the actions the organization may take in the event of non-payment, including collections action and reporting to credit agencies, and measures to widely publicize the policy within the community to be served by the organization. A written policy requiring the organization to provide, without discrimination, care for emergency medical conditions (within the meaning of section 1867 of the Social Security Act ( 42 U.S.C. 1395dd )) to individuals regardless of their eligibility under the financial assistance policy described in subparagraph (A). An organization meets the requirements of this paragraph if the organization— limits amounts charged for emergency or other medically necessary care provided to individuals eligible for assistance under the financial assistance policy described in paragraph (4)(A) to not more than the amounts generally billed to individuals who have insurance covering such care, and prohibits the use of gross charges. An organization meets the requirement of this paragraph only if the organization does not engage in extraordinary collection actions before the organization has made reasonable efforts to determine whether the individual is eligible for assistance under the financial assistance policy described in paragraph (4)(A). The Secretary shall issue such regulations and guidance as may be necessary to carry out the provisions of this subsection, including guidance relating to what constitutes reasonable efforts to determine the eligibility of a patient under a financial assistance policy for purposes of paragraph (6).

§ 502 Feeder organizations

(a) General rule An organization operated for the primary purpose of carrying on a trade or business for profit shall not be exempt from taxation under section 501 on the ground that all of its profits are payable to one or more organizations exempt from taxation under section 501.

(b) Special rule For purposes of this section, the term “trade or business” shall not include— the deriving of rents which would be excluded under section 512(b)(3), if section 512 applied to the organization, any trade or business in which substantially all the work in carrying on such trade or business is performed for the organization without compensation, or any trade or business which is the selling of merchandise, substantially all of which has been received by the organization as gifts or contributions.

§ 503 Requirements for exemption

(a) Denial of exemption to organizations engaged in prohibited transactions An organization described in paragraph (17) or (18) of section 501(c), or described in section 401(a) and referred to in section 4975(g) (2) or (3), shall not be exempt from taxation under section 501(a) if it has engaged in a prohibited transaction. An organization described in paragraph (1) shall be denied exemption from taxation under section 501(a) by reason of paragraph (1) only for taxable years after the taxable year during which it is notified by the Secretary that it has engaged in a prohibited transaction, unless such organization entered into such prohibited transaction with the purpose of diverting corpus or income of the organization from its exempt purposes, and such transaction involved a substantial part of the corpus or income of such organization.

(b) Prohibited transactions For purposes of this section, the term “prohibited transaction” means any transaction in which an organization subject to the provisions of this section— lends any part of its income or corpus, without the receipt of adequate security and a reasonable rate of interest, to; pays any compensation, in excess of a reasonable allowance for salaries or other compensation for personal services actually rendered, to; makes any part of its services available on a preferential basis to; makes any substantial purchase of securities or any other property, for more than adequate consideration in money or money’s worth, from; sells any substantial part of its securities or other property, for less than an adequate consideration in money or money’s worth, to; or engages in any other transaction which results in a substantial diversion of its income or corpus to; the creator of such organization (if a trust); a person who has made a substantial contribution to such organization; a member of the family (as defined in section 267(c)(4)) of an individual who is the creator of such trust or who has made a substantial contribution to such organization; or a corporation controlled by such creator or person through the ownership, directly or indirectly, of 50 percent or more of the total combined voting power of all classes of stock entitled to vote or 50 percent or more of the total value of shares of all classes of stock of the corporation.

(c) Future status of organizations denied exemption Any organization described in subsection (a)(1) which is denied exemption under section 501(a) by reason of subsection (a) of this section, with respect to any taxable year following the taxable year in which notice of denial of exemption was received, may, under regulations prescribed by the Secretary, file claim for exemption, and if the Secretary, pursuant to such regulations, is satisfied that such organization will not knowingly again engage in a prohibited transaction, such organization shall be exempt with respect to taxable years after the year in which such claim is filed.

([(d) Repealed. Pub. L. 101–508, title XI, § 11801(a)(22), Nov. 5, 1990, 104 Stat. 1388–521]

(e) Special rules For purposes of subsection (b)(1), a bond, debenture, note, or certificate or other evidence of indebtedness (hereinafter in this subsection referred to as “obligation”) shall not be treated as a loan made without the receipt of adequate security if— such obligation is acquired— on the market, either (i) at the price of the obligation prevailing on a national securities exchange which is registered with the Securities and Exchange Commission, or (ii) if the obligation is not traded on such a national securities exchange, at a price not less favorable to the trust than the offering price for the obligation as established by current bid and asked prices quoted by persons independent of the issuer; from an underwriter, at a price (i) not in excess of the public offering price for the obligation as set forth in a prospectus or offering circular filed with the Securities and Exchange Commission, and (ii) at which a substantial portion of the same issue is acquired by persons independent of the issuer; or directly from the issuer, at a price not less favorable to the trust than the price paid currently for a substantial portion of the same issue by persons independent of the issuer; immediately following acquisition of such obligation— not more than 25 percent of the aggregate amount of obligations issued in such issue and outstanding at the time of acquisition is held by the trust, and at least 50 percent of the aggregate amount referred to in subparagraph (A) is held by persons independent of the issuer; and immediately following acquisition of the obligation, not more than 25 percent of the assets of the trust is invested in obligations of persons described in subsection (b).

(f) Loans with respect to which employers are prohibited from pledging certain assets Subsection (b)(1) shall not apply to a loan made by a trust described in section 401(a) to the employer (or to a renewal of such a loan or, if the loan is repayable upon demand, to a continuation of such a loan) if the loan bears a reasonable rate of interest, and if (in the case of a making or renewal)— the employer is prohibited (at the time of such making or renewal) by any law of the United States or regulation thereunder from directly or indirectly pledging, as security for such a loan, a particular class or classes of his assets the value of which (at such time) represents more than one-half of the value of all his assets; the making or renewal, as the case may be, is approved in writing as an investment which is consistent with the exempt purposes of the trust by a trustee who is independent of the employer, and no other such trustee had previously refused to give such written approval; and immediately following the making or renewal, as the case may be, the aggregate amount loaned by the trust to the employer, without the receipt of adequate security, does not exceed 25 percent of the value of all the assets of the trust. For purposes of paragraph (2), the term “trustee” means, with respect to any trust for which there is more than one trustee who is independent of the employer, a majority of such independent trustees. For purposes of paragraph (3), the determination as to whether any amount loaned by the trust to the employer is loaned without the receipt of adequate security shall be made without regard to subsection (e).

§ 504 Status after organization ceases to qualify for exemption under section 501(c)(3) because of substantial lobbying or because of political activities

(a) General rule An organization which— was exempt (or was determined by the Secretary to be exempt) from taxation under section 501(a) by reason of being an organization described in section 501(c)(3), and is not an organization described in section 501(c)(3)— by reason of carrying on propaganda, or otherwise attempting, to influence legislation, or by reason of participating in, or intervening in, any political campaign on behalf of (or in opposition to) any candidate for public office, shall not at any time thereafter be treated as an organization described in section 501(c)(4).

(b) Regulations to prevent avoidance The Secretary shall prescribe such regulations as may be necessary or appropriate to prevent the avoidance of subsection (a), including regulations relating to a direct or indirect transfer of all or part of the assets of an organization to an organization controlled (directly or indirectly) by the same person or persons who control the transferor organization.

(c) Churches, etc. Subsection (a) shall not apply to any organization which is a disqualified organization within the meaning of section 501(h)(5) (relating to churches, etc.) for the taxable year immediately preceding the first taxable year for which such organization is described in paragraph (2) of subsection (a).

§ 505 Additional requirements for organizations described in paragraph (9) or (17) of section 501(c)

(a) Certain requirements must be met in the case of organizations described in section 501(c)(9) An organization described in section 501(c)(9) which is part of a plan shall not be exempt from tax under section 501(a) unless such plan meets the requirements of subsection (b) of this section. Paragraph (1) shall not apply to any organization which is part of a plan maintained pursuant to an agreement between employee representatives and 1 or more employers if the Secretary finds that such agreement is a collective bargaining agreement and that such plan was the subject of good faith bargaining between such employee representatives and such employer or employers.

(b) Nondiscrimination requirements Except as otherwise provided in this subsection, a plan meets the requirements of this subsection only if— each class of benefits under the plan is provided under a classification of employees which is set forth in the plan and which is found by the Secretary not to be discriminatory in favor of employees who are highly compensated individuals, and in the case of each class of benefits, such benefits do not discriminate in favor of employees who are highly compensated individuals. A life insurance, disability, severance pay, or supplemental unemployment compensation benefit shall not be considered to fail to meet the requirements of subparagraph (B) merely because the benefits available bear a uniform relationship to the total compensation, or the basic or regular rate of compensation, of employees covered by the plan. For purposes of paragraph (1), there may be excluded from consideration— employees who have not completed 3 years of service, employees who have not attained age 21, seasonal employees or less than half-time employees, employees not included in the plan who are included in a unit of employees covered by an agreement between employee representatives and 1 or more employers which the Secretary finds to be a collective bargaining agreement if the class of benefits involved was the subject of good faith bargaining between such employee representatives and such employer or employers, and employees who are nonresident aliens and who receive no earned income (within the meaning of section 911(d)(2)) from the employer which constitutes income from sources within the United States (within the meaning of section 861(a)(3)). In the case of any benefit for which a provision of this chapter other than this subsection provides nondiscrimination rules, paragraph (1) shall not apply but the requirements of this subsection shall be met only if the nondiscrimination rules so provided are satisfied with respect to such benefit. At the election of the employer, 2 or more plans of such employer may be treated as 1 plan for purposes of this subsection. For purposes of this subsection, the determination as to whether an individual is a highly compensated individual shall be made under rules similar to the rules for determining whether an individual is a highly compensated employee (within the meaning of section 414(q)). For purposes of this subsection, the term “compensation” has the meaning given such term by section 414(s). A plan shall not be treated as meeting the requirements of this subsection unless under the plan the annual compensation of each employee taken into account for any year does not exceed $200, 000. T h e S ecre t a rys ha ll a d j u s tt h e$ 200,000 amount at the same time, and by the same amount, as any adjustment under section 401(a)(17)(B). This paragraph shall not apply in determining whether the requirements of section 79(d) are met.

(c) Requirement that organization notify Secretary that it is applying for tax-exempt status An organization shall not be treated as an organization described in paragraph (9) or (17) of section 501(c)— unless it has given notice to the Secretary, in such manner as the Secretary may by regulations prescribe, that it is applying for recognition of such status, or for any period before the giving of such notice, if such notice is given after the time prescribed by the Secretary by regulations for giving notice under this subsection. In the case of any organization in existence on July 18, 1984 , the time for giving notice under paragraph (1) shall not expire before the date 1 year after such date of the enactment.

§ 506 Organizations required to notify Secretary of intent to operate under 501(c)(4)

(a) In general An organization described in section 501(c)(4) shall, not later than 60 days after the organization is established, notify the Secretary (in such manner as the Secretary shall by regulation prescribe) that it is operating as such.

(b) Contents of notice The notice required under subsection (a) shall include the following information: The name, address, and taxpayer identification number of the organization. The date on which, and the State under the laws of which, the organization was organized. A statement of the purpose of the organization.

(c) Acknowledgment of receipt Not later than 60 days after receipt of such a notice, the Secretary shall send to the organization an acknowledgment of such receipt.

(d) Extension for reasonable cause The Secretary may, for reasonable cause, extend the 60-day period described in subsection (a).

(e) User fee The Secretary shall impose a reasonable user fee for submission of the notice under subsection (a).

(f) Request for determination Upon request by an organization to be treated as an organization described in section 501(c)(4), the Secretary may issue a determination with respect to such treatment. Such request shall be treated for purposes of section 6104 as an application for exemption from taxation under section 501(a).

§ 507 Termination of private foundation status

(a) General rule Except as provided in subsection (b), the status of any organization as a private foundation shall be terminated only if— such organization notifies the Secretary (at such time and in such manner as the Secretary may by regulations prescribe) of its intent to accomplish such termination, or with respect to such organization, there have been either willful repeated acts (or failures to act), or a willful and flagrant act (or failure to act), giving rise to liability for tax under chapter 42, and the Secretary notifies such organization that, by reason of subparagraph (A), such organization is liable for the tax imposed by subsection (c), and either such organization pays the tax imposed by subsection (c) (or any portion not abated under subsection (g)) or the entire amount of such tax is abated under subsection (g).

(b) Special rules The status as a private foundation of any organization, with respect to which there have not been either willful repeated acts (or failures to act) or a willful and flagrant act (or failure to act) giving rise to liability for tax under chapter 42, shall be terminated if— such organization distributes all of its net assets to one or more organizations described in section 170(b)(1)(A) (other than in clauses (vii) and (viii)) each of which has been in existence and so described for a continuous period of at least 60 calendar months immediately preceding such distribution, or such organization meets the requirements of paragraph (1), (2), or (3) of section 509(a) by the end of the 12-month period beginning with its first taxable year which begins after December 31, 1969 , or for a continuous period of 60 calendar months beginning with the first day of any taxable year which begins after December 31, 1969 , such organization notifies the Secretary (in such manner as the Secretary may by regulations prescribe) before the commencement of such 12-month or 60-month period (or before the 90th day after the day on which regulations first prescribed under this subsection become final) that it is terminating its private foundation status, and such organization establishes to the satisfaction of the Secretary (in such manner as the Secretary may by regulations prescribe) immediately after the expiration of such 12-month or 60-month period that such organization has complied with clause (i). If an organization gives notice under subparagraph (B)(ii) of the commencement of a 60-month period and such organization fails to meet the requirements of paragraph (1), (2), or (3) of section 509(a) for the entire 60-month period, this part and chapter 42 shall not apply to such organization for any taxable year within such 60-month period for which it does meet such requirements. For purposes of this part, in the case of a transfer of assets of any private foundation to another private foundation pursuant to any liquidation, merger, redemption, recapitalization, or other adjustment, organization, or reorganization, the transferee foundation shall not be treated as a newly created organization.

(c) Imposition of tax There is hereby imposed on each organization which is referred to in subsection (a) a tax equal to the lower of— the amount which the private foundation substantiates by adequate records or other corroborating evidence as the aggregate tax benefit resulting from the section 501(c)(3) status of such foundation, or the value of the net assets of such foundation.

(d) Aggregate tax benefit For purposes of subsection (c), the aggregate tax benefit resulting from the section 501(c)(3) status of any private foundation is the sum of— the aggregate increases in tax under chapters 1, 11, and 12 (or the corresponding provisions of prior law) which would have been imposed with respect to all substantial contributors to the foundation if deductions for all contributions made by such contributors to the foundation after February 28, 1913 , had been disallowed, and the aggregate increases in tax under chapter 1 (or the corresponding provisions of prior law) which would have been imposed with respect to the income of the private foundation for taxable years beginning after December 31, 1912 , if (i) it had not been exempt from tax under section 501(a) (or the corresponding provisions of prior law), and (ii) in the case of a trust, deductions under section 642(c) (or the corresponding provisions of prior law) had been limited to 20 percent of the taxable income of the trust (computed without the benefit of section 642(c) but with the benefit of section 170(b)(1)(A)), and interest on the increases in tax determined under subparagraphs (A) and (B) from the first date on which each such increase would have been due and payable to the date on which the organization ceases to be a private foundation. For purposes of paragraph (1), the term “substantial contributor” means any person who contributed or bequeathed an aggregate amount of more than $5,000 to the private foundation, if such amount is more than 2 percent of the total contributions and bequests received by the foundation before the close of the taxable year of the foundation in which the contribution or bequest is received by the foundation from such person. In the case of a trust, the term “substantial contributor” also means the creator of the trust. For purposes of subparagraph (A)— each contribution or bequest shall be valued at fair market value on the date it was received, in the case of a foundation which is in existence on October 9, 1969 , all contributions and bequests received on or before such date shall be treated (except for purposes of clause (i)) as if received on such date, an individual shall be treated as making all contributions and bequests made by his spouse, and any person who is a substantial contributor on any date shall remain a substantial contributor for all subsequent periods. A person shall cease to be treated as a substantial contributor with respect to any private foundation as of the close of any taxable year of such foundation if— during the 10-year period ending at the close of such taxable year such person (and all related persons) have not made any contribution to such private foundation, at no time during such 10-year period was such person (or any related person) a foundation manager of such private foundation, and the aggregate contributions made by such person (and related persons) are determined by the Secretary to be insignificant when compared to the aggregate amount of contributions to such foundation by one other person. For purposes of subclause (III), appreciation on contributions while held by the foundation shall be taken into account. For purposes of clause (i), the term “related person” means, with respect to any person, any other person who would be a disqualified person (within the meaning of section 4946) by reason of his relationship to such person. In the case of a contributor which is a corporation, the term also includes any officer or director of such corporation. For purposes of this section, the determination as to whether and to what extent there would have been any increase in tax shall be made in accordance with regulations prescribed by the Secretary.

(e) Value of assets For purposes of subsection (c), the value of the net assets shall be determined at whichever time such value is higher: (1) the first day on which action is taken by the organization which culminates in its ceasing to be a private foundation, or (2) the date on which it ceases to be a private foundation.

(f) Liability in case of transfers of assets from private foundation For purposes of determining liability for the tax imposed by subsection (c) in the case of assets transferred by the private foundation, such tax shall be deemed to have been imposed on the first day on which action is taken by the organization which culminates in its ceasing to be a private foundation.

(g) Abatement of taxes The Secretary may abate the unpaid portion of the assessment of any tax imposed by subsection (c), or any liability in respect thereof, if— the private foundation distributes all of its net assets to one or more organizations described in section 170(b)(1)(A) (other than in clauses (vii) and (viii)) each of which has been in existence and so described for a continuous period of at least 60 calendar months, or following the notification prescribed in section 6104(c) to the appropriate State officer, such State officer within one year notifies the Secretary, in such manner as the Secretary may by regulations prescribe, that corrective action has been initiated pursuant to State law to insure that the assets of such private foundation are preserved for such charitable or other purposes specified in section 501(c)(3) as may be ordered or approved by a court of competent jurisdiction, and upon completion of the corrective action, the Secretary receives certification from the appropriate State officer that such action has resulted in such preservation of assets.

“In determining whether a person is a substantial contributor within the meaning of section 507(d)(2) of the Internal Revenue Code of 1986 [formerly I.R.C. 1954] for purposes of applying section 4941 of such Code (relating to taxes on self-dealing), contributions made before October 9, 1969 , which— were made on account of or in lieu of payments required under a lease in effect before such date, and were coincident with or by reason of the reduction in the required payments under such lease, shall not be taken into account. For purposes of applying section 507(d)(2)(B)(iv) of such Code, the preceding sentence shall be treated as having taken effect on January 1, 1970 .”

§ 508 Special rules with respect to section 501(c)(3) organizations

(a) New organizations must notify Secretary that they are applying for recognition of section 501(c)(3) status Except as provided in subsection (c), an organization organized after October 9, 1969 , shall not be treated as an organization described in section 501(c)(3)— unless it has given notice to the Secretary in such manner as the Secretary may by regulations prescribe, that it is applying for recognition of such status, or for any period before the giving of such notice, if such notice is given after the time prescribed by the Secretary by regulations for giving notice under this subsection.

(b) Presumption that organizations are private foundations Except as provided in subsection (c), any organization (including an organization in existence on October 9, 1969 ) which is described in section 501(c)(3) and which does not notify the Secretary, at such time and in such manner as the Secretary may by regulations prescribe, that it is not a private foundation shall be presumed to be a private foundation.

(c) Exceptions Subsections (a) and (b) shall not apply to— churches, their integrated auxiliaries, and conventions or associations of churches, or any organization which is not a private foundation (as defined in section 509(a)) and the gross receipts of which in each taxable year are normally not more than $5,000. The Secretary may by regulations exempt (to the extent and subject to such conditions as may be prescribed in such regulations) from the provisions of subsection (a) or (b) or both— educational organizations described in section 170(b)(1)(A)(ii), and any other class of organizations with respect to which the Secretary determines that full compliance with the provisions of subsections (a) and (b) is not necessary to the efficient administration of the provisions of this title relating to private foundations.

(d) Disallowance of certain charitable, etc., deductions No gift or bequest made to an organization upon which the tax provided by section 507(c) has been imposed shall be allowed as a deduction under section 170, 545(b)(2), 642(c), 2055, 2106(a)(2), or 2522, if such gift or bequest is made— by any person after notification is made under section 507(a), or by a substantial contributor (as defined in section 507(d)(2)) in his taxable year which includes the first day on which action is taken by such organization which culminates in the imposition of tax under section 507(c) and any subsequent taxable year. No gift or bequest made to an organization shall be allowed as a deduction under section 170, 545(b)(2), 642(c), 2055, 2106(a)(2), or 2522, if such gift or bequest is made— to a private foundation or a trust described in section 4947 in a taxable year for which it fails to meet the requirements of subsection (e) (determined without regard to subsection (e)(2)), or to any organization in a period for which it is not treated as an organization described in section 501(c)(3) by reason of subsection (a). Paragraph (1) shall not apply if the entire amount of the unpaid portion of the tax imposed by section 507(c) is abated by the Secretary under section 507(g).

(e) Governing instruments A private foundation shall not be exempt from taxation under section 501(a) unless its governing instrument includes provisions the effects of which are— to require its income for each taxable year to be distributed at such time and in such manner as not to subject the foundation to tax under section 4942, and to prohibit the foundation from engaging in any act of self-dealing (as defined in section 4941(d)), from retaining any excess business holdings (as defined in section 4943(c)), from making any investments in such manner as to subject the foundation to tax under section 4944, and from making any taxable expenditures (as defined in section 4945(d)). In the case of any organization organized before January 1, 1970 , paragraph (1) shall not apply— to any period after December 31, 1971 , during the pendency of any judicial proceeding begun before January 1, 1972 , by the private foundation which is necessary to reform, or to excuse such foundation from compliance with, its governing instrument or any other instrument in order to meet the requirements of paragraph (1), and to any period after the termination of any judicial proceeding described in subparagraph (A) during which its governing instrument or any other instrument does not permit it to meet the requirements of paragraph (1).

(f) Additional provisions relating to sponsoring organizations A sponsoring organization (as defined in section 4966(d)(1)) shall give notice to the Secretary (in such manner as the Secretary may provide) whether such organization maintains or intends to maintain donor advised funds (as defined in section 4966(d)(2)) and the manner in which such organization plans to operate such funds.

§ 509 Private foundation defined

(a) General rule For purposes of this title, the term “private foundation” means a domestic or foreign organization described in section 501(c)(3) other than— an organization described in section 170(b)(1)(A) (other than in clauses (vii) and (viii)); an organization which— normally receives more than one-third of its support in each taxable year from any combination of— gifts, grants, contributions, or membership fees, and gross receipts from admissions, sales of merchandise, performance of services, or furnishing of facilities, in an activity which is not an unrelated trade or business (within the meaning of section 513), not including such receipts from any person, or from any bureau or similar agency of a governmental unit (as described in section 170(c)(1)), in any taxable year to the extent such receipts exceed the greater of $5,000 or 1 percent of the organization’s support in such taxable year, from persons other than disqualified persons (as defined in section 4946) with respect to the organization, from governmental units described in section 170(c)(1), or from organizations described in section 170(b)(1)(A) (other than in clauses (vii) and (viii)), and normally receives not more than one-third of its support in each taxable year from the sum of— gross investment income (as defined in subsection (e)) and the excess (if any) of the amount of the unrelated business taxable income (as defined in section 512) over the amount of the tax imposed by section 511; an organization which— is organized, and at all times thereafter is operated, exclusively for the benefit of, to perform the functions of, or to carry out the purposes of one or more specified organizations described in paragraph (1) or (2), is— operated, supervised, or controlled by one or more organizations described in paragraph (1) or (2), supervised or controlled in connection with one or more such organizations, or operated in connection with one or more such organizations, and is not controlled directly or indirectly by one or more disqualified persons (as defined in section 4946) other than foundation managers and other than one or more organizations described in paragraph (1) or (2); and an organization which is organized and operated exclusively for testing for public safety. For purposes of paragraph (3), an organization described in paragraph (2) shall be deemed to include an organization described in section 501(c)(4), (5), or (6) which would be described in paragraph (2) if it were an organization described in section 501(c)(3).

(b) Continuation of private foundation status For purposes of this title, if an organization is a private foundation (within the meaning of subsection (a)) on October 9, 1969 , or becomes a private foundation on any subsequent date, such organization shall be treated as a private foundation for all periods after October 9, 1969 , or after such subsequent date, unless its status as such is terminated under section 507.

(c) Status of organization after termination of private foundation status For purposes of this part, an organization the status of which as a private foundation is terminated under section 507 shall (except as provided in section 507(b)(2)) be treated as an organization created on the day after the date of such termination.

(d) Definition of support For purposes of this part and chapter 42, the term “support” includes (but is not limited to)— gifts, grants, contributions, or membership fees, gross receipts from admissions, sales of merchandise, performance of services, or furnishing of facilities in any activity which is not an unrelated trade or business (within the meaning of section 513), net income from unrelated business activities, whether or not such activities are carried on regularly as a trade or business, gross investment income (as defined in subsection (e)), tax revenues levied for the benefit of an organization and either paid to or expended on behalf of such organization, and the value of services or facilities (exclusive of services or facilities generally furnished to the public without charge) furnished by a governmental unit referred to in section 170(c)(1) to an organization without charge. Such term does not include any gain from the sale or other disposition of property which would be considered as gain from the sale or exchange of a capital asset, or the value of exemption from any Federal, State, or local tax or any similar benefit.

(e) Definition of gross investment income For purposes of subsection (d), the term “gross investment income” means the gross amount of income from interest, dividends, payments with respect to securities loans (as defined in section 512(a)(5)), rents, and royalties, but not including any such income to the extent included in computing the tax imposed by section 511. Such term shall also include income from sources similar to those in the preceding sentence.

(f) Requirements for supporting organizations For purposes of subsection (a)(3)(B)(iii), an organization shall not be considered to be operated in connection with any organization described in paragraph (1) or (2) of subsection (a) unless such organization meets the following requirements: For each taxable year beginning after the date of the enactment of this subsection, the organization provides to each supported organization such information as the Secretary may require to ensure that such organization is responsive to the needs or demands of the supported organization. The organization is not operated in connection with any supported organization that is not organized in the United States. If the organization is operated in connection with an organization that is not organized in the United States on the date of the enactment of this subsection, clause (i) shall not apply until the first day of the third taxable year of the organization beginning after the date of the enactment of this subsection. For purposes of subsection (a)(3)(B), an organization shall not be considered to be— operated, supervised, or controlled by any organization described in paragraph (1) or (2) of subsection (a), or operated in connection with any organization described in paragraph (1) or (2) of subsection (a), if such organization accepts any gift or contribution from any person described in subparagraph (B). A person is described in this subparagraph if, with respect to a supported organization of an organization described in subparagraph (A), such person is— a person (other than an organization described in paragraph (1), (2), or (4) of section 509(a)) who directly or indirectly controls, either alone or together with persons described in clauses (ii) and (iii), the governing body of such supported organization, a member of the family (determined under section 4958(f)(4)) of an individual described in clause (i), or a 35-percent controlled entity (as defined in section 4958(f)(3) by substituting “persons described in clause (i) or (ii) of section 509(f)(2)(B)” for “persons described in subparagraph (A) or (B) of paragraph (1)” in subparagraph (A)(i) thereof). For purposes of this subsection, the term “supported organization” means, with respect to an organization described in subsection (a)(3), an organization described in paragraph (1) or (2) of subsection (a)— for whose benefit the organization described in subsection (a)(3) is organized and operated, or with respect to which the organization performs the functions of, or carries out the purposes of.

§ 511 Imposition of tax on unrelated business income of charitable, etc., organizations

(a) Charitable, etc., organizations taxable at corporation rates There is hereby imposed for each taxable year on the unrelated business taxable income (as defined in section 512) of every organization described in paragraph (2) a tax computed as provided in section 11. In making such computation for purposes of this section, the term “taxable income” as used in section 11 shall be read as “unrelated business taxable income”. The tax imposed by paragraph (1) shall apply in the case of any organization (other than a trust described in subsection (b) or an organization described in section 501(c)(1)) which is exempt, except as provided in this part or part II (relating to private foundations), from taxation under this subtitle by reason of section 501(a). The tax imposed by paragraph (1) shall apply in the case of any college or university which is an agency or instrumentality of any government or any political subdivision thereof, or which is owned or operated by a government or any political subdivision thereof, or by any agency or instrumentality of one or more governments or political subdivisions. Such tax shall also apply in the case of any corporation wholly owned by one or more such colleges or universities.

(b) Tax on charitable, etc., trusts There is hereby imposed for each taxable year on the unrelated business taxable income of every trust described in paragraph (2) a tax computed as provided in section 1(e). In making such computation for purposes of this section, the term “taxable income” as used in section 1 shall be read as “unrelated business taxable income” as defined in section 512. The tax imposed by paragraph (1) shall apply in the case of any trust which is exempt, except as provided in this part or part II (relating to private foundations), from taxation under this subtitle by reason of section 501(a) and which, if it were not for such exemption, would be subject to subchapter J (sec. 641 and following, relating to estates, trusts, beneficiaries, and decedents).

(c) Special rule for section 501(c)(2) corporations If a corporation described in section 501(c)(2)— pays any amount of its net income for a taxable year to an organization exempt from taxation under section 501(a) (or which would pay such an amount but for the fact that the expenses of collecting its income exceed its income), and such corporation and such organization file a consolidated return for the taxable year, such corporation shall be treated, for purposes of the tax imposed by subsection (a), as being organized and operated for the same purposes as such organization, in addition to the purposes described in section 501(c)(2).

§ 512 Unrelated business taxable income

(a) Definition For purposes of this title— Except as otherwise provided in this subsection, the term “unrelated business taxable income” means the gross income derived by any organization from any unrelated trade or business (as defined in section 513) regularly carried on by it, less the deductions allowed by this chapter which are directly connected with the carrying on of such trade or business, both computed with the modifications provided in subsection (b). In the case of an organization described in section 511 which is a foreign organization, the unrelated business taxable income shall be— its unrelated business taxable income which is derived from sources within the United States and which is not effectively connected with the conduct of a trade or business within the United States, plus its unrelated business taxable income which is effectively connected with the conduct of a trade or business within the United States. In the case of an organization described in paragraph (7), (9), or (17) of section 501(c), the term “unrelated business taxable income” means the gross income (excluding any exempt function income), less the deductions allowed by this chapter which are directly connected with the production of the gross income (excluding exempt function income), both computed with the modifications provided in paragraphs (6), (10), (11), and (12) of subsection (b). For purposes of the preceding sentence, the deductions provided by sections 243 and 245 (relating to dividends received by corporations) shall be treated as not directly connected with the production of gross income. For purposes of subparagraph (A), the term “exempt function income” means the gross income from dues, fees, charges, or similar amounts paid by members of the organization as consideration for providing such members or their dependents or guests goods, facilities, or services in furtherance of the purposes constituting the basis for the exemption of the organization to which such income is paid. Such term also means all income (other than an amount equal to the gross income derived from any unrelated trade or business regularly carried on by such organization computed as if the organization were subject to paragraph (1)), which is set aside— for a purpose specified in section 170(c)(4), or in the case of an organization described in paragraph (9) or (17) of section 501(c), to provide for the payment of life, sick, accident, or other benefits, including reasonable costs of administration directly connected with a purpose described in clause (i) or (ii). If during the taxable year, an amount which is attributable to income so set aside is used for a purpose other than that described in clause (i) or (ii), such amount shall be included, under subparagraph (A), in unrelated business taxable income for the taxable year. In the case of a corporation described in section 501(c)(2), the income of which is payable to an organization described in paragraph (7), (9), or (17) of section 501(c), subparagraph (A) shall apply as if such corporation were the organization to which the income is payable. For purposes of the preceding sentence, such corporation shall be treated as having exempt function income for a taxable year only if it files a consolidated return with such organization for such year. If property used directly in the performance of the exempt function of an organization described in paragraph (7), (9), or (17) of section 501(c) is sold by such organization, and within a period beginning 1 year before the date of such sale, and ending 3 years after such date, other property is purchased and used by such organization directly in the performance of its exempt function, gain (if any) from such sale shall be recognized only to the extent that such organization’s sales price of the old property exceeds the organization’s cost of purchasing the other property. For purposes of this subparagraph, the destruction in whole or in part, theft, seizure, requisition, or condemnation of property, shall be treated as the sale of such property, and rules similar to the rules provided by subsections (b), (c), (e), and (j) of section 1034 (as in effect on the day before the date of the enactment of the Taxpayer Relief Act of 1997) shall apply. In the case of any organization described in paragraph (9) or (17) of section 501(c), a set-aside for any purpose specified in clause (ii) of subparagraph (B) may be taken into account under subparagraph (B) only to the extent that such set-aside does not result in an amount of assets set aside for such purpose in excess of the account limit determined under section 419A (without regard to subsection (f)(6) thereof) for the taxable year (not taking into account any reserve described in section 419A(c)(2)(A) for post-retirement medical benefits). Clause (i) shall not apply to any income attributable to an existing reserve for post-retirement medical or life insurance benefits. For purposes of subclause (I), the term “reserve for post-retirement medical or life insurance benefits” means the greater of the amount of assets set aside for purposes of post-retirement medical or life insurance benefits to be provided to covered employees as of the close of the last plan year ending before the date of the enactment of the Tax Reform Act of 1984 or on July 18, 1984 . All payments during plan years ending on or after the date of the enactment of the Tax Reform Act of 1984 of post-retirement medical benefits or life insurance benefits shall be charged against the reserve referred to in subclause (II). Except to the extent provided in regulations prescribed by the Secretary, all plans of an employer shall be treated as 1 plan for purposes of the preceding sentence. This subparagraph shall not apply to any organization if substantially all of the contributions to such organization are made by employers who were exempt from tax under this chapter throughout the 5-taxable year period ending with the taxable year in which the contributions are made. In the case of an organization described in section 501(c)(19), the term “unrelated business taxable income” does not include any amount attributable to payments for life, sick, accident, or health insurance with respect to members of such organizations or their dependents which is set aside for the purpose of providing for the payment of insurance benefits or for a purpose specified in section 170(c)(4). If an amount set aside under the preceding sentence is used during the taxable year for a purpose other than a purpose described in the preceding sentence, such amount shall be included, under paragraph (1), in unrelated business taxable income for the taxable year. The term “payments with respect to securities loans” includes all amounts received in respect of a security (as defined in section 1236(c)) transferred by the owner to another person in a transaction to which section 1058 applies (whether or not title to the security remains in the name of the lender) including— amounts in respect of dividends, interest, or other distributions, fees computed by reference to the period beginning with the transfer of securities by the owner and ending with the transfer of identical securities back to the transferor by the transferee and the fair market value of the security during such period, income from collateral security for such loan, and income from the investment of collateral security. Subparagraph (A) shall apply only with respect to securities transferred pursuant to an agreement between the transferor and the transferee which provides for— reasonable procedures to implement the obligation of the transferee to furnish to the transferor, for each business day during such period, collateral with a fair market value not less than the fair market value of the security at the close of business on the preceding business day, termination of the loan by the transferor upon notice of not more than 5 business days, and return to the transferor of securities identical to the transferred securities upon termination of the loan. In the case of any organization with more than 1 unrelated trade or business— unrelated business taxable income, including for purposes of determining any net operating loss deduction, shall be computed separately with respect to each such trade or business and without regard to subsection (b)(12), the unrelated business taxable income of such organization shall be the sum of the unrelated business taxable income so computed with respect to each such trade or business, less a specific deduction under subsection (b)(12), and for purposes of subparagraph (B), unrelated business taxable income with respect to any such trade or business shall not be less than zero.

(b) Modifications The modifications referred to in subsection (a) are the following: There shall be excluded all dividends, interest, payments with respect to securities loans (as defined in subsection (a)(5)), amounts received or accrued as consideration for entering into agreements to make loans, and annuities, and all deductions directly connected with such income. There shall be excluded all royalties (including overriding royalties) whether measured by production or by gross or taxable income from the property, and all deductions directly connected with such income. In the case of rents— Except as provided in subparagraph (B), there shall be excluded— all rents from real property (including property described in section 1245(a)(3)(C)), and all rents from personal property (including for purposes of this paragraph as personal property any property described in section 1245(a)(3)(B)) leased with such real property, if the rents attributable to such personal property are an incidental amount of the total rents received or accrued under the lease, determined at the time the personal property is placed in service. Subparagraph (A) shall not apply— if more than 50 percent of the total rent received or accrued under the lease is attributable to personal property described in subparagraph (A)(ii), or if the determination of the amount of such rent depends in whole or in part on the income or profits derived by any person from the property leased (other than an amount based on a fixed percentage or percentages of receipts or sales). There shall be excluded all deductions directly connected with rents excluded under subparagraph (A). Notwithstanding paragraph (1), (2), (3), or (5), in the case of debt-financed property (as defined in section 514) there shall be included, as an item of gross income derived from an unrelated trade or business, the amount ascertained under section 514(a)(1), and there shall be allowed, as a deduction, the amount ascertained under section 514(a)(2). There shall be excluded all gains or losses from the sale, exchange, or other disposition of property other than— stock in trade or other property of a kind which would properly be includible in inventory if on hand at the close of the taxable year, or property held primarily for sale to customers in the ordinary course of the trade or business. There shall also be excluded all gains or losses recognized, in connection with the organization’s investment activities, from the lapse or termination of options to buy or sell securities (as defined in section 1236(c)) or real property and all gains or losses from the forfeiture of good-faith deposits (that are consistent with established business practice) for the purchase, sale, or lease of real property in connection with the organization’s investment activities. This paragraph shall not apply with respect to the cutting of timber which is considered, on the application of section 631, as a sale or exchange of such timber. The net operating loss deduction provided in section 172 shall be allowed, except that— the net operating loss for any taxable year, the amount of the net operating loss carryback or carryover to any taxable year, and the net operating loss deduction for any taxable year shall be determined under section 172 without taking into account any amount of income or deduction which is excluded under this part in computing the unrelated business taxable income; and the terms “preceding taxable year” and “preceding taxable years” as used in section 172 shall not include any taxable year for which the organization was not subject to the provisions of this part. There shall be excluded all income derived from research for (A) the United States, or any of its agencies or instrumentalities, or (B) any State or political subdivision thereof; and there shall be excluded all deductions directly connected with such income. In the case of a college, university, or hospital, there shall be excluded all income derived from research performed for any person, and all deductions directly connected with such income. In the case of an organization operated primarily for purposes of carrying on fundamental research the results of which are freely available to the general public, there shall be excluded all income derived from research performed for any person, and all deductions directly connected with such income. In the case of any organization described in section 511(a), the deduction allowed by section 170 (relating to charitable etc. contributions and gifts) shall be allowed (whether or not directly connected with the carrying on of the trade or business), but shall not exceed 10 percent of the unrelated business taxable income computed without the benefit of this paragraph. In the case of any trust described in section 511(b), the deduction allowed by section 170 (relating to charitable etc. contributions and gifts) shall be allowed (whether or not directly connected with the carrying on of the trade or business), and for such purpose a distribution made by the trust to a beneficiary described in section 170 shall be considered as a gift or contribution. The deduction allowed by this paragraph shall be allowed with the limitations prescribed in section 170(b)(1)(A) and (B) determined with reference to the unrelated business taxable income computed without the benefit of this paragraph (in lieu of with reference to adjusted gross income). Except for purposes of computing the net operating loss under section 172 and paragraph (6), there shall be allowed a specific deduction of $1, 000. I n t h ec a seo f a d i ocese, p ro v in ceo f a re l i g i o u sor d er, or a co n v e n t i o n or a ssoc ia t i o n o f c h u rc h es, t h eres ha ll a l so b e a ll o w e d, w i t h res p ec tt oe a c h p a r i s h, in d i v i d u a l c h u rc h, d i s t r i c t, oro t h er l oc a l u ni t, a s p ec i f i c d e d u c t i o n e q u a lt o t h e l o w ero f —$ 1,000, or the gross income derived from any unrelated trade or business regularly carried on by such local unit. If an organization (in this paragraph referred to as the “controlling organization”) receives or accrues (directly or indirectly) a specified payment from another entity which it controls (in this paragraph referred to as the “controlled entity”), notwithstanding paragraphs (1), (2), and (3), the controlling organization shall include such payment as an item of gross income derived from an unrelated trade or business to the extent such payment reduces the net unrelated income of the controlled entity (or increases any net unrelated loss of the controlled entity). There shall be allowed all deductions of the controlling organization directly connected with amounts treated as derived from an unrelated trade or business under the preceding sentence. For purposes of this paragraph— The term “net unrelated income” means— in the case of a controlled entity which is not exempt from tax under section 501(a), the portion of such entity’s taxable income which would be unrelated business taxable income if such entity were exempt from tax under section 501(a) and had the same exempt purposes as the controlling organization, or in the case of a controlled entity which is exempt from tax under section 501(a), the amount of the unrelated business taxable income of the controlled entity. The term “net unrelated loss” means the net operating loss adjusted under rules similar to the rules of clause (i). For purposes of this paragraph, the term “specified payment” means any interest, annuity, royalty, or rent. For purposes of this paragraph— The term “control” means— in the case of a corporation, ownership (by vote or value) of more than 50 percent of the stock in such corporation, in the case of a partnership, ownership of more than 50 percent of the profits interests or capital interests in such partnership, or in any other case, ownership of more than 50 percent of the beneficial interests in the entity. Section 318 (relating to constructive ownership of stock) shall apply for purposes of determining ownership of stock in a corporation. Similar principles shall apply for purposes of determining ownership of interests in any other entity. Subparagraph (A) shall apply only to the portion of a qualifying specified payment received or accrued by the controlling organization that exceeds the amount which would have been paid or accrued if such payment met the requirements prescribed under section 482. The tax imposed by this chapter on the controlling organization shall be increased by an amount equal to 20 percent of the larger of— such excess determined without regard to any amendment or supplement to a return of tax, or such excess determined with regard to all such amendments and supplements. The term “qualifying specified payment” means a specified payment which is made pursuant to— a binding written contract in effect on the date of the enactment of this subparagraph, or a contract which is a renewal, under substantially similar terms, of a contract described in subclause (I). The Secretary shall prescribe such rules as may be necessary or appropriate to prevent avoidance of the purposes of this paragraph through the use of related persons. Repealed. Pub. L. 101–508, title XI, § 11801(a)(23) , Nov. 5, 1990 , 104 Stat. 1388–521 .] Except as provided in paragraph (4), in the case of a trade or business— which consists of providing services under license issued by a Federal regulatory agency, which is carried on by a religious order or by an educational organization described in section 170(b)(1)(A)(ii) maintained by such religious order, and which was so carried on before May 27, 1959 , and less than 10 percent of the net income of which for each taxable year is used for activities which are not related to the purpose constituting the basis for the religious order’s exemption, there shall be excluded all gross income derived from such trade or business and all deductions directly connected with the carrying on of such trade or business, so long as it is established to the satisfaction of the Secretary that the rates or other charges for such services are competitive with rates or other charges charged for similar services by persons not exempt from taxation. Notwithstanding paragraph (5)(B), there shall be excluded all gains or losses from the sale, exchange, or other disposition of any real property described in subparagraph (B) if— such property was acquired by the organization from— a financial institution described in section 581 or 591(a) which is in conservatorship or receivership, or the conservator or receiver of such an institution (or any government agency or corporation succeeding to the rights or interests of the conservator or receiver), such property is designated by the organization within the 9-month period beginning on the date of its acquisition as property held for sale, except that not more than one-half (by value determined as of such date) of property acquired in a single transaction may be so designated, such sale, exchange, or disposition occurs before the later of— the date which is 30 months after the date of the acquisition of such property, or the date specified by the Secretary in order to assure an orderly disposition of property held by persons described in subparagraph (A), and while such property was held by the organization, the aggregate expenditures on improvements and development activities included in the basis of the property are (or were) not in excess of 20 percent of the net selling price of such property. Property is described in this subparagraph if it is real property which— was held by the financial institution at the time it entered into conservatorship or receivership, or was foreclosure property (as defined in section 514(c)(9)(H)(v)) which secured indebtedness held by the financial institution at such time. For purposes of this subparagraph, real property includes an interest in a mortgage. Notwithstanding paragraph (1), any amount included in gross income under section 951(a)(1)(A) shall be included as an item of gross income derived from an unrelated trade or business to the extent the amount so included is attributable to insurance income (as defined in section 953) which, if derived directly by the organization, would be treated as gross income from an unrelated trade or business. There shall be allowed all deductions directly connected with amounts included in gross income under the preceding sentence. Subparagraph (A) shall not apply to income attributable to a policy of insurance or reinsurance with respect to which the person (directly or indirectly) insured is— such organization, an affiliate of such organization which is exempt from tax under section 501(a), or a director or officer of, or an individual who (directly or indirectly) performs services for, such organization or affiliate but only if the insurance covers primarily risks associated with the performance of services in connection with such organization or affiliate. For purposes of this subparagraph— The determination as to whether an entity is an affiliate of an organization shall be made under rules similar to the rules of section 168(h)(4)(B). Two or more organizations (and any affiliates of such organizations) shall be treated as affiliates if such organizations are colleges or universities described in section 170(b)(1)(A)(ii) or organizations described in section 170(b)(1)(A)(iii) and participate in an insurance arrangement that provides for any profits from such arrangement to be returned to the policyholders in their capacity as such. The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this paragraph, including regulations for the application of this paragraph in the case of income paid through 1 or more entities or between 2 or more chains of entities. In the case of a mutual or cooperative electric company described in section 501(c)(12), there shall be excluded income which is treated as member income under subparagraph (H) thereof. Notwithstanding paragraph (5)(B), there shall be excluded any gain or loss from the qualified sale, exchange, or other disposition of any qualifying brownfield property by an eligible taxpayer. For purposes of this paragraph— The term “eligible taxpayer” means, with respect to a property, any organization exempt from tax under section 501(a) which— acquires from an unrelated person a qualifying brownfield property, and pays or incurs eligible remediation expenditures with respect to such property in an amount which exceeds the greater of $550,000 or 12 percent of the fair market value of the property at the time such property was acquired by the eligible taxpayer, determined as if there was not a presence of a hazardous substance, pollutant, or contaminant on the property which is complicating the expansion, redevelopment, or reuse of the property. Such term shall not include any organization which is— potentially liable under section 107 of the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 with respect to the qualifying brownfield property, affiliated with any other person which is so potentially liable through any direct or indirect familial relationship or any contractual, corporate, or financial relationship (other than a contractual, corporate, or financial relationship which is created by the instruments by which title to any qualifying brownfield property is conveyed or financed or by a contract of sale of goods or services), or the result of a reorganization of a business entity which was so potentially liable. For purposes of this paragraph— The term “qualifying brownfield property” means any real property which is certified, before the taxpayer incurs any eligible remediation expenditures (other than to obtain a Phase I environmental site assessment), by an appropriate State agency (within the meaning of section 198(c)(4)) in the State in which such property is located as a brownfield site within the meaning of section 101(39) of the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (as in effect on the date of the enactment of this paragraph). Any request by an eligible taxpayer for a certification described in clause (i) shall include a sworn statement by the eligible taxpayer and supporting documentation of the presence of a hazardous substance, pollutant, or contaminant on the property which is complicating the expansion, redevelopment, or reuse of the property given the property’s reasonably anticipated future land uses or capacity for uses of the property (including a Phase I environmental site assessment and, if applicable, evidence of the property’s presence on a local, State, or Federal list of brownfields or contaminated property) and other environmental assessments prepared or obtained by the taxpayer. For purposes of this paragraph— A sale, exchange, or other disposition of property shall be considered as qualified if— such property is transferred by the eligible taxpayer to an unrelated person, and within 1 year of such transfer the eligible taxpayer has received a certification from the Environmental Protection Agency or an appropriate State agency (within the meaning of section 198(c)(4)) in the State in which such property is located that, as a result of the eligible taxpayer’s remediation actions, such property would not be treated as a qualifying brownfield property in the hands of the transferee. For purposes of subclause (II), before issuing such certification, the Environmental Protection Agency or appropriate State agency shall respond to comments received pursuant to clause (ii)(V) in the same form and manner as required under section 117(b) of the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (as in effect on the date of the enactment of this paragraph). Any request by an eligible taxpayer for a certification described in clause (i) shall be made not later than the date of the transfer and shall include a sworn statement by the eligible taxpayer certifying the following: Remedial actions which comply with all applicable or relevant and appropriate requirements (consistent with section 121(d) of the Comprehensive Environmental Response, Compensation, and Liability Act of 1980) have been substantially completed, such that there are no hazardous substances, pollutants, or contaminants which complicate the expansion, redevelopment, or reuse of the property given the property’s reasonably anticipated future land uses or capacity for uses of the property. The reasonably anticipated future land uses or capacity for uses of the property are more economically productive or environmentally beneficial than the uses of the property in existence on the date of the certification described in subparagraph (C)(i). For purposes of the preceding sentence, use of property as a landfill or other hazardous waste facility shall not be considered more economically productive or environmentally beneficial. A remediation plan has been implemented to bring the property into compliance with all applicable local, State, and Federal environmental laws, regulations, and standards and to ensure that the remediation protects human health and the environment. The remediation plan described in subclause (III), including any physical improvements required to remediate the property, is either complete or substantially complete, and, if substantially complete, sufficient monitoring, funding, institutional controls, and financial assurances have been put in place to ensure the complete remediation of the property in accordance with the remediation plan as soon as is reasonably practicable after the sale, exchange, or other disposition of such property. Public notice and the opportunity for comment on the request for certification was completed before the date of such request. Such notice and opportunity for comment shall be in the same form and manner as required for public participation required under section 117(a) of the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (as in effect on the date of the enactment of this paragraph). For purposes of this subclause, public notice shall include, at a minimum, publication in a major local newspaper of general circulation. A copy of each of the requests for certification described in clause (ii) of subparagraph (C) and this subparagraph shall be included in the tax return of the eligible taxpayer (and, where applicable, of the qualifying partnership) for the taxable year during which the transfer occurs. For purposes of this subparagraph, a remedial action is substantially complete when any necessary physical construction is complete, all immediate threats have been eliminated, and all long-term threats are under control. For purposes of this paragraph— The term “eligible remediation expenditures” means, with respect to any qualifying brownfield property, any amount paid or incurred by the eligible taxpayer to an unrelated third person to obtain a Phase I environmental site assessment of the property, and any amount so paid or incurred after the date of the certification described in subparagraph (C)(i) for goods and services necessary to obtain a certification described in subparagraph (D)(i) with respect to such property, including expenditures— to manage, remove, control, contain, abate, or otherwise remediate a hazardous substance, pollutant, or contaminant on the property, to obtain a Phase II environmental site assessment of the property, including any expenditure to monitor, sample, study, assess, or otherwise evaluate the release, threat of release, or presence of a hazardous substance, pollutant, or contaminant on the property, to obtain environmental regulatory certifications and approvals required to manage the remediation and monitoring of the hazardous substance, pollutant, or contaminant on the property, and regardless of whether it is necessary to obtain a certification described in subparagraph (D)(i)(II), to obtain remediation cost-cap or stop-loss coverage, re-opener or regulatory action coverage, or similar coverage under environmental insurance policies, or financial guarantees required to manage such remediation and monitoring. Such term shall not include— any portion of the purchase price paid or incurred by the eligible taxpayer to acquire the qualifying brownfield property, environmental insurance costs paid or incurred to obtain legal defense coverage, owner/operator liability coverage, lender liability coverage, professional liability coverage, or similar types of coverage, any amount paid or incurred to the extent such amount is reimbursed, funded, or otherwise subsidized by grants provided by the United States, a State, or a political subdivision of a State for use in connection with the property, proceeds of an issue of State or local government obligations used to provide financing for the property the interest of which is exempt from tax under section 103, or subsidized financing provided (directly or indirectly) under a Federal, State, or local program provided in connection with the property, or any expenditure paid or incurred before the date of the enactment of this paragraph. For purposes of subclause (III), the Secretary may issue guidance regarding the treatment of government-provided funds for purposes of determining eligible remediation expenditures. For purposes of this paragraph, the determination of gain or loss shall not include an amount treated as gain which is ordinary income with respect to section 1245 or section 1250 property, including amounts deducted as section 198 expenses which are subject to the recapture rules of section 198(e), if the taxpayer had deducted such amounts in the computation of its unrelated business taxable income. In the case of an eligible taxpayer which is a partner of a qualifying partnership which acquires, remediates, and sells, exchanges, or otherwise disposes of a qualifying brownfield property, this paragraph shall apply to the eligible taxpayer’s distributive share of the qualifying partnership’s gain or loss from the sale, exchange, or other disposition of such property. The term “qualifying partnership” means a partnership which— has a partnership agreement which satisfies the requirements of section 514(c)(9)(B)(vi) at all times beginning on the date of the first certification received by the partnership under subparagraph (C)(i), satisfies the requirements of subparagraphs (B)(i), (C), (D), and (E), if “qualified partnership” is substituted for “eligible taxpayer” each place it appears therein (except subparagraph (D)(iii)), and is not an organization which would be prevented from constituting an eligible taxpayer by reason of subparagraph (B)(ii). This paragraph shall apply with respect to any eligible taxpayer which is a partner of a partnership which acquires, remediates, and sells, exchanges, or otherwise disposes of a qualifying brownfield property only if such eligible taxpayer was a partner of the qualifying partnership at all times beginning on the date of the first certification received by the partnership under subparagraph (C)(i) and ending on the date of the sale, exchange, or other disposition of the property by the partnership. The Secretary shall prescribe such regulations as are necessary to prevent abuse of the requirements of this subparagraph, including abuse through— the use of special allocations of gains or losses, or changes in ownership of partnership interests held by eligible taxpayers. An eligible taxpayer or a qualifying partnership of which the eligible taxpayer is a partner may make a 1-time election to apply this paragraph to more than 1 qualifying brownfield property by averaging the eligible remediation expenditures for all such properties acquired during the election period. If the eligible taxpayer or qualifying partnership makes such an election, the election shall apply to all qualified sales, exchanges, or other dispositions of qualifying brownfield properties the acquisition and transfer of which occur during the period for which the election remains in effect. An election under clause (i) shall be made with the eligible taxpayer’s or qualifying partnership’s timely filed tax return (including extensions) for the first taxable year for which the taxpayer or qualifying partnership intends to have the election apply. An election under clause (i) is effective for the period— beginning on the date which is the first day of the taxable year of the return in which the election is included or a later day in such taxable year selected by the eligible taxpayer or qualifying partnership, and ending on the date which is the earliest of a date of revocation selected by the eligible taxpayer or qualifying partnership, the date which is 8 years after the date described in subclause (I), or, in the case of an election by a qualifying partnership of which the eligible taxpayer is a partner, the date of the termination of the qualifying partnership. An eligible taxpayer or qualifying partnership may revoke an election under clause (i) by filing a statement of revocation with a timely filed tax return (including extensions). A revocation is effective as of the first day of the taxable year of the return in which the revocation is included or a later day in such taxable year selected by the eligible taxpayer or qualifying partnership. Once an eligible taxpayer or qualifying partnership revokes the election, the eligible taxpayer or qualifying partnership is ineligible to make another election under clause (i) with respect to any qualifying brownfield property subject to the revoked election. If an eligible taxpayer excludes gain or loss from a sale, exchange, or other disposition of property to which an election under subparagraph (H) applies, and such property fails to satisfy the requirements of this paragraph, the unrelated business taxable income of the eligible taxpayer for the taxable year in which such failure occurs shall be determined by including any previously excluded gain or loss from such sale, exchange, or other disposition allocable to such taxpayer, and interest shall be determined at the overpayment rate established under section 6621 on any resulting tax for the period beginning with the due date of the return for the taxable year during which such sale, exchange, or other disposition occurred, and ending on the date of payment of the tax. For purposes of this paragraph, a person shall be treated as related to another person if— such person bears a relationship to such other person described in section 267(b) (determined without regard to paragraph (9) thereof), or section 707(b)(1), determined by substituting “25 percent” for “50 percent” each place it appears therein, and in the case such other person is a nonprofit organization, if such person controls directly or indirectly more than 25 percent of the governing body of such organization. Except for purposes of determining the average eligible remediation expenditures for properties acquired during the election period under subparagraph (H), this paragraph shall not apply to any property acquired by the eligible taxpayer or qualifying partnership after December 31, 2009 .

(c) Special rules for partnerships If a trade or business regularly carried on by a partnership of which an organization is a member is an unrelated trade or business with respect to such organization, such organization in computing its unrelated business taxable income shall, subject to the exceptions, additions, and limitations contained in subsection (b), include its share (whether or not distributed) of the gross income of the partnership from such unrelated trade or business and its share of the partnership deductions directly connected with such gross income. If the taxable year of the organization is different from that of the partnership, the amounts to be included or deducted in computing the unrelated business taxable income under paragraph (1) shall be based upon the income and deductions of the partnership for any taxable year of the partnership ending within or with the taxable year of the organization.

(d) Treatment of dues of agricultural or horticultural organizations If— an agricultural or horticultural organization described in section 501(c)(5) requires annual dues to be paid in order to be a member of such organization, and the amount of such required annual dues does not exceed $100, inn oe v e n t s ha ll an y p or t i o n o f s u c h d u es b e t re a t e d a s d er i v e d b ys u c h or g ani z a t i o n f ro man u n re l a t e d t r a d eor b u s in ess b yre a so n o f an y b e n e f i t sor p r i v i l e g es t o w hi c hm e mb erso f s u c h or g ani z a t i o na ree n t i tl e d . I n t h ec a seo f an y t a x ab l eye a r b e g innin g ina c a l e n d a rye a r a f t er 1995, t h e$ 100 amount in paragraph (1) shall be increased by an amount equal to— $100, multiplied by the cost-of-living adjustment determined under section 1(f)(3) for the calendar year in which the taxable year begins, by substituting “calendar year 1994” for “calendar year 2016” in subparagraph (A)(ii) thereof. For purposes of this subsection, the term “dues” means any payment (whether or not designated as dues) which is required to be made in order to be recognized by the organization as a member of the organization.

(e) Special rules applicable to S corporations If an organization described in section 1361(c)(2)(A)(vi) or 1361(c)(6) holds stock in an S corporation— such interest shall be treated as an interest in an unrelated trade or business, and notwithstanding any other provision of this part— all items of income, loss, or deduction taken into account under section 1366(a), and any gain or loss on the disposition of the stock in the S corporation, shall be taken into account in computing the unrelated business taxable income of such organization. Except as provided in regulations, for purposes of paragraph (1), the basis of any stock acquired by purchase (as defined in section 1361(e)(1)(C)) shall be reduced by the amount of any dividends received by the organization with respect to the stock. This subsection shall not apply to employer securities (within the meaning of section 409( l )) held by an employee stock ownership plan described in section 4975(e)(7).

§ 513 Unrelated trade or business

(a) General rule The term “unrelated trade or business” means, in the case of any organization subject to the tax imposed by section 511, any trade or business the conduct of which is not substantially related (aside from the need of such organization for income or funds or the use it makes of the profits derived) to the exercise or performance by such organization of its charitable, educational, or other purpose or function constituting the basis for its exemption under section 501 (or, in the case of an organization described in section 511(a)(2)(B), to the exercise or performance of any purpose or function described in section 501(c)(3)), except that such term does not include any trade or business— in which substantially all the work in carrying on such trade or business is performed for the organization without compensation; or which is carried on, in the case of an organization described in section 501(c)(3) or in the case of a college or university described in section 511(a)(2)(B), by the organization primarily for the convenience of its members, students, patients, officers, or employees, or, in the case of a local association of employees described in section 501(c)(4) organized before May 27, 1969 , which is the selling by the organization of items of work-related clothes and equipment and items normally sold through vending machines, through food dispensing facilities, or by snack bars, for the convenience of its members at their usual places of employment; or which is the selling of merchandise, substantially all of which has been received by the organization as gifts or contributions.

(b) Special rule for trusts The term “unrelated trade or business” means, in the case of— a trust computing its unrelated business taxable income under section 512 for purposes of section 681; or a trust described in section 401(a), or section 501(c)(17), which is exempt from tax under section 501(a); any trade or business regularly carried on by such trust or by a partnership of which it is a member.

(c) Advertising, etc., activities For purposes of this section, the term “trade or business” includes any activity which is carried on for the production of income from the sale of goods or the performance of services. For purposes of the preceding sentence, an activity does not lose identity as a trade or business merely because it is carried on within a larger aggregate of similar activities or within a larger complex of other endeavors which may, or may not, be related to the exempt purposes of the organization. Where an activity carried on for profit constitutes an unrelated trade or business, no part of such trade or business shall be excluded from such classification merely because it does not result in profit.

(d) Certain activities of trade shows, State fairs, etc. The term “unrelated trade or business” does not include qualified public entertainment activities of an organization described in paragraph (2)(C), or qualified convention and trade show activities of an organization described in paragraph (3)(C). For purposes of this subsection— The term “public entertainment activity” means any entertainment or recreational activity of a kind traditionally conducted at fairs or expositions promoting agricultural and educational purposes, including, but not limited to, any activity one of the purposes of which is to attract the public to fairs or expositions or to promote the breeding of animals or the development of products or equipment. The term “qualified public entertainment activity” means a public entertainment activity which is conducted by a qualifying organization described in subparagraph (C) in— conjunction with an international, national, State, regional, or local fair or exposition, accordance with the provisions of State law which permit the activity to be operated or conducted solely by such an organization, or by an agency, instrumentality, or political subdivision of such State, or accordance with the provisions of State law which permit such an organization to be granted a license to conduct not more than 20 days of such activity on payment to the State of a lower percentage of the revenue from such licensed activity than the State requires from organizations not described in section 501(c)(3), (4), or (5). For purposes of this paragraph, the term “qualifying organization” means an organization which is described in section 501(c) (3), (4), or (5) which regularly conducts, as one of its substantial exempt purposes, an agricultural and educational fair or exposition. The term “convention and trade show activity” means any activity of a kind traditionally conducted at conventions, annual meetings, or trade shows, including, but not limited to, any activity one of the purposes of which is to attract persons in an industry generally (without regard to membership in the sponsoring organization) as well as members of the public to the show for the purpose of displaying industry products or to stimulate interest in, and demand for, industry products or services, or to educate persons engaged in the industry in the development of new products and services or new rules and regulations affecting the industry. The term “qualified convention and trade show activity” means a convention and trade show activity carried out by a qualifying organization described in subparagraph (C) in conjunction with an international, national, State, regional, or local convention, annual meeting, or show conducted by an organization described in subparagraph (C) if one of the purposes of such organization in sponsoring the activity is the promotion and stimulation of interest in, and demand for, the products and services of that industry in general or to educate persons in attendance regarding new developments or products and services related to the exempt activities of the organization, and the show is designed to achieve such purpose through the character of the exhibits and the extent of the industry products displayed. For purposes of this paragraph, the term “qualifying organization” means an organization described in section 501(c)(3), (4), (5), or (6) which regularly conducts as one of its substantial exempt purposes a show which stimulates interest in, and demand for, the products of a particular industry or segment of such industry or which educates persons in attendance regarding new developments or products and services related to the exempt activities of the organization. An organization described in section 501(c) (3), (4), or (5) shall not be considered as not entitled to the exemption allowed under section 501(a) solely because of qualified public entertainment activities conducted by it.

(e) Certain hospital services In the case of a hospital described in section 170(b)(1)(A)(iii), the term “unrelated trade or business” does not include the furnishing of one or more of the services described in section 501(e)(1)(A) to one or more hospitals described in section 170(b)(1)(A)(iii) if— such services are furnished solely to such hospitals which have facilities to serve not more than 100 inpatients; such services, if performed on its own behalf by the recipient hospital, would constitute activities in exercising or performing the purpose or function constituting the basis for its exemption; and such services are provided at a fee or cost which does not exceed the actual cost of providing such services, such cost including straight line depreciation and a reasonable amount for return on capital goods used to provide such services.

(f) Certain bingo games The term “unrelated trade or business” does not include any trade or business which consists of conducting bingo games. For purposes of paragraph (1), the term “bingo game” means any game of bingo— of a type in which usually— the wagers are placed, the winners are determined, and the distribution of prizes or other property is made, in the presence of all persons placing wagers in such game, the conducting of which is not an activity ordinarily carried out on a commercial basis, and the conducting of which does not violate any State or local law.

(g) Certain pole rentals In the case of a mutual or cooperative telephone or electric company, the term “unrelated trade or business” does not include engaging in qualified pole rentals (as defined in section 501(c)(12)(D)).

(h) Certain distributions of low cost articles without obligation to purchase and exchanges and rentals of member lists In the case of an organization which is described in section 501 and contributions to which are deductible under paragraph (2) or (3) of section 170(c), the term “unrelated trade or business” does not include— activities relating to the distribution of low cost articles if the distribution of such articles is incidental to the solicitation of charitable contributions, or any trade or business which consists of— exchanging with another such organization names and addresses of donors to (or members of) such organization, or renting such names and addresses to another such organization. For purposes of this subsection— The term “low cost article” means any article which has a cost not in excess of $5 t o t h eor g ani z a t i o n w hi c h d i s t r ib u t ess u c hi t e m (oro n w h ose b e ha l f s u c hi t e mi s d i s t r ib u t e d) . I f m ore t han 1 i t e mi s d i s t r ib u t e d b yoro nb e ha l f o f an or g ani z a t i o n t o a s in g l e d i s t r ib u t ee inan yc a l e n d a rye a r, t h e a gg re g a t eo f t h e i t e m sso d i s t r ib u t e d in s u c h c a l e n d a rye a r t os u c h d i s t r ib u t ees ha ll b e t re a t e d a s 1 a r t i c l e f or p u r p oseso f s u b p a r a g r a p h (A) . I n t h ec a seo f an y t a x ab l eye a r b e g innin g ina c a l e n d a rye a r a f t er 1987, t h e$ 5 amount in subparagraph (A) shall be increased by an amount equal to— $5, multiplied by the cost-of-living adjustment determined under section 1(f)(3) for the calendar year in which the taxable year begins, by substituting “calendar year 1987” for “calendar year 2016” in subparagraph (A)(ii) thereof. For purposes of this subsection, any distribution of low cost articles by an organization shall be treated as a distribution incidental to the solicitation of charitable contributions only if— such distribution is not made at the request of the distributee, such distribution is made without the express consent of the distributee, and the articles so distributed are accompanied by— a request for a charitable contribution (as defined in section 170(c)) by the distributee to such organization, and a statement that the distributee may retain the low cost article regardless of whether such distributee makes a charitable contribution to such organization.

(i) Treatment of certain sponsorship payments The term “unrelated trade or business” does not include the activity of soliciting and receiving qualified sponsorship payments. For purposes of this subsection— The term “qualified sponsorship payment” means any payment made by any person engaged in a trade or business with respect to which there is no arrangement or expectation that such person will receive any substantial return benefit other than the use or acknowledgement of the name or logo (or product lines) of such person’s trade or business in connection with the activities of the organization that receives such payment. Such a use or acknowledgement does not include advertising such person’s products or services (including messages containing qualitative or comparative language, price information, or other indications of savings or value, an endorsement, or an inducement to purchase, sell, or use such products or services). The term “qualified sponsorship payment” does not include any payment if the amount of such payment is contingent upon the level of attendance at one or more events, broadcast ratings, or other factors indicating the degree of public exposure to one or more events. The term “qualified sponsorship payment” does not include— any payment which entitles the payor to the use or acknowledgement of the name or logo (or product lines) of the payor’s trade or business in regularly scheduled and printed material published by or on behalf of the payee organization that is not related to and primarily distributed in connection with a specific event conducted by the payee organization, or any payment made in connection with any qualified convention or trade show activity (as defined in subsection (d)(3)(B)). For purposes of this subsection, to the extent that a portion of a payment would (if made as a separate payment) be a qualified sponsorship payment, such portion of such payment and the other portion of such payment shall be treated as separate payments.

(j) Debt management plan services The term “unrelated trade or business” includes the provision of debt management plan services (as defined in section 501(q)(4)(B)) by any organization other than an organization which meets the requirements of section 501(q).

§ 514 Unrelated debt-financed income

(a) Unrelated debt-financed income and deductions In computing under section 512 the unrelated business taxable income for any taxable year— There shall be included with respect to each debt-financed property as an item of gross income derived from an unrelated trade or business an amount which is the same percentage (but not in excess of 100 percent) of the total gross income derived during the taxable year from or on account of such property as (A) the average acquisition indebtedness (as defined in subsection (c)(7)) for the taxable year with respect to the property is of (B) the average amount (determined under regulations prescribed by the Secretary) of the adjusted basis of such property during the period it is held by the organization during such taxable year. There shall be allowed as a deduction with respect to each debt-financed property an amount determined by applying (except as provided in the last sentence of this paragraph) the percentage derived under paragraph (1) to the sum determined under paragraph (3). The percentage derived under this paragraph shall not be applied with respect to the deduction of any capital loss resulting from the carryback or carryover of net capital losses under section 1212. The sum referred to in paragraph (2) is the sum of the deductions under this chapter which are directly connected with the debt-financed property or the income therefrom, except that if the debt-financed property is of a character which is subject to the allowance for depreciation provided in section 167, the allowance shall be computed only by use of the straight-line method.

(b) Definition of debt-financed property For purposes of this section, the term “debt-financed property” means any property which is held to produce income and with respect to which there is an acquisition indebtedness (as defined in subsection (c)) at any time during the taxable year (or, if the property was disposed of during the taxable year, with respect to which there was an acquisition indebtedness at any time during the 12-month period ending with the date of such disposition), except that such term does not include— any property substantially all the use of which is substantially related (aside from the need of the organization for income or funds) to the exercise or performance by such organization of its charitable, educational, or other purpose or function constituting the basis for its exemption under section 501 (or, in the case of an organization described in section 511(a)(2)(B), to the exercise or performance of any purpose or function designated in section 501(c)(3)), or (ii) any property to which clause (i) does not apply, to the extent that its use is so substantially related; except in the case of income excluded under section 512(b)(5), any property to the extent that the income from such property is taken into account in computing the gross income of any unrelated trade or business; any property to the extent that the income from such property is excluded by reason of the provisions of paragraph (7), (8), or (9) of section 512(b) in computing the gross income of any unrelated trade or business; any property to the extent that it is used in any trade or business described in paragraph (1), (2), or (3) of section 513(a); or any property the gain or loss from the sale, exchange, or other disposition of which would be excluded by reason of the provisions of section 512(b)(19) in computing the gross income of any unrelated trade or business. For purposes of subparagraph (A), substantially all the use of a property shall be considered to be substantially related to the exercise or performance by an organization of its charitable, educational, or other purpose or function constituting the basis for its exemption under section 501 if such property is real property subject to a lease to a medical clinic entered into primarily for purposes which are substantially related (aside from the need of such organization for income or funds or the use it makes of the rents derived) to the exercise or performance by such organization of its charitable, educational, or other purpose or function constituting the basis for its exemption under section 501. For purposes of applying paragraphs (1) (A), (C), and (D), the use of any property by an exempt organization which is related to an organization shall be treated as use by such organization. If an organization acquires real property for the principal purpose of using the land (commencing within 10 years of the time of acquisition) in the manner described in paragraph (1)(A) and at the time of acquisition the property is in the neighborhood of other property owned by the organization which is used in such manner, the real property acquired for such future use shall not be treated as debt-financed property so long as the organization does not abandon its intent to so use the land within the 10-year period. The preceding sentence shall not apply for any period after the expiration of the 10-year period, and shall apply after the first 5 years of the 10-year period only if the organization establishes to the satisfaction of the Secretary that it is reasonably certain that the land will be used in the described manner before the expiration of the 10-year period. If the first sentence of subparagraph (A) is inapplicable only because— the acquired land is not in the neighborhood referred to in subparagraph (A), or the organization (for the period after the first 5 years of the 10-year period) is unable to establish to the satisfaction of the Secretary that it is reasonably certain that the land will be used in the manner described in paragraph (1)(A) before the expiration of the 10-year period, but the land is converted to such use by the organization within the 10-year period, the real property (subject to the provisions of subparagraph (D)) shall not be treated as debt-financed property for any period before such conversion. For purposes of this subparagraph, land shall not be treated as used in the manner described in paragraph (1)(A) by reason of the use made of any structure which was on the land when acquired by the organization. Subparagraphs (A) and (B)— shall apply with respect to any structure on the land when acquired by the organization, or to the land occupied by the structure, only if (and so long as) the intended future use of the land in the manner described in paragraph (1)(A) requires that the structure be demolished or removed in order to use the land in such manner; shall not apply to structures erected on the land after the acquisition of the land; and shall not apply to property subject to a lease which is a business lease (as defined in this section immediately before the enactment of the Tax Reform Act of 1976). If an organization for any taxable year has not used land in the manner to satisfy the actual use condition of subparagraph (B) before the time prescribed by law (including extensions thereof) for filing the return for such taxable year, the tax for such year shall be computed without regard to the application of subparagraph (B), but if and when such use condition is satisfied, the provisions of subparagraph (B) shall then be applied to such taxable year. If the actual use condition of subparagraph (B) is satisfied for any taxable year after such time for filing the return, and if credit or refund of any overpayment for the taxable year resulting from the satisfaction of such use condition is prevented at the close of the taxable year in which the use condition is satisfied, by the operation of any law or rule of law (other than chapter 74, relating to closing agreements and compromises), credit or refund of such overpayment may nevertheless be allowed or made if claim therefor is filed before the expiration of 1 year after the close of the taxable year in which the use condition is satisfied. In applying this paragraph to a church or convention or association of churches, in lieu of the 10-year period referred to in subparagraphs (A) and (B) a 15-year period shall be applied, and subparagraphs (A) and (B)(ii) shall apply whether or not the acquired land meets the neighborhood test.

(c) Acquisition indebtedness For purposes of this section, the term “acquisition indebtedness” means, with respect to any debt-financed property, the unpaid amount of— the indebtedness incurred by the organization in acquiring or improving such property; the indebtedness incurred before the acquisition or improvement of such property if such indebtedness would not have been incurred but for such acquisition or improvement; and the indebtedness incurred after the acquisition or improvement of such property if such indebtedness would not have been incurred but for such acquisition or improvement and the incurrence of such indebtedness was reasonably foreseeable at the time of such acquisition or improvement. For purposes of this subsection— Where property (no matter how acquired) is acquired subject to a mortgage or other similar lien, the amount of the indebtedness secured by such mortgage or lien shall be considered as an indebtedness of the organization incurred in acquiring such property even though the organization did not assume or agree to pay such indebtedness. Where property subject to a mortgage is acquired by an organization by bequest or devise, the indebtedness secured by the mortgage shall not be treated as acquisition indebtedness during a period of 10 years following the date of the acquisition. If an organization acquires property by gift subject to a mortgage which was placed on the property more than 5 years before the gift, which property was held by the donor more than 5 years before the gift, the indebtedness secured by such mortgage shall not be treated as acquisition indebtedness during a period of 10 years following the date of such gift. This subparagraph shall not apply if the organization, in order to acquire the equity in the property by bequest, devise, or gift, assumes and agrees to pay the indebtedness secured by the mortgage, or if the organization makes any payment for the equity in the property owned by the decedent or the donor. Where State law provides that— a lien for taxes, or a lien for assessments, made by a State or a political subdivision thereof attaches to property prior to the time when such taxes or assessments become due and payable, then such lien shall be treated as similar to a mortgage (within the meaning of subparagraph (A)) but only after such taxes or assessments become due and payable and the organization has had an opportunity to pay such taxes or assessments in accordance with State law. For purposes of this section, an extension, renewal, or refinancing of an obligation evidencing a pre-existing indebtedness shall not be treated as the creation of a new indebtedness. For purposes of this section, the term “acquisition indebtedness” does not include indebtedness the incurrence of which is inherent in the performance or exercise of the purpose or function constituting the basis of the organization’s exemption, such as the indebtedness incurred by a credit union described in section 501(c)(14) in accepting deposits from its members. For purposes of this section, the term “acquisition indebtedness” does not include an obligation to pay an annuity which— is the sole consideration (other than a mortgage to which paragraph (2)(B) applies) issued in exchange for property if, at the time of the exchange, the value of the annuity is less than 90 percent of the value of the property received in the exchange, is payable over the life of one individual in being at the time the annuity is issued, or over the lives of two individuals in being at such time, and is payable under a contract which— does not guarantee a minimum amount of payments or specify a maximum amount of payments, and does not provide for any adjustment of the amount of the annuity payments by reference to the income received from the transferred property or any other property. For purposes of this section, the term “acquisition indebtedness” does not include— an obligation, to the extent that it is insured by the Federal Housing Administration, to finance the purchase, rehabilitation, or construction of housing for low and moderate income persons, or indebtedness incurred by a small business investment company licensed after the date of the enactment of the American Jobs Creation Act of 2004 under the Small Business Investment Act of 1958 if such indebtedness is evidenced by a debenture— issued by such company under section 303(a) of such Act, and held or guaranteed by the Small Business Administration. Subparagraph (A)(ii) shall not apply with respect to any small business investment company during any period that— any organization which is exempt from tax under this title (other than a governmental unit) owns more than 25 percent of the capital or profits interest in such company, or organizations which are exempt from tax under this title (including governmental units other than any agency or instrumentality of the United States) own, in the aggregate, 50 percent or more of the capital or profits interest in such company. For purposes of this section, the term “average acquisition indebtedness” for any taxable year with respect to a debt-financed property means the average amount, determined under regulations prescribed by the Secretary of the acquisition indebtedness during the period the property is held by the organization during the taxable year, except that for the purpose of computing the percentage of any gain or loss to be taken into account on a sale or other disposition of debt-financed property, such term means the highest amount of the acquisition indebtedness with respect to such property during the 12-month period ending with the date of the sale or other disposition. For purposes of this section— payments with respect to securities loans (as defined in section 512(a)(5)) shall be deemed to be derived from the securities loaned and not from collateral security or the investment of collateral security from such loans, any deductions which are directly connected with collateral security for such loan, or with the investment of collateral security, shall be deemed to be deductions which are directly connected with the securities loaned, and an obligation to return collateral security shall not be treated as acquisition indebtedness (as defined in paragraph (1)). Except as provided in subparagraph (B), the term “acquisition indebtedness” does not, for purposes of this section, include indebtedness incurred by a qualified organization in acquiring or improving any real property. For purposes of this paragraph, an interest in a mortgage shall in no event be treated as real property. The provisions of subparagraph (A) shall not apply in any case in which— the price for the acquisition or improvement is not a fixed amount determined as of the date of the acquisition or the completion of the improvement; the amount of any indebtedness or any other amount payable with respect to such indebtedness, or the time for making any payment of any such amount, is dependent, in whole or in part, upon any revenue, income, or profits derived from such real property; the real property is at any time after the acquisition leased by the qualified organization to the person selling such property to such organization or to any person who bears a relationship described in section 267(b) or 707(b) to such person; the real property is acquired by a qualified trust from, or is at any time after the acquisition leased by such trust to, any person who— bears a relationship which is described in subparagraph (C), (E), or (G) of section 4975(e)(2) to any plan with respect to which such trust was formed, or bears a relationship which is described in subparagraph (F) or (H) of section 4975(e)(2) to any person described in subclause (I); any person described in clause (iii) or (iv) provides the qualified organization with financing in connection with the acquisition or improvement; or the real property is held by a partnership unless the partnership meets the requirements of clauses (i) through (v) and unless— all of the partners of the partnership are qualified organizations, each allocation to a partner of the partnership which is a qualified organization is a qualified allocation (within the meaning of section 168(h)(6)), or such partnership meets the requirements of subparagraph (E). For purposes of subclause (I) of clause (vi), an organization shall not be treated as a qualified organization if any income of such organization is unrelated business taxable income. For purposes of this paragraph, the term “qualified organization” means— an organization described in section 170(b)(1)(A)(ii) and its affiliated support organizations described in section 509(a)(3); any trust which constitutes a qualified trust under section 401; an organization described in section 501(c)(25); or a retirement income account described in section 403(b)(9). Rules similar to the rules of subparagraph (B)(vi) shall also apply in the case of any pass-thru entity other than a partnership and in the case of tiered partnerships and other entities. A partnership meets the requirements of this subparagraph if— the allocation of items to any partner which is a qualified organization cannot result in such partner having a share of the overall partnership income for any taxable year greater than such partner’s share of the overall partnership loss for the taxable year for which such partner’s loss share will be the smallest, and each allocation with respect to the partnership has substantial economic effect within the meaning of section 704(b)(2). For purposes of this clause, items allocated under section 704(c) shall not be taken into account. Except as provided in regulations, a partnership may without violating the requirements of this subparagraph provide for chargebacks with respect to disproportionate losses previously allocated to qualified organizations and disproportionate income previously allocated to other partners. Any chargeback referred to in the preceding sentence shall not be at a ratio in excess of the ratio under which the loss or income (as the case may be) was allocated. To the extent provided in regulations, a partnership may without violating the requirements of this subparagraph provide for reasonable preferred returns or reasonable guaranteed payments. The Secretary shall prescribe such regulations as may be necessary to carry out the purposes of this subparagraph, including regulations which may provide for exclusion or segregation of items. In computing under section 512 the unrelated business taxable income of a disqualified holder of an interest in an organization described in section 501(c)(25), there shall be taken into account— as gross income derived from an unrelated trade or business, such holder’s pro rata share of the items of income described in clause (ii)(I) of such organization, and as deductions allowable in computing unrelated business taxable income, such holder’s pro rata share of the items of deduction described in clause (ii)(II) of such organization. Such amounts shall be taken into account for the taxable year of the holder in which (or with which) the taxable year of such organization ends. For purposes of clause (i)— gross income is described in this clause to the extent such income would (but for this paragraph) be treated under subsection (a) as derived from an unrelated trade or business, and any deduction is described in this clause to the extent it would (but for this paragraph) be allowable under subsection (a)(2) in computing unrelated business taxable income. For purposes of this subparagraph, the term “disqualified holder” means any shareholder (or beneficiary) which is not described in clause (i) or (ii) of subparagraph (C). Except as otherwise provided by regulations— For purposes of clauses (iii) and (iv) of subparagraph (B), a lease to a person described in such clause (iii) or (iv) shall be disregarded if no more than 25 percent of the leasable floor space in a building (or complex of buildings) is covered by the lease and if the lease is on commercially reasonable terms. Clause (v) of subparagraph (B) shall not apply if the financing is on commercially reasonable terms. In the case of a qualifying sale by a financial institution, except as provided in regulations, clauses (i) and (ii) of subparagraph (B) shall not apply with respect to financing provided by such institution for such sale. For purposes of this clause, there is a qualifying sale by a financial institution if— a qualified organization acquires property described in clause (iii) from a financial institution and any gain recognized by the financial institution with respect to the property is ordinary income, the stated principal amount of the financing provided by the financial institution does not exceed the amount of the outstanding indebtedness (including accrued but unpaid interest) of the financial institution with respect to the property described in clause (iii) immediately before the acquisition referred to in clause (iii) or (v), whichever is applicable, and the present value (determined as of the time of the sale and by using the applicable Federal rate determined under section 1274(d)) of the maximum amount payable pursuant to the financing that is determined by reference to the revenue, income, or profits derived from the property cannot exceed 30 percent of the total purchase price of the property (including the contingent payments). Property is described in this clause if such property is foreclosure property, or is real property which— was acquired by the qualified organization from a financial institution which is in conservatorship or receivership, or from the conservator or receiver of such an institution, and was held by the financial institution at the time it entered into conservatorship or receivership. For purposes of this subparagraph, the term “financial institution” means— any financial institution described in section 581 or 591(a), any other corporation which is a direct or indirect subsidiary of an institution referred to in subclause (I) but only if, by virtue of being affiliated with such institution, such other corporation is subject to supervision and examination by a Federal or State agency which regulates institutions referred to in subclause (I), and any person acting as a conservator or receiver of an entity referred to in subclause (I) or (II) (or any government agency or corporation succeeding to the rights or interest of such person). For purposes of this subparagraph, the term “foreclosure property” means any real property acquired by the financial institution as the result of having bid on such property at foreclosure, or by operation of an agreement or process of law, after there was a default (or a default was imminent) on indebtedness which such property secured.

(d) Basis of debt-financed property acquired in corporate liquidation For purposes of this subtitle, if the property was acquired in a complete or partial liquidation of a corporation in exchange for its stock, the basis of the property shall be the same as it would be in the hands of the transferor corporation, increased by the amount of gain recognized to the transferor corporation upon such distribution and by the amount of any gain to the organization which was included, on account of such distribution, in unrelated business taxable income under subsection (a).

(e) Allocation rules Where debt-financed property is held for purposes described in subsection (b)(1)(A), (B), (C), or (D) as well as for other purposes, proper allocation shall be made with respect to basis, indebtedness, and income and deductions. The allocations required by this section shall be made in accordance with regulations prescribed by the Secretary to the extent proper to carry out the purposes of this section.

(f) Personal property leased with real property For purposes of this section, the term “real property” includes personal property of the lessor leased by it to a lessee of its real estate if the lease of such personal property is made under, or in connection with, the lease of such real estate.

(g) Regulations The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section, including regulations to prevent the circumvention of any provision of this section through the use of segregated asset accounts.

“The amendments made by this section [amending this section] shall apply to— property acquired by the partnership after October 13, 1987 , and partnership interests acquired after October 13, 1987 , except that such amendments shall not apply in the case of any property (or partnership interest) acquired pursuant to a written binding contract in effect on October 13, 1987 , and at all times thereafter before such property (or interest) is acquired.”

§ 515 Taxes of foreign countries and possessions of the United States

The amount of taxes imposed by foreign countries and possessions of the United States shall be allowed as a credit against the tax of an organization subject to the tax imposed by section 511 to the extent provided in section 901; and in the case of the tax imposed by section 511, the term “taxable income” as used in section 901 shall be read as “unrelated business taxable income”. ( Aug. 16, 1954, ch. 736 , 68A Stat. 176 .)

§ 521 Exemption of farmers’ cooperatives from tax

(a) Exemption from tax A farmers’ cooperative organization described in subsection (b)(1) shall be exempt from taxation under this subtitle except as otherwise provided in part I of subchapter T (sec. 1381 and following). Notwithstanding part I of subchapter T (sec. 1381 and following), such an organization shall be considered an organization exempt from income taxes for purposes of any law which refers to organizations exempt from income taxes.

(b) Applicable rules The farmers’ cooperatives exempt from taxation to the extent provided in subsection (a) are farmers’, fruit growers’, or like associations organized and operated on a cooperative basis (A) for the purpose of marketing the products of members or other producers, and turning back to them the proceeds of sales, less the necessary marketing expenses, on the basis of either the quantity or the value of the products furnished by them, or (B) for the purpose of purchasing supplies and equipment for the use of members or other persons, and turning over such supplies and equipment to them at actual cost, plus necessary expenses. Exemption shall not be denied any such association because it has capital stock, if the dividend rate of such stock is fixed at not to exceed the legal rate of interest in the State of incorporation or 8 percent per annum, whichever is greater, on the value of the consideration for which the stock was issued, and if substantially all such stock (other than nonvoting preferred stock, the owners of which are not entitled or permitted to participate, directly or indirectly, in the profits of the association, upon dissolution or otherwise, beyond the fixed dividends) is owned by producers who market their products or purchase their supplies and equipment through the association. Exemption shall not be denied any such association because there is accumulated and maintained by it a reserve required by State law or a reasonable reserve for any necessary purpose. Exemption shall not be denied any such association which markets the products of nonmembers in an amount the value of which does not exceed the value of the products marketed for members, or which purchases supplies and equipment for nonmembers in an amount the value of which does not exceed the value of the supplies and equipment purchased for members, provided the value of the purchases made for persons who are neither members nor producers does not exceed 15 percent of the value of all its purchases. Business done for the United States or any of its agencies shall be disregarded in determining the right to exemption under this section. Exemption shall not be denied any such association because such association computes its net earnings for purposes of determining any amount available for distribution to patrons in the manner described in paragraph (1) of section 1388(j). For treatment of value-added processing involving animals, see section 1388(k).

[§ 522 Repealed. Pub. L. 87–834, § 17(b)(2), Oct. 16, 1962, 76 Stat. 1051]

§ 526 Shipowners’ protection and indemnity associations

There shall not be included in gross income the receipts of shipowners’ mutual protection and indemnity associations not organized for profit, and no part of the net earnings of which inures to the benefit of any private shareholder; but such corporations shall be subject as other persons to the tax on their taxable income from interest, dividends, and rents. ( Aug. 16, 1954, ch. 736 , 68A Stat. 178 .)

§ 527 Political organizations

(a) General rule A political organization shall be subject to taxation under this subtitle only to the extent provided in this section. A political organization shall be considered an organization exempt from income taxes for the purpose of any law which refers to organizations exempt from income taxes.

(b) Tax imposed A tax is hereby imposed for each taxable year on the political organization taxable income of every political organization. Such tax shall be computed by multiplying the political organization taxable income by the highest rate of tax specified in section 11(b).

(c) Political organization taxable income defined For purposes of this section, the political organization taxable income of any organization for any taxable year is an amount equal to the excess (if any) of— the gross income for the taxable year (excluding any exempt function income), over the deductions allowed by this chapter which are directly connected with the production of the gross income (excluding exempt function income), computed with the modifications provided in paragraph (2). For purposes of this subsection— there shall be allowed a specific deduction of $100, no net operating loss deduction shall be allowed under section 172, and no deduction shall be allowed under part VIII of subchapter B (relating to special deductions for corporations). For purposes of this subsection, the term “exempt function income” means any amount received as— a contribution of money or other property, membership dues, a membership fee or assessment from a member of the political organization, proceeds from a political fundraising or entertainment event, or proceeds from the sale of political campaign materials, which are not received in the ordinary course of any trade or business, or proceeds from the conducting of any bingo game (as defined in section 513(f)(2)), to the extent such amount is segregated for use only for the exempt function of the political organization.

(d) Certain uses not treated as income to candidate For purposes of this title, if any political organization— contributes any amount to or for the use of any political organization which is treated as exempt from tax under subsection (a) of this section, contributes any amount to or for the use of any organization described in paragraph (1) or (2) of section 509(a) which is exempt from tax under section 501(a), or deposits any amount in the general fund of the Treasury or in the general fund of any State or local government, such amount shall be treated as an amount not diverted for the personal use of the candidate or any other person. No deduction shall be allowed under this title for the contribution or deposit of any amount described in the preceding sentence.

(e) Other definitions For purposes of this section— The term “political organization” means a party, committee, association, fund, or other organization (whether or not incorporated) organized and operated primarily for the purpose of directly or indirectly accepting contributions or making expenditures, or both, for an exempt function. The term “exempt function” means the function of influencing or attempting to influence the selection, nomination, election, or appointment of any individual to any Federal, State, or local public office or office in a political organization, or the election of Presidential or Vice-Presidential electors, whether or not such individual or electors are selected, nominated, elected, or appointed. Such term includes the making of expenditures relating to an office described in the preceding sentence which, if incurred by the individual, would be allowable as a deduction under section 162(a). The term “contributions” has the meaning given to such term by section 271(b)(2). The term “expenditures” has the meaning given to such term by section 271(b)(3). The term “qualified State or local political organization” means a political organization— all the exempt functions of which are solely for the purposes of influencing or attempting to influence the selection, nomination, election, or appointment of any individual to any State or local public office or office in a State or local political organization, which is subject to State law that requires the organization to report (and it so reports)— information regarding each separate expenditure from and contribution to such organization, and information regarding the person who makes such contribution or receives such expenditure, which would otherwise be required to be reported under this section, and with respect to which the reports referred to in clause (ii) are (I) made public by the agency with which such reports are filed, and (II) made publicly available for inspection by the organization in the manner described in section 6104(d). An organization shall not be treated as failing to meet the requirements of subparagraph (A)(ii) solely by reason of 1 or more of the following: The minimum amount of any expenditure or contribution required to be reported under State law is not more than $300 greater than the minimum amount required to be reported under subsection (j). The State law does not require the organization to identify 1 or more of the following: The employer of any person who makes contributions to the organization. The occupation of any person who makes contributions to the organization. The employer of any person who receives expenditures from the organization. The occupation of any person who receives expenditures from the organization. The purpose of any expenditure of the organization. The date any contribution was made to the organization. The date of any expenditure of the organization. An organization shall not fail to be treated as a qualified State or local political organization solely because such organization makes de minimis errors in complying with the State reporting requirements and the public inspection requirements described in subparagraph (A) as long as the organization corrects such errors within a reasonable period after the organization becomes aware of such errors. The term “qualified State or local political organization” shall not include any organization otherwise described in subparagraph (A) if a candidate for nomination or election to Federal elective public office or an individual who holds such office— controls or materially participates in the direction of the organization, solicits contributions to the organization (unless the Secretary determines that such solicitations resulted in de minimis contributions and were made without the prior knowledge and consent, whether explicit or implicit, of the organization or its officers, directors, agents, or employees), or directs, in whole or in part, disbursements by the organization.

(f) Exempt organization, which is not political organization, must include certain amounts in gross income If an organization described in section 501(c) which is exempt from tax under section 501(a) expends any amount during the taxable year directly (or through another organization) for an exempt function (within the meaning of subsection (e)(2)), then, notwithstanding any other provision of law, there shall be included in the gross income of such organization for the taxable year, and shall be subject to tax under subsection (b) as if it constituted political organization taxable income, an amount equal to the lesser of— the net investment income of such organization for the taxable year, or the aggregate amount so expended during the taxable year for such an exempt function. For purposes of this subsection, the term “net investment income” means the excess of— the gross amount of income from interest, dividends, rents, and royalties, plus the excess (if any) of gains from the sale or exchange of assets over the losses from the sale or exchange of assets, over the deductions allowed by this chapter which are directly connected with the production of the income referred to in subparagraph (A). For purposes of the preceding sentence, there shall not be taken into account items taken into account for purposes of the tax imposed by section 511 (relating to tax on unrelated business income). For purposes of this subsection and subsection (e)(1), a separate segregated fund (within the meaning of section 610 of title 18 or of any similar State statute, or within the meaning of any State statute which permits the segregation of dues moneys for exempt functions (within the meaning of subsection (e)(2))) which is maintained by an organization described in section 501(c) which is exempt from tax under section 501(a) shall be treated as a separate organization.

(g) Treatment of newsletter funds For purposes of this section, a fund established and maintained by an individual who holds, has been elected to, or is a candidate (within the meaning of paragraph (3)) for nomination or election to, any Federal, State, or local elective public office, for use by such individual exclusively for the preparation and circulation of such individual’s newsletter shall, except as provided in paragraph (2), be treated as if such fund constituted a political organization. In the case of any fund described in paragraph (1)— the exempt function shall be only the preparation and circulation of the newsletter, and the specific deduction provided by subsection (c)(2)(A) shall not be allowed. For purposes of paragraph (1), the term “candidate” means, with respect to any Federal, State, or local elective public office, an individual who— publicly announces that he is a candidate for nomination or election to such office, and meets the qualifications prescribed by law to hold such office.

(h) Special rule for principal campaign committees In the case of a political organization, which is a principal campaign committee, paragraph (1) of subsection (b) shall be applied by substituting “the appropriate rates” for “the highest rate”. For purposes of this subsection, the term “principal campaign committee” means the political committee designated by a candidate for Congress as his principal campaign committee for purposes of— section 302(e) of the Federal Election Campaign Act of 1971 ( 52 U.S.C. 30102(e) ), and this subsection. A candidate may have only 1 designation in effect under subparagraph (A)(ii) at any time and such designation— shall be made at such time and in such manner as the Secretary may prescribe by regulations, and once made, may be revoked only with the consent of the Secretary. Nothing in this subsection shall be construed to require any designation where there is only one political committee with respect to a candidate.

(i) Organizations must notify Secretary that they are section 527 organizations Except as provided in paragraph (5), an organization shall not be treated as an organization described in this section— unless it has given notice to the Secretary electronically that it is to be so treated, or if the notice is given after the time required under paragraph (2), the organization shall not be so treated for any period before such notice is given or, in the case of any material change in the information required under paragraph (3), for the period beginning on the date on which the material change occurs and ending on the date on which such notice is given. The notice required under paragraph (1) shall be transmitted not later than 24 hours after the date on which the organization is established or, in the case of any material change in the information required under paragraph (3), not later than 30 days after such material change. The notice required under paragraph (1) shall include information regarding— the name and address of the organization (including any business address, if different) and its electronic mailing address, the purpose of the organization, the names and addresses of its officers, highly compensated employees, contact person, custodian of records, and members of its Board of Directors, the name and address of, and relationship to, any related entities (within the meaning of section 168(h)(4)), whether the organization intends to claim an exemption from the requirements of subsection (j) or section 6033, and such other information as the Secretary may require to carry out the internal revenue laws. In the case of an organization failing to meet the requirements of paragraph (1) for any period, the taxable income of such organization shall be computed by taking into account any exempt function income (and any deductions directly connected with the production of such income) or, in the case of a failure relating to a material change, by taking into account such income and deductions only during the period beginning on the date on which the material change occurs and ending on the date on which notice is given under this subsection. For purposes of the preceding sentence, the term “exempt function income” means any amount described in a subparagraph of subsection (c)(3), whether or not segregated for use for an exempt function. This subsection shall not apply to any organization— to which this section applies solely by reason of subsection (f)(1), which reasonably anticipates that it will not have gross receipts of $25,000 or more for any taxable year, or which is a political committee of a State or local candidate or which is a State or local committee of a political party. This subsection shall not apply to any person required (without regard to this subsection) to report under the Federal Election Campaign Act of 1971 ( 52 U.S.C. 30101 et seq.) as a political committee.

(j) Required disclosure of expenditures and contributions In the case of— a failure to make the required disclosures under paragraph (2) at the time and in the manner prescribed therefor, or a failure to include any of the information required to be shown by such disclosures or to show the correct information, there shall be paid by the organization an amount equal to the rate of tax specified in subsection (b)(1) multiplied by the amount to which the failure relates. For purposes of subtitle F, the amount imposed by this paragraph shall be assessed and collected in the same manner as penalties imposed by section 6652(c). A political organization which accepts a contribution, or makes an expenditure, for an exempt function during any calendar year shall file with the Secretary either— in the case of a calendar year in which a regularly scheduled election is held— quarterly reports, beginning with the first quarter of the calendar year in which a contribution is accepted or expenditure is made, which shall be filed not later than the fifteenth day after the last day of each calendar quarter, except that the report for the quarter ending on December 31 of such calendar year shall be filed not later than January 31 of the following calendar year, a pre-election report, which shall be filed not later than the twelfth day before (or posted by registered or certified mail not later than the fifteenth day before) any election with respect to which the organization makes a contribution or expenditure, and which shall be complete as of the twentieth day before the election, and a post-general election report, which shall be filed not later than the thirtieth day after the general election and which shall be complete as of the twentieth day after such general election, and in the case of any other calendar year, a report covering the period beginning January 1 and ending June 30, which shall be filed no later than July 31 and a report covering the period beginning July 1 and ending December 31, which shall be filed no later than January 31 of the following calendar year, or monthly reports for the calendar year, beginning with the first month of the calendar year in which a contribution is accepted or expenditure is made, which shall be filed not later than the twentieth day after the last day of the month and shall be complete as if the last day of the month, except that, in lieu of filing the reports otherwise due in November and December of any year in which a regularly scheduled general election is held, a pre-general election report shall be filed in accordance with subparagraph (A)(i)(II), a post-general election report shall be filed in accordance with subparagraph (A)(i)(III), and a year end report shall be filed not later than January 31 of the following calendar year. A report required under paragraph (2) shall contain the following information: The amount, date, and purpose of each expenditure made to a person if the aggregate amount of expenditures to such person during the calendar year equals or exceeds $500 an d t h e nam e an d a dd resso f t h e p erso n (in t h ec a seo f anin d i v i d u a l, in c l u d in g t h eocc u p a t i o nan d nam eo f e m pl oyero f s u c hin d i v i d u a l) . T h e nam e an d a dd ress (in t h ec a seo f anin d i v i d u a l, in c l u d in g t h eocc u p a t i o nan d nam eo f e m pl oyero f s u c hin d i v i d u a l) o f a ll co n t r ib u t ors w hi c h co n t r ib u t e d ana gg re g a t e am o u n t o f$ 200 or more to the organization during the calendar year and the amount and date of the contribution. Any expenditure or contribution disclosed in a previous reporting period is not required to be included in the current reporting period. For purposes of this subsection, a person shall be treated as having made an expenditure or contribution if the person has contracted or is otherwise obligated to make the expenditure or contribution. This subsection shall not apply— to any person required (without regard to this subsection) to report under the Federal Election Campaign Act of 1971 ( 52 U.S.C. 30101 et seq.) as a political committee, to any State or local committee of a political party or political committee of a State or local candidate, to any organization which is a qualified State or local political organization, to any organization which reasonably anticipates that it will not have gross receipts of $25,000 or more for any taxable year, to any organization to which this section applies solely by reason of subsection (f)(1), or with respect to any expenditure which is an independent expenditure (as defined in section 301 of such Act). For purposes of this subsection, the term “election” means— a general, special, primary, or runoff election for a Federal office, a convention or caucus of a political party which has authority to nominate a candidate for Federal office, a primary election held for the selection of delegates to a national nominating convention of a political party, or a primary election held for the expression of a preference for the nomination of individuals for election to the office of President. Any report required under paragraph (2) with respect to any calendar year shall be filed in electronic form.

(k) Public availability of notices and reports The Secretary shall make any notice described in subsection (i)(1) or report described in subsection (j)(7) available for public inspection on the Internet not later than 48 hours after such notice or report has been filed (in addition to such public availability as may be made under section 6104(d)(7)). The Secretary shall make the entire database of notices and reports which are made available to the public under paragraph (1) searchable by the following items (to the extent the items are required to be included in the notices and reports): Names, States, zip codes, custodians of records, directors, and general purposes of the organizations. Entities related to the organizations. Contributors to the organizations. Employers of such contributors. Recipients of expenditures by the organizations. Ranges of contributions and expenditures. Time periods of the notices and reports. Such database shall be downloadable.

(l) Authority to waive The Secretary may waive all or any portion of the— tax assessed on an organization by reason of the failure of the organization to comply with the requirements of subsection (i), or amount imposed under subsection (j) for a failure to comply with the requirements thereof, on a showing that such failure was due to reasonable cause and not due to willful neglect.

§ 528 Certain homeowners associations

(a) General rule A homeowners association (as defined in subsection (c)) shall be subject to taxation under this subtitle only to the extent provided in this section. A homeowners association shall be considered an organization exempt from income taxes for the purpose of any law which refers to organizations exempt from income taxes.

(b) Tax imposed A tax is hereby imposed for each taxable year on the homeowners association taxable income of every homeowners association. Such tax shall be equal to 30 percent of the homeowners association taxable income (32 percent of such income in the case of a timeshare association).

(c) Homeowners association defined For purposes of this section— The term “homeowners association” means an organization which is a condominium management association, a residential real estate management association, or a timeshare association if— such organization is organized and operated to provide for the acquisition, construction, management, maintenance, and care of association property, 60 percent or more of the gross income of such organization for the taxable year consists solely of amounts received as membership dues, fees, or assessments from— owners of residential units in the case of a condominium management association, owners of residences or residential lots in the case of a residential real estate management association, or owners of timeshare rights to use, or timeshare ownership interests in, association property in the case of a timeshare association, 90 percent or more of the expenditures of the organization for the taxable year are expenditures for the acquisition, construction, management, maintenance, and care of association property and, in the case of a timeshare association, for activities provided to or on behalf of members of the association, no part of the net earnings of such organization inures (other than by acquiring, constructing, or providing management, maintenance, and care of association property, and other than by a rebate of excess membership dues, fees, or assessments) to the benefit of any private shareholder or individual, and such organization elects (at such time and in such manner as the Secretary by regulations prescribes) to have this section apply for the taxable year. The term “condominium management association” means any organization meeting the requirement of subparagraph (A) of paragraph (1) with respect to a condominium project substantially all of the units of which are used by individuals for residences. The term “residential real estate management association” means any organization meeting the requirements of subparagraph (A) of paragraph (1) with respect to a subdivision, development, or similar area substantially all the lots or buildings of which may only be used by individuals for residences. The term “timeshare association” means any organization (other than a condominium management association) meeting the requirement of subparagraph (A) of paragraph (1) if any member thereof holds a timeshare right to use, or a timeshare ownership interest in, real property constituting association property. The term “association property” means— property held by the organization, property commonly held by the members of the organization, property within the organization privately held by the members of the organization, and property owned by a governmental unit and used for the benefit of residents of such unit. In the case of a timeshare association, such term includes property in which the timeshare association, or members of the association, have rights arising out of recorded easements, covenants, or other recorded instruments to use property related to the timeshare project.

(d) Homeowners association taxable income defined For purposes of this section, the homeowners association taxable income of any organization for any taxable year is an amount equal to the excess (if any) of— the gross income for the taxable year (excluding any exempt function income), over the deductions allowed by this chapter which are directly connected with the production of the gross income (excluding exempt function income), computed with the modifications provided in paragraph (2). For purposes of this subsection— there shall be allowed a specific deduction of $100, no net operating loss deduction shall be allowed under section 172, and no deduction shall be allowed under part VIII of subchapter B (relating to special deductions for corporations). For purposes of this subsection, the term “exempt function income” means any amount received as membership dues, fees, or assessments from— owners of condominium housing units in the case of a condominium management association, owners of real property in the case of a residential real estate management association, or owners of timeshare rights to use, or timeshare ownership interests in, real property in the case of a timeshare association.

§ 529 Qualified tuition programs

(a) General rule A qualified tuition program shall be exempt from taxation under this subtitle. Notwithstanding the preceding sentence, such program shall be subject to the taxes imposed by section 511 (relating to imposition of tax on unrelated business income of charitable organizations).

(b) Qualified tuition program For purposes of this section— The term “qualified tuition program” means a program established and maintained by a State or agency or instrumentality thereof or by 1 or more eligible educational institutions— under which a person— may purchase tuition credits or certificates on behalf of a designated beneficiary which entitle the beneficiary to the waiver or payment of qualified higher education expenses of the beneficiary, or in the case of a program established and maintained by a State or agency or instrumentality thereof, may make contributions to an account which is established for the purpose of meeting the qualified higher education expenses of the designated beneficiary of the account, and which meets the other requirements of this subsection. Except to the extent provided in regulations, a program established and maintained by 1 or more eligible educational institutions shall not be treated as a qualified tuition program unless such program provides that amounts are held in a qualified trust and such program has received a ruling or determination that such program meets the applicable requirements for a qualified tuition program. For purposes of the preceding sentence, the term “qualified trust” means a trust which is created or organized in the United States for the exclusive benefit of designated beneficiaries and with respect to which the requirements of paragraphs (2) and (5) of section 408(a) are met. A program shall not be treated as a qualified tuition program unless it provides that purchases or contributions may only be made in cash. A program shall not be treated as a qualified tuition program unless it provides separate accounting for each designated beneficiary. A program shall not be treated as a qualified tuition program unless it provides that any contributor to, or designated beneficiary under, such program may, directly or indirectly, direct the investment of any contributions to the program (or any earnings thereon) no more than 2 times in any calendar year. A program shall not be treated as a qualified tuition program if it allows any interest in the program or any portion thereof to be used as security for a loan. A program shall not be treated as a qualified tuition program unless it provides adequate safeguards to prevent contributions on behalf of a designated beneficiary in excess of those necessary to provide for the qualified higher education expenses of the beneficiary.

(c) Tax treatment of designated beneficiaries and contributors Except as otherwise provided in this subsection, no amount shall be includible in gross income of— a designated beneficiary under a qualified tuition program, or a contributor to such program on behalf of a designated beneficiary, with respect to any distribution or earnings under such program. For purposes of chapters 12 and 13— Any contribution to a qualified tuition program on behalf of any designated beneficiary— shall be treated as a completed gift to such beneficiary which is not a future interest in property, and shall not be treated as a qualified transfer under section 2503(e). If the aggregate amount of contributions described in subparagraph (A) during the calendar year by a donor exceeds the limitation for such year under section 2503(b), such aggregate amount shall, at the election of the donor, be taken into account for purposes of such section ratably over the 5-year period beginning with such calendar year. Any distribution under a qualified tuition program shall be includible in the gross income of the distributee in the manner as provided under section 72 to the extent not excluded from gross income under any other provision of this chapter. For purposes of this paragraph— No amount shall be includible in gross income under subparagraph (A) by reason of a distribution which consists of providing a benefit to the distributee which, if paid for by the distributee, would constitute payment of a qualified higher education expense. In the case of distributions not described in clause (i), if— such distributions do not exceed the qualified higher education expenses (reduced by expenses described in clause (i)), no amount shall be includible in gross income, and in any other case, the amount otherwise includible in gross income shall be reduced by an amount which bears the same ratio to such amount as such expenses bear to such distributions. In the case of any taxable year beginning before January 1, 2004 , clauses (i) and (ii) shall not apply with respect to any distribution during such taxable year under a qualified tuition program established and maintained by 1 or more eligible educational institutions. Any benefit furnished to a designated beneficiary under a qualified tuition program shall be treated as a distribution to the beneficiary for purposes of this paragraph. The total amount of qualified higher education expenses with respect to an individual for the taxable year shall be reduced— as provided in section 25A(g)(2), and by the amount of such expenses which were taken into account in determining the credit allowed to the taxpayer or any other person under section 25A. If, with respect to an individual for any taxable year— the aggregate distributions to which clauses (i) and (ii) and section 530(d)(2)(A) apply, exceed the total amount of qualified higher education expenses otherwise taken into account under clauses (i) and (ii) (after the application of clause (v)) for such year, the taxpayer shall allocate such expenses among such distributions for purposes of determining the amount of the exclusion under clauses (i) and (ii) and section 530(d)(2)(A). Subparagraph (A) shall not apply to that portion of any distribution which, within 60 days of such distribution, is transferred— to another qualified tuition program for the benefit of the designated beneficiary, to the credit of another designated beneficiary under a qualified tuition program who is a member of the family of the designated beneficiary with respect to which the distribution was made, or to an ABLE account (as defined in section 529A(e)(6)) of the designated beneficiary or a member of the family of the designated beneficiary. Subclause (III) shall not apply to so much of a distribution which, when added to all other contributions made to the ABLE account for the taxable year, exceeds the limitation under section 529A(b)(2)(B)(i). Any change in the designated beneficiary of an interest in a qualified tuition program shall not be treated as a distribution for purposes of subparagraph (A) if the new beneficiary is a member of the family of the old beneficiary. Clause (i)(I) shall not apply to any transfer if such transfer occurs within 12 months from the date of a previous transfer to any qualified tuition program for the benefit of the designated beneficiary. In the case of a beneficiary who receives a refund of any qualified higher education expenses from an eligible educational institution, subparagraph (A) shall not apply to that portion of any distribution for the taxable year which is recontributed to a qualified tuition program of which such individual is a beneficiary, but only to the extent such recontribution is made not later than 60 days after the date of such refund and does not exceed the refunded amount. In the case of a distribution from a qualified tuition program of a designated beneficiary which has been maintained for the 15-year period ending on the date of such distribution, subparagraph (A) shall not apply to so much the portion of such distribution which— does not exceed the aggregate amount contributed to the program (and earnings attributable thereto) before the 5-year period ending on the date of the distribution, and is paid in a direct trustee-to-trustee transfer to a Roth IRA maintained for the benefit of such designated beneficiary. Clause (i) shall only apply to so much of any distribution as does not exceed the amount applicable to the designated beneficiary under section 408A(c)(2) for the taxable year (reduced by the amount of aggregate contributions made during the taxable year to all individual retirement plans maintained for the benefit of the designated beneficiary). This subparagraph shall not apply to any distribution described in clause (i) to the extent that the aggregate amount of such distributions with respect to the designated beneficiary for such taxable year and all prior taxable years exceeds 10,000 (reduced by the amount of distributions so treated for all prior taxable years). For purposes of subparagraph (B) and subsection (d), amounts treated as a qualified higher education expense with respect to the loans of a sibling of the designated beneficiary shall be taken into account with respect to such sibling and not with respect to such designated beneficiary. For purposes of this paragraph, the term “sibling” means an individual who bears a relationship to the designated beneficiary which is described in section 152(d)(2)(B).

(d) Reports Each officer or employee having control of the qualified tuition program or their designee shall make such reports regarding such program to the Secretary and to designated beneficiaries with respect to contributions, distributions, and such other matters as the Secretary may require. The reports required by this paragraph shall be filed at such time and in such manner and furnished to such individuals at such time and in such manner as may be required by the Secretary. In the case of any distribution described in subsection (c)(3)(E), the officer or employee having control of the qualified tuition program (or their designee) shall provide a report to the trustee of the Roth IRA to which the distribution is made. Such report shall be filed at such time and in such manner as the Secretary may require and shall include information with respect to the contributions, distributions, and earnings of the qualified tuition program as of the date of the distribution described in subsection (c)(3)(A), together with such other matters as the Secretary may require.

(e) Other definitions and special rules For purposes of this section— The term “designated beneficiary” means— the individual designated at the commencement of participation in the qualified tuition program as the beneficiary of amounts paid (or to be paid) to the program, in the case of a change in beneficiaries described in subsection (c)(3)(C), the individual who is the new beneficiary, and in the case of an interest in a qualified tuition program purchased by a State or local government (or agency or instrumentality thereof) or an organization described in section 501(c)(3) and exempt from taxation under section 501(a) as part of a scholarship program operated by such government or organization, the individual receiving such interest as a scholarship. The term “member of the family” means, with respect to any designated beneficiary— the spouse of such beneficiary; an individual who bears a relationship to such beneficiary which is described in subparagraphs (A) through (G) of section 152(d)(2); the spouse of any individual described in subparagraph (B); and any first cousin of such beneficiary. The term “qualified higher education expenses” means— tuition, fees, books, supplies, and equipment required for the enrollment or attendance of a designated beneficiary at an eligible educational institution, expenses for special needs services in the case of a special needs beneficiary which are incurred in connection with such enrollment or attendance, and expenses for the purchase of computer or peripheral equipment (as defined in section 168(i)(2)(B)), computer software (as defined in section 197(e)(3)(B)), or Internet access and related services, if such equipment, software, or services are to be used primarily by the beneficiary during any of the years the beneficiary is enrolled at an eligible educational institution. Clause (iii) shall not include expenses for computer software designed for sports, games, or hobbies unless the software is predominantly educational in nature. The amount of cash distributions from all qualified tuition programs described in subsection (b)(1)(A)(ii) with respect to a beneficiary during any taxable year shall, in the aggregate, include not more than $20,000 in expenses described in subsection (c)(7) incurred during the taxable year. In the case of an individual who is an eligible student (as defined in section 25A(b)(3)) for any academic period, such term shall also include reasonable costs for such period (as determined under the qualified tuition program) incurred by the designated beneficiary for room and board while attending such institution. For purposes of subsection (b)(6), a designated beneficiary shall be treated as meeting the requirements of this clause. The amount treated as qualified higher education expenses by reason of clause (i) shall not exceed— the allowance (applicable to the student) for room and board included in the cost of attendance (as defined in section 472 of the Higher Education Act of 1965 ( 20 U.S.C. 1087 ll ), as in effect on the date of the enactment of the Economic Growth and Tax Relief Reconciliation Act of 2001) as determined by the eligible educational institution for such period, or if greater, the actual invoice amount the student residing in housing owned or operated by the eligible educational institution is charged by such institution for room and board costs for such period. The term “qualified higher education expenses” includes qualified postsecondary credentialing expenses (as defined in subsection (f)). An interest in a qualified tuition program shall not be treated as debt for purposes of section 514. The term “eligible educational institution” means an institution— which is described in section 481 of the Higher Education Act of 1965 ( 20 U.S.C. 1088 ), as in effect on the date of the enactment of this paragraph, and which is eligible to participate in a program under title IV of such Act.

(f) Qualified postsecondary credentialing expenses For purposes of this section— The term “qualified postsecondary credentialing expenses” means— tuition, fees, books, supplies, and equipment required for the enrollment or attendance of a designated beneficiary in a recognized postsecondary credential program, or any other expense incurred in connection with enrollment in or attendance at a recognized postsecondary credential program if such expense would, if incurred in connection with enrollment or attendance at an eligible educational institution, be covered under subsection (e)(3)(A), fees for testing if such testing is required to obtain or maintain a recognized postsecondary credential, and fees for continuing education if such education is required to maintain a recognized postsecondary credential. The term “recognized postsecondary credential program” means any program to obtain a recognized postsecondary credential if— such program is included on a State list prepared under section 122(d) of the Workforce Innovation and Opportunity Act ( 29 U.S.C. 3152(d) ), such program is listed in the public directory of the Web Enabled Approval Management System (WEAMS) of the Veterans Benefits Administration, or successor directory such program, an examination (developed or administered by an organization widely recognized as providing reputable credentials in the occupation) is required to obtain or maintain such credential and such organization recognizes such program as providing training or education which prepares individuals to take such examination, or such program is identified by the Secretary, after consultation with the Secretary of Labor, as being a reputable program for obtaining a recognized postsecondary credential for purposes of this subparagraph. The term “recognized postsecondary credential” means— any postsecondary employment credential that is industry recognized and is— any postsecondary employment credential issued by a program that is accredited by the Institute for Credentialing Excellence, the National Commission on Certifying Agencies, or the American National Standards Institute, any postsecondary employment credential that is included in the Credentialing Opportunities On-Line (COOL) directory of credentialing programs (or successor directory) maintained by the Department of Defense or by any branch of the Armed Forces, or any postsecondary employment credential identified for purposes of this clause by the Secretary, after consultation with the Secretary of Labor, as being industry recognized, any certificate of completion of an apprenticeship that is registered and certified with the Secretary of Labor under the Act of August 16, 1937 (commonly known as the “National Apprenticeship Act”; 50 Stat. 664 , chapter 663; 29 U.S.C. 50 et seq.), any occupational or professional license issued or recognized by a State or the Federal Government (and any certification that satisfies a condition for obtaining such a license), and any recognized postsecondary credential as defined in section 3(52) of the Workforce Innovation and Opportunity Act ( 29 U.S.C. 3102(52) ), provided through a program described in paragraph (2)(A).

(g) Regulations Notwithstanding any other provision of this section, the Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section and to prevent abuse of such purposes, including regulations under chapters 11, 12, and 13 of this title.

§ 529A Qualified ABLE programs

(a) General rule A qualified ABLE program shall be exempt from taxation under this subtitle. Notwithstanding the preceding sentence, such program shall be subject to the taxes imposed by section 511 (relating to imposition of tax on unrelated business income of charitable organizations).

(b) Qualified ABLE program For purposes of this section— The term “qualified ABLE program” means a program established and maintained by a State, or agency or instrumentality thereof— under which a person may make contributions for a taxable year, for the benefit of an individual who is an eligible individual for such taxable year, to an ABLE account which is established for the purpose of meeting the qualified disability expenses of the designated beneficiary of the account, which limits a designated beneficiary to 1 ABLE account for purposes of this section, and which meets the other requirements of this section. A program shall not be treated as a qualified ABLE program unless it provides that no contribution will be accepted— unless it is in cash, or except in the case of contributions under subsection (c)(1)(C) or received in a qualified ABLE rollover contribution described in section 530A(d)(4)(B), if such contribution to an ABLE account would result in aggregate contributions from all contributors to the ABLE account for the taxable year exceeding the sum of— the amount in effect under section 2503(b) (determined by substituting “1996” for “1997” in paragraph (2)(B) thereof) for the calendar year in which the taxable year begins, plus in the case of any contribution by a designated beneficiary described in paragraph (7), the lesser of— compensation (as defined by section 219(f)(1)) includible in the designated beneficiary’s gross income for the taxable year, or an amount equal to the poverty line for a one-person household, as determined for the calendar year preceding the calendar year in which the taxable year begins. For purposes of this paragraph, rules similar to the rules of section 408(d)(4) (determined without regard to subparagraph (B) thereof) shall apply. A designated beneficiary (or a person acting on behalf of such beneficiary) shall maintain adequate records for purposes of ensuring, and shall be responsible for ensuring, that the requirements of subparagraph (B)(ii) are met. A program shall not be treated as a qualified ABLE program unless it provides separate accounting for each designated beneficiary. A program shall not be treated as a qualified ABLE program unless it provides that any designated beneficiary under such program may, directly or indirectly, direct the investment of any contributions to the program (or any earnings thereon) no more than 2 times in any calendar year. A program shall not be treated as a qualified ABLE program if it allows any interest in the program or any portion thereof to be used as security for a loan. A program shall not be treated as a qualified ABLE program unless it provides adequate safeguards to prevent aggregate contributions on behalf of a designated beneficiary in excess of the limit established by the State under section 529(b)(6). For purposes of the preceding sentence, aggregate contributions include contributions under any prior qualified ABLE program of any State or agency or instrumentality thereof but do not include any contributions received in a qualified ABLE rollover contribution described in section 530A(d)(4)(B). For purposes of paragraph (2)(B)(ii)— A designated beneficiary described in this paragraph is an employee (including an employee within the meaning of section 401(c)) with respect to whom— no contribution is made for the taxable year to a defined contribution plan (within the meaning of section 414(i)) with respect to which the requirements of section 401(a) or 403(a) are met, no contribution is made for the taxable year to an annuity contract described in section 403(b), and no contribution is made for the taxable year to an eligible deferred compensation plan described in section 457(b). The term “poverty line” has the meaning given such term by section 673 of the Community Services Block Grant Act ( 42 U.S.C. 9902 ).

(c) Tax treatment Any distribution under a qualified ABLE program shall be includible in the gross income of the distributee in the manner as provided under section 72 to the extent not excluded from gross income under any other provision of this chapter. For purposes of this paragraph, if distributions from a qualified ABLE program— do not exceed the qualified disability expenses of the designated beneficiary, no amount shall be includible in gross income, and in any other case, the amount otherwise includible in gross income shall be reduced by an amount which bears the same ratio to such amount as such expenses bear to such distributions. Subparagraph (A) shall not apply to any amount paid or distributed from an ABLE account to the extent that the amount received is paid, not later than the 60th day after the date of such payment or distribution, into another ABLE account for the benefit of the same designated beneficiary or an eligible individual who is a member of the family of the designated beneficiary. Any change in the designated beneficiary of an interest in a qualified ABLE program during a taxable year shall not be treated as a distribution for purposes of subparagraph (A) if the new beneficiary is an eligible individual for such taxable year and a member of the family of the former beneficiary. Clause (i) shall not apply to any transfer if such transfer occurs within 12 months from the date of a previous transfer to any qualified ABLE program for the benefit of the designated beneficiary. For purposes of chapters 12 and 13— Any contribution to a qualified ABLE program on behalf of any designated beneficiary— shall be treated as a completed gift to such designated beneficiary which is not a future interest in property, and shall not be treated as a qualified transfer under section 2503(e). In no event shall a distribution from an ABLE account to such account’s designated beneficiary be treated as a taxable gift. The taxes imposed by chapters 12 and 13 shall not apply to a transfer by reason of a change in the designated beneficiary under subsection (c)(1)(C). The tax imposed by this chapter for any taxable year on any taxpayer who receives a distribution from a qualified ABLE program which is includible in gross income shall be increased by 10 percent of the amount which is so includible. Subparagraph (A) shall not apply if the payment or distribution is made to a beneficiary (or to the estate of the designated beneficiary) on or after the death of the designated beneficiary. Subparagraph (A) shall not apply to the distribution of any contribution made during a taxable year on behalf of the designated beneficiary if— such distribution is received on or before the day prescribed by law (including extensions of time) for filing such designated beneficiary’s return for such taxable year, and such distribution is accompanied by the amount of net income attributable to such excess contribution. Any net income described in clause (ii) shall be included in gross income for the taxable year in which such excess contribution was made. If an ABLE account is established for a designated beneficiary, no account subsequently established for such beneficiary shall be treated as an ABLE account. The preceding sentence shall not apply in the case of an account established for purposes of a rollover described in paragraph (1)(C)(i) of this section if the transferor account is closed as of the end of the 60th day referred to in paragraph (1)(C)(i).

(d) Reports Each officer or employee having control of the qualified ABLE program or their designee shall make such reports regarding such program to the Secretary and to designated beneficiaries with respect to contributions, distributions, the return of excess contributions, and such other matters as the Secretary may require. For research purposes, the Secretary shall make available to the public reports containing aggregate information, by diagnosis and other relevant characteristics, on contributions and distributions from the qualified ABLE program. In carrying out the preceding sentence an item may not be made available to the public if such item can be associated with, or otherwise identify, directly or indirectly, a particular individual. A qualified ABLE program shall submit a notice to the Secretary upon the establishment of an ABLE account. Such notice shall contain the name of the designated beneficiary and such other information as the Secretary may require. For purposes of section 103 of the Stephen Beck, Jr., ABLE Act of 2014, States shall submit electronically on a monthly basis to the Commissioner of Social Security, in the manner specified by the Commissioner, statements on relevant distributions and account balances from all ABLE accounts. The reports and notices required by paragraphs (1), (2), and (3) shall be filed at such time and in such manner and furnished to such individuals at such time and in such manner as may be required by the Secretary.

(e) Other definitions and special rules For purposes of this section— An individual is an eligible individual for a taxable year if during such taxable year— the individual is entitled to benefits based on blindness or disability under title II or XVI of the Social Security Act, and such blindness or disability occurred before the date on which the individual attained age 46, or a disability certification with respect to such individual is filed with the Secretary for such taxable year. The term “disability certification” means, with respect to an individual, a certification to the satisfaction of the Secretary by the individual or the parent or guardian of the individual that— certifies that— the individual has a medically determinable physical or mental impairment, which results in marked and severe functional limitations, and which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months, or is blind (within the meaning of section 1614(a)(2) of the Social Security Act), and such blindness or disability occurred before the date on which the individual attained age 46, and includes a copy of the individual’s diagnosis relating to the individual’s relevant impairment or impairments, signed by a physician meeting the criteria of section 1861(r)(1) of the Social Security Act. No inference may be drawn from a disability certification for purposes of establishing eligibility for benefits under title II, XVI, or XIX of the Social Security Act. The term “designated beneficiary” in connection with an ABLE account established under a qualified ABLE program means the eligible individual who established an ABLE account and is the owner of such account. The term “member of the family” means, with respect to any designated beneficiary, an individual who bears a relationship to such beneficiary which is described in section 152(d)(2)(B). For purposes of the preceding sentence, a rule similar to the rule of section 152(f)(1)(B) shall apply. The term “qualified disability expenses” means any expenses related to the eligible individual’s blindness or disability which are made for the benefit of an eligible individual who is the designated beneficiary, including the following expenses: education, housing, transportation, employment training and support, assistive technology and personal support services, health, prevention and wellness, financial management and administrative services, legal fees, expenses for oversight and monitoring, funeral and burial expenses, and other expenses, which are approved by the Secretary under regulations and consistent with the purposes of this section. The term “ABLE account” means an account established by an eligible individual, owned by such eligible individual, and maintained under a qualified ABLE program.

(f) Transfer to State Subject to any outstanding payments due for qualified disability expenses, upon the death of the designated beneficiary, all amounts remaining in the qualified ABLE account not in excess of the amount equal to the total medical assistance paid for the designated beneficiary after the establishment of the account, net of any premiums paid from the account or paid by or on behalf of the beneficiary to a Medicaid Buy-In program under any State Medicaid plan established under title XIX of the Social Security Act, shall be distributed to such State upon filing of a claim for payment by such State. For purposes of this paragraph, the State shall be a creditor of an ABLE account and not a beneficiary. Subsection (c)(3) shall not apply to a distribution under the preceding sentence.

(g) Regulations The Secretary shall prescribe such regulations or other guidance as the Secretary determines necessary or appropriate to carry out the purposes of this section, including regulations— to enforce the 1 ABLE account per eligible individual limit, providing for the information required to be presented to open an ABLE account, to generally define qualified disability expenses, developed in consultation with the Commissioner of Social Security, relating to disability certifications and determinations of disability, including those conditions deemed to meet the requirements of subsection (e)(1)(B), to prevent fraud and abuse with respect to amounts claimed as qualified disability expenses, under chapters 11, 12, and 13 of this title, and to allow for transfers from one ABLE account to another ABLE account.

§ 530 Coverdell education savings accounts

(a) General rule A Coverdell education savings account shall be exempt from taxation under this subtitle. Notwithstanding the preceding sentence, the Coverdell education savings account shall be subject to the taxes imposed by section 511 (relating to imposition of tax on unrelated business income of charitable organizations).

(b) Definitions and special rules For purposes of this section— The term “Coverdell education savings account” means a trust created or organized in the United States exclusively for the purpose of paying the qualified education expenses of an individual who is the designated beneficiary of the trust (and designated as a Coverdell education savings account at the time created or organized), but only if the written governing instrument creating the trust meets the following requirements: No contribution will be accepted— unless it is in cash, after the date on which such beneficiary attains age 18, or except in the case of rollover contributions, if such contribution would result in aggregate contributions for the taxable year exceeding $2,000. The trustee is a bank (as defined in section 408(n)) or another person who demonstrates to the satisfaction of the Secretary that the manner in which that person will administer the trust will be consistent with the requirements of this section or who has so demonstrated with respect to any individual retirement plan. No part of the trust assets will be invested in life insurance contracts. The assets of the trust shall not be commingled with other property except in a common trust fund or common investment fund. Except as provided in subsection (d)(7), any balance to the credit of the designated beneficiary on the date on which the beneficiary attains age 30 shall be distributed within 30 days after such date to the beneficiary or, if the beneficiary dies before attaining age 30, shall be distributed within 30 days after the date of death of such beneficiary. The age limitations in subparagraphs (A)(ii) and (E), and paragraphs (5) and (6) of subsection (d), shall not apply to any designated beneficiary with special needs (as determined under regulations prescribed by the Secretary). The term “qualified education expenses” means— qualified higher education expenses (as defined in section 529(e)(3)), and qualified elementary and secondary education expenses (as defined in paragraph (3)). Such term shall include any contribution to a qualified tuition program (as defined in section 529(b)) on behalf of the designated beneficiary (as defined in section 529(e)(1)); but there shall be no increase in the investment in the contract for purposes of applying section 72 by reason of any portion of such contribution which is not includible in gross income by reason of subsection (d)(2). The term “qualified elementary and secondary education expenses” means— expenses for tuition, fees, academic tutoring, special needs services in the case of a special needs beneficiary, books, supplies, and other equipment which are incurred in connection with the enrollment or attendance of the designated beneficiary of the trust as an elementary or secondary school student at a public, private, or religious school, expenses for room and board, uniforms, transportation, and supplementary items and services (including extended day programs) which are required or provided by a public, private, or religious school in connection with such enrollment or attendance, and expenses for the purchase of any computer technology or equipment or Internet access and related services, if such technology, equipment, or services are to be used by the beneficiary and the beneficiary’s family during any of the years the beneficiary is in school. Clause (iii) shall not include expenses for computer software designed for sports, games, or hobbies unless the software is predominantly educational in nature. The term “school” means any school which provides elementary education or secondary education (kindergarten through grade 12), as determined under State law. The term “computer technology or equipment” means computer software (as defined by section 197(e)(3)(B)), computer or peripheral equipment (as defined by section 168(i)(2)(B)), and fiber optic cable related to computer use. An individual shall be deemed to have made a contribution to an education individual retirement account on the last day of the preceding taxable year if the contribution is made on account of such taxable year and is made not later than the time prescribed by law for filing the return for such taxable year (not including extensions thereof).

(c) Reduction in permitted contributions based on adjusted gross income In the case of a contributor who is an individual, the maximum amount the contributor could otherwise make to an account under this section shall be reduced by an amount which bears the same ratio to such maximum amount as— the excess of— the contributor’s modified adjusted gross income for such taxable year, over $95, 000 ($ 190,000 in the case of a joint return), bears to $15, 000 ($ 30,000 in the case of a joint return). For purposes of paragraph (1), the term “modified adjusted gross income” means the adjusted gross income of the taxpayer for the taxable year increased by any amount excluded from gross income under section 911, 931, or 933.

(d) Tax treatment of distributions Any distribution shall be includible in the gross income of the distributee in the manner as provided in section 72. No amount shall be includible in gross income under paragraph (1) if the qualified education expenses of the designated beneficiary during the taxable year are not less than the aggregate distributions during the taxable year. If such aggregate distributions exceed such expenses during the taxable year, the amount otherwise includible in gross income under paragraph (1) shall be reduced by the amount which bears the same ratio to the amount which would be includible in gross income under paragraph (1) (without regard to this subparagraph) as the qualified education expenses bear to such aggregate distributions. For purposes of subparagraph (A)— The total amount of qualified education expenses with respect to an individual for the taxable year shall be reduced— as provided in section 25A(g)(2), and by the amount of such expenses which were taken into account in determining the credit allowed to the taxpayer or any other person under section 25A. If, with respect to an individual for any taxable year— the aggregate distributions during such year to which subparagraph (A) and section 529(c)(3)(B) apply, exceed the total amount of qualified education expenses (after the application of clause (i)) for such year, the taxpayer shall allocate such expenses among such distributions for purposes of determining the amount of the exclusion under subparagraph (A) and section 529(c)(3)(B). No deduction, credit, or exclusion shall be allowed to the taxpayer under any other section of this chapter for any qualified education expenses to the extent taken into account in determining the amount of the exclusion under this paragraph. Rules similar to the rules of paragraphs (2), (4), and (5) of section 529(c) shall apply for purposes of this section. The tax imposed by this chapter for any taxable year on any taxpayer who receives a payment or distribution from a Coverdell education savings account which is includible in gross income shall be increased by 10 percent of the amount which is so includible. Subparagraph (A) shall not apply if the payment or distribution is— made to a beneficiary (or to the estate of the designated beneficiary) on or after the death of the designated beneficiary, attributable to the designated beneficiary’s being disabled (within the meaning of section 72(m)(7)), made on account of a scholarship, allowance, or payment described in section 25A(g)(2) received by the designated beneficiary to the extent the amount of the payment or distribution does not exceed the amount of the scholarship, allowance, or payment, made on account of the attendance of the designated beneficiary at the United States Military Academy, the United States Naval Academy, the United States Air Force Academy, the United States Coast Guard Academy, or the United States Merchant Marine Academy, to the extent that the amount of the payment or distribution does not exceed the costs of advanced education (as defined by section 2005(e)(3) of title 10 , United States Code, as in effect on the date of the enactment of this section) attributable to such attendance, or an amount which is includible in gross income solely by application of paragraph (2)(C)(i)(II) for the taxable year. Subparagraph (A) shall not apply to the distribution of any contribution made during a taxable year on behalf of the designated beneficiary if— such distribution is made before the first day of the sixth month of the taxable year following the taxable year, and such distribution is accompanied by the amount of net income attributable to such excess contribution. Any net income described in clause (ii) shall be included in gross income for the taxable year in which such excess contribution was made. Paragraph (1) shall not apply to any amount paid or distributed from a Coverdell education savings account to the extent that the amount received is paid, not later than the 60th day after the date of such payment or distribution, into another Coverdell education savings account for the benefit of the same beneficiary or a member of the family (within the meaning of section 529(e)(2)) of such beneficiary who has not attained age 30 as of such date. The preceding sentence shall not apply to any payment or distribution if it applied to any prior payment or distribution during the 12-month period ending on the date of the payment or distribution. Any change in the beneficiary of a Coverdell education savings account shall not be treated as a distribution for purposes of paragraph (1) if the new beneficiary is a member of the family (as so defined) of the old beneficiary and has not attained age 30 as of the date of such change. Rules similar to the rules of paragraphs (7) and (8) of section 220(f) shall apply. In applying the preceding sentence, members of the family (as so defined) of the designated beneficiary shall be treated in the same manner as the spouse under such paragraph (8). In any case in which a distribution is required under subsection (b)(1)(E), any balance to the credit of a designated beneficiary as of the close of the 30-day period referred to in such subsection for making such distribution shall be deemed distributed at the close of such period. For purposes of this section, the term “rollover contribution” includes a contribution to a Coverdell education savings account made before the end of the 1-year period beginning on the date on which the contributor receives an amount under section 1477 of title 10 , United States Code, or section 1967 of title 38 of such Code, with respect to a person, to the extent that such contribution does not exceed— the sum of the amounts received during such period by such contributor under such sections with respect to such person, reduced by the amounts so received which were contributed to a Roth IRA under section 408A(e)(2) or to another Coverdell education savings account. The last sentence of paragraph (5) shall not apply with respect to amounts treated as a rollover by subparagraph (A). For purposes of applying section 72 in the case of a distribution which is includible in gross income under paragraph (1), the amount treated as a rollover by reason of subparagraph (A) shall be treated as investment in the contract.

(e) Tax treatment of accounts Rules similar to the rules of paragraphs (2) and (4) of section 408(e) shall apply to any Coverdell education savings account.

(f) Community property laws This section shall be applied without regard to any community property laws.

(g) Custodial accounts For purposes of this section, a custodial account shall be treated as a trust if the assets of such account are held by a bank (as defined in section 408(n)) or another person who demonstrates, to the satisfaction of the Secretary, that the manner in which he will administer the account will be consistent with the requirements of this section, and if the custodial account would, except for the fact that it is not a trust, constitute an account described in subsection (b)(1). For purposes of this title, in the case of a custodial account treated as a trust by reason of the preceding sentence, the custodian of such account shall be treated as the trustee thereof.

(h) Reports The trustee of a Coverdell education savings account shall make such reports regarding such account to the Secretary and to the beneficiary of the account with respect to contributions, distributions, and such other matters as the Secretary may require. The reports required by this subsection shall be filed at such time and in such manner and furnished to such individuals at such time and in such manner as may be required.

§ 530A Trump accounts

(a) General rule Except as provided in this section or under regulations or guidance established by the Secretary, a Trump account shall be treated for purposes of this title in the same manner as an individual retirement account under section 408(a).

(b) Trump account For purposes of this section— The term “Trump account” means an individual retirement account (as defined in section 408(a)) which is not designated as a Roth IRA and which meets the following requirements: The account— is created or organized by the Secretary for the exclusive benefit of an eligible individual or such eligible individual’s beneficiaries, or is— created or organized in the United States for the exclusive benefit of an individual who has not attained the age of 18 before the end of the calendar year, or such individual’s beneficiaries, and funded by a qualified rollover contribution. The account is designated (in such manner as the Secretary shall prescribe) at the time of the establishment of the account as a Trump account. The written governing instrument creating the account meets the following requirements: No contribution will be accepted— before the date that is 12 months after the date of the enactment of this section, or in the case of a contribution made in any calendar year before the calendar year in which the account beneficiary attains age 18, if such contribution would result in aggregate contributions (other than exempt contributions) for such calendar year in excess of the contribution limit specified in subsection (c)(2)(A). Except as provided in subsection (d), no distribution will be allowed before the first day of the calendar year in which the account beneficiary attains age 18. No part of the account funds will be invested in any asset other than an eligible investment during any period before the first day of the calendar year in which the account beneficiary attains age 18. The term “eligible individual” means any individual— who has not attained the age of 18 before the close of the calendar year in which the election under subparagraph (C) is made, for whom a social security number (within the meaning of section 24(h)(7)) has been issued before the date on which an election under subsection (C) is made, and for whom— an election is made under this subparagraph by the Secretary if the Secretary determines (based on information available to the Secretary from tax returns or otherwise) that such individual meets the requirements of subparagraphs (A) and (B) and no prior election has been made for such individual under clause (ii), or an election is made under this subparagraph by a person other than the Secretary (at such time and in such manner as the Secretary may prescribe) for the establishment of a Trump account if no prior election has been made for such individual under clause (i). The term “eligible investment” means any mutual fund or exchange traded fund which— tracks the returns of a qualified index, does not use leverage, does not have annual fees and expenses of more than 0.1 percent of the balance of the investment in the fund, and meets such other criteria as the Secretary determines appropriate for purposes of this section. The term “qualified index” means— the Standard and Poor’s 500 stock market index, or any other index— which is comprised of equity investments in primarily United States companies, and for which regulated futures contracts (as defined in section 1256(g)(1)) are traded on a qualified board or exchange (as defined in section 1256(g)(7)). Such term shall not include any industry or sector-specific index, but may include an index based on market capitalization. The term “account beneficiary” means the individual on whose behalf the Trump account was established.

(c) Treatment of contributions No deduction shall be allowed under section 219 for any contribution which is made before the first day of the calendar year in which the account beneficiary attains age 18. In the case of any contribution made before the calendar year in which the account beneficiary attains age 18— The aggregate amount of contributions (other than exempt contributions) for such calendar year shall not exceed $5, 000. F or p u r p oseso f t hi s p a r a g r a p h, t h e t er m “ e x e m pt co n t r ib u t i o n ” m e an s — a q u a l i f i e d ro ll o v erco n t r ib u t i o n, an y q u a l i f i e d g e n er a l co n t r ib u t i o n, or an yco n t r ib u t i o n p ro v i d e d u n d ersec t i o n 6434. I n t h ec a seo f an y t a x ab l eye a r a f t er 2027, t h e$ 5,000 amount under subparagraph (A) shall be increased by an amount equal to— such dollar amount, multiplied by the cost-of-living adjustment determined under section 1(f)(3) for the calendar year in which the taxable year begins, determined by substituting “calendar year 2026” for “calendar year 2016” in subparagraph (A)(ii) thereof. If any increase under this subparagraph is not a multiple of $100, s u c ham o u n t s ha ll b ero u n d e d t o t h e n e x tl o w es t m u lt i pl eo f$ 100. Section 219(f)(3) shall not apply to any contribution made to a Trump account for any taxable year ending before the calendar year in which the account beneficiary attains age 18.

(d) Distributions Except as otherwise provided in this subsection, no distribution shall be allowed before the first day of the calendar year in which the account beneficiary attains age 18. For purposes of applying section 72 to any amount distributed from a Trump account, the investment in the contract shall not include— any qualified general contribution, any contribution provided under section 6434, and the amount of any contribution which is excluded from gross income under section 128. Paragraph (1) shall not apply to any distribution which is a qualified rollover contribution and the amount of such distribution shall not be included in the gross income of the beneficiary. Paragraph (1) shall not apply to any distribution which is a qualified ABLE rollover contribution and the amount of such distribution shall not be included in the gross income of the beneficiary. For purposes of this section, the term “qualified ABLE rollover contribution” means an amount which is paid during the calendar year in which the account beneficiary attains age 17 in a direct trustee-to-trustee transfer from a Trump account maintained for the benefit of the account beneficiary to an ABLE account (as defined in section 529A(e)(6)) for the benefit of the such account beneficiary, but only if the amount of such payment is equal to the entire balance of the Trump account from which the payment is made. In the case of any contribution which is made before the calendar year in which the account beneficiary attains age 18 and which is in excess of the limitation in effect under subsection (c)(2)(A) for the calendar year— paragraph (1) shall not apply to the distribution of such excess, the amount of such distribution shall not be included in gross income of the account beneficiary, and the tax imposed by this chapter on the distributee for the taxable year in which the distribution is made shall be increased by 100 percent of the amount of net income attributable to such excess (determined without regard to subparagraph (B)). If, by reason of the death of the account beneficiary before the first day of the calendar year in which the account beneficiary attains age 18, any person acquires the account beneficiary’s interest in the Trump account— paragraph (1) shall not apply, such account shall cease to be a Trump account as of the date of death, and an amount equal to the fair market value of the assets (reduced by the investment in the contract) in such account on such date shall— if such person is not the estate of such beneficiary, be includible in such person’s gross income for the taxable year which includes such date, or if such person is the estate of such beneficiary, be includible in such beneficiary’s gross income for the last taxable year of such beneficiary.

(e) Qualified rollover contribution For purposes of this section, the term “qualified rollover contribution” means an amount which is paid in a direct trustee-to-trustee transfer from a Trump account maintained for the benefit of the account beneficiary to a Trump account maintained for such beneficiary, but only if the amount of such payment is equal to the entire balance of the Trump account from which the payment is made.

(f) Qualified general contribution For purposes of this section— The term “qualified general contribution” means any contribution which— is made by the Secretary pursuant to a general funding contribution, is made to the Trump account of an account beneficiary in the qualified class of account beneficiaries specified in the general funding contribution, and is in an amount which is equal to the ratio of— the amount of such general funding contribution, to the number of account beneficiaries in such qualified class. The term “general funding contribution” means a contribution which— is made by— an entity described in section 170(c)(1) (other than a possession of the United States or a political subdivision thereof) or an Indian tribal government, or an organization described in section 501(c)(3) and exempt from tax under section 501(a), and which specifies a qualified class of account beneficiaries to whom such contribution is to be distributed. The term “qualified class” means any of the following: All account beneficiaries who have not attained the age of 18 before the close of the calendar year in which the contribution is made. All account beneficiaries who have not attained the age of 18 before the close of the calendar year in which the contribution is made and who reside in one or more States or other qualified geographic areas specified by the terms of the general funding contribution. All account beneficiaries who have not attained the age of 18 before the close of the calendar year in which the contribution is made and who were born in one or more calendar years specified by the terms of the general funding contribution. The term “qualified geographic area” means any geographic area in which not less than 5,000 account beneficiaries reside and which is designated by the Secretary as a qualified geographic area under this subparagraph.

(g) Trustee selection In the case of any Trump account created or organized by the Secretary, the Secretary shall take into account the following criteria in selecting the trustee: The history of reliability and regulatory compliance of the trustee. The customer service experience of the trustee. The costs imposed by the trustee on the account or the account beneficiary.

(h) Other special rules and coordination with individual retirement account rules The rules of subsections (k) and (p) of section 408 shall not apply to a Trump account, and the rules of subsections (d) and (i) of section 408 shall not apply to a Trump account for any taxable year beginning before the calendar year in which the account beneficiary attains age 18. In the case of a Trump account, section 408(h) shall be applied by substituting “a Trump account described in section 530A(b)(1)” for “an individual retirement account described in subsection (a)”. In the case of any taxable year beginning before the first day of the calendar year in which the account beneficiary attains age 18, a contribution to a Trump account shall not be taken into account in applying any contribution limit to any individual retirement plan other than a Trump account. Section 408(d)(2) shall be applied separately with respect to Trump Accounts 1 and other individual retirement plans. For purposes of applying section 4973(b) to a Trump account for any taxable year beginning before the first day of the calendar year in which the account beneficiary attains age 18, the term “excess contributions” means the sum of— the amount by which the amount contributed to the account for the calendar year in which taxable year begins exceeds the amount permitted to be contributed to the account under subsection (c)(2), and the amount determined under this paragraph for the preceding taxable year. For purposes of this paragraph, the excess contributions for a taxable year are reduced by the distributions to which subsection (d)(5) applies that are made during the taxable year or by the date prescribed by law (including extensions of time) for filing the account beneficiary’s return for the taxable year.

(i) Reports The trustee of a Trump account shall make such reports regarding such account to the Secretary and to the beneficiary of the account at such time and in such manner as may be required by the Secretary. Such reports shall include information with respect to— contributions (including the amount and source of any contribution in excess of $25 made from a person other than the Secretary, the account beneficiary, or the parent or legal guardian of the account beneficiary), distributions (including distributions which are qualified rollover contributions), the fair market value of the account, the investment in the contract with respect to such account, and such other matters as the Secretary may require. Not later than 30 days after the date of any qualified rollover contribution, the trustee of the Trump account to which the contribution was made shall make a report to the Secretary. Such report shall include— the name, address, and social security number of the account beneficiary, the name and address of such trustee, the account number, the routing number of the trustee, and such other information as the Secretary may require. This subsection shall not apply to any period after the calendar year in which the beneficiary attains age 17.

§ 531 Imposition of accumulated earnings tax

In addition to other taxes imposed by this chapter, there is hereby imposed for each taxable year on the accumulated taxable income (as defined in section 535) of each corporation described in section 532, an accumulated earnings tax equal to 20 percent of the accumulated taxable income. ( Aug. 16, 1954, ch. 736 , 68A Stat. 179 ; Pub. L. 100–647, title I, § 1001(a)(2)(A) , Nov. 10, 1988 , 102 Stat. 3349 ; Pub. L. 103–66, title XIII , §§ 13201(b)(1), 13202(b), Aug. 10, 1993 , 107 Stat. 459 , 461; Pub. L. 107–16, title I, § 101(c)(4) , June 7, 2001 , 115 Stat. 43 ; Pub. L. 108–27, title III, § 302(e)(5) , May 28, 2003 , 117 Stat. 764 ; Pub. L. 112–240, title I, § 102(c)(1)(A) , Jan. 2, 2013 , 126 Stat. 2319 .)

§ 532 Corporations subject to accumulated earnings tax

(a) General rule The accumulated earnings tax imposed by section 531 shall apply to every corporation (other than those described in subsection (b)) formed or availed of for the purpose of avoiding the income tax with respect to its shareholders or the shareholders of any other corporation, by permitting earnings and profits to accumulate instead of being divided or distributed.

(b) Exceptions The accumulated earnings tax imposed by section 531 shall not apply to— a personal holding company (as defined in section 542), a corporation exempt from tax under subchapter F (section 501 and following), or a passive foreign investment company (as defined in section 1297).

(c) Application determined without regard to number of shareholders The application of this part to a corporation shall be determined without regard to the number of shareholders of such corporation.

§ 533 Evidence of purpose to avoid income tax

(a) Unreasonable accumulation determinative of purpose For purposes of section 532, the fact that the earnings and profits of a corporation are permitted to accumulate beyond the reasonable needs of the business shall be determinative of the purpose to avoid the income tax with respect to shareholders, unless the corporation by the preponderance of the evidence shall prove to the contrary.

(b) Holding or investment company The fact that any corporation is a mere holding or investment company shall be prima facie evidence of the purpose to avoid the income tax with respect to shareholders.

§ 534 Burden of proof

(a) General rule In any proceeding before the Tax Court involving a notice of deficiency based in whole or in part on the allegation that all or any part of the earnings and profits have been permitted to accumulate beyond the reasonable needs of the business, the burden of proof with respect to such allegation shall— if notification has not been sent in accordance with subsection (b), be on the Secretary, or if the taxpayer has submitted the statement described in subsection (c), be on the Secretary with respect to the grounds set forth in such statement in accordance with the provisions of such subsection.

(b) Notification by Secretary Before mailing the notice of deficiency referred to in subsection (a), the Secretary may send by certified mail or registered mail a notification informing the taxpayer that the proposed notice of deficiency includes an amount with respect to the accumulated earnings tax imposed by section 531.

(c) Statement by taxpayer Within such time (but not less than 30 days) after the mailing of the notification described in subsection (b) as the Secretary may prescribe by regulations, the taxpayer may submit a statement of the grounds (together with facts sufficient to show the basis thereof) on which the taxpayer relies to establish that all or any part of the earnings and profits have not been permitted to accumulate beyond the reasonable needs of the business.

(d) Jeopardy assessment If pursuant to section 6861(a) a jeopardy assessment is made before the mailing of the notice of deficiency referred to in subsection (a), for purposes of this section such notice of deficiency shall, to the extent that it informs the taxpayer that such deficiency includes the accumulated earnings tax imposed by section 531, constitute the notification described in subsection (b), and in that event the statement described in subsection (c) may be included in the taxpayer’s petition to the Tax Court.

§ 535 Accumulated taxable income

(a) Definition For purposes of this subtitle, the term “accumulated taxable income” means the taxable income, adjusted in the manner provided in subsection (b), minus the sum of the dividends paid deduction (as defined in section 561) and the accumulated earnings credit (as defined in subsection (c)).

(b) Adjustments to taxable income For purposes of subsection (a), taxable income shall be adjusted as follows: There shall be allowed as a deduction Federal income and excess profits taxes and income, war profits, and excess profits taxes of foreign countries and possessions of the United States (to the extent not allowable as a deduction under section 275(a)(4)), accrued during the taxable year or deemed to be paid by a domestic corporation under section 960 for the taxable year, but not including the accumulated earnings tax imposed by section 531 or the personal holding company tax imposed by section 541. The deduction for charitable contributions provided under section 170 shall be allowed without regard to section 170(b)(2). The special deductions for corporations provided in part VIII (except section 248) of subchapter B (section 241 and following, relating to the deduction for dividends received by corporations, etc.) shall not be allowed. The net operating loss deduction provided in section 172 shall not be allowed. Except as provided in subparagraph (B), there shall be allowed as a deduction an amount equal to the net capital loss for the taxable year (determined without regard to paragraph (7)(A)). The aggregate amount allowable as a deduction under subparagraph (A) for any taxable year shall be reduced by the lesser of— the nonrecaptured capital gains deductions, or the amount of the accumulated earnings and profits of the corporation as of the close of the preceding taxable year. For purposes of subparagraph (B), the term “nonrecaptured capital gains deductions” means the excess of— the aggregate amount allowable as a deduction under paragraph (6) for preceding taxable years beginning after July 18, 1984 , over the aggregate of the reductions under subparagraph (B) for preceding taxable years. There shall be allowed as a deduction— the net capital gain for the taxable year (determined with the application of paragraph (7)), reduced by the taxes attributable to such net capital gain. For purposes of subparagraph (A), the taxes attributable to the net capital gain shall be an amount equal to the difference between— the taxes imposed by this subtitle (except the tax imposed by this part) for the taxable year, and such taxes computed for such year without including in taxable income the net capital gain for the taxable year (determined without the application of paragraph (7)). The net capital loss for any taxable year shall be treated as a short-term capital loss in the next taxable year. No allowance shall be made for the capital loss carryback or carryforward provided in section 1212. In the case of a mere holding or investment company— Paragraphs (5) and (7)(A) shall not apply. There shall be allowed as a deduction the net short-term capital gain for the taxable year to the extent such gain does not exceed the amount of any capital loss carryover to such taxable year under section 1212 (determined without regard to paragraph (7)(B)). For purposes of subchapter C, the accumulated earnings and profits at any time shall not be less than they would be if this subsection had applied to the computation of earnings and profits for all taxable years beginning after July 18, 1984 . In the case of a foreign corporation, paragraph (6) shall be applied by taking into account only gains and losses which are effectively connected with the conduct of a trade or business within the United States and are not exempt from tax under treaty. There shall be allowed as a deduction the amount of the corporation’s income for the taxable year which is included in the gross income of a United States shareholder under section 951(a). In the case of any corporation the accumulated taxable income of which would (but for this sentence) be determined without allowance of any deductions, the deduction under this paragraph shall be allowed and shall be appropriately adjusted to take into account any deductions which reduced such inclusion.

(c) Accumulated earnings credit For purposes of subsection (a), in the case of a corporation other than a mere holding or investment company the accumulated earnings credit is (A) an amount equal to such part of the earnings and profits for the taxable year as are retained for the reasonable needs of the business, minus (B) the deduction allowed by subsection (b)(6). For purposes of this paragraph, the amount of the earnings and profits for the taxable year which are retained is the amount by which the earnings and profits for the taxable year exceed the dividends paid deduction (as defined in section 561) for such year. The credit allowable under paragraph (1) shall in no case be less than the amount by which $250, 000 e x cee d s t h e a cc u m u l a t e d e a r nin g s an d p ro f i t so f t h ecor p or a t i o na tt h ec l oseo f t h e p rece d in g t a x ab l eye a r . I n t h ec a seo f a cor p or a t i o n t h e p r in c i p a l f u n c t i o n o f w hi c hi s t h e p er f or man ceo f ser v i ces in t h e f i e l d o f h e a lt h, l a w, e n g in eer in g, a rc hi t ec t u re, a cco u n t in g, a c t u a r ia l sc i e n ce, p er f or min g a r t s, orco n s u lt in g, s u b p a r a g r a p h (A) s ha ll b e a ppl i e d b ys u b s t i t u t in g “$ 150,000” for “ $250, 000”. I n t h ec a seo f a cor p or a t i o n w hi c hi s am ere h o l d in g or in v es t m e n t co m p an y, t h e a cc u m u l a t e d e a r nin g scre d i t i s t h e am o u n t (i f an y) b y w hi c h$ 250,000 exceeds the accumulated earnings and profits of the corporation at the close of the preceding taxable year. For purposes of paragraphs (2) and (3), the accumulated earnings and profits at the close of the preceding taxable year shall be reduced by the dividends which under section 563(a) (relating to dividends paid after the close of the taxable year) are considered as paid during such taxable year. For limitation on credit provided in paragraph (2) or (3) in the case of certain controlled corporations, see section 1561.

(d) Income distributed to United States-owned foreign corporation retains United States connection For purposes of this part, if 10 percent or more of the earnings and profits of any foreign corporation for any taxable year— is derived from sources within the United States, or is effectively connected with the conduct of a trade or business within the United States, any distribution out of such earnings and profits (and any interest payment) received (directly or through 1 or more other entities) by a United States-owned foreign corporation shall be treated as derived by such corporation from sources within the United States. The term “United States-owned foreign corporation” has the meaning given to such term by section 904(h)(6).

§ 536 Income not placed on annual basis

Section 443(b) (relating to computation of tax on change of annual accounting period) shall not apply in the computation of the accumulated earnings tax imposed by section 531. ( Aug. 16, 1954, ch. 736 , 68A Stat. 182 .)

§ 537 Reasonable needs of the business

(a) General rule For purposes of this part, the term “reasonable needs of the business” includes— the reasonably anticipated needs of the business, the section 303 redemption needs of the business, and the excess business holdings redemption needs of the business.

(b) Special rules For purposes of subsection (a)— The term “section 303 redemption needs” means, with respect to the taxable year of the corporation in which a shareholder of the corporation died or any taxable year thereafter, the amount needed (or reasonably anticipated to be needed) to make a redemption of stock included in the gross estate of the decedent (but not in excess of the maximum amount of stock to which section 303(a) may apply). The term “excess business holdings redemption needs” means the amount needed (or reasonably anticipated to be needed) to redeem from a private foundation stock which— such foundation held on May 26, 1969 (or which was received by such foundation pursuant to a will or irrevocable trust to which section 4943(c)(5) applies), and constituted excess business holdings on May 26, 1969 , or would have constituted excess business holdings as of such date if there were taken into account (i) stock received pursuant to a will or trust described in subparagraph (A), and (ii) the reduction in the total outstanding stock of the corporation which would have resulted solely from the redemption of stock held by the private foundation. In applying paragraphs (1) and (2), the discharge of any obligation incurred to make a redemption described in such paragraphs shall be treated as the making of such redemption. The accumulation of reasonable amounts for the payment of reasonably anticipated product liability losses (as defined in section 172(f) (as in effect before the date of enactment of the Tax Cuts and Jobs Act)), as determined under regulations prescribed by the Secretary, shall be treated as accumulated for the reasonably anticipated needs of the business. The application of this part to any taxable year before the first taxable year specified in paragraph (1) shall be made without regard to the fact that distributions in redemption coming within the terms of such paragraphs were subsequently made.

§ 541 Imposition of personal holding company tax

In addition to other taxes imposed by this chapter, there is hereby imposed for each taxable year on the undistributed personal holding company income (as defined in section 545) of every personal holding company (as defined in section 542) a personal holding company tax equal to 20 percent of the undistributed personal holding company income. ( Aug. 16, 1954, ch. 736 , 68A Stat. 182 ; Pub. L. 88–272, title II, § 225(a) , Feb. 26, 1964 , 78 Stat. 79 ; Pub. L. 97–34, title I, § 101(d)(2) , Aug. 13, 1981 , 95 Stat. 184 ; Pub. L. 99–514, title I, § 104(b)(8) , Oct. 22, 1986 , 100 Stat. 2105 ; Pub. L. 101–508, title XI, § 11802(f)(1) , Nov. 5, 1990 , 104 Stat. 1388–530 ; Pub. L. 103–66, title XIII , §§ 13201(b)(2), 13202(b), Aug. 10, 1993 , 107 Stat. 459 , 461; Pub. L. 107–16, title I, § 101(c)(5) , June 7, 2001 , 115 Stat. 43 ; Pub. L. 108–27, title III, § 302(e)(6) , May 28, 2003 , 117 Stat. 764 ; Pub. L. 112–240, title I, § 102(c)(1)(B) , Jan. 2, 2013 , 126 Stat. 2319 .)

§ 542 Definition of personal holding company

(a) General rule For purposes of this subtitle, the term “personal holding company” means any corporation (other than a corporation described in subsection (c)) if— At least 60 percent of its adjusted ordinary gross income (as defined in section 543(b)(2)) for the taxable year is personal holding company income (as defined in section 543(a)), and At any time during the last half of the taxable year more than 50 percent in value of its outstanding stock is owned, directly or indirectly, by or for not more than 5 individuals. For purposes of this paragraph, an organization described in section 401(a), 501(c)(17), or 509(a) or a portion of a trust permanently set aside or to be used exclusively for the purposes described in section 642(c) or a corresponding provision of a prior income tax law shall be considered an individual.

(b) Corporations filing consolidated returns In the case of an affiliated group of corporations filing or required to file a consolidated return under section 1501 for any taxable year, the adjusted ordinary gross income requirement of subsection (a)(1) of this section shall, except as provided in paragraphs (2) and (3), be applied for such year with respect to the consolidated adjusted ordinary gross income and the consolidated personal holding company income of the affiliated group. No member of such an affiliated group shall be considered to meet such adjusted ordinary gross income requirement unless the affiliated group meets such requirement. Paragraph (1) shall not apply to an affiliated group of corporations if— any member of the affiliated group of corporations (including the common parent corporation) derived 10 percent or more of its adjusted ordinary gross income for the taxable year from sources outside the affiliated group, and 80 percent or more of the amount described in subparagraph (A) consists of personal holding company income (as defined in section 543). For purposes of this paragraph, section 543 shall be applied as if the amount described in subparagraph (A) were the adjusted ordinary gross income of the corporation. Paragraph (1) shall not apply to an affiliated group of corporations if any member of the affiliated group (including the common parent corporation) is a corporation excluded from the definition of personal holding company under subsection (c). In applying paragraph (2) (A) and (B), personal holding company income and adjusted ordinary gross income shall not include dividends received by a common parent corporation from another corporation if— the common parent corporation owns, directly or indirectly, more than 50 percent of the outstanding voting stock of such other corporation, and such other corporation is not a personal holding company for the taxable year in which the dividends are paid. In the case of an affiliated group of corporations filing or required to file a consolidated return under section 1501 for any taxable year, there shall be excluded from consolidated personal holding company income and consolidated adjusted ordinary gross income for purposes of this part dividends received by a member of the affiliated group from a life insurance company taxable under section 801 that is not a member of the affiliated group solely by reason of the application of paragraph (2) of subsection (b) of section 1504.

(c) Exceptions The term “personal holding company” as defined in subsection (a) does not include— a corporation exempt from tax under subchapter F (sec. 501 and following); a bank as defined in section 581, or a domestic building and loan association within the meaning of section 7701(a)(19); a life insurance company; a surety company; a foreign corporation; a lending or finance company if— 60 percent or more of its ordinary gross income (as defined in section 543(b)(1)) is derived directly from the active and regular conduct of a lending or finance business; the personal holding company income for the taxable year (computed without regard to income described in subsection (d)(3) and income derived directly from the active and regular conduct of a lending or finance business, and computed by including as personal holding company income the entire amount of the gross income from rents, royalties, produced film rents, and compensation for use of corporate property by shareholders) is not more than 20 percent of the ordinary gross income; the sum of the deductions which are directly allocable to the active and regular conduct of its lending or finance business equals or exceeds the sum of— 15 percent of so much of the ordinary gross income derived therefrom as does not exceed $500, 000, pl u s 5 p erce n t o f so m u c h o f t h eor d ina ry g ross in co m e d er i v e d t h ere f ro ma se x cee d s$ 500,000; and the loans to a person who is a shareholder in such company during the taxable year by or for whom 10 percent or more in value of its outstanding stock is owned directly or indirectly (including, in the case of an individual, stock owned by members of his family as defined in section 544(a)(2)), outstanding at any time during such year do not exceed $5,000 in principal amount; a small business investment company which is licensed by the Small Business Administration and operating under the Small Business Investment Act of 1958 ( 15 U.S.C. 661 and following) and which is actively engaged in the business of providing funds to small business concerns under that Act. This paragraph shall not apply if any shareholder of the small business investment company owns at any time during the taxable year directly or indirectly (including, in the case of an individual, ownership by the members of his family as defined in section 544(a)(2)) a 5 per centum or more proprietary interest in a small business concern to which funds are provided by the investment company or 5 per centum or more in value of the outstanding stock of such concern; and a corporation which is subject to the jurisdiction of the court in a title 11 or similar case (within the meaning of section 368(a)(3)(A)) unless a major purpose of instituting or continuing such case is the avoidance of the tax imposed by section 541.

(d) Special rules for applying subsection (c)(6) Except as provided in subparagraph (B), for purposes of subsection (c)(6), the term “lending or finance business” means a business of— making loans, purchasing or discounting accounts receivable, notes, or installment obligations, rendering services or making facilities available in connection with activities described in clauses (i) and (ii) carried on by the corporation rendering services or making facilities available, or rendering services or making facilities available to another corporation which is engaged in the lending or finance business (within the meaning of this paragraph), if such services or facilities are related to the lending or finance business (within such meaning) of such other corporation and such other corporation and the corporation rendering services or making facilities available are members of the same affiliated group (as defined in section 1504). For purposes of subparagraph (A), the term “lending or finance business” does not include the business of— making loans, or purchasing or discounting accounts receivable, notes, or installment obligations, if (at the time of the loan, purchase, or discount) the remaining maturity exceeds 144 months; unless— the loans, notes, or installment obligations are evidenced or secured by contracts of conditional sale, chattel mortgages, or chattel lease agreements arising out of the sale of goods or services in the course of the borrower’s or transferor’s trade or business, or the loans, notes, or installment obligations are made or acquired by the taxpayer and meet the requirements of subparagraph (C), or making loans evidenced by, or purchasing, certificates of indebtedness issued in a series, under a trust indenture, and in registered form or with interest coupons attached. For purposes of clause (i), the remaining maturity shall be treated as including any period for which there may be a renewal or extension under the terms of an option exercisable by the borrower. For purposes of subparagraph (B)(i), a loan, note, or installment obligation meets the requirements of this subparagraph if it is made under an agreement— under which the creditor agrees to make loans or advances (not in excess of an agreed upon maximum amount) from time to time to or for the account of the debtor upon request, and under which the debtor may repay the loan or advance in full or in installments. For purposes of subsection (c)(6)(C), the deductions which may be taken into account shall include only— deductions which are allowable only by reason of section 162 or section 404, except there shall not be included any such deduction in respect of compensation for personal services rendered by shareholders (including members of the shareholder’s family as described in section 544(a)(2)), and deductions allowable under section 167, and deductions allowable under section 164 for real property taxes, but in either case only to the extent that the property with respect to which such deductions are allowable is used directly in the active and regular conduct of the lending or finance business. For purposes of subsection (c)(6)(B), in the case of a lending or finance company which meets the requirements of subsection (c)(6)(A), there shall not be treated as personal holding company income the lawful income received from a corporation which meets the requirements of subsection (c)(6) and which is a member of the same affiliated group (as defined in section 1504) of which such company is a member.

§ 543 Personal holding company income

(a) General rule For purposes of this subtitle, the term “personal holding company income” means the portion of the adjusted ordinary gross income which consists of: Dividends, interest, royalties (other than mineral, oil, or gas royalties or copyright royalties), and annuities. This paragraph shall not apply to— interest constituting rent (as defined in subsection (b)(3)), interest on amounts set aside in a reserve fund under chapter 533 or 535 of title 46, United States Code, dividends received by a United States shareholder (as defined in section 951(b)) from a controlled foreign corporation (as defined in section 957(a)), active business computer software royalties (within the meaning of subsection (d)), and interest received by a broker or dealer (within the meaning of section 3(a)(4) or (5) of the Securities and Exchange Act of 1934) in connection with— any securities or money market instruments held as property described in section 1221(a)(1), margin accounts, or any financing for a customer secured by securities or money market instruments. The adjusted income from rents; except that such adjusted income shall not be included if— such adjusted income constitutes 50 percent or more of the adjusted ordinary gross income, and the sum of— the dividends paid during the taxable year (determined under section 562), the dividends considered as paid on the last day of the taxable year under section 563(c) (as limited by the second sentence of section 563(b)), and the consent dividends for the taxable year (determined under section 565), equals or exceeds the amount, if any, by which the personal holding company income for the taxable year (computed without regard to this paragraph and paragraph (6), and computed by including as personal holding company income copyright royalties and the adjusted income from mineral, oil, and gas royalties) exceeds 10 percent of the ordinary gross income. The adjusted income from mineral, oil, and gas royalties; except that such adjusted income shall not be included if— such adjusted income constitutes 50 percent or more of the adjusted ordinary gross income, the personal holding company income for the taxable year (computed without regard to this paragraph, and computed by including as personal holding company income copyright royalties and the adjusted income from rents) is not more than 10 percent of the ordinary gross income, and the sum of the deductions which are allowable under section 162 (relating to trade or business expenses) other than— deductions for compensation for personal services rendered by the shareholders, and deductions which are specifically allowable under sections other than section 162, equals or exceeds 15 percent of the adjusted ordinary gross income. Copyright royalties; except that copyright royalties shall not be included if— such royalties (exclusive of royalties received for the use of, or right to use, copyrights or interests in copyrights on works created in whole, or in part, by any shareholder) constitute 50 percent or more of the ordinary gross income, the personal holding company income for the taxable year computed— without regard to copyright royalties, other than royalties received for the use of, or right to use, copyrights or interests in copyrights in works created in whole, or in part, by any shareholder owning more than 10 percent of the total outstanding capital stock of the corporation, without regard to dividends from any corporation in which the taxpayer owns at least 50 percent of all classes of stock entitled to vote and at least 50 percent of the total value of all classes of stock and which corporation meets the requirements of this subparagraph and subparagraphs (A) and (C), and by including as personal holding company income the adjusted income from rents and the adjusted income from mineral, oil, and gas royalties, is not more than 10 percent of the ordinary gross income, and the sum of the deductions which are properly allocable to such royalties and which are allowable under section 162, other than— deductions for compensation for personal services rendered by the shareholders, deductions for royalties paid or accrued, and deductions which are specifically allowable under sections other than section 162, equals or exceeds 25 percent of the amount by which the ordinary gross income exceeds the sum of the royalties paid or accrued and the amounts allowable as deductions under section 167 (relating to depreciation) with respect to copyright royalties. For purposes of this subsection, the term “copyright royalties” means compensation, however designated, for the use of, or the right to use, copyrights in works protected by copyright issued under title 17 of the United States Code and to which copyright protection is also extended by the laws of any country other than the United States of America by virtue of any international treaty, convention, or agreement, or interests in any such copyrighted works, and includes payments from any person for performing rights in any such copyrighted work and payments (other than produced film rents as defined in paragraph (5)(B)) received for the use of, or right to use, films. For purposes of this paragraph, the term “shareholder” shall include any person who owns stock within the meaning of section 544. This paragraph shall not apply to active business computer software royalties. Produced film rents; except that such rents shall not be included if such rents constitute 50 percent or more of the ordinary gross income. For purposes of this section, the term “produced film rents” means payments received with respect to an interest in a film for the use of, or right to use, such film, but only to the extent that such interest was acquired before substantial completion of production of such film. In the case of a producer who actively participates in the production of the film, such term includes an interest in the proceeds or profits from the film, but only to the extent such interest is attributable to such active participation. Amounts received as compensation (however designated and from whomever received) for the use of, or the right to use, tangible property of the corporation in any case where, at any time during the taxable year, 25 percent or more in value of the outstanding stock of the corporation is owned, directly or indirectly, by or for an individual entitled to the use of the property (whether such right is obtained directly from the corporation or by means of a sublease or other arrangement). Subparagraph (A) shall apply only to a corporation which has personal holding company income in excess of 10 percent of its ordinary gross income. For purposes of the limitation in subparagraph (B), personal holding company income shall be computed— without regard to subparagraph (A) or paragraph (2), by excluding amounts received as compensation for the use of (or right to use) intangible property (other than mineral, oil, or gas royalties or copyright royalties) if a substantial part of the tangible property used in connection with such intangible property is owned by the corporation and all such tangible and intangible property is used in the active conduct of a trade or business by an individual or individuals described in subparagraph (A), and by including copyright royalties and adjusted income from mineral, oil, and gas royalties. Amounts received under a contract under which the corporation is to furnish personal services; if some person other than the corporation has the right to designate (by name or by description) the individual who is to perform the services, or if the individual who is to perform the services is designated (by name or by description) in the contract; and amounts received from the sale or other disposition of such a contract. This paragraph shall apply with respect to amounts received for services under a particular contract only if at some time during the taxable year 25 percent or more in value of the outstanding stock of the corporation is owned, directly or indirectly, by or for the individual who has performed, is to perform, or may be designated (by name or by description) as the one to perform, such services. Amounts includible in computing the taxable income of the corporation under part I of subchapter J (sec. 641 and following, relating to estates, trusts, and beneficiaries).

(b) Definitions For purposes of this part— The term “ordinary gross income” means the gross income determined by excluding— all gains from the sale or other disposition of capital assets, and all gains (other than those referred to in subparagraph (A)) from the sale or other disposition of property described in section 1231(b). The term “adjusted ordinary gross income” means the ordinary gross income adjusted as follows: From the gross income from rents (as defined in the second sentence of paragraph (3) of this subsection) subtract the amount allowable as deductions for— exhaustion, wear and tear, obsolescence, and amortization of property other than tangible personal property which is not customarily retained by any one lessee for more than three years, property taxes, interest, and rent, to the extent allocable, under regulations prescribed by the Secretary, to such gross income from rents. The amount subtracted under this subparagraph shall not exceed such gross income from rents. From the gross income from mineral, oil, and gas royalties described in paragraph (4), and from the gross income from working interests in an oil or gas well, subtract the amount allowable as deductions for— exhaustion, wear and tear, obsolescence, amortization, and depletion, property and severance taxes, interest, and rent, to the extent allocable, under regulations prescribed by the Secretary, to such gross income from royalties or such gross income from working interests in oil or gas wells. The amount subtracted under this subparagraph with respect to royalties shall not exceed the gross income from such royalties, and the amount subtracted under this subparagraph with respect to working interests shall not exceed the gross income from such working interests. There shall be excluded— interest received on a direct obligation of the United States held for sale to customers in the ordinary course of trade or business by a regular dealer who is making a primary market in such obligations, and interest on a condemnation award, a judgment, and a tax refund. From the gross income consisting of compensation described in subparagraph (D) of paragraph (3) subtract the amount allowable as deductions for the items described in clauses (i), (ii), (iii), and (iv) of subparagraph (A) to the extent allocable, under regulations prescribed by the Secretary, to such gross income. The amount subtracted under this subparagraph shall not exceed such gross income. The term “adjusted income from rents” means the gross income from rents, reduced by the amount subtracted under paragraph (2)(A) of this subsection. For purposes of the preceding sentence, the term “rents” means compensation, however designated, for the use of, or right to use, property, and the interest on debts owed to the corporation, to the extent such debts represent the price for which real property held primarily for sale to customers in the ordinary course of its trade or business was sold or exchanged by the corporation; but such term does not include— amounts constituting personal holding company income under subsection (a)(6), copyright royalties (as defined in subsection (a)(4)), produced film rents (as defined in subsection (a)(5)(B)), compensation, however designated, for the use of, or the right to use, any tangible personal property manufactured or produced by the taxpayer, if during the taxable year the taxpayer is engaged in substantial manufacturing or production of tangible personal property of the same type, or active business computer software royalties (as defined in subsection (d)). The term “adjusted income from mineral, oil, and gas royalties” means the gross income from mineral, oil, and gas royalties (including production payments and overriding royalties), reduced by the amount subtracted under paragraph (2)(B) of this subsection in respect of such royalties.

(c) Gross income of insurance companies other than life insurance companies In the case of an insurance company other than a life insurance company, the term “gross income” as used in this part means the gross income, as defined in section 832(b)(1), increased by the amount of losses incurred, as defined in section 832(b)(5), and the amount of expenses incurred, as defined in section 832(b)(6), and decreased by the amount deductible under section 832(c)(7) (relating to tax-free interest).

(d) Active business computer software royalties For purposes of this section, the term “active business computer software royalties” means any royalties— received by any corporation during the taxable year in connection with the licensing of computer software, and with respect to which the requirements of paragraphs (2), (3), (4), and (5) are met. The requirements of this paragraph are met if the royalties described in paragraph (1)— are received by a corporation engaged in the active conduct of the trade or business of developing, manufacturing, or producing computer software, and are attributable to computer software which— is developed, manufactured, or produced by such corporation (or its predecessor) in connection with the trade or business described in subparagraph (A), or is directly related to such trade or business. The requirements of this paragraph are met if the royalties described in paragraph (1) constitute at least 50 percent of the ordinary gross income of the corporation for the taxable year. The requirements of this paragraph are met if— the sum of the deductions allowable to the corporation under sections 162, 174, 174A, and 195 for the taxable year which are properly allocable to the trade or business described in paragraph (2) equals or exceeds 25 percent of the ordinary gross income of such corporation for such taxable year, or the average of such deductions for the 5-taxable year period ending with such taxable year equals or exceeds 25 percent of the average ordinary gross income of such corporation for such period. If a corporation has not been in existence during the 5-taxable year period described in clause (ii), then the period of existence of such corporation shall be substituted for such 5-taxable year period. For purposes of subparagraph (A), a deduction shall not be treated as allowable under section 162 if it is specifically allowable under another section. For purposes of subparagraph (A), no deduction shall be taken into account with respect to compensation for personal services rendered by the 5 individual shareholders holding the largest percentage (by value) of the outstanding stock of the corporation. For purposes of the preceding sentence— individuals holding less than 5 percent (by value) of the stock of such corporation shall not be taken into account, and stock deemed to be owned by a shareholder solely by attribution from a partner under section 544(a)(2) shall be disregarded. The requirements of this paragraph are met if the sum of— the dividends paid during the taxable year (determined under section 562), the dividends considered as paid on the last day of the taxable year under section 563(c) (as limited by the second sentence of section 563(b)), and the consent dividends for the taxable year (determined under section 565), equals or exceeds the amount, if any, by which the personal holding company income for the taxable year exceeds 10 percent of the ordinary gross income of such corporation for such taxable year. For purposes of this paragraph, personal holding company income shall be computed— without regard to amounts described in subsection (a)(1)(C), without regard to interest income during any taxable year— which is in the 5-taxable year period beginning with the later of the 1st taxable year of the corporation or the 1st taxable year in which the corporation conducted the trade or business described in paragraph (2)(A), and during which the corporation meets the requirements of paragraphs (2), (3), and (4), and by including adjusted income from rents and adjusted income from mineral, oil, and gas royalties (within the meaning of paragraphs (2) and (3) of subsection (a)). In any case in which— the taxpayer receives royalties in connection with the licensing of computer software, and another corporation which is a member of the same affiliated group as the taxpayer meets the requirements of paragraphs (2), (3), (4), and (5) with respect to such computer software, the taxpayer shall be treated as having met such requirements. For purposes of this paragraph, the term “affiliated group” has the meaning given such term by section 1504(a).

§ 544 Rules for determining stock ownership

(a) Constructive ownership For purposes of determining whether a corporation is a personal holding company, insofar as such determination is based on stock ownership under section 542(a)(2), section 543(a)(7), section 543(a)(6), or section 543(a)(4)— Stock owned, directly or indirectly, by or for a corporation, partnership, estate, or trust shall be considered as being owned proportionately by its shareholders, partners, or beneficiaries. An individual shall be considered as owning the stock owned, directly or indirectly, by or for his family or by or for his partner. For purposes of this paragraph, the family of an individual includes only his brothers and sisters (whether by the whole or half blood), spouse, ancestors, and lineal descendants. If any person has an option to acquire stock, such stock shall be considered as owned by such person. For purposes of this paragraph, an option to acquire such an option, and each one of a series of such options, shall be considered as an option to acquire such stock. Paragraphs (2) and (3) shall be applied— for purposes of the stock ownership requirement provided in section 542(a)(2), if, but only if, the effect is to make the corporation a personal holding company; for purposes of section 543(a)(7) (relating to personal service contracts), of section 543(a)(6) (relating to use of property by shareholders), or of section 543(a)(4) (relating to copyright royalties), if, but only if, the effect is to make the amounts therein referred to includible under such paragraph as personal holding company income. Stock constructively owned by a person by reason of the application of paragraph (1) or (3), shall, for purposes of applying paragraph (1) or (2), be treated as actually owned by such person; but stock constructively owned by an individual by reason of the application of paragraph (2) shall not be treated as owned by him for purposes of again applying such paragraph in order to make another the constructive owner of such stock. If stock may be considered as owned by an individual under either paragraph (2) or (3) it shall be considered as owned by him under paragraph (3).

(b) Convertible securities Outstanding securities convertible into stock (whether or not convertible during the taxable year) shall be considered as outstanding stock— for purposes of the stock ownership requirement provided in section 542(a)(2), but only if the effect of the inclusion of all such securities is to make the corporation a personal holding company; for purposes of section 543(a)(7) (relating to personal service contracts), but only if the effect of the inclusion of all such securities is to make the amounts therein referred to includible under such paragraph as personal holding company income; for purposes of section 543(a)(6) (relating to the use of property by shareholders), but only if the effect of the inclusion of all such securities is to make the amounts therein referred to includible under such paragraph as personal holding company income; and for purposes of section 543(a)(4) (relating to copyright royalties), but only if the effect of the inclusion of all such securities is to make the amounts therein referred to includible under such paragraph as personal holding company income. The requirement in paragraphs (1), (2), (3), and (4) that all convertible securities must be included if any are to be included shall be subject to the exception that, where some of the outstanding securities are convertible only after a later date than in the case of others, the class having the earlier conversion date may be included although the others are not included, but no convertible securities shall be included unless all outstanding securities having a prior conversion date are also included.

§ 545 Undistributed personal holding company income

(a) Definition For purposes of this part, the term “undistributed personal holding company income” means the taxable income of a personal holding company adjusted in the manner provided in subsections (b), (c), and (d), minus the dividends paid deduction as defined in section 561. In the case of a personal holding company which is a foreign corporation, not more than 10 percent in value of the outstanding stock of which is owned (within the meaning of section 958(a)) during the last half of the taxable year by United States persons, the term “undistributed personal holding company income” means the amount determined by multiplying the undistributed personal holding company income (determined without regard to this sentence) by the percentage in value of its outstanding stock which is the greatest percentage in value of its outstanding stock so owned by United States persons on any one day during such period.

(b) Adjustments to taxable income For the purposes of subsection (a), the taxable income shall be adjusted as follows: There shall be allowed as a deduction Federal income and excess profits taxes and income, war profits and excess profits taxes of foreign countries and possessions of the United States (to the extent not allowable as a deduction under section 275(a)(4)), accrued during the taxable year or deemed to be paid by a domestic corporation under section 960 for the taxable year, but not including the accumulated earnings tax imposed by section 531 or the personal holding company tax imposed by section 541. The deduction for charitable contributions provided under section 170 shall be allowed, but in computing such deduction the limitations in section 170(b)(1)(A), (B), (D), and (E) shall apply, and section 170(b)(2) and (d)(1) shall not apply. For purposes of this paragraph, the term “contribution base” when used in section 170(b)(1) means the taxable income computed with the adjustments (other than the 10-percent limitation) provided in section 170(b)(2) and (d)(1) and without deduction of the amount disallowed under paragraph (6) of this subsection. The special deductions for corporations provided in part VIII (except section 248) of subchapter B (section 241 and following, relating to the deduction for dividends received by corporations, etc.) shall not be allowed. The net operating loss deduction provided in section 172 shall not be allowed, but there shall be allowed as a deduction the amount of the net operating loss (as defined in section 172(c)) for the preceding taxable year computed without the deductions provided in part VIII (except section 248) of subchapter B. There shall be allowed as a deduction the net capital gain for the taxable year, minus the taxes imposed by this subtitle attributable to such net capital gain. The taxes attributable to such net capital gain shall be an amount equal to the difference between— the taxes imposed by this subtitle (except the tax imposed by this part) for such year, and such taxes computed for such year without including such excess in taxable income. The aggregate of the deductions allowed under section 162 (relating to trade or business expenses) and section 167 (relating to depreciation), which are allocable to the operation and maintenance of property owned or operated by the corporation, shall be allowed only in an amount equal to the rent or other compensation received for the use of, or the right to use, the property, unless it is established (under regulations prescribed by the Secretary) to the satisfaction of the Secretary— that the rent or other compensation received was the highest obtainable, or, if none was received, that none was obtainable; that the property was held in the course of a business carried on bona fide for profit; and either that there was reasonable expectation that the operation of the property would result in a profit, or that the property was necessary to the conduct of the business. In the case of a foreign corporation, paragraph (5) shall be applied by taking into account only gains and losses which are effectively connected with the conduct of a trade or business within the United States and are not exempt from tax under treaty.

(c) Certain foreign corporations In the case of a foreign corporation all of the outstanding stock of which during the last half of the taxable year is owned by nonresident alien individuals (whether directly or indirectly through foreign estates, foreign trusts, foreign partnerships, or other foreign corporations), the taxable income for purposes of subsection (a) shall be the income which constitutes personal holding company income under section 543(a)(7), reduced by the deductions attributable to such income, and adjusted, with respect to such income, in the manner provided in subsection (b).

§ 546 Income not placed on annual basis

Section 443(b) (relating to computation of tax on change of annual accounting period) shall not apply in the computation of the personal holding company tax imposed by section 541. ( Aug. 16, 1954, ch. 736 , 68A Stat. 191 .)

§ 547 Deduction for deficiency dividends

(a) General rule If a determination (as defined in subsection (c)) with respect to a taxpayer establishes liability for personal holding company tax imposed by section 541 (or by a corresponding provision of a prior income tax law) for any taxable year, a deduction shall be allowed to the taxpayer for the amount of deficiency dividends (as defined in subsection (d)) for the purpose of determining the personal holding company tax for such year, but not for the purpose of determining interest, additional amounts, or assessable penalties computed with respect to such personal holding company tax.

(b) Rules for application of section The deficiency dividend deduction shall be allowed as of the date the claim for the deficiency dividend deduction is filed. If the allowance of a deficiency dividend deduction results in an overpayment of personal holding company tax for any taxable year, credit or refund with respect to such overpayment shall be made as if on the date of the determination 2 years remained before the expiration of the period of limitation on the filing of claim for refund for the taxable year to which the overpayment relates. No interest shall be allowed on a credit or refund arising from the application of this section.

(c) Determination For purposes of this section, the term “determination” means— a decision by the Tax Court or a judgment, decree, or other order by any court of competent jurisdiction, which has become final; a closing agreement made under section 7121; or under regulations prescribed by the Secretary, an agreement signed by the Secretary and by, or on behalf of, the taxpayer relating to the liability of such taxpayer for personal holding company tax.

(d) Deficiency dividends For purposes of this section, the term “deficiency dividends” means the amount of the dividends paid by the corporation on or after the date of the determination and before filing claim under subsection (e), which would have been includible in the computation of the deduction for dividends paid under section 561 for the taxable year with respect to which the liability for personal holding company tax exists, if distributed during such taxable year. No dividends shall be considered as deficiency dividends for purposes of subsection (a) unless distributed within 90 days after the determination. Deficiency dividends paid in any taxable year (to the extent of the portion thereof taken into account under subsection (a) in determining personal holding company tax) shall not be included in the amount of dividends paid for such year for purposes of computing the dividends paid deduction for such year and succeeding years. Deficiency dividends paid in any taxable year (to the extent of the portion thereof taken into account under subsection (a) in determining personal holding company tax) shall not be allowed for purposes of section 563(b) in the computation of the dividends paid deduction for the taxable year preceding the taxable year in which paid.

(e) Claim required No deficiency dividend deduction shall be allowed under subsection (a) unless (under regulations prescribed by the Secretary) claim therefor is filed within 120 days after the determination.

(f) Suspension of statute of limitations and stay of collection If the corporation files a claim, as provided in subsection (e), the running of the statute of limitations provided in section 6501 on the making of assessments, and the bringing of distraint or a proceeding in court for collection, in respect of the deficiency and all interest, additional amounts, or assessable penalties, shall be suspended for a period of 2 years after the date of the determination. In the case of any deficiency with respect to the tax imposed by section 541 established by a determination under this section— the collection of the deficiency and all interest, additional amounts, and assessable penalties shall, except in cases of jeopardy, be stayed until the expiration of 120 days after the date of the determination, and if claim for deficiency dividend deduction is filed under subsection (e), the collection of such part of the deficiency as is not reduced by the deduction for deficiency dividends provided in subsection (a) shall be stayed until the date the claim is disallowed (in whole or in part) and if disallowed in part collection shall be made only with respect to the part disallowed. No distraint or proceeding in court shall be begun for the collection of an amount the collection of which is stayed under subparagraph (A) or (B) during the period for which the collection of such amount is stayed.

(g) Deduction denied in case of fraud, etc. No deficiency dividend deduction shall be allowed under subsection (a) if the determination contains a finding that any part of the deficiency is due to fraud with intent to evade tax, or to wilful failure to file an income tax return within the time prescribed by law or prescribed by the Secretary in pursuance of law.

[§§ 551 to 558 Repealed. Pub. L. 108–357, title IV, § 413(a)(1), Oct. 22, 2004, 118 Stat. 1506]

§ 561 Definition of deduction for dividends paid

(a) General rule The deduction for dividends paid shall be the sum of— the dividends paid during the taxable year, the consent dividends for the taxable year (determined under section 565), and in the case of a personal holding company, the dividend carryover described in section 564.

(b) Special rules applicable In determining the deduction for dividends paid, the rules provided in section 562 (relating to rules applicable in determining dividends eligible for dividends paid deduction) and section 563 (relating to dividends paid after the close of the taxable year) shall be applicable.

§ 562 Rules applicable in determining dividends eligible for dividends paid deduction

(a) General rule For purposes of this part, the term “dividend” shall, except as otherwise provided in this section, include only dividends described in section 316 (relating to definition of dividends for purposes of corporate distributions).

(b) Distributions in liquidation Except in the case of a personal holding company described in section 542— in the case of amounts distributed in liquidation, the part of such distribution which is properly chargeable to earnings and profits accumulated after February 28, 1913 , shall be treated as a dividend for purposes of computing the dividends paid deduction, and in the case of a complete liquidation occurring within 24 months after the adoption of a plan of liquidation, any distribution within such period pursuant to such plan shall, to the extent of the earnings and profits (computed without regard to capital losses) of the corporation for the taxable year in which such distribution is made, be treated as a dividend for purposes of computing the dividends paid deduction. For purposes of subparagraph (A), a liquidation includes a redemption of stock to which section 302 applies. Except to the extent provided in regulations, the preceding sentence shall not apply in the case of any mere holding or investment company which is not a regulated investment company. In the case of a complete liquidation of a personal holding company, occurring within 24 months after the adoption of a plan of liquidation, the amount of any distribution within such period pursuant to such plan shall be treated as a dividend for purposes of computing the dividends paid deduction, to the extent that such amount is distributed to corporate distributees and represents such corporate distributees’ allocable share of the undistributed personal holding company income for the taxable year of such distribution computed without regard to this paragraph and without regard to subparagraph (B) of section 316(b)(2).

(c) Preferential dividends Except in the case of a publicly offered regulated investment company (as defined in section 67(c)(2)(B)) or a publicly offered REIT, the amount of any distribution shall not be considered as a dividend for purposes of computing the dividends paid deduction, unless such distribution is pro rata, with no preference to any share of stock as compared with other shares of the same class, and with no preference to one class of stock as compared with another class except to the extent that the former is entitled (without reference to waivers of their rights by shareholders) to such preference. In the case of a distribution by a regulated investment company (other than a publicly offered regulated investment company (as so defined)) to a shareholder who made an initial investment of at least $10,000,000 in such company, such distribution shall not be treated as not being pro rata or as being preferential solely by reason of an increase in the distribution by reason of reductions in administrative expenses of the company. For purposes of this subsection, the term “publicly offered REIT” means a real estate investment trust which is required to file annual and periodic reports with the Securities and Exchange Commission under the Securities Exchange Act of 1934.

(d) Distributions by a member of an affiliated group In the case where a corporation which is a member of an affiliated group of corporations filing or required to file a consolidated return for a taxable year is required to file a separate personal holding company schedule for such taxable year, a distribution by such corporation to another member of the affiliated group shall be considered as a dividend for purposes of computing the dividends paid deduction if such distribution would constitute a dividend under the other provisions of this section to a recipient which is not a member of an affiliated group.

(e) Special rules for real estate investment trusts In the case of a real estate investment trust, in determining the amount of dividends under section 316 for purposes of computing the dividends paid deduction— the earnings and profits of such trust for any taxable year (but not its accumulated earnings) shall be increased by the amount of gain (if any) on the sale or exchange of real property which is taken into account in determining the taxable income of such trust for such taxable year (and not otherwise taken into account in determining such earnings and profits), and section 857(d)(1) shall be applied without regard to subparagraph (B) thereof. In the case of a failure of a distribution by a real estate investment trust to comply with the requirements of subsection (c), the Secretary may provide an appropriate remedy to cure such failure in lieu of not considering the distribution to be a dividend for purposes of computing the dividends paid deduction if— the Secretary determines that such failure is inadvertent or is due to reasonable cause and not due to willful neglect, or such failure is of a type of failure which the Secretary has identified for purposes of this paragraph as being described in subparagraph (A).

§ 563 Rules relating to dividends paid after close of taxable year

(a) Accumulated earnings tax In the determination of the dividends paid deduction for purposes of the accumulated earnings tax imposed by section 531, a dividend paid after the close of any taxable year and on or before the 15th day of the fourth month following the close of such taxable year shall be considered as paid during such taxable year.

(b) Personal holding company tax In the determination of the dividends paid deduction for purposes of the personal holding company tax imposed by section 541, a dividend paid after the close of any taxable year and on or before the 15th day of the fourth month following the close of such taxable year shall, to the extent the taxpayer elects in its return for the taxable year, be considered as paid during such taxable year. The amount allowed as a dividend by reason of the application of this subsection with respect to any taxable year shall not exceed either— The undistributed personal holding company income of the corporation for the taxable year, computed without regard to this subsection, or 20 percent of the sum of the dividends paid during the taxable year, computed without regard to this subsection.

(c) Dividends considered as paid on last day of taxable year For the purpose of applying section 562(a), with respect to distributions under subsection (a) or (b) of this section, a distribution made after the close of a taxable year and on or before the 15th day of the fourth month following the close of the taxable year shall be considered as made on the last day of such taxable year.

§ 564 Dividend carryover

(a) General rule For purposes of computing the dividends paid deduction under section 561, in the case of a personal holding company the dividend carryover for any taxable year shall be the dividend carryover to such taxable year, computed as provided in subsection (b), from the two preceding taxable years.

(b) Computation of dividend carryover The dividend carryover to the taxable year shall be determined as follows: For each of the 2 preceding taxable years there shall be determined the taxable income computed with the adjustments provided in section 545 (whether or not the taxpayer was a personal holding company for either of such preceding taxable years), and there shall also be determined for each such year the deduction for dividends paid during such year as provided in section 561 (but determined without regard to the dividend carryover to such year). There shall be determined for each such taxable year whether there is an excess of such taxable income over such deduction for dividends paid or an excess of such deduction for dividends paid over such taxable income, and the amount of each such excess. If there is an excess of such deductions for dividends paid over such taxable income for the first preceding taxable year, such excess shall be allowed as a dividend carryover to the taxable year. If there is an excess of such deduction for dividends paid over such taxable income for the second preceding taxable year, such excess shall be reduced by the amount determined in paragraph (5), and the remainder of such excess shall be allowed as a dividend carryover to the taxable year. The amount of the reduction specified in paragraph (4) shall be the amount of the excess of the taxable income, if any, for the first preceding taxable year over such deduction for dividends paid, if any, for the first preceding taxable year.

(a) General rule If any person owns consent stock (as defined in subsection (f)(1)) in a corporation on the last day of the taxable year of such corporation, and such person agrees, in a consent filed with the return of such corporation in accordance with regulations prescribed by the Secretary, to treat as a dividend the amount specified in such consent, the amount so specified shall, except as provided in subsection (b), constitute a consent dividend for purposes of section 561 (relating to the deduction for dividends paid).

(b) Limitations A consent dividend shall not include— an amount specified in a consent which, if distributed in money, would constitute, or be part of, a distribution which would be disqualified for purposes of the dividends paid deduction under section 562(c) (relating to preferential dividends), or an amount specified in a consent which would not constitute a dividend (as defined in section 316) if the total amounts specified in consents filed by the corporation had been distributed in money to shareholders on the last day of the taxable year of such corporation.

(c) Effect of consent The amount of a consent dividend shall be considered, for purposes of this title— as distributed in money by the corporation to the shareholder on the last day of the taxable year of the corporation, and as contributed to the capital of the corporation by the shareholder on such day.

(d) Consent dividends and other distributions If a distribution by a corporation consists in part of consent dividends and in part of money or other property, the entire amount specified in the consents and the amount of such money or other property shall be considered together for purposes of applying this title.

(e) Nonresident aliens and foreign corporations In the case of a consent dividend which, if paid in money would be subject to the provisions of section 1441 (relating to withholding of tax on nonresident aliens) or section 1442 (relating to withholding of tax on foreign corporations), this section shall not apply unless the consent is accompanied by money, or such other medium of payment as the Secretary may by regulations authorize, in an amount equal to the amount that would be required to be deducted and withheld under sections 1441 or 1442 if the consent dividend had been, on the last day of the taxable year of the corporation, paid to the shareholder in money as a dividend. The amount accompanying the consent shall be credited against the tax imposed by this subtitle on the shareholder.

(f) Definitions Consent stock, for purposes of this section, means the class or classes of stock entitled, after the payment of preferred dividends, to a share in the distribution (other than in complete or partial liquidation) within the taxable year of all the remaining earnings and profits, which share constitutes the same proportion of such distribution regardless of the amount of such distribution. Preferred dividends, for purposes of this section, means a distribution (other than in complete or partial liquidation), limited in amount, which must be made on any class of stock before a further distribution (other than in complete or partial liquidation) of earnings and profits may be made within the taxable year.

§ 581 Definition of bank

For purposes of sections 582 and 584, the term “bank” means a bank or trust company incorporated and doing business under the laws of the United States (including laws relating to the District of Columbia) or of any State, a substantial part of the business of which consists of receiving deposits and making loans and discounts, or of exercising fiduciary powers similar to those permitted to national banks under authority of the Comptroller of the Currency, and which is subject by law to supervision and examination by State or Federal authority having supervision over banking institutions. Such term also means a domestic building and loan association. ( Aug. 16, 1954, ch. 736 , 68A Stat. 202 ; Pub. L. 87–722, § 5 , Sept. 28, 1962 , 76 Stat. 670 ; Pub. L. 94–455, title XIX, § 1901(c)(5) , Oct. 4, 1976 , 90 Stat. 1803 .)

§ 582 Bad debts, losses, and gains with respect to securities held by financial institutions

(a) Securities Notwithstanding sections 165(g)(1) and 166(e), subsections (a) and (b) of section 166 (relating to allowance of deduction for bad debts) shall apply in the case of a bank to a debt which is evidenced by a security as defined in section 165(g)(2)(C).

(b) Worthless stock in affiliated bank For purposes of section 165(g)(1), where the taxpayer is a bank and owns directly at least 80 percent of each class of stock of another bank, stock in such other bank shall not be treated as a capital asset.

(c) Bond, etc., losses and gains of financial institutions For purposes of this subtitle, in the case of a financial institution referred to in paragraph (2), the sale or exchange of a bond, debenture, note, or certificate or other evidence of indebtedness shall not be considered a sale or exchange of a capital asset. For purposes of the preceding sentence, any regular or residual interest in a REMIC shall be treated as an evidence of indebtedness. For purposes of paragraph (1), the financial institutions referred to in this paragraph are— any bank (and any corporation which would be a bank except for the fact it is a foreign corporation), any financial institution referred to in section 591, any small business investment company operating under the Small Business Investment Act of 1958, and any business development corporation. For purposes of subparagraph (A), the term “business development corporation” means a corporation which was created by or pursuant to an act of a State legislature for purposes of promoting, maintaining, and assisting the economy and industry within such State on a regional or statewide basis by making loans to be used in trades and businesses which would generally not be made by banks within such region or State in the ordinary course of their business (except on the basis of a partial participation), and which is operated primarily for such purposes. In the case of a foreign corporation referred to in subparagraph (A)(i), paragraph (1) shall only apply to gains and losses which are effectively connected with the conduct of a banking business in the United States.

[§ 583 Repealed. Pub. L. 94–455, title XIX, § 1901(a)(82), Oct. 4, 1976, 90 Stat. 1778]

§ 584 Common trust funds

(a) Definitions For purposes of this subtitle, the term “common trust fund” means a fund maintained by a bank— exclusively for the collective investment and reinvestment of moneys contributed thereto by the bank in its capacity— as a trustee, executor, administrator, or guardian, or as a custodian of accounts— which the Secretary determines are established pursuant to a State law which is substantially similar to the Uniform Gifts to Minors Act as published by the American Law Institute, and with respect to which the bank establishes, to the satisfaction of the Secretary, that it has duties and responsibilities similar to duties and responsibilities of a trustee or guardian; and in conformity with the rules and regulations, prevailing from time to time, of the Board of Governors of the Federal Reserve System or the Comptroller of the Currency pertaining to the collective investment of trust funds by national banks. For purposes of this subsection, two or more banks which are members of the same affiliated group (within the meaning of section 1504) shall be treated as one bank for the period of affiliation with respect to any fund of which any of the member banks is trustee or two or more of the member banks are cotrustees.

(b) Taxation of common trust funds A common trust fund shall not be subject to taxation under this chapter and for purposes of this chapter shall not be considered a corporation.

(c) Income of participants in fund Each participant in the common trust fund in computing its taxable income shall include, whether or not distributed and whether or not distributable— as part of its gains and losses from sales or exchanges of capital assets held for not more than 1 year, its proportionate share of the gains and losses of the common trust fund from sales or exchanges of capital assets held for not more than 1 year, as part of its gains and losses from sales or exchanges of capital assets held for more than 1 year, its proportionate share of the gains and losses of the common trust fund from sales or exchanges of capital assets held for more than 1 year, and its proportionate share of the ordinary taxable income or the ordinary net loss of the common trust fund, computed as provided in subsection (d). The proportionate share of each participant in the amount of dividends received by the common trust fund and to which section 1(h)(11) applies shall be considered for purposes of such paragraph as having been received by such participant.

(d) Computation of common trust fund income The taxable income of a common trust fund shall be computed in the same manner and on the same basis as in the case of an individual, except that— there shall be segregated the gains and losses from sales or exchanges of capital assets; after excluding all items of gain and loss from sales or exchanges of capital assets, there shall be computed— an ordinary taxable income which shall consist of the excess of the gross income over deductions; or an ordinary net loss which shall consist of the excess of the deductions over the gross income; and the deduction provided by section 170 (relating to charitable, etc., contributions and gifts) shall not be allowed.

(e) Admission and withdrawal No gain or loss shall be realized by the common trust fund by the admission or withdrawal of a participant. The admission of a participant shall be treated with respect to the participant as the purchase of, or an exchange for, the participating interest. The withdrawal of any participating interest by a participant shall be treated as a sale or exchange of such interest by the participant.

(f) Different taxable years of common trust fund and participant If the taxable year of the common trust fund is different from that of a participant, the inclusions with respect to the taxable income of the common trust fund, in computing the taxable income of the participant for its taxable year, shall be based upon the taxable income of the common trust fund for any taxable year of the common trust fund ending within or with the taxable year of the participant.

(g) Net operating loss deduction The benefit of the deduction for net operating losses provided by section 172 shall not be allowed to a common trust fund, but shall be allowed to the participants in the common trust fund under regulations prescribed by the Secretary.

(h) Nonrecognition treatment for certain transfers to regulated investment companies If— a common trust fund transfers substantially all of its assets to one or more regulated investment companies in exchange solely for stock in the company or companies to which such assets are so transferred, and such stock is distributed by such common trust fund to participants in such common trust fund in exchange solely for their interests in such common trust fund, no gain or loss shall be recognized by such common trust fund by reason of such transfer or distribution, and no gain or loss shall be recognized by any participant in such common trust fund by reason of such exchange. The basis of any asset received by a regulated investment company in a transfer referred to in paragraph (1)(A) shall be the same as it would be in the hands of the common trust fund. The basis of the stock which is received in an exchange referred to in paragraph (1)(B) shall be the same as that of the property exchanged. If stock in more than one regulated investment company is received in such exchange, the basis determined under the preceding sentence shall be allocated among the stock in each such company on the basis of respective fair market values. In determining whether the transfer referred to in paragraph (1)(A) is in exchange solely for stock in one or more regulated investment companies, the assumption by any such company of a liability of the common trust fund shall be disregarded. If, in any transfer referred to in paragraph (1)(A), the assumed liabilities exceed the aggregate adjusted bases (in the hands of the common trust fund) of the assets transferred to the regulated investment company or companies— notwithstanding paragraph (1), gain shall be recognized to the common trust fund on such transfer in an amount equal to such excess, the basis of the assets received by the regulated investment company or companies in such transfer shall be increased by the amount so recognized, and any adjustment to the basis of a participant’s interest in the common trust fund as a result of the gain so recognized shall be treated as occurring immediately before the exchange referred to in paragraph (1)(B). If the transfer referred to in paragraph (1)(A) is to two or more regulated investment companies, the basis increase under subclause (II) shall be allocated among such companies on the basis of the respective fair market values of the assets received by each of such companies. For purposes of clause (i), the term “assumed liabilities” means any liability of the common trust fund assumed by any regulated investment company in connection with the transfer referred to in paragraph (1)(A). For purposes of this paragraph, in determining the amount of any liability assumed, the rules of section 357(d) shall apply. This subsection shall not apply to any common trust fund which would not meet the requirements of section 368(a)(2)(F)(ii) if it were a corporation. For purposes of the preceding sentence, Government securities shall not be treated as securities of an issuer in applying the 25-percent and 50-percent test and such securities shall not be excluded for purposes of determining total assets under clause (iv) of section 368(a)(2)(F).

(i) Taxable year of common trust fund For purposes of this subtitle, the taxable year of any common trust fund shall be the calendar year.

§ 585 Reserves for losses on loans of banks

(a) Reserve for bad debts Except as provided in subsection (c), a bank shall be allowed a deduction for a reasonable addition to a reserve for bad debts. Such deduction shall be in lieu of any deduction under section 166(a). For purposes of this section— The term “bank” means any bank (as defined in section 581). The term “bank” also includes any corporation to which subparagraph (A) would apply except for the fact that it is a foreign corporation. In the case of any such foreign corporation, this section shall apply only with respect to loans outstanding the interest on which is effectively connected with the conduct of a banking business within the United States.

(b) Addition to reserves for bad debts For purposes of subsection (a), the reasonable addition to the reserve for bad debts of any financial institution to which this section applies shall be an amount determined by the taxpayer which shall not exceed the addition to the reserve for losses on loans determined under the experience method as provided in paragraph (2). The amount determined under this paragraph for a taxable year shall be the amount necessary to increase the balance of the reserve for losses on loans (at the close of the taxable year) to the greater of— the amount which bears the same ratio to loans outstanding at the close of the taxable year as (i) the total bad debts sustained during the taxable year and the 5 preceding taxable years (or, with the approval of the Secretary, a shorter period), adjusted for recoveries of bad debts during such period, bears to (ii) the sum of the loans outstanding at the close of such 6 or fewer taxable years, or the lower of— the balance of the reserve at the close of the base year, or if the amount of loans outstanding at the close of the taxable year is less than the amount of loans outstanding at the close of the base year, the amount which bears the same ratio to loans outstanding at the close of the taxable year as the balance of the reserve at the close of the base year bears to the amount of loans outstanding at the close of the base year. For purposes of this paragraph, the base year shall be the last taxable year before the most recent adoption of the experience method, except that for taxable years beginning after 1987 the base year shall be the last taxable year beginning before 1988. The Secretary shall define the term loan and prescribe such regulations as may be necessary to carry out the purposes of this section.

(c) Section not to apply to large banks In the case of a large bank, this section shall not apply (and no deduction shall be allowed under any other provision of this subtitle for any addition to a reserve for bad debts). For purposes of this subsection, a bank is a large bank if, for the taxable year (or for any preceding taxable year beginning after December 31, 1986 )— the average adjusted bases of all assets of such bank exceeded $500, 000, 000, ors u c hbank w a s am e mb ero f a p a re n t - s u b s i d ia ryco n t ro ll e d g ro u p an d t h e a v er a g e a d j u s t e d ba seso f a ll a sse t so f s u c h g ro u p e x cee d e d$ 500,000,000. Except as provided in paragraph (4), in the case of any bank which for its last taxable year before the disqualification year maintained a reserve for bad debts— the provisions of this subsection shall be treated as a change in the method of accounting of such bank for the disqualification year, such change shall be treated as having been made with the consent of the Secretary, and the net amount of adjustments required by section 481(a) to be taken into account by the taxpayer shall be taken into account in each of the 4 taxable years beginning with the disqualification year with— the amount taken into account for the 1st of such taxable years being the greater of 10 percent of such net amount or such higher percentage of such net amount as the taxpayer may elect, and the amount taken into account in each of the 3 succeeding taxable years being equal to the applicable fraction (determined in accordance with the following table for the taxable year involved) of the portion of such net amount not taken into account under subclause (I). The applicable If the case of the— fraction is— 1st succeeding year 2 ⁄ 9 2nd succeeding year ⅓ 3rd succeeding year 4 ⁄ 9 . In the case of a bank which is a financially troubled bank for any taxable year— no adjustment shall be taken into account under subparagraph (A) for such taxable year, and such taxable year shall be disregarded in determining whether any other taxable year is a taxable year for which an adjustment is required to be taken into account under subparagraph (A) or the amount of such adjustment. Clause (i) shall not apply to the 1st taxable year referred to in subparagraph (A)(iii)(I) if the taxpayer elects a higher percentage in accordance with such subparagraph. For purposes of clause (i), the term “financially troubled bank” means any bank if, for the taxable year, the nonperforming loan percentage of such bank exceeds 75 percent. For purposes of clause (iii), the term “nonperforming loan percentage” means the percentage determined by dividing— the sum of the outstanding balances of nonperforming loans of the bank as of the close of each quarter of the taxable year, by the sum of the amounts of equity of the bank as of the close of each such quarter. In the case of a bank which is a member of a parent-subsidiary controlled group for the taxable year, the preceding sentence shall be applied with respect to such group. For purposes of this subparagraph— The term “nonperforming loan” means any loan which is considered to be nonperforming by the primary Federal regulatory agency with respect to the bank. The term “equity” means the equity of the bank as determined for Federal regulatory purposes. For purposes of applying section 6655(e)(2)(A)(i) with respect to any installment, the determination under subparagraph (B) of whether an adjustment is required to be taken into account under subparagraph (A) shall be made as of the last day prescribed for payment of such installment. If a bank makes an election under this paragraph for the disqualification year— the provisions of this subsection shall not be treated as a change in the method of accounting of the taxpayer for purposes of section 481, the taxpayer shall continue to maintain its reserve for loans held by the bank as of the 1st day of the disqualification year and charge against such reserve any losses resulting from loans held by the bank as of such 1st day, and no deduction shall be allowed under this section (or any other provision of this subtitle) for any addition to such reserve for the disqualification year or any subsequent taxable year. If the amount of the reserve referred to in subparagraph (B) as of the close of any taxable year exceeds the outstanding balance (as of such time) of the loans referred to in subparagraph (B), such excess shall be included in gross income for such taxable year. For purposes of this subsection— The term “parent-subsidiary controlled group” means any controlled group of corporations described in section 1563(a)(1). In determining the average adjusted bases of assets held by such a group, interests held by one member of such group in another member of such group shall be disregarded. The term “disqualification year” means, with respect to any bank, the 1st taxable year beginning after December 31, 1986 , for which such bank was a large bank if such bank maintained a reserve for bad debts for the preceding taxable year. In the case of a parent-subsidiary controlled group, any election under this section shall be made separately by each member of such group.

[§ 586 Repealed. Pub. L. 99–514, title IX, § 901(c), Oct. 22, 1986, 100 Stat. 2378]

§ 591 Deduction for dividends paid on deposits

(a) In general In the case of mutual savings banks, cooperative banks, domestic building and loan associations, and other savings institutions chartered and supervised as savings and loan or similar associations under Federal or State law, there shall be allowed as deductions in computing taxable income amounts paid to, or credited to the accounts of, depositors or holders of accounts as dividends or interest on their deposits or withdrawable accounts, if such amounts paid or credited are withdrawable on demand subject only to customary notice of intention to withdraw.

(b) Mutual savings bank to include certain banks with capital stock For purposes of this part, the term “mutual savings bank” includes any bank— which has capital stock represented by shares, and which is subject to, and operates under, Federal or State laws relating to mutual savings bank.

[§ 592 Repealed. Pub. L. 94–455, title XIX, § 1901(a)(83), Oct. 4, 1976, 90 Stat. 1778]

§ 593 Reserves for losses on loans

(a) Reserve for bad debts Except as provided in paragraph (2), in the case of— any domestic building and loan association, any mutual savings bank, or any cooperative bank without capital stock organized and operated for mutual purposes and without profit, there shall be allowed a deduction for a reasonable addition to a reserve for bad debts. Such deduction shall be in lieu of any deduction under section 166(a). This section shall apply to an association or bank referred to in paragraph (1) only if it meets the requirements of section 7701(a)(19)(C).

(b) Addition to reserves for bad debts For purposes of subsection (a), the reasonable addition for the taxable year to the reserve for bad debts of any taxpayer described in subsection (a) shall be an amount equal to the sum of— the amount determined to be a reasonable addition to the reserve for losses on nonqualifying loans, computed in the same manner as is provided with respect to additions to the reserves for losses on loans of banks under section 585(b)(2), plus the amount determined by the taxpayer to be a reasonable addition to the reserve for losses on qualifying real property loans, but such amount shall not exceed the amount determined under paragraph (2) or (3), whichever is the larger, but the amount determined under this subparagraph shall in no case be greater than the larger of— the amount determined under paragraph (3), or the amount which, when added to the amount determined under subparagraph (A), equals the amount by which 12 percent of the total deposits or withdrawable accounts of depositors of the taxpayer at the close of such year exceeds the sum of its surplus, undivided profits, and reserves at the beginning of such year (taking into account any portion thereof attributable to the period before the first taxable year beginning after December 31, 1951 ). Subject to subparagraphs (B) and (C), the amount determined under this paragraph for the taxable year shall be an amount equal to 8 percent of the taxable income for such year. The amount determined under subparagraph (A) shall be reduced (but not below 0) by the amount determined under paragraph (1)(A). The amount determined under this paragraph shall not exceed the amount necessary to increase the balance at the close of the taxable year of the reserve for losses on qualifying real property loans to 6 percent of such loans outstanding at such time. For purposes of this paragraph, taxable income shall be computed— by excluding from gross income any amount included therein by reason of subsection (e), without regard to any deduction allowable for any addition to the reserve for bad debts, by excluding from gross income an amount equal to the net gain for the taxable year arising from the sale or exchange of stock of a corporation or of obligations the interest on which is excludable from gross income under section 103, by excluding from gross income dividends with respect to which a deduction is allowable by part VIII of subchapter B, reduced by an amount equal to 8 percent of the dividends received deduction for the taxable year, and if there is a capital gain rate differential (as defined in section 904(b)(3)(D)) for the taxable year, by excluding from gross income the rate differential portion (within the meaning of section 904(b)(3)(E)) of the lesser of— the net long-term capital gain for the taxable year, or the net long-term capital gain for the taxable year from the sale or exchange of property other than property described in clause (iii). The amount determined under this paragraph for the taxable year shall be computed in the same manner as is provided with respect to additions to the reserves for losses on loans of banks under section 585(b)(2).

(c) Treatment of reserves for bad debts Each taxpayer described in subsection (a) which uses the reserve method of accounting for bad debts shall establish and maintain a reserve for losses on qualifying real property loans, a reserve for losses on nonqualifying loans, and a supplemental reserve for losses on loans. For purposes of this title, such reserves shall be treated as reserves for bad debts, but no deduction shall be allowed for any addition to the supplemental reserve for losses on loans. Notwithstanding the second sentence of paragraph (1), any amount allocated pursuant to paragraph (5) (as in effect immediately before the enactment of the Tax Reform Act of 1976) during a taxable year beginning before January 1, 1977 , to the reserve for losses on qualifying real property loans out of the surplus, undivided profits, and bad debt reserves (determined as of December 31, 1962 ) attributable to the period before the first taxable year beginning after December 31, 1951 , shall not be treated as a reserve for bad debts for any purpose other than determining the amount referred to in subsection (b)(1)(B), and for such purpose such amount shall be treated as remaining in such reserve. Any debt becoming worthless or partially worthless in respect of a qualifying real property loan shall be charged to the reserve for losses on such loans, and any debt becoming worthless or partially worthless in respect of a nonqualifying loan shall be charged to the reserve for losses on nonqualifying loans; except that any such debt may, at the election of the taxpayer, be charged in whole or in part to the supplemental reserve for losses on loans.

(d) Loans defined For purposes of this section— The term “qualifying real property loan” means any loan secured by an interest in improved real property or secured by an interest in real property which is to be improved out of the proceeds of the loan, but such term does not include— any loan evidenced by a security (as defined in section 165(g)(2)(C)); any loan, whether or not evidenced by a security (as defined in section 165(g)(2)(C)), the primary obligor on which is— a government or political subdivision or instrumentality thereof; a bank (as defined in section 581); or another member of the same affiliated group; any loan, to the extent secured by a deposit in or share of the taxpayer; or any loan which, within a 60-day period beginning in one taxable year of the creditor and ending in its next taxable year, is made or acquired and then repaid or disposed of, unless the transactions by which such loan was made or acquired and then repaid or disposed of are established to be for bona fide business purposes. For purposes of subparagraph (B)(iii), the term “affiliated group” has the meaning assigned to such term by section 1504(a); except that (i) the phrase “more than 50 percent” shall be substituted for the phrase “at least 80 percent” each place it appears in section 1504(a), and (ii) all corporations shall be treated as includible corporations (without any exclusion under section 1504(b)). The term “nonqualifying loan” means any loan which is not a qualifying real property loan. The term “loan” means debt, as the term “debt” is used in section 166. A regular or residual interest in a REMIC shall be treated as a qualifying real property loan; except that, if less than 95 percent of the assets of such REMIC are qualifying real property loans (determined as if the taxpayer held the assets of the REMIC), such interest shall be so treated only in the proportion which the assets of such REMIC consist of such loans. For purposes of determining whether any interest in a REMIC qualifies under the preceding sentence, any interest in another REMIC held by such REMIC shall be treated as a qualifying real property loan under principles similar to the principles of the preceding sentence, except that if such REMIC’s are part of a tiered structure, they shall be treated as 1 REMIC for purposes of this paragraph.

(e) Distributions to shareholders For purposes of this chapter, any distribution of property (as defined in section 317(a)) by a taxpayer having a balance described in subsection (g)(2)(A)(ii) to a shareholder with respect to its stock, if such distribution is not allowable as a deduction under section 591, shall be treated as made— first out of its earnings and profits accumulated in taxable years beginning after December 31, 1951 , (and, in the case of an S corporation, the accumulated adjustments account, as defined in section 1368(e)(1)) to the extent thereof, then out of the balance taken into account under subsection (g)(2)(A)(ii) (properly adjusted for amounts charged against such reserves for taxable years beginning after December 31, 1987 ), then out of the supplemental reserve for losses on loans, to the extent thereof, then out of such other accounts as may be proper. This paragraph shall apply in the case of any distribution in redemption of stock or in partial or complete liquidation of a taxpayer having a balance described in subsection (g)(2)(A)(ii), except that any such distribution shall be treated as made first out of the amount referred to in subparagraph (B), second out of the amount referred to in subparagraph (C), third out of the amount referred to in subparagraph (A), and then out of such other accounts as may be proper. This paragraph shall not apply to any transaction to which section 381 applies, or to any distribution to the Federal Savings and Loan Insurance Corporation (or any successor thereof) or the Federal Deposit Insurance Corporation in redemption of an interest in a taxpayer having a balance described in subsection (g)(2)(A)(ii), if such interest was originally received by any such entity in exchange for assistance provided under a provision of law referred to in section 597(c). This paragraph shall not apply to any distribution of all of the stock of a bank (as defined in section 581) to another corporation if, immediately after the distribution, such bank and such other corporation are members of the same affiliated group (as defined in section 1504) and the provisions of section 5(e) of the Federal Deposit Insurance Act (as in effect on December 31, 1995 ) or similar provisions are in effect. If any distribution is treated under paragraph (1) as having been made out of the reserves described in subparagraphs (B) and (C) of such paragraph, the amount charged against such reserve shall be the amount which, when reduced by the amount of tax imposed under this chapter and attributable to the inclusion of such amount in gross income, is equal to the amount of such distribution; and the amount so charged against such reserve shall be included in gross income of the taxpayer. For purposes of paragraph (1)(B), additions to the reserve for losses on qualifying real property loans for the taxable year in which the distribution occurs shall be taken into account. For purposes of computing under this section the amount of a reasonable addition to the reserve for losses on qualifying real property loans for any taxable year, any amount charged during any year to such reserve pursuant to the provisions of paragraph (2) shall not be taken into account.

(f) Termination of reserve method Subsections (a), (b), (c), and (d) shall not apply to any taxable year beginning after December 31, 1995 .

(g) 6-year spread of adjustments In the case of any taxpayer who is required by reason of subsection (f) to change its method of computing reserves for bad debts— such change shall be treated as a change in a method of accounting, such change shall be treated as initiated by the taxpayer and as having been made with the consent of the Secretary, and the net amount of the adjustments required to be taken into account by the taxpayer under section 481(a)— shall be determined by taking into account only applicable excess reserves, and as so determined, shall be taken into account ratably over the 6-taxable year period beginning with the first taxable year beginning after December 31, 1995 . For purposes of paragraph (1), the term “applicable excess reserves” means the excess (if any) of— the balance of the reserves described in subsection (c)(1) (other than the supplemental reserve) as of the close of the taxpayer’s last taxable year beginning before January 1, 1996 , over the lesser of— the balance of such reserves as of the close of the taxpayer’s last taxable year beginning before January 1, 1988 , or the balance of the reserves described in subclause (I), reduced in the same manner as under section 585(b)(2)(B)(ii) on the basis of the taxable years described in clause (i) and this clause. In the case of a bank (as defined in section 581) which was not a large bank (as defined in section 585(c)(2)) for its first taxable year beginning after December 31, 1995 — the balance taken into account under subparagraph (A)(ii) shall not be less than the amount which would be the balance of such reserves as of the close of its last taxable year beginning before such date if the additions to such reserves for all taxable years had been determined under section 585(b)(2)(A), and the opening balance of the reserve for bad debts as of the beginning of such first taxable year shall be the balance taken into account under subparagraph (A)(ii) (determined after the application of clause (i) of this subparagraph). The preceding sentence shall not apply for purposes of paragraphs (5) and (6) or subsection (e)(1). If, during any taxable year beginning after December 31, 1995 , a taxpayer to which paragraph (1) applied is not a bank (as defined in section 581), paragraph (1) shall apply to the reserves described in paragraph (2)(A)(ii) and the supplemental reserve; except that such reserves shall be taken into account ratably over the 6-taxable year period beginning with such taxable year. In the case of a bank which meets the residential loan requirement of subparagraph (B) for the first taxable year beginning after December 31, 1995 , or for the following taxable year— no adjustment shall be taken into account under paragraph (1) for such taxable year, and such taxable year shall be disregarded in determining— whether any other taxable year is a taxable year for which an adjustment is required to be taken into account under paragraph (1), and the amount of such adjustment. A taxpayer meets the residential loan requirement of this subparagraph for any taxable year if the principal amount of the residential loans made by the taxpayer during such year is not less than the base amount for such year. For purposes of this paragraph, the term “residential loan” means any loan described in clause (v) of section 7701(a)(19)(C) but only if such loan is incurred in acquiring, constructing, or improving the property described in such clause. For purposes of subparagraph (B), the base amount is the average of the principal amounts of the residential loans made by the taxpayer during the 6 most recent taxable years beginning on or before December 31, 1995 . At the election of the taxpayer who made such loans during each of such 6 taxable years, the preceding sentence shall be applied without regard to the taxable year in which such principal amount was the highest and the taxable year in such principal amount was the lowest. Such an election may be made only for the first taxable year beginning after such date, and, if made for such taxable year, shall apply to the succeeding taxable year unless revoked with the consent of the Secretary. In the case of a taxpayer which is a member of any controlled group of corporations described in section 1563(a)(1), subparagraph (B) shall be applied with respect to such group. In the case of a taxpayer to which paragraph (1) applied and which was not a large bank (as defined in section 585(c)(2)) for its first taxable year beginning after December 31, 1995 : For purposes of determining the net amount of adjustments referred to in section 585(c)(3)(A)(iii), there shall be taken into account only the excess (if any) of the reserve for bad debts as of the close of the last taxable year before the disqualification year over the balance taken into account by such taxpayer under paragraph (2)(A)(ii) of this subsection. For purposes of applying section 585(c)(4)— the balance of the reserve taken into account under subparagraph (B) thereof shall be reduced by the balance taken into account by such taxpayer under paragraph (2)(A)(ii) of this subsection, and no amount shall be includible in gross income by reason of such reduction. The balance taken into account by a taxpayer under paragraph (2)(A)(ii) of this subsection and the supplemental reserve shall be treated as items described in section 381(c). In the case of a taxpayer to which paragraph (1) applied which becomes a credit union described in section 501(c) and exempt from taxation under section 501(a)— any amount required to be included in the gross income of the credit union by reason of this subsection shall be treated as derived from an unrelated trade or business (as defined in section 513), and for purposes of paragraph (3), the credit union shall not be treated as if it were a bank. The Secretary shall prescribe such regulations as may be necessary to carry out this subsection and subsection (e), including regulations providing for the application of such subsections in the case of acquisitions, mergers, spin-offs, and other reorganizations.

§ 594 Alternative tax for mutual savings banks conducting life insurance business

(a) Alternative tax In the case of a mutual savings bank not having capital stock represented by shares, authorized under State law to engage in the business of issuing life insurance contracts, and which conducts a life insurance business in a separate department the accounts of which are maintained separately from the other accounts of the mutual savings bank, there shall be imposed in lieu of the tax imposed by section 11, a tax consisting of the sum of the partial taxes determined under paragraphs (1) and (2): A partial tax computed on the taxable income determined without regard to any items of gross income or deductions properly allocable to the business of the life insurance department, at the rates and in the manner as if this section had not been enacted; and a partial tax computed on the income of the life insurance department determined without regard to any items of gross income or deductions not properly allocable to such department, at the rates and in the manner provided in subchapter L (sec. 801 and following) with respect to life insurance companies.

(b) Limitations of section Subsection (a) shall apply only if the life insurance department would, if it were treated as a separate corporation, qualify as a life insurance company under section 816.

[§§ 595, 596 Repealed. Pub. L. 104–188, title I, § 1616(b)(8), (9), Aug. 20, 1996, 110 Stat. 1857]

§ 597 Treatment of transactions in which Federal financial assistance provided

(a) General rule The treatment for purposes of this chapter of any transaction in which Federal financial assistance is provided with respect to a bank or domestic building and loan association shall be determined under regulations prescribed by the Secretary.

(b) Principles used in prescribing regulations In the case of any acquisition of assets to which section 381(a) does not apply, the regulations prescribed under subsection (a) shall— provide that Federal financial assistance shall be properly taken into account by the institution from which the assets were acquired, and provide the proper method of allocating basis among the assets so acquired (including rights to receive Federal financial assistance). In the case of any transaction not described in paragraph (1), the regulations prescribed under subsection (a) shall provide for the proper treatment of Federal financial assistance and appropriate adjustments to basis or other tax attributes in connection with such assistance. No regulations prescribed under this section shall permit the utilization of any deduction (or other tax benefit) if such amount was in effect reimbursed by nontaxable Federal financial assistance.

(c) Federal financial assistance For purposes of this section, the term “Federal financial assistance” means— any money or other property provided with respect to a domestic building and loan association by the Federal Savings and Loan Insurance Corporation or the Resolution Trust Corporation pursuant to section 406(f) of the National Housing Act (or under any other similar provision of law), and any money or other property provided with respect to a bank or domestic building and loan association by the Federal Deposit Insurance Corporation pursuant to section 11(f) or 13(c) of the Federal Deposit Insurance Act (or under any other similar provision of law), regardless of whether any note or other instrument is issued in exchange therefor.

(d) Domestic building and loan association For purposes of this section, the term “domestic building and loan association” has the meaning given such term by section 7701(a)(19) without regard to subparagraph (C) thereof.

“The amendments made by this subsection [amending this section and provisions set out below] shall apply to any transfer— after December 31, 1988 , and before January 1, 1990 , unless such transfer is pursuant to an acquisition occurring before January 1, 1989 , and after December 31, 1989 , if such transfer is pursuant to an acquisition occurring after December 31, 1988 , and before January 1, 1990 . In the case of any bank or any institution treated as a domestic building and loan association for purposes of section 597 of the 1986 Code by reason of the amendment made by subsection (b)(2)(B), the amendments made by this subsection shall also apply to any transfer before January 1, 1989 , to which the amendments made by subsection (b)(2) [amending this section] apply.”

[§ 601 Repealed. Pub. L. 94–455, title XIX, § 1901(a)(85), Oct. 4, 1976, 90 Stat. 1778]

§ 611 Allowance of deduction for depletion

(a) General rule In the case of mines, oil and gas wells, other natural deposits, and timber, there shall be allowed as a deduction in computing taxable income a reasonable allowance for depletion and for depreciation of improvements, according to the peculiar conditions in each case; such reasonable allowance in all cases to be made under regulations prescribed by the Secretary. For purposes of this part, the term “mines” includes deposits of waste or residue, the extraction of ores or minerals from which is treated as mining under section 613(c). In any case in which it is ascertained as a result of operations or of development work that the recoverable units are greater or less than the prior estimate thereof, then such prior estimate (but not the basis for depletion) shall be revised and the allowance under this section for subsequent taxable years shall be based on such revised estimate.

(b) Special rules In the case of a lease, the deduction under this section shall be equitably apportioned between the lessor and lessee. In the case of property held by one person for life with remainder to another person, the deduction under this section shall be computed as if the life tenant were the absolute owner of the property and shall be allowed to the life tenant. In the case of property held in trust, the deduction under this section shall be apportioned between the income beneficiaries and the trustee in accordance with the pertinent provisions of the instrument creating the trust, or, in the absence of such provisions, on the basis of the trust income allocable to each. In the case of an estate, the deduction under this section shall be apportioned between the estate and the heirs, legatees, and devisees on the basis of the income of the estate allocable to each.

(c) Cross reference For other rules applicable to depreciation of improvements, see section 167.

§ 612 Basis for cost depletion

Except as otherwise provided in this subchapter, the basis on which depletion is to be allowed in respect of any property shall be the adjusted basis provided in section 1011 for the purpose of determining the gain upon the sale or other disposition of such property. ( Aug. 16, 1954, ch. 736 , 68A Stat. 208 .)

§ 613 Percentage depletion

(a) General rule In the case of the mines, wells, and other natural deposits listed in subsection (b), the allowance for depletion under section 611 shall be the percentage, specified in subsection (b), of the gross income from the property excluding from such gross income an amount equal to any rents or royalties paid or incurred by the taxpayer in respect of the property. Such allowance shall not exceed 50 percent (100 percent in the case of oil and gas properties) of the taxpayer’s taxable income from the property (computed without allowance for depletion and without any deduction under section 199A). For purposes of the preceding sentence, the allowable deductions taken into account with respect to expenses of mining in computing the taxable income from the property shall be decreased by an amount equal to so much of any gain which (1) is treated under section 1245 (relating to gain from disposition of certain depreciable property) as ordinary income, and (2) is properly allocable to the property. In no case shall the allowance for depletion under section 611 be less than it would be if computed without reference to this section.

(b) Percentage depletion rates The mines, wells, and other natural deposits, and the percentages, referred to in subsection (a) are as follows: sulphur and uranium; and if from deposits in the United States—anorthosite, clay, laterite, and nephelite syenite (to the extent that alumina and aluminum compounds are extracted therefrom), asbestos, bauxite, celestite, chromite, corundum, fluorspar, graphite, ilmenite, kyanite, mica, olivine, quartz crystals (radio grade), rutile, block steatite talc, and zircon, and ores of the following metals: antimony, beryllium, bismuth, cadmium, cobalt, columbium, lead, lithium, manganese, mercury, molybdenum, nickel, platinum and platinum group metals, tantalum, thorium, tin, titanium, tungsten, vanadium, and zinc. If from deposits in the United States— gold, silver, copper, and iron ore, and oil shale (except shale described in paragraph (5)). metal mines (if paragraph (1)(B) or (2)(A) does not apply), rock asphalt, and vermiculite; and if paragraph (1)(B), (5), or (6)(B) does not apply, ball clay, bentonite, china clay, sagger clay, and clay used or sold for use for purposes dependent on its refractory properties. Asbestos (if paragraph (1)(B) does not apply), brucite, coal, lignite, perlite, sodium chloride, and wollastonite. Clay and shale used or sold for use in the manufacture of sewer pipe or brick, and clay, shale, and slate used or sold for use as sintered or burned lightweight aggregates. gravel, peat, pumice, sand, scoria, shale (except shale described in paragraph (2)(B) or (5)), and stone (except stone described in paragraph (7)); clay used, or sold for use, in the manufacture of drainage and roofing tile, flower pots, and kindred products; and if from brine wells—bromine, calcium chloride, and magnesium chloride. All other minerals, including, but not limited to, aplite, barite, borax, calcium carbonates, diatomaceous earth, dolomite, feldspar, fullers earth, garnet, gilsonite, granite, limestone, magnesite, magnesium carbonates, marble, mollusk shells (including clam shells and oyster shells), phosphate rock, potash, quartzite, slate, soapstone, stone (used or sold for use by the mine owner or operator as dimension stone or ornamental stone), thenardite, tripoli, trona, and (if paragraph (1)(B) does not apply) bauxite, flake graphite, fluorspar, lepidolite, mica, spodumene, and talc (including pyrophyllite), except that, unless sold on bid in direct competition with a bona fide bid to sell a mineral listed in paragraph (3), the percentage shall be 5 percent for any such other mineral (other than slate to which paragraph (5) applies) when used, or sold for use, by the mine owner or operator as rip rap, ballast, road material, rubble, concrete aggregates, or for similar purposes. For purposes of this paragraph, the term “all other minerals” does not include— soil, sod, dirt, turf, water, or mosses; minerals from sea water, the air, or similar inexhaustible sources; or oil and gas wells. For the purposes of this subsection, minerals (other than sodium chloride) extracted from brines pumped from a saline perennial lake within the United States shall not be considered minerals from an inexhaustible source.

(c) Definition of gross income from property For purposes of this section— The term “gross income from the property” means, in the case of a property other than an oil or gas well and other than a geothermal deposit, the gross income from mining. The term “mining” includes not merely the extraction of the ores or minerals from the ground but also the treatment processes considered as mining described in paragraph (4) (and the treatment processes necessary or incidental thereto), and so much of the transportation of ores or minerals (whether or not by common carrier) from the point of extraction from the ground to the plants or mills in which such treatment processes are applied thereto as is not in excess of 50 miles unless the Secretary finds that the physical and other requirements are such that the ore or mineral must be transported a greater distance to such plants or mills. The term “extraction of the ores or minerals from the ground” includes the extraction by mine owners or operators of ores or minerals from the waste or residue of prior mining. The preceding sentence shall not apply to any such extraction of the mineral or ore by a purchaser of such waste or residue or of the rights to extract ores or minerals therefrom. The following treatment processes where applied by the mine owner or operator shall be considered as mining to the extent they are applied to the ore or mineral in respect of which he is entitled to a deduction for depletion under section 611: In the case of coal—cleaning, breaking, sizing, dust allaying, treating to prevent freezing, and loading for shipment; in the case of sulfur recovered by the Frasch process—cleaning, pumping to vats, cooling, breaking, and loading for shipment; in the case of iron ore, bauxite, ball and sagger clay, rock asphalt, and ores or minerals which are customarily sold in the form of a crude mineral product—sorting, concentrating, sintering, and substantially equivalent processes to bring to shipping grade and form, and loading for shipment; in the case of lead, zinc, copper, gold, silver, uranium, or fluorspar ores, potash, and ores or minerals which are not customarily sold in the form of the crude mineral product—crushing, grinding, and beneficiation by concentration (gravity, flotation, amalgamation, electrostatic, or magnetic), cyanidation, leaching, crystallization, precipitation (but not including electrolytic deposition, roasting, thermal or electric smelting, or refining), or by substantially equivalent processes or combination of processes used in the separation or extraction of the product or products from the ore or the mineral or minerals from other material from the mine or other natural deposit; the pulverization of talc, the burning of magnesite, the sintering and nodulizing of phosphate rock, the decarbonation of trona, and the furnacing of quicksilver ores; in the case of calcium carbonates and other minerals when used in making cement—all processes (other than preheating of the kiln feed) applied prior to the introduction of the kiln feed into the kiln, but not including any subsequent process; in the case of clay to which paragraph (5) or (6)(B) of subsection (b) applies—crushing, grinding, and separating the mineral from waste, but not including any subsequent process; in the case of oil shale—extraction from the ground, crushing, loading into the retort, and retorting (including in situ retorting), but not hydrogenation, refining, or any other process subsequent to retorting; and any other treatment process provided for by regulations prescribed by the Secretary which, with respect to the particular ore or mineral, is not inconsistent with the preceding provisions of this paragraph. Unless such processes are otherwise provided for in paragraph (4) (or are necessary or incidental to processes so provided for), the following treatment processes shall not be considered as “mining”: electrolytic deposition, roasting, calcining, thermal or electric smelting, refining, polishing, fine pulverization, blending with other materials, treatment effecting a chemical change, thermal action, and molding or shaping.

(d) Denial of percentage depletion in case of oil and gas wells Except as provided in section 613A, in the case of any oil or gas well, the allowance for depletion shall be computed without reference to this section.

(e) Percentage depletion for geothermal deposits In the case of geothermal deposits located in the United States or in a possession of the United States, for purposes of subsection (a)— such deposits shall be treated as listed in subsection (b), and 15 percent shall be deemed to be the percentage specified in subsection (b). For purposes of paragraph (1), the term “geothermal deposit” means a geothermal reservoir consisting of natural heat which is stored in rocks or in an aqueous liquid or vapor (whether or not under pressure). Such a deposit shall in no case be treated as a gas well for purposes of this section or section 613A, and this section shall not apply to a geothermal deposit which is located outside the United States or its possessions. In the case of any geothermal deposit, the term “gross income from the property” shall, for purposes of this section, not include any amount described in section 613A(d)(5).

§ 613A Limitations on percentage depletion in case of oil and gas wells

(a) General rule Except as otherwise provided in this section, the allowance for depletion under section 611 with respect to any oil or gas well shall be computed without regard to section 613.

(b) Exemption for certain domestic gas wells The allowance for depletion under section 611 shall be computed in accordance with section 613 with respect to— regulated natural gas, and natural gas sold under a fixed contract, and 22 percent shall be deemed to be specified in subsection (b) of section 613 for purposes of subsection (a) of that section. The allowance for depletion under section 611 shall be computed in accordance with section 613 with respect to any qualified natural gas from geopressured brine, and 10 percent shall be deemed to be specified in subsection (b) of section 613 for purposes of subsection (a) of such section. For purposes of this subsection— The term “natural gas sold under a fixed contract” means domestic natural gas sold by the producer under a contract, in effect on February 1, 1975 , and at all times thereafter before such sale, under which the price for such gas cannot be adjusted to reflect to any extent the increase in liabilities of the seller for tax under this chapter by reason of the repeal of percentage depletion for gas. Price increases after February 1, 1975 , shall be presumed to take increases in tax liabilities into account unless the taxpayer demonstrates to the contrary by clear and convincing evidence. The term “regulated natural gas” means domestic natural gas produced and sold by the producer, before July 1, 1976 , subject to the jurisdiction of the Federal Power Commission, the price for which has not been adjusted to reflect to any extent the increase in liability of the seller for tax under this chapter by reason of the repeal of percentage depletion for gas. Price increases after February 1, 1975 , shall be presumed to take increases in tax liabilities into account unless the taxpayer demonstrates the contrary by clear and convincing evidence. The term “qualified natural gas from geopressured brine” means any natural gas— which is determined in accordance with section 503 of the Natural Gas Policy Act of 1978 to be produced from geopressured brine, and which is produced from any well the drilling of which began after September 30, 1978 , and before January 1, 1984 .

(c) Exemption for independent producers and royalty owners Except as provided in subsection (d), the allowance for depletion under section 611 shall be computed in accordance with section 613 with respect to— so much of the taxpayer’s average daily production of domestic crude oil as does not exceed the taxpayer’s depletable oil quantity; and so much of the taxpayer’s average daily production of domestic natural gas as does not exceed the taxpayer’s depletable natural gas quantity; and 15 percent shall be deemed to be specified in subsection (b) of section 613 for purposes of subsection (a) of that section. For purposes of paragraph (1)— the taxpayer’s average daily production of domestic crude oil or natural gas for any taxable year, shall be determined by dividing his aggregate production of domestic crude oil or natural gas, as the case may be, during the taxable year by the number of days in such taxable year, and in the case of a taxpayer holding a partial interest in the production from any property (including an interest held in a partnership) such taxpayer’s production shall be considered to be that amount of such production determined by multiplying the total production of such property by the taxpayer’s percentage participation in the revenues from such property. For purposes of paragraph (1), the taxpayer’s depletable oil quantity shall be equal to— the tentative quantity determined under subparagraph (B), reduced (but not below zero) by except in the case of a taxpayer making an election under paragraph (6)(B), the taxpayer’s average daily marginal production for the taxable year. For purposes of subparagraph (A), the tentative quantity is 1,000 barrels. For purposes of paragraph (1), the depletable natural gas quantity of any taxpayer for any taxable year shall be equal to 6,000 cubic feet multiplied by the number of barrels of the taxpayer’s depletable oil quantity to which the taxpayer elects to have this paragraph apply. The taxpayer’s depletable oil quantity for any taxable year shall be reduced by the number of barrels with respect to which an election under this paragraph applies. Such election shall be made at such time and in such manner as the Secretary shall by regulations prescribe. Except as provided in subsection (d) and subparagraph (B), the allowance for depletion under section 611 shall be computed in accordance with section 613 with respect to— so much of the taxpayer’s average daily marginal production of domestic crude oil as does not exceed the taxpayer’s depletable oil quantity (determined without regard to paragraph (3)(A)(ii)), and so much of the taxpayer’s average daily marginal production of domestic natural gas as does not exceed the taxpayer’s depletable natural gas quantity (determined without regard to paragraph (3)(A)(ii)), and the applicable percentage shall be deemed to be specified in subsection (b) of section 613 for purposes of subsection (a) of that section. If the taxpayer elects to have this subparagraph apply for any taxable year, the rules of subparagraph (A) shall apply to the average daily marginal production of domestic crude oil or domestic natural gas of the taxpayer to which paragraph (1) would have applied without regard to this paragraph. For purposes of subparagraph (A), the term “applicable percentage” means the percentage (not greater than 25 percent) equal to the sum of— 15 percent, plus 1 percentage point for each whole dollar by which $20 exceeds the reference price for crude oil for the calendar year preceding the calendar year in which the taxable year begins. For purposes of this paragraph, the term “reference price” means, with respect to any calendar year, the reference price determined for such calendar year under section 45K(d)(2)(C). The term “marginal production” means domestic crude oil or domestic natural gas which is produced during any taxable year from a property which— is a stripper well property for the calendar year in which the taxable year begins, or is a property substantially all of the production of which during such calendar year is heavy oil. For purposes of this paragraph, the term “stripper well property” means, with respect to any calendar year, any property with respect to which the amount determined by dividing— the average daily production of domestic crude oil and domestic natural gas from producing wells on such property for such calendar year, by the number of such wells, is 15 barrel equivalents or less. For purposes of this paragraph, the term “heavy oil” means domestic crude oil produced from any property if such crude oil had a weighted average gravity of 20 degrees API or less (corrected to 60 degrees Fahrenheit). For purposes of this subsection— the taxpayer’s average daily marginal production of domestic crude oil or natural gas for any taxable year shall be determined by dividing the taxpayer’s aggregate marginal production of domestic crude oil or natural gas, as the case may be, during the taxable year by the number of days in such taxable year, and in the case of a taxpayer holding a partial interest in the production from any property (including any interest held in any partnership), such taxpayer’s production shall be considered to be that amount of such production determined by multiplying the total production of such property by the taxpayer’s percentage participation in the revenues from such property. If the taxpayer’s average daily production of domestic crude oil exceeds his depletable oil quantity, the allowance under paragraph (1)(A) with respect to oil produced during the taxable year from each property in the United States shall be that amount which bears the same ratio to the amount of depletion which would have been allowable under section 613(a) for all of the taxpayer’s oil produced from such property during the taxable year (computed as if section 613 applied to all of such production at the rate specified in paragraph (1) or (6), as the case may be) as his depletable oil quantity bears to the aggregate number of barrels representing the average daily production of domestic crude oil of the taxpayer for such year. If the taxpayer’s average daily production of domestic natural gas exceeds his depletable natural gas quantity, the allowance under paragraph (1)(B) with respect to natural gas produced during the taxable year from each property in the United States shall be that amount which bears the same ratio to the amount of depletion which would have been allowable under section 613(a) for all of the taxpayer’s natural gas produced from such property during the taxable year (computed as if section 613 applied to all of such production at the rate specified in paragraph (1) or (6), as the case may be) as the amount of his depletable natural gas quantity in cubic feet bears to the aggregate number of cubic feet representing the average daily production of domestic natural gas of the taxpayer for such year. If both oil and gas are produced from the property during the taxable year, for purposes of subparagraphs (A) and (B) the taxable income from the property, in applying the taxable income limitation in section 613(a), shall be allocated between the oil production and the gas production in proportion to the gross income during the taxable year from each. In the case of a partnership, the depletion allowance shall be computed separately by the partners and not by the partnership. The partnership shall allocate to each partner his proportionate share of the adjusted basis of each partnership oil or gas property. The allocation is to be made as of the later of the date of acquisition of the oil or gas property by the partnership, or January 1, 1975 . A partner’s proportionate share of the adjusted basis of partnership property shall be determined in accordance with his interest in partnership capital or income and, in the case of property contributed to the partnership by a partner, section 704(c) (relating to contributed property) shall apply in determining such share. Each partner shall separately keep records of his share of the adjusted basis in each oil and gas property of the partnership, adjust such share of the adjusted basis for any depletion taken on such property, and use such adjusted basis each year in the computation of his cost depletion or in the computation of his gain or loss on the disposition of such property by the partnership. For purposes of section 732 (relating to basis of distributed property other than money), the partnership’s adjusted basis in mineral property shall be an amount equal to the sum of the partners’ adjusted basis in such property as determined under this paragraph. For purposes of this subsection, persons who are members of the same controlled group of corporations shall be treated as one taxpayer. If 50 percent or more of the beneficial interest in two or more corporations, trusts, or estates is owned by the same or related persons (taking into account only persons who own at least 5 percent of such beneficial interest), the tentative quantity determined under paragraph (3)(B) shall be allocated among all such entities in proportion to the respective production of domestic crude oil during the period in question by such entities. In the case of individuals who are members of the same family, the tentative quantity determined under paragraph (3)(B) shall be allocated among such individuals in proportion to the respective production of domestic crude oil during the period in question by such individuals. For purposes of this paragraph— the term “controlled group of corporations” has the meaning given to such term by section 1563(a), except that section 1563(b)(2) shall not apply and except that “more than 50 percent” shall be substituted for “at least 80 percent” each place it appears in section 1563(a), a person is a related person to another person if such persons are members of the same controlled group of corporations or if the relationship between such persons would result in a disallowance of losses under section 267 or 707(b), except that for this purpose the family of an individual includes only his spouse and minor children. the family of an individual includes only his spouse and minor children, and each 6,000 cubic feet of domestic natural gas shall be treated as 1 barrel of domestic crude oil. In applying this subsection to a taxable year which is not a calendar year, each portion of such taxable year which occurs during a single calendar year shall be treated as if it were a short taxable year. In applying this subsection, there shall not be taken into account the production of natural gas with respect to which subsection (b) applies. In the case of an S corporation, the allowance for depletion with respect to any oil or gas property shall be computed separately by each shareholder. The S corporation shall allocate to each shareholder his pro rata share of the adjusted basis of the S corporation in each oil or gas property held by the S corporation. The allocation shall be made as of the later of the date of acquisition of the property by the S corporation, or the first day of the first taxable year of the S corporation to which the Subchapter S Revision Act of 1982 applies. Each shareholder shall separately keep records of his share of the adjusted basis in each oil and gas property of the S corporation, adjust such share of the adjusted basis for any depletion taken on such property, and use such adjusted basis each year in the computation of his cost depletion or in the computation of his gain or loss on the disposition of such property by the S corporation. In the case of any distribution of oil or gas property to its shareholders by the S corporation, the corporation’s adjusted basis in the property shall be an amount equal to the sum of the shareholders’ adjusted bases in such property, as determined under this subparagraph.

(d) Limitations on application of subsection (c) The deduction for the taxable year attributable to the application of subsection (c) shall not exceed 65 percent of the taxpayer’s taxable income for the year computed without regard to— any depletion on production from an oil or gas property which is subject to the provisions of subsection (c), any deduction allowable under section 199A, any net operating loss carryback to the taxable year under section 172, any capital loss carryback to the taxable year under section 1212, and in the case of a trust, any distributions to its beneficiary, except in the case of any trust where any beneficiary of such trust is a member of the family (as defined in section 267(c)(4)) of a settlor who created inter vivos and testamentary trusts for members of the family and such settlor died within the last six days of the fifth month in 1970, and the law in the jurisdiction in which such trust was created requires all or a portion of the gross or net proceeds of any royalty or other interest in oil, gas, or other mineral representing any percentage depletion allowance to be allocated to the principal of the trust. If an amount is disallowed as a deduction for the taxable year by reason of application of the preceding sentence, the disallowed amount shall be treated as an amount allowable as a deduction under subsection (c) for the following taxable year, subject to the application of the preceding sentence to such taxable year. For purposes of basis adjustments and determining whether cost depletion exceeds percentage depletion with respect to the production from a property, any amount disallowed as a deduction on the application of this paragraph shall be allocated to the respective properties from which the oil or gas was produced in proportion to the percentage depletion otherwise allowable to such properties under subsection (c). Subsection (c) shall not apply in the case of any taxpayer who directly, or through a related person, sells oil or natural gas (excluding bulk sales of such items to commercial or industrial users), or any product derived from oil or natural gas (excluding bulk sales of aviation fuels to the Department of Defense)— through any retail outlet operated by the taxpayer or a related person, or to any person— obligated under an agreement or contract with the taxpayer or a related person to use a trademark, trade name, or service mark or name owned by such taxpayer or a related person, in marketing or distributing oil or natural gas or any product derived from oil or natural gas, or given authority, pursuant to an agreement or contract with the taxpayer or a related person, to occupy any retail outlet owned, leased, or in any way controlled by the taxpayer or a related person. Notwithstanding the preceding sentence this paragraph shall not apply in any case where the combined gross receipts from the sale of such oil, natural gas, or any product derived therefrom, for the taxable year of all retail outlets taken into account for purposes of this paragraph do not exceed $5,000,000. For purposes of this paragraph, sales of oil, natural gas, or any product derived from oil or natural gas shall not include sales made of such items outside the United States, if no domestic production of the taxpayer or a related person is exported during the taxable year or the immediately preceding taxable year. For purposes of this subsection, a person is a related person with respect to the taxpayer if a significant ownership interest in either the taxpayer or such person is held by the other, or if a third person has a significant ownership interest in both the taxpayer and such person. For purposes of the preceding sentence, the term “significant ownership interest” means— with respect to any corporation, 5 percent or more in value of the outstanding stock of such corporation, with respect to a partnership, 5 percent or more interest in the profits or capital of such partnership, and with respect to an estate or trust, 5 percent or more of the beneficial interests in such estate or trust. For purposes of determining a significant ownership interest, an interest owned by or for a corporation, partnership, trust, or estate shall be considered as owned directly both by itself and proportionately by its shareholders, partners, or beneficiaries, as the case may be. If the taxpayer or one or more related persons engages in the refining of crude oil, subsection (c) shall not apply to the taxpayer for a taxable year if the average daily refinery runs of the taxpayer and such persons for the taxable year exceed 75,000 barrels. For purposes of this paragraph, the average daily refinery runs for any taxable year shall be determined by dividing the aggregate refinery runs for the taxable year by the number of days in the taxable year. In the case of any oil or gas property to which subsection (c) applies, for purposes of section 613, the term “gross income from the property” shall not include any lease bonus, advance royalty, or other amount payable without regard to production from property.

(e) Definitions For purposes of this section— The term “crude oil” includes a natural gas liquid recovered from a gas well in lease separators or field facilities. The term “natural gas” means any product (other than crude oil) of an oil or gas well if a deduction for depletion is allowable under section 611 with respect to such product. The term “domestic” refers to production from an oil or gas well located in the United States or in a possession of the United States. The term “barrel” means 42 United States gallons.

§ 614 Definition of property

(a) General rule For the purpose of computing the depletion allowance in the case of mines, wells, and other natural deposits, the term “property” means each separate interest owned by the taxpayer in each mineral deposit in each separate tract or parcel of land.

(b) Special rules as to operating mineral interests in oil and gas wells or geothermal deposits In the case of oil and gas wells or geothermal deposits— Except as otherwise provided in this subsection— all of the taxpayer’s operating mineral interests in a separate tract or parcel of land shall be combined and treated as one property, and the taxpayer may not combine an operating mineral interest in one tract or parcel of land with an operating mineral interest in another tract or parcel of land. If the taxpayer has more than one operating mineral interest in a single tract or parcel of land, he may elect to treat one or more of such operating mineral interests as separate properties. The taxpayer may not have more than one combination of operating mineral interests in a single tract or parcel of land. If the taxpayer makes the election provided in this paragraph with respect to any interest in a tract or parcel of land, each operating mineral interest which is discovered or acquired by the taxpayer in such tract or parcel of land after the taxable year for which the election is made shall be treated— if there is no combination of interests in such tract or parcel, as a separate property unless the taxpayer elects to combine it with another interest, or if there is a combination of interests in such tract or parcel, as part of such combination unless the taxpayer elects to treat it as a separate property. Under regulations prescribed by the Secretary, if one or more of the taxpayer’s operating mineral interests participate, under a voluntary or compulsory unitization or pooling agreement, in a single cooperative or unit plan of operation, then for the period of such participation— they shall be treated for all purposes of this subtitle as one property, and the application of paragraphs (1), (2), and (4) in respect of such interests shall be suspended. Subparagraph (A) shall apply to a voluntary agreement only if all the operating mineral interests covered by such agreement— are in the same deposit, or are in 2 or more deposits the joint development or production of which is logical from the standpoint of geology, convenience, economy, or conservation, and are in tracts or parcels of land which are contiguous or in close proximity. Any election provided in paragraph (2) shall be made for each operating mineral interest, in the manner prescribed by the Secretary by regulations, not later than the time prescribed by law for filing the return (including extensions thereof) for the first taxable year in which any expenditure for development or operation in respect of such operating mineral interest is made by the taxpayer after the acquisition of such interest. Any election under paragraph (2) shall be for all purposes of this subtitle and shall be binding on the taxpayer for all subsequent taxable years.

(c) Special rules as to operating mineral interests in mines Except in the case of oil and gas wells and geothermal deposits, if a taxpayer owns two or more separate operating mineral interests which constitute part or all of an operating unit, he may elect (for all purposes of this subtitle)— to form an aggregation of, and to treat as one property, all such interests owned by him which comprise any one mine or any two or more mines; and to treat as a separate property each such interest which is not included within an aggregation referred to in subparagraph (A). For purposes of this paragraph, separate operating mineral interests which constitute part or all of an operating unit may be aggregated whether or not they are included in a single tract or parcel of land and whether or not they are included in contiguous tracts or parcels. For purposes of this paragraph, a taxpayer may elect to form more than one aggregation of operating mineral interests within any one operating unit; but no aggregation may include any operating mineral interest which is a part of a mine without including all of the operating mineral interests which are a part of such mine in the first taxable year for which the election to aggregate is effective, and any operating mineral interest which thereafter becomes a part of such mine shall be included in such aggregation. Except in the case of oil and gas wells and geothermal deposits, if a single tract or parcel of land contains a mineral deposit which is being extracted, or will be extracted, by means of two or more mines for which expenditures for development or operation have been made by the taxpayer, then the taxpayer may elect to allocate to such mines, under regulations prescribed by the Secretary, all of the tract or parcel of land and of the mineral deposit contained therein, and to treat as a separate property that portion of the tract or parcel of land and of the mineral deposit so allocated to each mine. A separate property formed pursuant to an election under this paragraph shall be treated as a separate property for all purposes of this subtitle (including this paragraph). A separate property so formed may, under regulations prescribed by the Secretary, be included as a part of an aggregation in accordance with paragraphs (1) and (3). The election provided by this paragraph may not be made with respect to any property which is a part of an aggregation formed by the taxpayer under paragraph (1) except with the consent of the Secretary. The elections provided by paragraphs (1) and (2) shall be made, in accordance with regulations prescribed by the Secretary, not later than the time prescribed for filing the return (including extensions thereof) for the first taxable year— in which, in the case of an election under paragraph (1), any expenditure for development or operation in respect of the separate operating mineral interest is made by the taxpayer after the acquisition of such interest, or in which, in the case of an election under paragraph (2), expenditures for development or operation of more than one mine in respect of a property are made by the taxpayer after the acquisition of the property. An election made under paragraph (1) or (2) for a taxable year shall be binding upon the taxpayer for such year and all subsequent taxable years, except that the Secretary may consent to a different treatment of any interest with respect to which an election has been made.

(d) Operating mineral interests defined For purposes of this section, the term “operating mineral interest” includes only an interest in respect of which the costs of production of the mineral are required to be taken into account by the taxpayer for purposes of computing the taxable income limitation provided for in section 613, or would be so required if the mine, well, or other natural deposit were in the production stage.

(e) Special rule as to nonoperating mineral interests If a taxpayer owns two or more separate nonoperating mineral interests in a single tract or parcel of land or in two or more adjacent tracts or parcels of land, the Secretary shall, on showing by the taxpayer that a principal purpose is not the avoidance of tax, permit the taxpayer to treat (for all purposes of this subtitle) all such mineral interests in each separate kind of mineral deposit as one property. If such permission is granted for any taxable year, the taxpayer shall treat such interests as one property for all subsequent taxable years unless the Secretary consents to a different treatment. For purposes of this subsection, the term “nonoperating mineral interests” includes only interests which are not operating mineral interests.

[§ 615 Repealed. Pub. L. 94–455, title XIX, § 1901(a)(88), Oct. 4, 1976, 90 Stat. 1779]

§ 616 Development expenditures

(a) In general Except as provided in subsections (b) and (d), there shall be allowed as a deduction in computing taxable income all expenditures paid or incurred during the taxable year for the development of a mine or other natural deposit (other than an oil or gas well) if paid or incurred after the existence of ores or minerals in commercially marketable quantities has been disclosed. This section shall not apply to expenditures for the acquisition or improvement of property of a character which is subject to the allowance for depreciation provided in section 167, but allowances for depreciation shall be considered, for purposes of this section, as expenditures.

(b) Election of taxpayer At the election of the taxpayer, made in accordance with regulations prescribed by the Secretary, expenditures described in subsection (a) paid or incurred during the taxable year shall be treated as deferred expenses and shall be deductible on a ratable basis as the units of produced ores or minerals benefited by such expenditures are sold. In the case of such expenditures paid or incurred during the development stage of the mine or deposit, the election shall apply only with respect to the excess of such expenditures during the taxable year over the net receipts during the taxable year from the ores or minerals produced from such mine or deposit. The election under this subsection, if made, must be for the total amount of such expenditures, or the total amount of such excess, as the case may be, with respect to the mine or deposit, and shall be binding for such taxable year.

(c) Adjusted basis of mine or deposit The amount of expenditures which are treated under subsection (b) as deferred expenses shall be taken into account in computing the adjusted basis of the mine or deposit, except that such amount, and the adjustments to basis provided in section 1016(a)(9), shall be disregarded in determining the adjusted basis of the property for the purpose of computing a deduction for depletion under section 611.

(d) Special rules for foreign development In the case of any expenditures paid or incurred with respect to the development of a mine or other natural deposit (other than an oil, gas, or geothermal well) located outside of the United States— subsections (a) and (b) shall not apply, and such expenditures shall— at the election of the taxpayer, be included in adjusted basis for purposes of computing the amount of any deduction allowable under section 611 (without regard to section 613), or if subparagraph (A) does not apply, be allowed as a deduction ratably over the 10-taxable year period beginning with the taxable year in which such expenditures were paid or incurred.

(e) Cross reference For election of 10-year amortization of expenditures allowable as a deduction under subsection (a), see section 59(e).

§ 617 Deduction and recapture of certain mining exploration expenditures

(a) Allowance of deduction At the election of the taxpayer, expenditures paid or incurred during the taxable year for the purpose of ascertaining the existence, location, extent, or quality of any deposit of ore or other mineral, and paid or incurred before the beginning of the development stage of the mine, shall be allowed as a deduction in computing taxable income. This subsection shall apply only with respect to the amount of such expenditures which, but for this subsection, would not be allowable as a deduction for the taxable year. This subsection shall not apply to expenditures for the acquisition or improvement of property of a character which is subject to the allowance for depreciation provided in section 167, but allowances for depreciation shall be considered, for purposes of this subsection, as expenditures paid or incurred. In no case shall this subsection apply with respect to amounts paid or incurred for the purpose of ascertaining the existence, location, extent, or quality of any deposit of oil or gas or of any mineral with respect to which a deduction for percentage depletion is not allowable under section 613. Any election under this subsection shall be made in such manner as the Secretary may by regulations prescribe. The election provided by paragraph (1) for the taxable year may be made at any time before the expiration of the period prescribed for making a claim for credit or refund of the tax imposed by this chapter for the taxable year. Such an election for the taxable year shall apply to all expenditures described in paragraph (1) paid or incurred by the taxpayer during the taxable year or during any subsequent taxable year. Such an election may not be revoked unless the Secretary consents to such revocation. The statutory period for the assessment of any deficiency for any taxable year, to the extent such deficiency is attributable to an election or revocation of an election under this subsection, shall not expire before the last day of the 2-year period beginning on the day after the date on which such election or revocation of election is made; and such deficiency may be assessed at any time before the expiration of such 2-year period, notwithstanding any law or rule of law which would otherwise prevent such assessment.

(b) Recapture on reaching producing stage If, in any taxable year, any mine with respect to which expenditures were deducted pursuant to subsection (a) reaches the producing stage, then— If the taxpayer so elects with respect to all such mines reaching the producing stage during the taxable year, he shall include in gross income for the taxable year an amount equal to the adjusted exploration expenditures with respect to such mines, and the amount so included in income shall be treated for purposes of this subtitle as expenditures which (i) are paid or incurred on the respective dates on which the mines reach the producing stage, and (ii) are properly chargeable to capital account. If subparagraph (A) does not apply with respect to any such mine, then the deduction for depletion under section 611 with respect to the property shall be disallowed until the amount of depletion which would be allowable but for this subparagraph equals the amount of the adjusted exploration expenditures with respect to such mine. Any election under this subsection shall be made in such manner as the Secretary may by regulations prescribe. The election provided by paragraph (1) for any taxable year may be made or changed not later than the time prescribed by law for filing the return (including extensions thereof) for such taxable year.

(c) Recapture in case of bonus or royalty If an election has been made under subsection (a) with respect to expenditures relating to a mining property and the taxpayer receives or accrues a bonus or a royalty with respect to such property, then the deduction for depletion under section 611 with respect to the bonus or royalty shall be disallowed until the amount of depletion which would be allowable but for this subsection equals the amount of the adjusted exploration expenditures with respect to the property to which the bonus or royalty relates.

(d) Gain from dispositions of certain mining property Except as otherwise provided in this subsection, if mining property is disposed of the lower of— the adjusted exploration expenditures with respect to such property, or the excess of— the amount realized (in the case of a sale, exchange, or involuntary conversion), or the fair market value (in the case of any other disposition), over the adjusted basis of such property, shall be treated as ordinary income. Such gain shall be recognized notwithstanding any other provision of this subtitle. For purposes of paragraph (1)— In the case of the disposition of a portion of a mining property (other than an undivided interest), the entire amount of the adjusted exploration expenditures with respect to such property shall be treated as attributable to such portion to the extent of the amount of the gain to which paragraph (1) applies. In the case of the disposition of an undivided interest in a mining property (or a portion thereof), a proportionate part of the adjusted exploration expenditures with respect to such property shall be treated as attributable to such undivided interest to the extent of the amount of the gain to which paragraph (1) applies. This paragraph shall not apply to any expenditure to the extent the taxpayer establishes to the satisfaction of the Secretary that such expenditure relates neither to the portion (or interest therein) disposed of nor to any mine, in the property held by the taxpayer before the disposition, which has reached the producing stage. Paragraphs (1), (2), and (3) of section 1245(b) (relating to exceptions and limitations with respect to gain from disposition of certain depreciable property) shall apply in respect of this subsection in the same manner and with the same effect as if references in section 1245(b) to section 1245 or any provision thereof were references to this subsection or the corresponding provisions of this subsection and as if references to section 1245 property were references to mining property. This subsection shall apply notwithstanding any other provision of this subtitle. This subsection shall not apply to any disposition to which section 1254 applies.

(e) Basis of property The basis of any property shall not be reduced by the amount of any depletion which would be allowable but for the application of this section. The Secretary shall prescribe such regulations as he may deem necessary to provide for adjustments to the basis of property to reflect gain recognized under subsection (d)(1).

(f) Definitions For purposes of this section The term “adjusted exploration expenditures” means, with respect to any property or mine— the amount of the expenditures allowed for the taxable year and all preceding taxable years as deductions under subsection (a) to the taxpayer or any other person which are properly chargeable to such property or mine and which (but for the election under subsection (a)) would be reflected in the adjusted basis of such property or mine, reduced by for the taxable year and for each preceding taxable year, the amount (if any) by which (i) the amount which would have been allowable for percentage depletion under section 613 but for the deduction of such expenditures, exceeds (ii) the amount allowable for depletion under section 611, properly adjusted for any amounts included in gross income under subsection (b) or (c) and for any amounts of gain to which subsection (d) applied. The term “mining property” means any property (within the meaning of section 614 after the application of subsections (c) and (e) thereof) with respect to which any expenditures allowed as a deduction under subsection (a)(1) are properly chargeable. A transaction which constitutes a disposal of coal or iron ore under section 631(c) shall be treated as a disposition. In such a case, the excess referred to in subsection (d)(1)(B) shall be treated as equal to the gain (if any) referred to in section 631(c).

(g) Special rules relating to partnership property In the case of any property or mine received by the taxpayer in a distribution with respect to part or all of his interest in a partnership, the adjusted exploration expenditures with respect to such property or mine include the adjusted exploration expenditures (not otherwise included under subsection (f)(1)) with respect to such property or mine immediately prior to such distribution, but the adjusted exploration expenditures with respect to any such property or mine shall be reduced by the amount of gain to which section 751(b) applied realized by the partnership (as constituted after the distribution) on the distribution of such property or mine. In the case of any property or mine held by a partnership after a distribution to a partner to which section 751(b) applied, the adjusted exploration expenditures with respect to such property or mine shall, under regulations prescribed by the Secretary, be reduced by the amount of gain to which section 751(b) applied realized by such partner with respect to such distribution on account of such property or mine.

(h) Special rules for foreign exploration In the case of any expenditures paid or incurred before the development stage for the purpose of ascertaining the existence, location, extent, or quality of any deposit of ore or other mineral (other than an oil, gas, or geothermal well) located outside the United States— subsection (a) shall not apply, and such expenditures shall— at the election of the taxpayer, be included in adjusted basis for purposes of computing the amount of any deduction allowable under section 611 (without regard to section 613), or if subparagraph (A) does not apply, be allowed as a deduction ratably over the 10-taxable year period beginning with the taxable year in which such expenditures were paid or incurred.

(i) Cross reference For election of 10-year amortization of expenditures allowable as a deduction under this section, see section 59(e).

[§ 621 Repealed. Pub. L. 101–508, title XI, § 11801(a)(28), Nov. 5, 1990, 104 Stat. 1388–521]

§ 631 Gain or loss in the case of timber, coal, or domestic iron ore

(a) Election to consider cutting as sale or exchange If the taxpayer so elects on his return for a taxable year, the cutting of timber (for sale or for use in the taxpayer’s trade or business) during such year by the taxpayer who owns, or has a contract right to cut, such timber (providing he has owned such timber or has held such contract right for a period of more than 1 year) shall be considered as a sale or exchange of such timber cut during such year. If such election has been made, gain or loss to the taxpayer shall be recognized in an amount equal to the difference between the fair market value of such timber, and the adjusted basis for depletion of such timber in the hands of the taxpayer. Such fair market value shall be the fair market value as of the first day of the taxable year in which such timber is cut, and shall thereafter be considered as the cost of such cut timber to the taxpayer for all purposes for which such cost is a necessary factor. If a taxpayer makes an election under this subsection, such election shall apply with respect to all timber which is owned by the taxpayer or which the taxpayer has a contract right to cut and shall be binding on the taxpayer for the taxable year for which the election is made and for all subsequent years, unless the Secretary, on showing of undue hardship, permits the taxpayer to revoke his election; such revocation, however, shall preclude any further elections under this subsection except with the consent of the Secretary. For purposes of this subsection and subsection (b), the term “timber” includes evergreen trees which are more than 6 years old at the time severed from the roots and are sold for ornamental purposes.

(b) Disposal of timber In the case of the disposal of timber held for more than 1 year before such disposal, by the owner thereof under any form or type of contract by virtue of which such owner either retains an economic interest in such timber or makes an outright sale of such timber, the difference between the amount realized from the disposal of such timber and the adjusted depletion basis thereof, shall be considered as though it were a gain or loss, as the case may be, on the sale of such timber. In determining the gross income, the adjusted gross income, or the taxable income of the lessee, the deductions allowable with respect to rents and royalties shall be determined without regard to the provisions of this subsection. In the case of disposal of timber with a retained economic interest, the date of disposal of such timber shall be deemed to be the date such timber is cut, but if payment is made to the owner under the contract before such timber is cut the owner may elect to treat the date of such payment as the date of disposal of such timber. For purposes of this subsection, the term “owner” means any person who owns an interest in such timber, including a sublessor and a holder of a contract to cut timber.

(c) Disposal of coal or domestic iron ore with a retained economic interest In the case of the disposal of coal (including lignite), or iron ore mined in the United States, held for more than 1 year before such disposal, by the owner thereof under any form of contract by virtue of which such owner retains an economic interest in such coal or iron ore, the difference between the amount realized from the disposal of such coal or iron ore and the adjusted depletion basis thereof plus the deductions disallowed for the taxable year under section 272 shall be considered as though it were a gain or loss, as the case may be, on the sale of such coal or iron ore. If for the taxable year of such gain or loss the maximum rate of tax imposed by this chapter on any net capital gain is less than such maximum rate for ordinary income, such owner shall not be entitled to the allowance for percentage depletion provided in section 613 with respect to such coal or iron ore. This subsection shall not apply to income realized by any owner as a co-adventurer, partner, or principal in the mining of such coal or iron ore, and the word “owner” means any person who owns an economic interest in coal or iron ore in place, including a sublessor. The date of disposal of such coal or iron ore shall be deemed to be the date such coal or iron ore is mined. In determining the gross income, the adjusted gross income, or the taxable income of the lessee, the deductions allowable with respect to rents and royalties shall be determined without regard to the provisions of this subsection. This subsection shall have no application, for purposes of applying subchapter G, relating to corporations used to avoid income tax on shareholders (including the determinations of the amount of the deductions under section 535(b)(6) or section 545(b)(5)). This subsection shall not apply to any disposal of iron ore or coal— to a person whose relationship to the person disposing of such iron ore or coal would result in the disallowance of losses under section 267 or 707(b), or to a person owned or controlled directly or indirectly by the same interests which own or control the person disposing of such iron ore or coal.

[§ 632 Repealed. Pub. L. 94–455, title XIX, § 1901(a)(90), Oct. 4, 1976, 90 Stat. 1779]

§ 636 Income tax treatment of mineral production payments

(a) Carved-out production payments A production payment carved out of mineral property shall be treated, for purposes of this subtitle, as if it were a mortgage loan on the property, and shall not qualify as an economic interest in the mineral property. In the case of a production payment carved out for exploration or development of a mineral property, the preceding sentence shall apply only if and to the extent gross income from the property (for purposes of section 613) would be realized, in the absence of the application of such sentence, by the person creating the production payment.

(b) Retained production payment on sale of mineral property A production payment retained on the sale of a mineral property shall be treated, for purposes of this subtitle, as if it were a purchase money mortgage loan and shall not qualify as an economic interest in the mineral property.

(c) Retained production payment on lease of mineral property A production payment retained in a mineral property by the lessor in a leasing transaction shall be treated, for purposes of this subtitle, insofar as the lessee (or his successors in interest) is concerned, as if it were a bonus granted by the lessee to the lessor payable in installments. The treatment of the production payment in the hands of the lessor shall be determined without regard to the provisions of this subsection.

(d) Definition As used in this section, the term “mineral property” has the meaning assigned to the term “property” in section 614(a).

(e) Regulations The Secretary shall prescribe such regulations as may be necessary to carry out the purposes of this section.

§ 638 Continental shelf areas

For purposes of applying the provisions of this chapter (including sections 861(a)(3) and 862(a)(3) in the case of the performance of personal services) with respect to mines, oil and gas wells, and other natural deposits— the term “United States” when used in a geographical sense includes the seabed and subsoil of those submarine areas which are adjacent to the territorial waters of the United States and over which the United States has exclusive rights, in accordance with international law, with respect to the exploration and exploitation of natural resources; and the terms “foreign country” and “possession of the United States” when used in a geographical sense include the seabed and subsoil of those submarine areas which are adjacent to the territorial waters of the foreign country or such possession and over which the foreign country (or the United States in case of such possession) has exclusive rights, in accordance with international law, with respect to the exploration and exploitation of natural resources, but this paragraph shall apply in the case of a foreign country only if it exercises, directly or indirectly, taxing jurisdiction with respect to such exploration or exploitation. No foreign country shall, by reason of the application of this section, be treated as a country contiguous to the United States. (Added Pub. L. 91–172, title V, § 505(a) , Dec. 30, 1969 , 83 Stat. 634 .)

§ 641 Imposition of tax

(a) Application of tax The tax imposed by section 1(e) shall apply to the taxable income of estates or of any kind of property held in trust, including— income accumulated in trust for the benefit of unborn or unascertained persons or persons with contingent interests, and income accumulated or held for future distribution under the terms of the will or trust; income which is to be distributed currently by the fiduciary to the beneficiaries, and income collected by a guardian of an infant which is to be held or distributed as the court may direct; income received by estates of deceased persons during the period of administration or settlement of the estate; and income which, in the discretion of the fiduciary, may be either distributed to the beneficiaries or accumulated.

(b) Computation and payment The taxable income of an estate or trust shall be computed in the same manner as in the case of an individual, except as otherwise provided in this part. The tax shall be computed on such taxable income and shall be paid by the fiduciary. For purposes of this subsection, a foreign trust or foreign estate shall be treated as a nonresident alien individual who is not present in the United States at any time.

(c) Special rules for taxation of electing small business trusts For purposes of this chapter— the portion of any electing small business trust which consists of stock in 1 or more S corporations shall be treated as a separate trust, and the amount of the tax imposed by this chapter on such separate trust shall be determined with the modifications of paragraph (2). For purposes of paragraph (1), the modifications of this paragraph are the following: Except as provided in section 1(h), the amount of the tax imposed by section 1(e) shall be determined by using the highest rate of tax set forth in section 1(e). The exemption amount under section 55(d) shall be zero. The only items of income, loss, deduction, or credit to be taken into account are the following: The items required to be taken into account under section 1366. Any gain or loss from the disposition of stock in an S corporation. To the extent provided in regulations, State or local income taxes or administrative expenses to the extent allocable to items described in clauses (i) and (ii). Any interest expense paid or accrued on indebtedness incurred to acquire stock in an S corporation. No deduction or credit shall be allowed for any amount not described in this paragraph, and no item described in this paragraph shall be apportioned to any beneficiary. No amount shall be allowed under paragraph (1) or (2) of section 1211(b). Section 642(c) shall not apply. For purposes of section 170(b)(1)(G), adjusted gross income shall be computed in the same manner as in the case of an individual, except that the deductions for costs which are paid or incurred in connection with the administration of the trust and which would not have been incurred if the property were not held in such trust shall be treated as allowable in arriving at adjusted gross income. For purposes of determining— the amount of the tax imposed by this chapter on the portion of any electing small business trust not treated as a separate trust under paragraph (1), and the distributable net income of the entire trust, the items referred to in paragraph (2)(C) shall be excluded. Except as provided in the preceding sentence, this subsection shall not affect the taxation of any distribution from the trust. If a portion of an electing small business trust ceases to be treated as a separate trust under paragraph (1), any carryover or excess deduction of the separate trust which is referred to in section 642(h) shall be taken into account by the entire trust. For purposes of this subsection, the term “electing small business trust” has the meaning given such term by section 1361(e)(1).

§ 642 Special rules for credits and deductions

(a) Foreign tax credit allowed An estate or trust shall be allowed the credit against tax for taxes imposed by foreign countries and possessions of the United States, to the extent allowed by section 901, only in respect of so much of the taxes described in such section as is not properly allocable under such section to the beneficiaries.

(b) Deduction for personal exemption An estate shall be allowed a deduction of $600. E x ce pt a so t h er w i se p ro v i d e d in t hi s p a r a g r a p h, a t r u s t s ha ll b e a ll o w e d a d e d u c t i o n o f$ 100. A trust which, under its governing instrument, is required to distribute all of its income currently shall be allowed a deduction of $300. A q u a l i f i e dd i s abi l i t y t r u s t s ha ll b e a ll o w e d a d e d u c t i o n e q u a lt o t h ee x e m pt i o nam o u n t u n d ersec t i o n 151 (d), d e t er min e d — b y t re a t in g s u c h t r u s t a s anin d i v i d u a l d escr ib e d in sec t i o n 68 (b) (1) (C), 1 an d b y a ppl y in g sec t i o n 67 (e) (w i t h o u tt h ere f ere n ce t osec t i o n 642 (b)) f or p u r p oseso fd e t er minin g t h e a d j u s t e d g ross in co m eo f t h e t r u s t . F or p u r p oseso f c l a u se (i), t h e t er m “ q u a l i f i e dd i s abi l i t y t r u s t ” m e an s an y t r u s t i f — s u c h t r u s t i s a d i s abi l i t y t r u s t d escr ib e d in s u b sec t i o n (c) (2) (B) (i v) o f sec t i o n 1917 o f t h e S oc ia lS ec u r i t y A c t (42 U . S . C .1396 p), an d a ll o f t h e b e n e f i c ia r i eso f t h e t r u s t a so f t h ec l oseo f t h e t a x ab l eye a r a re d e t er min e d b y t h e C o mmi ss i o n ero f S oc ia lS ec u r i t y t o ha v e b ee n d i s ab l e d (w i t hin t h e m e anin g o f sec t i o n 1614 (a) (3) o f t h e S oc ia lS ec u r i t y A c t, 42 U . S . C .1382 c (a) (3)) f orso m e p or t i o n o f s u c h ye a r . A t r u s t s ha ll n o t f ai lt o m ee tt h ere q u i re m e n t so f s u b c l a u se (II) m ere l y b ec a u se t h ecor p u so f t h e t r u s t ma yre v er tt o a p erso n w h o i s n o t so d i s ab l e d a f t er t h e t r u s t ce a ses t o ha v e an y b e n e f i c ia ry w h o i sso d i s ab l e d . I n t h ec a seo f an y t a x ab l eye a r in w hi c h t h ee x e m pt i o nam o u n t u n d ersec t i o n 151 (d) i szero, c l a u se (i) s ha ll b e a ppl i e d b ys u b s t i t u t in g “$ 4,150” for “the exemption amount under section 151(d)”. In the case of any taxable year beginning in a calendar year after 2018, the $4,150 amount in subparagraph (A) shall be increased in the same manner as provided in section 6334(d)(4)(C). The deductions allowed by this subsection shall be in lieu of the deductions allowed under section 151 (relating to deduction for personal exemption).

(c) Deduction for amounts paid or permanently set aside for a charitable purpose In the case of an estate or trust (other than a trust meeting the specifications of subpart B), there shall be allowed as a deduction in computing its taxable income (in lieu of the deduction allowed by section 170(a), relating to deduction for charitable, etc., contributions and gifts) any amount of the gross income, without limitation, which pursuant to the terms of the governing instrument is, during the taxable year, paid for a purpose specified in section 170(c) (determined without regard to section 170(c)(2)(A)). If a charitable contribution is paid after the close of such taxable year and on or before the last day of the year following the close of such taxable year, then the trustee or administrator may elect to treat such contribution as paid during such taxable year. The election shall be made at such time and in such manner as the Secretary prescribes by regulations. In the case of an estate, and in the case of a trust (other than a trust meeting the specifications of subpart B) required by the terms of its governing instrument to set aside amounts which was— created on or before October 9, 1969 , if— an irrevocable remainder interest is transferred to or for the use of an organization described in section 170(c), or the grantor is at all times after October 9, 1969 , under a mental disability to change the terms of the trust; or established by a will executed on or before October 9, 1969 , if— the testator dies before October 9, 1972 , without having republished the will after October 9, 1969 , by codicil or otherwise, the testator at no time after October 9, 1969 , had the right to change the portions of the will which pertain to the trust, or the will is not republished by codicil or otherwise before October 9, 1972 , and the testator is on such date and at all times thereafter under a mental disability to republish the will by codicil or otherwise, there shall also be allowed as a deduction in computing its taxable income any amount of the gross income, without limitation, which pursuant to the terms of the governing instrument is, during the taxable year, permanently set aside for a purpose specified in section 170(c), or is to be used exclusively for religious, charitable, scientific, literary, or educational purposes, or for the prevention of cruelty to children or animals, or for the establishment, acquisition, maintenance, or operation of a public cemetery not operated for profit. In the case of a trust, the preceding sentence shall apply only to gross income earned with respect to amounts transferred to the trust before October 9, 1969 , or transferred under a will to which subparagraph (B) applies. In the case of a pooled income fund (as defined in paragraph (5)), there shall also be allowed as a deduction in computing its taxable income any amount of the gross income attributable to gain from the sale of a capital asset held for more than 1 year, without limitation, which pursuant to the terms of the governing instrument is, during the taxable year, permanently set aside for a purpose specified in section 170(c). To the extent that the amount otherwise allowable as a deduction under this subsection consists of gain described in section 1202(a), proper adjustment shall be made for any exclusion allowable to the estate or trust under section 1202. In the case of a trust, the deduction allowed by this subsection shall be subject to section 681 (relating to unrelated business income). For purposes of paragraph (3), a pooled income fund is a trust— to which each donor transfers property, contributing an irrevocable remainder interest in such property to or for the use of an organization described in section 170(b)(1)(A) (other than in clauses (vii) or (viii)), and retaining an income interest for the life of one or more beneficiaries (living at the time of such transfer), in which the property transferred by each donor is commingled with property transferred by other donors who have made or make similar transfers, which cannot have investments in securities which are exempt from the taxes imposed by this subtitle, which includes only amounts received from transfers which meet the requirements of this paragraph, which is maintained by the organization to which the remainder interest is contributed and of which no donor or beneficiary of an income interest is a trustee, and from which each beneficiary of an income interest receives income, for each year for which he is entitled to receive the income interest referred to in subparagraph (A), determined by the rate of return earned by the trust for such year. For purposes of determining the amount of any charitable contribution allowable by reason of a transfer of property to a pooled fund, the value of the income interest shall be determined on the basis of the highest rate of return earned by the fund for any of the 3 taxable years immediately preceding the taxable year of the fund in which the transfer is made. In the case of funds in existence less than 3 taxable years preceding the taxable year of the fund in which a transfer is made the rate of return shall be deemed to be 6 percent per annum, except that the Secretary may prescribe a different rate of return. In the case of a private foundation which is not exempt from taxation under section 501(a) for the taxable year, the provisions of this subsection shall not apply and the provisions of section 170 shall apply.

(d) Net operating loss deduction The benefit of the deduction for net operating losses provided by section 172 shall be allowed to estates and trusts under regulations prescribed by the Secretary.

(e) Deduction for depreciation and depletion An estate or trust shall be allowed the deduction for depreciation and depletion only to the extent not allowable to beneficiaries under sections 167(d) and 611(b).

(f) Amortization deductions The benefit of the deductions for amortization provided by sections 169 and 197 shall be allowed to estates and trusts in the same manner as in the case of an individual. The allowable deduction shall be apportioned between the income beneficiaries and the fiduciary under regulations prescribed by the Secretary.

(g) Disallowance of double deductions Amounts allowable under section 2053 or 2054 as a deduction in computing the taxable estate of a decedent shall not be allowed as a deduction (or as an offset against the sales price of property in determining gain or loss) in computing the taxable income of the estate or of any other person, unless there is filed, within the time and in the manner and form prescribed by the Secretary, a statement that the amounts have not been allowed as deductions under section 2053 or 2054 and a waiver of the right to have such amounts allowed at any time as deductions under section 2053 or 2054. Rules similar to the rules of the preceding sentence shall apply to amounts which may be taken into account under section 2621(a)(2) or 2622(b). This subsection shall not apply with respect to deductions allowed under part II (relating to income in respect of decedents).

(h) Unused loss carryovers and excess deductions on termination available to beneficiaries If on the termination of an estate or trust, the estate or trust has— a net operating loss carryover under section 172 or a capital loss carryover under section 1212, or for the last taxable year of the estate or trust deductions (other than the deductions allowed under subsections (b) or (c)) in excess of gross income for such year, then such carryover or such excess shall be allowed as a deduction, in accordance with regulations prescribed by the Secretary, to the beneficiaries succeeding to the property of the estate or trust.

(i) Certain distributions by cemetery perpetual care funds In the case of a cemetery perpetual care fund which— was created pursuant to local law by a taxable cemetery corporation for the care and maintenance of cemetery property, and is treated for the taxable year as a trust for purposes of this subchapter, any amount distributed by such fund for the care and maintenance of gravesites which have been purchased from the cemetery corporation before the beginning of the taxable year of the trust and with respect to which there is an obligation to furnish care and maintenance shall be considered to be a distribution solely for purposes of sections 651 and 661, but only to the extent that the aggregate amount so distributed during the taxable year does not exceed $5 multiplied by the aggregate number of such gravesites.

§ 643 Definitions applicable to subparts A, B, C, and D

(a) Distributable net income For purposes of this part, the term “distributable net income” means, with respect to any taxable year, the taxable income of the estate or trust computed with the following modifications— No deduction shall be taken under sections 651 and 661 (relating to additional deductions). No deduction shall be taken under section 642(b) (relating to deduction for personal exemptions). Gains from the sale or exchange of capital assets shall be excluded to the extent that such gains are allocated to corpus and are not (A) paid, credited, or required to be distributed to any beneficiary during the taxable year, or (B) paid, permanently set aside, or to be used for the purposes specified in section 642(c). Losses from the sale or exchange of capital assets shall be excluded, except to the extent such losses are taken into account in determining the amount of gains from the sale or exchange of capital assets which are paid, credited, or required to be distributed to any beneficiary during the taxable year. The exclusion under section 1202 shall not be taken into account. For purposes only of subpart B (relating to trusts which distribute current income only), there shall be excluded those items of gross income constituting extraordinary dividends or taxable stock dividends which the fiduciary, acting in good faith, does not pay or credit to any beneficiary by reason of his determination that such dividends are allocable to corpus under the terms of the governing instrument and applicable local law. There shall be included any tax-exempt interest to which section 103 applies, reduced by any amounts which would be deductible in respect of disbursements allocable to such interest but for the provisions of section 265 (relating to disallowance of certain deductions). In the case of a foreign trust— There shall be included the amounts of gross income from sources without the United States, reduced by any amounts which would be deductible in respect of disbursements allocable to such income but for the provisions of section 265(a)(1) (relating to disallowance of certain deductions). Gross income from sources within the United States shall be determined without regard to section 894 (relating to income exempt under treaty). Paragraph (3) shall not apply to a foreign trust. In the case of such a trust, there shall be included gains from the sale or exchange of capital assets, reduced by losses from such sales or exchanges to the extent such losses do not exceed gains from such sales or exchanges. The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this part, including regulations to prevent avoidance of such purposes. If the estate or trust is allowed a deduction under section 642(c), the amount of the modifications specified in paragraphs (5) and (6) shall be reduced to the extent that the amount of income which is paid, permanently set aside, or to be used for the purposes specified in section 642(c) is deemed to consist of items specified in those paragraphs. For this purpose, such amount shall (in the absence of specific provisions in the governing instrument) be deemed to consist of the same proportion of each class of items of income of the estate or trust as the total of each class bears to the total of all classes.

(b) Income For purposes of this subpart and subparts B, C, and D, the term “income”, when not preceded by the words “taxable”, “distributable net”, “undistributed net”, or “gross”, means the amount of income of the estate or trust for the taxable year determined under the terms of the governing instrument and applicable local law. Items of gross income constituting extraordinary dividends or taxable stock dividends which the fiduciary, acting in good faith, determines to be allocable to corpus under the terms of the governing instrument and applicable local law shall not be considered income.

(c) Beneficiary For purposes of this part, the term “beneficiary” includes heir, legatee, devisee.

(d) Coordination with back-up withholding Except to the extent otherwise provided in regulations, this subchapter shall be applied with respect to payments subject to withholding under section 3406— by allocating between the estate or trust and its beneficiaries any credit allowable under section 31(c) (on the basis of their respective shares of any such payment taken into account under this subchapter), by treating each beneficiary to whom such credit is allocated as if an amount equal to such credit has been paid to him by the estate or trust, and by allowing the estate or trust a deduction in an amount equal to the credit so allocated to beneficiaries.

(e) Treatment of property distributed in kind The basis of any property received by a beneficiary in a distribution from an estate or trust shall be— the adjusted basis of such property in the hands of the estate or trust immediately before the distribution, adjusted for any gain or loss recognized to the estate or trust on the distribution. In the case of any distribution of property (other than cash), the amount taken into account under sections 661(a)(2) and 662(a)(2) shall be the lesser of— the basis of such property in the hands of the beneficiary (as determined under paragraph (1)), or the fair market value of such property. In the case of any distribution of property (other than cash) to which an election under this paragraph applies— paragraph (2) shall not apply, gain or loss shall be recognized by the estate or trust in the same manner as if such property had been sold to the distributee at its fair market value, and the amount taken into account under sections 661(a)(2) and 662(a)(2) shall be the fair market value of such property. Any election under this paragraph shall apply to all distributions made by the estate or trust during a taxable year and shall be made on the return of such estate or trust for such taxable year. Any such election, once made, may be revoked only with the consent of the Secretary. This subsection shall not apply to any distribution described in section 663(a).

(f) Treatment of multiple trusts For purposes of this subchapter, under regulations prescribed by the Secretary, 2 or more trusts shall be treated as 1 trust if— such trusts have substantially the same grantor or grantors and substantially the same primary beneficiary or beneficiaries, and a principal purpose of such trusts is the avoidance of the tax imposed by this chapter. For purposes of the preceding sentence, a husband and wife shall be treated as 1 person.

(g) Certain payments of estimated tax treated as paid by beneficiary In the case of a trust— the trustee may elect to treat any portion of a payment of estimated tax made by such trust for any taxable year of the trust as a payment made by a beneficiary of such trust, any amount so treated shall be treated as paid or credited to the beneficiary on the last day of such taxable year, and for purposes of subtitle F, the amount so treated— shall not be treated as a payment of estimated tax made by the trust, but shall be treated as a payment of estimated tax made by such beneficiary on January 15 following the taxable year. An election under paragraph (1) shall be made on or before the 65th day after the close of the taxable year of the trust and in such manner as the Secretary may prescribe. In the case of a taxable year reasonably expected to be the last taxable year of an estate— any reference in this subsection to a trust shall be treated as including a reference to an estate, and the fiduciary of the estate shall be treated as the trustee.

(h) Distributions by certain foreign trusts through nominees For purposes of this part, any amount paid to a United States person which is derived directly or indirectly from a foreign trust of which the payor is not the grantor shall be deemed in the year of payment to have been directly paid by the foreign trust to such United States person.

(i) Loans from foreign trusts For purposes of subparts B, C, and D— Except as provided in regulations, if a foreign trust makes a loan of cash or marketable securities (or permits the use of any other trust property) directly or indirectly to or by— any grantor or beneficiary of such trust who is a United States person, or any United States person not described in subparagraph (A) who is related to such grantor or beneficiary, the amount of such loan (or the fair market value of the use of such property) shall be treated as a distribution by such trust to such grantor or beneficiary (as the case may be). For purposes of this subsection— The term “cash” includes foreign currencies and cash equivalents. A person is related to another person if the relationship between such persons would result in a disallowance of losses under section 267 or 707(b). In applying section 267 for purposes of the preceding sentence, section 267(c)(4) shall be applied as if the family of an individual includes the spouses of the members of the family. If any person described in paragraph (1)(B) is related to more than one person, the grantor or beneficiary to whom the treatment under this subsection applies shall be determined under regulations prescribed by the Secretary. The term “United States person” does not include any entity exempt from tax under this chapter. Any trust which is treated under this subsection as making a distribution shall be treated as not described in section 651. In the case of the use of any trust property other than a loan of cash or marketable securities, paragraph (1) shall not apply to the extent that the trust is paid the fair market value of such use within a reasonable period of time of such use. If any loan (or use of property) is taken into account under paragraph (1), any subsequent transaction between the trust and the original borrower regarding the principal of the loan (by way of complete or partial repayment, satisfaction, cancellation, discharge, or otherwise) or the return of such property shall be disregarded for purposes of this title.

“If— on a return for the 1st taxable year of the trusts involved beginning after March 1, 1984 , 2 or more trusts were treated as a single trust for purposes of the tax imposed by chapter 1 of the Internal Revenue Code of 1954 [now 1986], such trusts would have been required to be so treated but for the amendment made by section 1806(b) of the Reform Act [ Pub. L. 99–514 , which amended provisions set out as an Effective Date of 1984 Amendment note above], and such trusts did not accumulate any income during such taxable year and did not make any accumulation distributions during such taxable year, then, notwithstanding the amendment made by section 1806(b) of the Reform Act, such trusts shall be treated as one trust for purposes of such taxable year.”

§ 644 Taxable year of trusts

(a) In general For purposes of this subtitle, the taxable year of any trust shall be the calendar year.

(b) Exception for trusts exempt from tax and charitable trusts Subsection (a) shall not apply to a trust exempt from taxation under section 501(a) or to a trust described in section 4947(a)(1).

§ 645 Certain revocable trusts treated as part of estate

(a) General rule For purposes of this subtitle, if both the executor (if any) of an estate and the trustee of a qualified revocable trust elect the treatment provided in this section, such trust shall be treated and taxed as part of such estate (and not as a separate trust) for all taxable years of the estate ending after the date of the decedent’s death and before the applicable date.

(b) Definitions For purposes of subsection (a)— The term “qualified revocable trust” means any trust (or portion thereof) which was treated under section 676 as owned by the decedent of the estate referred to in subsection (a) by reason of a power in the grantor (determined without regard to section 672(e)). The term “applicable date” means— if no return of tax imposed by chapter 11 is required to be filed, the date which is 2 years after the date of the decedent’s death, and if such a return is required to be filed, the date which is 6 months after the date of the final determination of the liability for tax imposed by chapter 11.

(c) Election The election under subsection (a) shall be made not later than the time prescribed for filing the return of tax imposed by this chapter for the first taxable year of the estate (determined with regard to extensions) and, once made, shall be irrevocable.

§ 646 Tax treatment of electing Alaska Native Settlement Trusts

(a) In general If an election under this section is in effect with respect to any Settlement Trust, the provisions of this section shall apply in determining the income tax treatment of the Settlement Trust and its beneficiaries with respect to the Settlement Trust.

(b) Taxation of income of trust Except as provided in subsection (f)(1)(B)(ii)— There is hereby imposed on the taxable income of an electing Settlement Trust, other than its net capital gain, a tax at the lowest rate specified in section 1(c). 1 In the case of an electing Settlement Trust with a net capital gain for the taxable year, a tax is hereby imposed on such gain at the rate of tax which would apply to such gain if the taxpayer were subject to a tax on its other taxable income at only the lowest rate specified in section 1(c). Any such tax shall be in lieu of the income tax otherwise imposed by this chapter on such income or gain.

(c) One-time election A Settlement Trust may elect to have the provisions of this section apply to the trust and its beneficiaries. An election under paragraph (1) shall be made by the trustee of such trust— on or before the due date (including extensions) for filing the Settlement Trust’s return of tax for the first taxable year of such trust ending after the date of the enactment of this section, and by attaching to such return of tax a statement specifically providing for such election. Except as provided in subsection (f), an election under this subsection— shall apply to the first taxable year described in paragraph (2)(A) and all subsequent taxable years, and may not be revoked once it is made.

(d) Contributions to trust In the case of an electing Settlement Trust, no amount shall be includible in the gross income of a beneficiary of such trust by reason of a contribution to such trust. The earnings and profits of the sponsoring Native Corporation shall not be reduced on account of any contribution to such Settlement Trust.

(e) Tax treatment of distributions to beneficiaries Amounts distributed by an electing Settlement Trust during any taxable year shall be considered as having the following characteristics in the hands of the recipient beneficiary: First, as amounts excludable from gross income for the taxable year to the extent of the taxable income of such trust for such taxable year (decreased by any income tax paid by the trust with respect to the income) plus any amount excluded from gross income of the trust under section 103. Second, as amounts excludable from gross income to the extent of the amount described in paragraph (1) for all taxable years for which an election is in effect under subsection (c) with respect to the trust, and not previously taken into account under paragraph (1). Third, as amounts distributed by the sponsoring Native Corporation with respect to its stock (within the meaning of section 301(a)) during such taxable year and taxable to the recipient beneficiary as amounts described in section 301(c)(1), to the extent of current or accumulated earnings and profits of the sponsoring Native Corporation as of the close of such taxable year after proper adjustment is made for all distributions made by the sponsoring Native Corporation during such taxable year. Fourth, as amounts distributed by the trust in excess of the distributable net income of such trust for such taxable year. Amounts distributed to which paragraph (3) applies shall not be treated as a corporate distribution subject to section 311(b), and for purposes of determining the amount of a distribution for purposes of paragraph (3) and the basis to the recipients, section 643(e) and not section 301(b) or (d) shall apply.

(f) Special rules where transfer restrictions modified If, at any time, a beneficial interest in an electing Settlement Trust may be disposed of to a person in a manner which would not be permitted by section 7(h) of the Alaska Native Claims Settlement Act ( 43 U.S.C. 1606(h) ) if such interest were Settlement Common Stock— no election may be made under subsection (c) with respect to such trust, and if such an election is in effect as of such time— such election shall cease to apply as of the first day of the taxable year in which such disposition is first permitted, the provisions of this section shall not apply to such trust for such taxable year and all taxable years thereafter, and the distributable net income of such trust shall be increased by the current or accumulated earnings and profits of the sponsoring Native Corporation as of the close of such taxable year after proper adjustment is made for all distributions made by the sponsoring Native Corporation during such taxable year. In no event shall the increase under clause (iii) exceed the fair market value of the trust’s assets as of the date the beneficial interest of the trust first becomes so disposable. The earnings and profits of the sponsoring Native Corporation shall be adjusted as of the last day of such taxable year by the amount of earnings and profits so included in the distributable net income of the trust. If— stock in the sponsoring Native Corporation may be disposed of to a person in a manner which would not be permitted by section 7(h) of the Alaska Native Claims Settlement Act ( 43 U.S.C. 1606(h) ) if such stock were Settlement Common Stock, and at any time after such disposition of stock is first permitted, such corporation transfers assets to a Settlement Trust, paragraph (1)(B) shall be applied to such trust on and after the date of the transfer in the same manner as if the trust permitted dispositions of beneficial interests in the trust in a manner not permitted by such section 7(h). For purposes of this section, the surrender of an interest in a Native Corporation or an electing Settlement Trust in order to accomplish the whole or partial redemption of the interest of a shareholder or beneficiary in such corporation or trust, or to accomplish the whole or partial liquidation of such corporation or trust, shall be deemed to be a transfer permitted by section 7(h) of the Alaska Native Claims Settlement Act.

(g) Taxable income For purposes of this title, the taxable income of an electing Settlement Trust shall be determined under section 641(b) without regard to any deduction under section 651 or 661.

(h) Definitions For purposes of this section— The term “electing Settlement Trust” means a Settlement Trust which has made the election, effective for a taxable year, described in subsection (c). The term “Native Corporation” has the meaning given such term by section 3(m) of the Alaska Native Claims Settlement Act ( 43 U.S.C. 1602(m) ). The term “Settlement Common Stock” has the meaning given such term by section 3(p) of the Alaska Native Claims Settlement Act ( 43 U.S.C. 1602(p) ). The term “Settlement Trust” means a trust that constitutes a settlement trust under section 3(t) of the Alaska Native Claims Settlement Act ( 43 U.S.C. 1602(t) ). The term “sponsoring Native Corporation” means the Native Corporation which transfers assets to an electing Settlement Trust.

(i) Special loss disallowance rule Any loss that would otherwise be recognized by a shareholder upon a disposition of a share of stock of a sponsoring Native Corporation shall be reduced (but not below zero) by the per share loss adjustment factor. The per share loss adjustment factor shall be the aggregate of all contributions to all electing Settlement Trusts sponsored by such Native Corporation made on or after the first day each trust is treated as an electing Settlement Trust expressed on a per share basis and determined as of the day of each such contribution.

(j) Cross reference For information required with respect to electing Settlement Trusts and sponsoring Native Corporations, see section 6039H.

§ 651 Deduction for trusts distributing current income only

(a) Deduction In the case of any trust the terms of which— provide that all of its income is required to be distributed currently, and do not provide that any amounts are to be paid, permanently set aside, or used for the purposes specified in section 642(c) (relating to deduction for charitable, etc., purposes), there shall be allowed as a deduction in computing the taxable income of the trust the amount of the income for the taxable year which is required to be distributed currently. This section shall not apply in any taxable year in which the trust distributes amounts other than amounts of income described in paragraph (1).

(b) Limitation on deduction If the amount of income required to be distributed currently exceeds the distributable net income of the trust for the taxable year, the deduction shall be limited to the amount of the distributable net income. For this purpose, the computation of distributable net income shall not include items of income which are not included in the gross income of the trust and the deductions allocable thereto.

§ 652 Inclusion of amounts in gross income of beneficiaries of trusts distributing current income only

(a) Inclusion Subject to subsection (b), the amount of income for the taxable year required to be distributed currently by a trust described in section 651 shall be included in the gross income of the beneficiaries to whom the income is required to be distributed, whether distributed or not. If such amount exceeds the distributable net income, there shall be included in the gross income of each beneficiary an amount which bears the same ratio to distributable net income as the amount of income required to be distributed to such beneficiary bears to the amount of income required to be distributed to all beneficiaries.

(b) Character of amounts The amounts specified in subsection (a) shall have the same character in the hands of the beneficiary as in the hands of the trust. For this purpose, the amounts shall be treated as consisting of the same proportion of each class of items entering into the computation of distributable net income of the trust as the total of each class bears to the total distributable net income of the trust, unless the terms of the trust specifically allocate different classes of income to different beneficiaries. In the application of the preceding sentence, the items of deduction entering into the computation of distributable net income shall be allocated among the items of distributable net income in accordance with regulations prescribed by the Secretary.

(c) Different taxable years If the taxable year of a beneficiary is different from that of the trust, the amount which the beneficiary is required to include in gross income in accordance with the provisions of this section shall be based upon the amount of income of the trust for any taxable year or years of the trust ending within or with his taxable year.

§ 661 Deduction for estates and trusts accumulating income or distributing corpus

(a) Deduction In any taxable year there shall be allowed as a deduction in computing the taxable income of an estate or trust (other than a trust to which subpart B applies), the sum of— any amount of income for such taxable year required to be distributed currently (including any amount required to be distributed which may be paid out of income or corpus to the extent such amount is paid out of income for such taxable year); and any other amounts properly paid or credited or required to be distributed for such taxable year; but such deduction shall not exceed the distributable net income of the estate or trust.

(b) Character of amounts distributed The amount determined under subsection (a) shall be treated as consisting of the same proportion of each class of items entering into the computation of distributable net income of the estate or trust as the total of each class bears to the total distributable net income of the estate or trust in the absence of the allocation of different classes of income under the specific terms of the governing instrument. In the application of the preceding sentence, the items of deduction entering into the computation of distributable net income (including the deduction allowed under section 642(c)) shall be allocated among the items of distributable net income in accordance with regulations prescribed by the Secretary.

(c) Limitation on deduction No deduction shall be allowed under subsection (a) in respect of any portion of the amount allowed as a deduction under that subsection (without regard to this subsection) which is treated under subsection (b) as consisting of any item of distributable net income which is not included in the gross income of the estate or trust.

§ 662 Inclusion of amounts in gross income of beneficiaries of estates and trusts accumulating income or distributing corpus

(a) Inclusion Subject to subsection (b), there shall be included in the gross income of a beneficiary to whom an amount specified in section 661(a) is paid, credited, or required to be distributed (by an estate or trust described in section 661), the sum of the following amounts: The amount of income for the taxable year required to be distributed currently to such beneficiary, whether distributed or not. If the amount of income required to be distributed currently to all beneficiaries exceeds the distributable net income (computed without the deduction allowed by section 642(c), relating to deduction for charitable, etc., purposes) of the estate or trust, then, in lieu of the amount provided in the preceding sentence, there shall be included in the gross income of the beneficiary an amount which bears the same ratio to distributable net income (as so computed) as the amount of income required to be distributed currently to such beneficiary bears to the amount required to be distributed currently to all beneficiaries. For purposes of this section, the phrase “the amount of income for the taxable year required to be distributed currently” includes any amount required to be paid out of income or corpus to the extent such amount is paid out of income for such taxable year. All other amounts properly paid, credited, or required to be distributed to such beneficiary for the taxable year. If the sum of— the amount of income for the taxable year required to be distributed currently to all beneficiaries, and all other amounts properly paid, credited, or required to be distributed to all beneficiaries exceeds the distributable net income of the estate or trust, then, in lieu of the amount provided in the preceding sentence, there shall be included in the gross income of the beneficiary an amount which bears the same ratio to distributable net income (reduced by the amounts specified in (A)) as the other amounts properly paid, credited or required to be distributed to the beneficiary bear to the other amounts properly paid, credited, or required to be distributed to all beneficiaries.

(b) Character of amounts The amounts determined under subsection (a) shall have the same character in the hands of the beneficiary as in the hands of the estate or trust. For this purpose, the amounts shall be treated as consisting of the same proportion of each class of items entering into the computation of distributable net income as the total of each class bears to the total distributable net income of the estate or trust unless the terms of the governing instrument specifically allocate different classes of income to different beneficiaries. In the application of the preceding sentence, the items of deduction entering into the computation of distributable net income (including the deduction allowed under section 642(c)) shall be allocated among the items of distributable net income in accordance with regulations prescribed by the Secretary. In the application of this subsection to the amount determined under paragraph (1) of subsection (a), distributable net income shall be computed without regard to any portion of the deduction under section 642(c) which is not attributable to income of the taxable year.

(c) Different taxable years If the taxable year of a beneficiary is different from that of the estate or trust, the amount to be included in the gross income of the beneficiary shall be based on the distributable net income of the estate or trust and the amounts properly paid, credited, or required to be distributed to the beneficiary during any taxable year or years of the estate or trust ending within or with his taxable year.

§ 663 Special rules applicable to sections 661 and 662

(a) Exclusions There shall not be included as amounts falling within section 661(a) or 662(a)— Any amount which, under the terms of the governing instrument, is properly paid or credited as a gift or bequest of a specific sum of money or of specific property and which is paid or credited all at once or in not more than 3 installments. For this purpose an amount which can be paid or credited only from the income of the estate or trust shall not be considered as a gift or bequest of a specific sum of money. Any amount paid or permanently set aside or otherwise qualifying for the deduction provided in section 642(c) (computed without regard to sections 508(d), 681, and 4948(c)(4)). Any amount paid, credited, or distributed in the taxable year, if section 651 or section 661 applied to such amount for a preceding taxable year of an estate or trust because credited or required to be distributed in such preceding taxable year.

(b) Distributions in first sixty-five days of taxable year If within the first 65 days of any taxable year of an estate or a trust, an amount is properly paid or credited, such amount shall be considered paid or credited on the last day of the preceding taxable year. Paragraph (1) shall apply with respect to any taxable year of an estate or a trust only if the executor of such estate or the fiduciary of such trust (as the case may be) elects, in such manner and at such time as the Secretary prescribes by regulations, to have paragraph (1) apply for such taxable year.

(c) Separate shares treated as separate estates or trusts For the sole purpose of determining the amount of distributable net income in the application of sections 661 and 662, in the case of a single trust having more than one beneficiary, substantially separate and independent shares of different beneficiaries in the trust shall be treated as separate trusts. Rules similar to the rules of the preceding provisions of this subsection shall apply to treat substantially separate and independent shares of different beneficiaries in an estate having more than 1 beneficiary as separate estates. The existence of such substantially separate and independent shares and the manner of treatment as separate trusts or estates, including the application of subpart D, shall be determined in accordance with regulations prescribed by the Secretary.

§ 664 Charitable remainder trusts

(a) General rule Notwithstanding any other provision of this subchapter, the provisions of this section shall, in accordance with regulations prescribed by the Secretary, apply in the case of a charitable remainder annuity trust and a charitable remainder unitrust.

(b) Character of distributions Amounts distributed by a charitable remainder annuity trust or by a charitable remainder unitrust shall be considered as having the following characteristics in the hands of a beneficiary to whom is paid the annuity described in subsection (d)(1)(A) or the payment described in subsection (d)(2)(A): First, as amounts of income (other than gains, and amounts treated as gains, from the sale or other disposition of capital assets) includible in gross income to the extent of such income of the trust for the year and such undistributed income of the trust for prior years; Second, as a capital gain to the extent of the capital gain of the trust for the year and the undistributed capital gain of the trust for prior years; Third, as other income to the extent of such income of the trust for the year and such undistributed income of the trust for prior years; and Fourth, as a distribution of trust corpus. For purposes of this section, the trust shall determine the amount of its undistributed capital gain on a cumulative net basis.

(c) Taxation of trusts A charitable remainder annuity trust and a charitable remainder unitrust shall, for any taxable year, not be subject to any tax imposed by this subtitle. In the case of a charitable remainder annuity trust or a charitable remainder unitrust which has unrelated business taxable income (within the meaning of section 512, determined as if part III of subchapter F applied to such trust) for a taxable year, there is hereby imposed on such trust or unitrust an excise tax equal to the amount of such unrelated business taxable income. The tax imposed by subparagraph (A) shall be treated as imposed by chapter 42 for purposes of this title other than subchapter E of chapter 42. For purposes of this paragraph, the references in section 6212(c)(1) to section 4940 shall be deemed to include references to this paragraph.

(d) Definitions For purposes of this section, a charitable remainder annuity trust is a trust— from which a sum certain (which is not less than 5 percent nor more than 50 percent of the initial net fair market value of all property placed in trust) is to be paid, not less often than annually, to one or more persons (at least one of which is not an organization described in section 170(c) and, in the case of individuals, only to an individual who is living at the time of the creation of the trust) for a term of years (not in excess of 20 years) or for the life or lives of such individual or individuals, from which no amount other than the payments described in subparagraph (A) and other than qualified gratuitous transfers described in subparagraph (C) may be paid to or for the use of any person other than an organization described in section 170(c), following the termination of the payments described in subparagraph (A), the remainder interest in the trust is to be transferred to, or for the use of, an organization described in section 170(c) or is to be retained by the trust for such a use or, to the extent the remainder interest is in qualified employer securities (as defined in subsection (g)(4)), all or part of such securities are to be transferred to an employee stock ownership plan (as defined in section 4975(e)(7)) in a qualified gratuitous transfer (as defined by subsection (g)), and the value (determined under section 7520) of such remainder interest is at least 10 percent of the initial net fair market value of all property placed in the trust. For purposes of this section, a charitable remainder unitrust is a trust— from which a fixed percentage (which is not less than 5 percent nor more than 50 percent) of the net fair market value of its assets, valued annually, is to be paid, not less often than annually, to one or more persons (at least one of which is not an organization described in section 170(c) and, in the case of individuals, only to an individual who is living at the time of the creation of the trust) for a term of years (not in excess of 20 years) or for the life or lives of such individual or individuals, from which no amount other than the payments described in subparagraph (A) and other than qualified gratuitous transfers described in subparagraph (C) may be paid to or for the use of any person other than an organization described in section 170(c), following the termination of the payments described in subparagraph (A), the remainder interest in the trust is to be transferred to, or for the use of, an organization described in section 170(c) or is to be retained by the trust for such a use or, to the extent the remainder interest is in qualified employer securities (as defined in subsection (g)(4)), all or part of such securities are to be transferred to an employee stock ownership plan (as defined in section 4975(e)(7)) in a qualified gratuitous transfer (as defined by subsection (g)), and with respect to each contribution of property to the trust, the value (determined under section 7520) of such remainder interest in such property is at least 10 percent of the net fair market value of such property as of the date such property is contributed to the trust. Notwithstanding the provisions of paragraphs (2)(A) and (B), the trust instrument may provide that the trustee shall pay the income beneficiary for any year— the amount of the trust income, if such amount is less than the amount required to be distributed under paragraph (2)(A), and any amount of the trust income which is in excess of the amount required to be distributed under paragraph (2)(A), to the extent that (by reason of subparagraph (A)) the aggregate of the amounts paid in prior years was less than the aggregate of such required amounts. If— any contribution is made to a trust which before the contribution is a charitable remainder unitrust, and such contribution would (but for this paragraph) result in such trust ceasing to be a charitable unitrust by reason of paragraph (2)(D), such contribution shall be treated as a transfer to a separate trust under regulations prescribed by the Secretary.

(e) Valuation of interests For purposes of determining the amount of any charitable contribution, the remainder interest of a charitable remainder annuity trust or charitable remainder unitrust shall be computed on the basis that an amount equal to 5 percent of the net fair market value of its assets (or a greater amount, if required under the terms of the trust instrument) is to be distributed each year. In the case of the early termination of a trust which is a charitable remainder unitrust by reason of subsection (d)(3), the valuation of interests in such trust for purposes of this section shall be made under rules similar to the rules of the preceding sentence.

(f) Certain contingencies permitted If a trust would, but for a qualified contingency, meet the requirements of paragraph (1)(A) or (2)(A) of subsection (d), such trust shall be treated as meeting such requirements. For purposes of determining the amount of any charitable contribution (or the actuarial value of any interest), a qualified contingency shall not be taken into account. For purposes of this subsection, the term “qualified contingency” means any provision of a trust which provides that, upon the happening of a contingency, the payments described in paragraph (1)(A) or (2)(A) of subsection (d) (as the case may be) will terminate not later than such payments would otherwise terminate under the trust.

(g) Qualified gratuitous transfer of qualified employer securities For purposes of this section, the term “qualified gratuitous transfer” means a transfer of qualified employer securities to an employee stock ownership plan (as defined in section 4975(e)(7)) but only to the extent that— the securities transferred previously passed from a decedent dying before January 1, 1999 , to a trust described in paragraph (1) or (2) of subsection (d), no deduction under section 404 is allowable with respect to such transfer, such plan contains the provisions required by paragraph (3), such plan treats such securities as being attributable to employer contributions but without regard to the limitations otherwise applicable to such contributions under section 404, and the employer whose employees are covered by the plan described in this paragraph files with the Secretary a verified written statement consenting to the application of sections 4978 and 4979A with respect to such employer. The term “qualified gratuitous transfer” shall not include a transfer of qualified employer securities to an employee stock ownership plan unless— such plan was in existence on August 1, 1996 , at the time of the transfer, the decedent and members of the decedent’s family (within the meaning of section 2032A(e)(2)) own (directly or through the application of section 318(a)) no more than 10 percent of the value of the stock of the corporation referred to in paragraph (4), and immediately after the transfer, such plan owns (after the application of section 318(a)(4)) at least 60 percent of the value of the outstanding stock of the corporation. A plan contains the provisions required by this paragraph if such plan provides that— the qualified employer securities so transferred are allocated to plan participants in a manner consistent with section 401(a)(4), plan participants are entitled to direct the plan as to the manner in which such securities which are entitled to vote and are allocated to the account of such participant are to be voted, an independent trustee votes the securities so transferred which are not allocated to plan participants, each participant who is entitled to a distribution from the plan has the rights described in subparagraphs (A) and (B) of section 409(h)(1), such securities are held in a suspense account under the plan to be allocated each year, up to the applicable limitation under paragraph (7) (determined on the basis of fair market value of securities when allocated to participants), after first allocating all other annual additions for the limitation year, up to the limitation under section 415(c), and on termination of the plan, all securities so transferred which are not allocated to plan participants as of such termination are to be transferred to, or for the use of, an organization described in section 170(c). For purposes of the preceding sentence, the term “independent trustee” means any trustee who is not a member of the family (within the meaning of section 2032A(e)(2)) of the decedent or a 5-percent shareholder. A plan shall not fail to be treated as meeting the requirements of section 401(a) by reason of meeting the requirements of this subsection. For purposes of this section, the term “qualified employer securities” means employer securities (as defined in section 409( l )) which are issued by a domestic corporation— which has no outstanding stock which is readily tradable on an established securities market, and which has only 1 class of stock. If any portion of the assets of the plan attributable to securities acquired by the plan in a qualified gratuitous transfer are allocated to the account of— any person who is related to the decedent (within the meaning of section 267(b)) or a member of the decedent’s family (within the meaning of section 2032A(e)(2)), or any person who, at the time of such allocation or at any time during the 1-year period ending on the date of the acquisition of qualified employer securities by the plan, is a 5-percent shareholder of the employer maintaining the plan, the plan shall be treated as having distributed (at the time of such allocation) to such person or shareholder the amount so allocated. For purposes of subparagraph (A), the term “5-percent shareholder” means any person who owns (directly or through the application of section 318(a)) more than 5 percent of the outstanding stock of the corporation which issued such qualified employer securities or of any corporation which is a member of the same controlled group of corporations (within the meaning of section 409( l )(4)) as such corporation. For purposes of the preceding sentence, section 318(a) shall be applied without regard to the exception in paragraph (2)(B)(i) thereof. For excise tax on allocations described in subparagraph (A), see section 4979A. If the requirements of paragraph (3)(F) are not met with respect to any securities, there is hereby imposed a tax on the employer maintaining the plan in an amount equal to the sum of— the amount of the increase in the tax which would be imposed by chapter 11 if such securities were not transferred as described in paragraph (1), and interest on such amount at the underpayment rate under section 6621 (and compounded daily) from the due date for filing the return of the tax imposed by chapter 11. For purposes of paragraph (3)(E), the applicable limitation under this paragraph with respect to a participant is an amount equal to the lesser of— $30, 000, or 25 p erce n t o f t h e p a r t i c i p an t ’ sco m p e n s a t i o n (a s d e f in e d in sec t i o n 415 (c) (3)) . T h e S ecre t a rys ha ll a d j u s t ann u a ll y t h e$ 30,000 amount under subparagraph (A)(i) at the same time and in the same manner as under section 415(d), except that the base period shall be the calendar quarter beginning October 1, 1993 , and any increase under this subparagraph which is not a multiple of $5, 000 s ha ll b ero u n d e d t o t h e n e x tl o w es t m u lt i pl eo f$ 5,000.

§ 665 Definitions applicable to subpart D

(a) Undistributed net income For purposes of this subpart, the term “undistributed net income” for any taxable year means the amount by which distributable net income of the trust for such taxable year exceeds the sum of— the amounts for such taxable year specified in paragraphs (1) and (2) of section 661(a), and the amount of taxes imposed on the trust attributable to such distributable net income.

(b) Accumulation distribution For purposes of this subpart, except as provided in subsection (c), the term “accumulation distribution” means, for any taxable year of the trust, the amount by which— the amounts specified in paragraph (2) of section 661(a) for such taxable year, exceed distributable net income for such year reduced (but not below zero) by the amounts specified in paragraph (1) of section 661(a). For purposes of section 667 (other than subsection (c) thereof, relating to multiple trusts), the amounts specified in paragraph (2) of section 661(a) shall not include amounts properly paid, credited, or required to be distributed to a beneficiary from a trust (other than a foreign trust) as income accumulated before the birth of such beneficiary or before such beneficiary attains the age of 21. If the amounts properly paid, credited, or required to be distributed by the trust for the taxable year do not exceed the income of the trust for such year, there shall be no accumulation distribution for such year.

(c) Exception for accumulation distributions from certain domestic trusts For purposes of this subpart— In the case of a qualified trust, any distribution in any taxable year beginning after the date of the enactment of this subsection shall be computed without regard to any undistributed net income. For purposes of this subsection, the term “qualified trust” means any trust other than— a foreign trust (or, except as provided in regulations, a domestic trust which at any time was a foreign trust), or a trust created before March 1, 1984 , unless it is established that the trust would not be aggregated with other trusts under section 643(f) if such section applied to such trust.

(d) Taxes imposed on the trust For purposes of this subpart— The term “taxes imposed on the trust” means the amount of the taxes which are imposed for any taxable year of the trust under this chapter (without regard to this subpart or part IV of subchapter A) and which, under regulations prescribed by the Secretary, are properly allocable to the undistributed portions of distributable net income and gains in excess of losses from sales or exchanges of capital assets. The amount determined in the preceding sentence shall be reduced by any amount of such taxes deemed distributed under section 666(b) and (c) to any beneficiary. In the case of any foreign trust, the term “taxes imposed on the trust” includes the amount, reduced as provided in the last sentence of paragraph (1), of any income, war profits, and excess profits taxes imposed by any foreign country or possession of the United States on such foreign trust which, as determined under paragraph (1), are so properly allocable. Under rules or regulations prescribed by the Secretary, in the case of any foreign trust of which the settlor or another person would be treated as owner of any portion of the trust under subpart E but for section 672(f), the term “taxes imposed on the trust” includes the allocable amount of any income, war profits, and excess profits taxes imposed by any foreign country or possession of the United States on the settlor or such other person in respect of trust income.

(e) Preceding taxable year For purposes of this subpart— In the case of a foreign trust created by a United States person, the term “preceding taxable year” does not include any taxable year of the trust to which this part does not apply. In the case of a preceding taxable year with respect to which a trust qualified, without regard to this subpart, under the provisions of subpart B, for purposes of the application of this subpart to such trust for such taxable year, such trust shall, in accordance with regulations prescribed by the Secretary, be treated as a trust to which subpart C applies.

§ 666 Accumulation distribution allocated to preceding years

(a) Amount allocated In the case of a trust which is subject to subpart C, the amount of the accumulation distribution of such trust for a taxable year shall be deemed to be an amount within the meaning of paragraph (2) of section 661(a) distributed on the last day of each of the preceding taxable years, commencing with the earliest of such years, to the extent that such amount exceeds the total of any undistributed net income for all earlier preceding taxable years. The amount deemed to be distributed in any such preceding taxable year under the preceding sentence shall not exceed the undistributed net income for such preceding taxable year. For purposes of this subsection, undistributed net income for each of such preceding taxable years shall be computed without regard to such accumulation distribution and without regard to any accumulation distribution determined for any succeeding taxable year.

(b) Total taxes deemed distributed If any portion of an accumulation distribution for any taxable year is deemed under subsection (a) to be an amount within the meaning of paragraph (2) of section 661(a) distributed on the last day of any preceding taxable year, and such portion of such distribution is not less than the undistributed net income for such preceding taxable year, the trust shall be deemed to have distributed on the last day of such preceding taxable year an additional amount within the meaning of paragraph (2) of section 661(a). Such additional amount shall be equal to the taxes (other than the tax imposed by section 55) imposed on the trust for such preceding taxable year attributable to the undistributed net income. For purposes of this subsection, the undistributed net income and the taxes imposed on the trust for such preceding taxable year attributable to such undistributed net income shall be computed without regard to such accumulation distribution and without regard to any accumulation distribution determined for any succeeding taxable year.

(c) Pro rata portion of taxes deemed distributed If any portion of an accumulation distribution for any taxable year is deemed under subsection (a) to be an amount within the meaning of paragraph (2) of section 661(a) distributed on the last day of any preceding taxable year and such portion of the accumulation distribution is less than the undistributed net income for such preceding taxable year, the trust shall be deemed to have distributed on the last day of such preceding taxable year an additional amount within the meaning of paragraph (2) of section 661(a). Such additional amount shall be equal to the taxes (other than the tax imposed by section 55) imposed on the trust for such taxable year attributable to the undistributed net income multiplied by the ratio of the portion of the accumulation distribution to the undistributed net income of the trust for such year. For purposes of this subsection, the undistributed net income and the taxes imposed on the trust for such preceding taxable year attributable to such undistributed net income shall be computed without regard to the accumulation distribution and without regard to any accumulation distribution determined for any succeeding taxable year.

(d) Rule when information is not available If adequate records are not available to determine the proper application of this subpart to an amount distributed by a trust, such amount shall be deemed to be an accumulation distribution consisting of undistributed net income earned during the earliest preceding taxable year of the trust in which it can be established that the trust was in existence.

(e) Denial of refund to trusts and beneficiaries No refund or credit shall be allowed to a trust or a beneficiary of such trust for any preceding taxable year by reason of a distribution deemed to have been made by such trust in such year under this section.

§ 667 Treatment of amounts deemed distributed by trust in preceding years

(a) General rule The total of the amounts which are treated under section 666 as having been distributed by a trust in a preceding taxable year shall be included in the income of a beneficiary of the trust when paid, credited, or required to be distributed to the extent that such total would have been included in the income of such beneficiary under section 662(a)(2) (and, with respect to any tax-exempt interest to which section 103 applies, under section 662(b)) if such total had been paid to such beneficiary on the last day of such preceding taxable year. The tax imposed by this subtitle on a beneficiary for a taxable year in which any such amount is included in his income shall be determined only as provided in this section and shall consist of the sum of— a partial tax computed on the taxable income reduced by an amount equal to the total of such amounts, at the rate and in the manner as if this section had not been enacted, a partial tax determined as provided in subsection (b) of this section, and in the case of a foreign trust, the interest charge determined as provided in section 668.

(b) Tax on distribution The partial tax imposed by subsection (a)(2) shall be determined. by determining the number of preceding taxable years of the trust on the last day of which an amount is deemed under section 666(a) to have been distributed, by taking from the 5 taxable years immediately preceding the year of the accumulation distribution the 1 taxable year for which the beneficiary’s taxable income was the highest and the 1 taxable year for which his taxable income was the lowest, by adding to the beneficiary’s taxable income for each of the 3 taxable years remaining after the application of subparagraph (B) an amount determined by dividing the amount deemed distributed under section 666 and required to be included in income under subsection (a) by the number of preceding taxable years determined under subparagraph (A), and by determining the average increase in tax for the 3 taxable years referred to in subparagraph (C) resulting from the application of such subparagraph. The partial tax imposed by subsection (a)(2) shall be the excess (if any) of the average increase in tax determined under subparagraph (D), multiplied by the number of preceding taxable years determined under subparagraph (A), over the amount of taxes (other than the amount of taxes described in section 665(d)(2)) deemed distributed to the beneficiary under sections 666(b) and (c). For purposes of paragraph (1), the taxable income of the beneficiary for any taxable year shall be deemed to be not less than zero. For purposes of paragraph (1), if the amount of the undistributed net income deemed distributed in any preceding taxable year of the trust is less than 25 percent of the amount of the accumulation distribution divided by the number of preceding taxable years to which the accumulation distribution is allocated under section 666(a), the number of preceding taxable years of the trust with respect to which an amount is deemed distributed to a beneficiary under section 666(a) shall be determined without regard to such year. In computing the partial tax under paragraph (1) for any beneficiary, the income of such beneficiary for each of his prior taxable years shall include amounts previously deemed distributed to such beneficiary in such year under section 666 as a result of prior accumulation distributions (whether from the same or another trust). In the case of accumulation distributions made from more than one trust which are includible in the income of a beneficiary in the same taxable year, the distributions shall be deemed to have been made consecutively in whichever order the beneficiary shall determine. The partial tax shall be reduced by an amount which is equal to the pre-death portion of the partial tax multiplied by a fraction— the numerator of which is that portion of the tax imposed by chapter 11 or 13, as the case may be, which is attributable (on a proportionate basis) to amounts included in the accumulation distribution, and the denominator of which is the amount of the accumulation distribution which is subject to the tax imposed by chapter 11 or 13, as the case may be. For purposes of this paragraph, the term “partial tax” means the partial tax imposed by subsection (a)(2) determined under this subsection without regard to this paragraph. For purposes of this paragraph, the pre-death portion of the partial tax shall be an amount which bears the same ratio to the partial tax as the portion of the accumulation distribution which is attributable to the period before the date of the death of the decedent or the date of the generation-skipping transfer bears to the total accumulation distribution.

(c) Special rule for multiple trusts If, in the same prior taxable year of the beneficiary in which any part of the accumulation distribution from a trust (hereinafter in this paragraph referred to as “third trust”) is deemed under section 666(a) to have been distributed to such beneficiary, some part of prior distributions by each of 2 or more other trusts is deemed under section 666(a) to have been distributed to such beneficiary, then subsections (b) and (c) of section 666 shall not apply with respect to such part of the accumulation distribution from such third trust. For purposes of paragraph (1), an accumulation distribution from a trust to a beneficiary shall be taken into account only if such distribution, when added to any prior accumulation distributions from such trust which are deemed under section 666(a) to have been distributed to such beneficiary for the same prior taxable year of the beneficiary, equals or exceeds $1,000.

(d) Special rules for foreign trust In determining the increase in tax under subsection (b)(1)(D) for any computation year, the taxes described in section 665(d)(2) which are deemed distributed under section 666(b) or (c) and added under subsection (b)(1)(C) to the taxable income of the beneficiary for any computation year shall, except as provided in subparagraphs (B) and (C), be treated as a credit against the increase in tax for such computation year under subsection (b)(1)(D). If the beneficiary did not choose the benefits of subpart A of part III of subchapter N with respect to the computation year, the beneficiary may in lieu of treating the amounts described in subparagraph (A) (without regard to subparagraph (C)) as a credit may treat such amounts as a deduction in computing the beneficiary’s taxable income under subsection (b)(1)(C) for the computation year. For purposes of determining under subparagraph (A) the amount treated as a credit for any computation year, the limitations under subpart A of part III of subchapter N shall be applied separately with respect to amounts added under subsection (b)(1)(C) to the taxable income of the beneficiary for such computation year. For purposes of computing the increase in tax under subsection (b)(1)(D) for any computation year for which the beneficiary did not choose the benefits of subpart A of part III of subchapter N, the beneficiary shall be treated as having chosen such benefits for such computation year. The items of income, deduction, and credit of the Trust shall retain their character (subject to the application of section 904(f)(5)) to the extent necessary to apply this paragraph. For purposes of this paragraph, the term “computation year” means any of the three taxable years remaining after application of subsection (b)(1)(B).

(e) Retention of character of amounts distributed from accumulation trust to nonresident aliens and foreign corporations In the case of a distribution from a trust to a nonresident alien individual or to a foreign corporation, the first sentence of subsection (a) shall be applied as if the reference to the determination of character under section 662(b) applied to all amounts instead of just to tax-exempt interest.

§ 668 Interest charge on accumulation distributions from foreign trusts

(a) General rule For purposes of the tax determined under section 667(a)— The interest charge determined under this section with respect to any distribution is the amount of interest which would be determined on the partial tax computed under section 667(b) for the period described in paragraph (2) using the rates and the method under section 6621 applicable to underpayments of tax. For purposes of paragraph (1), the period described in this paragraph is the period which begins on the date which is the applicable number of years before the date of the distribution and which ends on the date of the distribution. For purposes of paragraph (2)— The applicable number of years with respect to a distribution is the number determined by dividing— the sum of the products described in subparagraph (B) with respect to each undistributed income year, by the aggregate undistributed net income. The quotient determined under the preceding sentence shall be rounded under procedures prescribed by the Secretary. For purposes of subparagraph (A), the product described in this subparagraph with respect to any undistributed income year is the product of— the undistributed net income for such year, and the sum of the number of taxable years between such year and the taxable year of the distribution (counting in each case the undistributed income year but not counting the taxable year of the distribution). For purposes of this subsection, the term “undistributed income year” means any prior taxable year of the trust for which there is undistributed net income, other than a taxable year during all of which the beneficiary receiving the distribution was not a citizen or resident of the United States. Notwithstanding section 666, for purposes of this subsection, an accumulation distribution from the trust shall be treated as reducing proportionately the undistributed net income for undistributed income years. Interest for the portion of the period described in paragraph (2) which occurs before January 1, 1996 , shall be determined— by using an interest rate of 6 percent, and without compounding until January 1, 1996 .

(b) Limitation The total amount of the interest charge shall not, when added to the total partial tax computed under section 667(b), exceed the amount of the accumulation distribution (other than the amount of tax deemed distributed by section 666(b) or (c)) in respect of which such partial tax was determined.

(c) Interest charge not deductible The interest charge determined under this section shall not be allowed as a deduction for purposes of any tax imposed by this title.

[§ 669 Repealed. Pub. L. 94–455, title VII, § 701(d)(1), Oct. 4, 1976, 90 Stat. 1578]

§ 671 Trust income, deductions, and credits attributable to grantors and others as substantial owners

Where it is specified in this subpart that the grantor or another person shall be treated as the owner of any portion of a trust, there shall then be included in computing the taxable income and credits of the grantor or the other person those items of income, deductions, and credits against tax of the trust which are attributable to that portion of the trust to the extent that such items would be taken into account under this chapter in computing taxable income or credits against the tax of an individual. Any remaining portion of the trust shall be subject to subparts A through D. No items of a trust shall be included in computing the taxable income and credits of the grantor or of any other person solely on the grounds of his dominion and control over the trust under section 61 (relating to definition of gross income) or any other provision of this title, except as specified in this subpart. ( Aug. 16, 1954, ch. 736 , 68A Stat. 226 .)

§ 672 Definitions and rules

(a) Adverse party For purposes of this subpart, the term “adverse party” means any person having a substantial beneficial interest in the trust which would be adversely affected by the exercise or nonexercise of the power which he possesses respecting the trust. A person having a general power of appointment over the trust property shall be deemed to have a beneficial interest in the trust.

(b) Nonadverse party For purposes of this subpart, the term “nonadverse party” means any person who is not an adverse party.

(c) Related or subordinate party For purposes of this subpart, the term “related or subordinate party” means any nonadverse party who is— the grantor’s spouse if living with the grantor; any one of the following: The grantor’s father, mother, issue, brother or sister; an employee of the grantor; a corporation or any employee of a corporation in which the stock holdings of the grantor and the trust are significant from the viewpoint of voting control; a subordinate employee of a corporation in which the grantor is an executive. For purposes of subsection (f) and sections 674 and 675, a related or subordinate party shall be presumed to be subservient to the grantor in respect of the exercise or nonexercise of the powers conferred on him unless such party is shown not to be subservient by a preponderance of the evidence.

(d) Rule where power is subject to condition precedent A person shall be considered to have a power described in this subpart even though the exercise of the power is subject to a precedent giving of notice or takes effect only on the expiration of a certain period after the exercise of the power.

(e) Grantor treated as holding any power or interest of grantor’s spouse For purposes of this subpart, a grantor shall be treated as holding any power or interest held by— any individual who was the spouse of the grantor at the time of the creation of such power or interest, or any individual who became the spouse of the grantor after the creation of such power or interest, but only with respect to periods after such individual became the spouse of the grantor. For purposes of paragraph (1)(A), an individual legally separated from his spouse under a decree of divorce or of separate maintenance shall not be considered as married.

(f) Subpart not to result in foreign ownership Notwithstanding any other provision of this subpart, this subpart shall apply only to the extent such application results in an amount (if any) being currently taken into account (directly or through 1 or more entities) under this chapter in computing the income of a citizen or resident of the United States or a domestic corporation. Paragraph (1) shall not apply to any portion of a trust if— the power to revest absolutely in the grantor title to the trust property to which such portion is attributable is exercisable solely by the grantor without the approval or consent of any other person or with the consent of a related or subordinate party who is subservient to the grantor, or the only amounts distributable from such portion (whether income or corpus) during the lifetime of the grantor are amounts distributable to the grantor or the spouse of the grantor. Except as provided in regulations, paragraph (1) shall not apply to any portion of a trust distributions from which are taxable as compensation for services rendered. Except as otherwise provided in regulations prescribed by the Secretary— a controlled foreign corporation (as defined in section 957) shall be treated as a domestic corporation for purposes of paragraph (1), and paragraph (1) shall not apply for purposes of applying section 1297. In the case of any transfer directly or indirectly from a partnership or foreign corporation which the transferee treats as a gift or bequest, the Secretary may recharacterize such transfer in such circumstances as the Secretary determines to be appropriate to prevent the avoidance of the purposes of this subsection. If— but for this subsection, a foreign person would be treated as the owner of any portion of a trust, and such trust has a beneficiary who is a United States person, such beneficiary shall be treated as the grantor of such portion to the extent such beneficiary has made (directly or indirectly) transfers of property (other than in a sale for full and adequate consideration) to such foreign person. For purposes of the preceding sentence, any gift shall not be taken into account to the extent such gift would be excluded from taxable gifts under section 2503(b). The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this subsection, including regulations providing that paragraph (1) shall not apply in appropriate cases.

§ 673 Reversionary interests

(a) General rule The grantor shall be treated as the owner of any portion of a trust in which he has a reversionary interest in either the corpus or the income therefrom, if, as of the inception of that portion of the trust, the value of such interest exceeds 5 percent of the value of such portion.

(b) Reversionary interest taking effect at death of minor lineal descendant beneficiary In the case of any beneficiary who— is a lineal descendant of the grantor, and holds all of the present interests in any portion of a trust, the grantor shall not be treated under subsection (a) as the owner of such portion solely by reason of a reversionary interest in such portion which takes effect upon the death of such beneficiary before such beneficiary attains age 21.

(c) Special rule for determining value of reversionary interest For purposes of subsection (a), the value of the grantor’s reversionary interest shall be determined by assuming the maximum exercise of discretion in favor of the grantor.

(d) Postponement of date specified for reacquisition Any postponement of the date specified for the reacquisition of possession or enjoyment of the reversionary interest shall be treated as a new transfer in trust commencing with the date on which the postponement is effective and terminating with the date prescribed by the postponement. However, income for any period shall not be included in the income of the grantor by reason of the preceding sentence if such income would not be so includible in the absence of such postponement.

§ 674 Power to control beneficial enjoyment

(a) General rule The grantor shall be treated as the owner of any portion of a trust in respect of which the beneficial enjoyment of the corpus or the income therefrom is subject to a power of disposition, exercisable by the grantor or a nonadverse party, or both, without the approval or consent of any adverse party.

(b) Exceptions for certain powers Subsection (a) shall not apply to the following powers regardless of by whom held: A power described in section 677(b) to the extent that the grantor would not be subject to tax under that section. A power, the exercise of which can only affect the beneficial enjoyment of the income for a period commencing after the occurrence of an event such that a grantor would not be treated as the owner under section 673 if the power were a reversionary interest; but the grantor may be treated as the owner after the occurrence of the event unless the power is relinquished. A power exercisable only by will, other than a power in the grantor to appoint by will the income of the trust where the income is accumulated for such disposition by the grantor or may be so accumulated in the discretion of the grantor or a nonadverse party, or both, without the approval or consent of any adverse party. A power to determine the beneficial enjoyment of the corpus or the income therefrom if the corpus or income is irrevocably payable for a purpose specified in section 170(c) (relating to definition of charitable contributions) or to an employee stock ownership plan (as defined in section 4975(e)(7)) in a qualified gratuitous transfer (as defined in section 664(g)(1)). A power to distribute corpus either— to or for a beneficiary or beneficiaries or to or for a class of beneficiaries (whether or not income beneficiaries) provided that the power is limited by a reasonably definite standard which is set forth in the trust instrument; or to or for any current income beneficiary, provided that the distribution of corpus must be chargeable against the proportionate share of corpus held in trust for the payment of income to the beneficiary as if the corpus constituted a separate trust. A power does not fall within the powers described in this paragraph if any person has a power to add to the beneficiary or beneficiaries or to a class of beneficiaries designated to receive the income or corpus, except where such action is to provide for after-born or after-adopted children. A power to distribute or apply income to or for any current income beneficiary or to accumulate the income for him, provided that any accumulated income must ultimately be payable— to the beneficiary from whom distribution or application is withheld, to his estate, or to his appointees (or persons named as alternate takers in default of appointment) provided that such beneficiary possesses a power of appointment which does not exclude from the class of possible appointees any person other than the beneficiary, his estate, his creditors, or the creditors of his estate, or on termination of the trust, or in conjunction with a distribution of corpus which is augmented by such accumulated income, to the current income beneficiaries in shares which have been irrevocably specified in the trust instrument. Accumulated income shall be considered so payable although it is provided that if any beneficiary does not survive a date of distribution which could reasonably have been expected to occur within the beneficiary’s lifetime, the share of the deceased beneficiary is to be paid to his appointees or to one or more designated alternate takers (other than the grantor or the grantor’s estate) whose shares have been irrevocably specified. A power does not fall within the powers described in this paragraph if any person has a power to add to the beneficiary or beneficiaries or to a class of beneficiaries designated to receive the income or corpus except where such action is to provide for after-born or after-adopted children. A power exercisable only during— the existence of a legal disability of any current income beneficiary, or the period during which any income beneficiary shall be under the age of 21 years, to distribute or apply income to or for such beneficiary or to accumulate and add the income to corpus. A power does not fall within the powers described in this paragraph if any person has a power to add to the beneficiary or beneficiaries or to a class of beneficiaries designated to receive the income or corpus, except where such action is to provide for after-born or after-adopted children. A power to allocate receipts and disbursements as between corpus and income, even though expressed in broad language.

(c) Exception for certain powers of independent trustees Subsection (a) shall not apply to a power solely exercisable (without the approval or consent of any other person) by a trustee or trustees, none of whom is the grantor, and no more than half of whom are related or subordinate parties who are subservient to the wishes of the grantor— to distribute, apportion, or accumulate income to or for a beneficiary or beneficiaries, or to, for, or within a class of beneficiaries; or to pay out corpus to or for a beneficiary or beneficiaries or to or for a class of beneficiaries (whether or not income beneficiaries). A power does not fall within the powers described in this subsection if any person has a power to add to the beneficiary or beneficiaries or to a class of beneficiaries designated to receive the income or corpus, except where such action is to provide for after-born or after-adopted children. For periods during which an individual is the spouse of the grantor (within the meaning of section 672(e)(2)), any reference in this subsection to the grantor shall be treated as including a reference to such individual.

(d) Power to allocate income if limited by a standard Subsection (a) shall not apply to a power solely exercisable (without the approval or consent of any other person) by a trustee or trustees, none of whom is the grantor or spouse living with the grantor, to distribute, apportion, or accumulate income to or for a beneficiary or beneficiaries, or to, for, or within a class of beneficiaries, whether or not the conditions of paragraph (6) or (7) of subsection (b) are satisfied, if such power is limited by a reasonably definite external standard which is set forth in the trust instrument. A power does not fall within the powers described in this subsection if any person has a power to add to the beneficiary or beneficiaries or to a class of beneficiaries designated to receive the income or corpus except where such action is to provide for after-born or after-adopted children.

§ 675 Administrative powers

The grantor shall be treated as the owner of any portion of a trust in respect of which— A power exercisable by the grantor or a nonadverse party, or both, without the approval or consent of any adverse party enables the grantor or any person to purchase, exchange, or otherwise deal with or dispose of the corpus or the income therefrom for less than an adequate consideration in money or money’s worth. A power exercisable by the grantor or a nonadverse party, or both, enables the grantor to borrow the corpus or income, directly or indirectly, without adequate interest or without adequate security except where a trustee (other than the grantor) is authorized under a general lending power to make loans to any person without regard to interest or security. The grantor has directly or indirectly borrowed the corpus or income and has not completely repaid the loan, including any interest, before the beginning of the taxable year. The preceding sentence shall not apply to a loan which provides for adequate interest and adequate security, if such loan is made by a trustee other than the grantor and other than a related or subordinate trustee subservient to the grantor. For periods during which an individual is the spouse of the grantor (within the meaning of section 672(e)(2)), any reference in this paragraph to the grantor shall be treated as including a reference to such individual. A power of administration is exercisable in a nonfiduciary capacity by any person without the approval or consent of any person in a fiduciary capacity. For purposes of this paragraph, the term “power of administration” means any one or more of the following powers: (A) a power to vote or direct the voting of stock or other securities of a corporation in which the holdings of the grantor and the trust are significant from the viewpoint of voting control; (B) a power to control the investment of the trust funds either by directing investments or reinvestments, or by vetoing proposed investments or reinvestments, to the extent that the trust funds consist of stocks or securities of corporations in which the holdings of the grantor and the trust are significant from the viewpoint of voting control; or (C) a power to reacquire the trust corpus by substituting other property of an equivalent value. ( Aug. 16, 1954, ch. 736 , 68A Stat. 229 ; Pub. L. 100–647, title I, § 1014(a)(2) , Nov. 10, 1988 , 102 Stat. 3559 .)

§ 676 Power to revoke

(a) General rule The grantor shall be treated as the owner of any portion of a trust, whether or not he is treated as such owner under any other provision of this part, where at any time the power to revest in the grantor title to such portion is exercisable by the grantor or a non-adverse party, or both.

(b) Power affecting beneficial enjoyment only after occurrence of event Subsection (a) shall not apply to a power the exercise of which can only affect the beneficial enjoyment of the income for a period commencing after the occurrence of an event such that a grantor would not be treated as the owner under section 673 if the power were a reversionary interest. But the grantor may be treated as the owner after the occurrence of such event unless the power is relinquished.

§ 677 Income for benefit of grantor

(a) General rule The grantor shall be treated as the owner of any portion of a trust, whether or not he is treated as such owner under section 674, whose income without the approval or consent of any adverse party is, or, in the discretion of the grantor or a nonadverse party, or both, may be— distributed to the grantor or the grantor’s spouse; held or accumulated for future distribution to the grantor or the grantor’s spouse; or applied to the payment of premiums on policies of insurance on the life of the grantor or the grantor’s spouse (except policies of insurance irrevocably payable for a purpose specified in section 170(c) (relating to definition of charitable contributions)). This subsection shall not apply to a power the exercise of which can only affect the beneficial enjoyment of the income for a period commencing after the occurrence of an event such that the grantor would not be treated as the owner under section 673 if the power were a reversionary interest; but the grantor may be treated as the owner after the occurrence of the event unless the power is relinquished.

(b) Obligations of support Income of a trust shall not be considered taxable to the grantor under subsection (a) or any other provision of this chapter merely because such income in the discretion of another person, the trustee, or the grantor acting as trustee or co-trustee, may be applied or distributed for the support or maintenance of a beneficiary (other than the grantor’s spouse) whom the grantor is legally obligated to support or maintain, except to the extent that such income is so applied or distributed. In cases where the amounts so applied or distributed are paid out of corpus or out of other than income for the taxable year, such amounts shall be considered to be an amount paid or credited within the meaning of paragraph (2) of section 661(a) and shall be taxed to the grantor under section 662.

§ 678 Person other than grantor treated as substantial owner

(a) General rule A person other than the grantor shall be treated as the owner of any portion of a trust with respect to which: such person has a power exercisable solely by himself to vest the corpus or the income therefrom in himself, or such person has previously partially released or otherwise modified such a power and after the release or modification retains such control as would, within the principles of sections 671 to 677, inclusive, subject a grantor of a trust to treatment as the owner thereof.

(b) Exception where grantor is taxable Subsection (a) shall not apply with respect to a power over income, as originally granted or thereafter modified, if the grantor of the trust or a transferor (to whom section 679 applies) is otherwise treated as the owner under the provisions of this subpart other than this section.

(c) Obligations of support Subsection (a) shall not apply to a power which enables such person, in the capacity of trustee or cotrustee, merely to apply the income of the trust to the support or maintenance of a person whom the holder of the power is obligated to support or maintain except to the extent that such income is so applied. In cases where the amounts so applied or distributed are paid out of corpus or out of other than income of the taxable year, such amounts shall be considered to be an amount paid or credited within the meaning of paragraph (2) of section 661(a) and shall be taxed to the holder of the power under section 662.

(d) Effect of renunciation or disclaimer Subsection (a) shall not apply with respect to a power which has been renounced or disclaimed within a reasonable time after the holder of the power first became aware of its existence.

(e) Cross reference For provision under which beneficiary of trust is treated as owner of the portion of the trust which consists of stock in an S corporation, see section 1361(d).

§ 679 Foreign trusts having one or more United States beneficiaries

(a) Transferor treated as owner A United States person who directly or indirectly transfers property to a foreign trust (other than a trust described in section 6048(a)(3)(B)(ii)) shall be treated as the owner for his taxable year of the portion of such trust attributable to such property if for such year there is a United States beneficiary of any portion of such trust. Paragraph (1) shall not apply— To any transfer by reason of the death of the transferor. To any transfer of property to a trust in exchange for consideration of at least the fair market value of the transferred property. For purposes of the preceding sentence, consideration other than cash shall be taken into account at its fair market value. In determining whether paragraph (2)(B) applies to any transfer by a person described in clause (ii) or (iii) of subparagraph (C), there shall not be taken into account— except as provided in regulations, any obligation of a person described in subparagraph (C), and to the extent provided in regulations, any obligation which is guaranteed by a person described in subparagraph (C). Principal payments by the trust on any obligation referred to in subparagraph (A) shall be taken into account on and after the date of the payment in determining the portion of the trust attributable to the property transferred. The persons described in this subparagraph are— the trust, any grantor, owner, or beneficiary of the trust, and any person who is related (within the meaning of section 643(i)(2)(B)) to any grantor, owner, or beneficiary of the trust. If a nonresident alien individual has a residency starting date within 5 years after directly or indirectly transferring property to a foreign trust, this section and section 6048 shall be applied as if such individual transferred to such trust on the residency starting date an amount equal to the portion of such trust attributable to the property transferred by such individual to such trust in such transfer. For purposes of this section, undistributed net income for periods before such individual’s residency starting date shall be taken into account in determining the portion of the trust which is attributable to property transferred by such individual to such trust but shall not otherwise be taken into account. For purposes of this paragraph, an individual’s residency starting date is the residency starting date determined under section 7701(b)(2)(A). If— an individual who is a citizen or resident of the United States transferred property to a trust which was not a foreign trust, and such trust becomes a foreign trust while such individual is alive, then this section and section 6048 shall be applied as if such individual transferred to such trust on the date such trust becomes a foreign trust an amount equal to the portion of such trust attributable to the property previously transferred by such individual to such trust. A rule similar to the rule of paragraph (4)(B) shall apply for purposes of this paragraph.

(b) Trusts acquiring United States beneficiaries If— subsection (a) applies to a trust for the transferor’s taxable year, and subsection (a) would have applied to the trust for his immediately preceding taxable year but for the fact that for such preceding taxable year there was no United States beneficiary for any portion of the trust, then, for purposes of this subtitle, the transferor shall be treated as having income for the taxable year (in addition to his other income for such year) equal to the undistributed net income (at the close of such immediately preceding taxable year) attributable to the portion of the trust referred to in subsection (a).

(c) Trusts treated as having a United States beneficiary For purposes of this section, a trust shall be treated as having a United States beneficiary for the taxable year unless— under the terms of the trust, no part of the income or corpus of the trust may be paid or accumulated during the taxable year to or for the benefit of a United States person, and if the trust were terminated at any time during the taxable year, no part of the income or corpus of such trust could be paid to or for the benefit of a United States person. For purposes of subparagraph (A), an amount shall be treated as accumulated for the benefit of a United States person even if the United States person’s interest in the trust is contingent on a future event. For purposes of paragraph (1), an amount shall be treated as paid or accumulated to or for the benefit of a United States person if such amount is paid to or accumulated for a foreign corporation, foreign partnership, or foreign trust or estate, and— in the case of a foreign corporation, such corporation is a controlled foreign corporation (as defined in section 957(a)), in the case of a foreign partnership, a United States person is a partner of such partnership, or in the case of a foreign trust or estate, such trust or estate has a United States beneficiary (within the meaning of paragraph (1)). A beneficiary shall not be treated as a United States person in applying this section with respect to any transfer of property to foreign trust if such beneficiary first became a United States person more than 5 years after the date of such transfer. For purposes of paragraph (1)(A), if any person has the discretion (by authority given in the trust agreement, by power of appointment, or otherwise) of making a distribution from the trust to, or for the benefit of, any person, such trust shall be treated as having a beneficiary who is a United States person unless— the terms of the trust specifically identify the class of persons to whom such distributions may be made, and none of those persons are United States persons during the taxable year. For purposes of paragraph (1)(A), if any United States person who directly or indirectly transfers property to the trust is directly or indirectly involved in any agreement or understanding (whether written, oral, or otherwise) that may result in the income or corpus of the trust being paid or accumulated to or for the benefit of a United States person, such agreement or understanding shall be treated as a term of the trust. For purposes of this subsection, a loan of cash or marketable securities (or the use of any other trust property) directly or indirectly to or by any United States person (whether or not a beneficiary under the terms of the trust) shall be treated as paid or accumulated for the benefit of a United States person. The preceding sentence shall not apply to the extent that the United States person repays the loan at a market rate of interest (or pays the fair market value of the use of such property) within a reasonable period of time.

(d) Presumption that foreign trust has United States beneficiary If a United States person directly or indirectly transfers property to a foreign trust (other than a trust described in section 6048(a)(3)(B)(ii)), the Secretary may treat such trust as having a United States beneficiary for purposes of applying this section to such transfer unless such person— submits such information to the Secretary as the Secretary may require with respect to such transfer, and demonstrates to the satisfaction of the Secretary that such trust satisfies the requirements of subparagraphs (A) and (B) of subsection (c)(1).

(e) Regulations The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section.

§ 681 Limitation on charitable deduction

(a) Trade or business income In computing the deduction allowable under section 642(c) to a trust, no amount otherwise allowable under section 642(c) as a deduction shall be allowed as a deduction with respect to income of the taxable year which is allocable to its unrelated business income for such year. For purposes of the preceding sentence, the term “unrelated business income” means an amount equal to the amount which, if such trust were exempt from tax under section 501(a) by reason of section 501(c)(3), would be computed as its unrelated business taxable income under section 512 (relating to income derived from certain business activities and from certain property acquired with borrowed funds).

(b) Cross reference For disallowance of certain charitable, etc., deductions otherwise allowable under section 642(c), see sections 508(d) and 4948(c)(4).

[§ 682 Repealed. Pub. L. 115–97, title I, § 11051(b)(1)(C), Dec. 22, 2017, 131 Stat. 2089]

§ 683 Use of trust as an exchange fund

(a) General rule Except as provided in subsection (b), if property is transferred to a trust in exchange for an interest in other trust property and if the trust would be an investment company (within the meaning of section 351) if it were a corporation, then gain shall be recognized to the transferor.

(b) Exception for pooled income funds Subsection (a) shall not apply to any transfer to a pooled income fund (within the meaning of section 642(c)(5)).

§ 684 Recognition of gain on certain transfers to certain foreign trusts and estates

(a) In general Except as provided in regulations, in the case of any transfer of property by a United States person to a foreign estate or trust, for purposes of this subtitle, such transfer shall be treated as a sale or exchange for an amount equal to the fair market value of the property transferred, and the transferor shall recognize as gain the excess of— the fair market value of the property so transferred, over the adjusted basis (for purposes of determining gain) of such property in the hands of the transferor.

(b) Exception Subsection (a) shall not apply to a transfer to a trust by a United States person to the extent that any person is treated as the owner of such trust under section 671.

(c) Treatment of trusts which become foreign trusts If a trust which is not a foreign trust becomes a foreign trust, such trust shall be treated for purposes of this section as having transferred, immediately before becoming a foreign trust, all of its assets to a foreign trust.

§ 685 Treatment of funeral trusts

(a) In general In the case of a qualified funeral trust— subparts B, C, D, and E shall not apply, and no deduction shall be allowed by section 642(b).

(b) Qualified funeral trust For purposes of this subsection, the term “qualified funeral trust” means any trust (other than a foreign trust) if— the trust arises as a result of a contract with a person engaged in the trade or business of providing funeral or burial services or property necessary to provide such services, the sole purpose of the trust is to hold, invest, and reinvest funds in the trust and to use such funds solely to make payments for such services or property for the benefit of the beneficiaries of the trust, the only beneficiaries of such trust are individuals with respect to whom such services or property are to be provided at their death under contracts described in paragraph (1), the only contributions to the trust are contributions by or for the benefit of such beneficiaries, the trustee elects the application of this subsection, and the trust would (but for the election described in paragraph (5)) be treated as owned under subpart E by the purchasers of the contracts described in paragraph (1). A trust shall not fail to be treated as meeting the requirement of paragraph (6) by reason of the death of an individual but only during the 60-day period beginning on the date of such death.

(c) Application of rate schedule Section 1(e) shall be applied to each qualified funeral trust by treating each beneficiary’s interest in each such trust as a separate trust.

(d) Treatment of amounts refunded to purchaser on cancellation No gain or loss shall be recognized to a purchaser of a contract described in subsection (b)(1) by reason of any payment from such trust to such purchaser by reason of cancellation of such contract. If any payment referred to in the preceding sentence consists of property other than money, the basis of such property in the hands of such purchaser shall be the same as the trust’s basis in such property immediately before the payment.

(e) Simplified reporting The Secretary may prescribe rules for simplified reporting of all trusts having a single trustee and of trusts terminated during the year.

§ 691 Recipients of income in respect of decedents

(a) Inclusion in gross income The amount of all items of gross income in respect of a decedent which are not properly includible in respect of the taxable period in which falls the date of his death or a prior period (including the amount of all items of gross income in respect of a prior decedent, if the right to receive such amount was acquired by reason of the death of the prior decedent or by bequest, devise, or inheritance from the prior decedent) shall be included in the gross income, for the taxable year when received, of: the estate of the decedent, if the right to receive the amount is acquired by the decedent’s estate from the decedent; the person who, by reason of the death of the decedent, acquires the right to receive the amount, if the right to receive the amount is not acquired by the decedent’s estate from the decedent; or the person who acquires from the decedent the right to receive the amount by bequest, devise, or inheritance, if the amount is received after a distribution by the decedent’s estate of such right. If a right, described in paragraph (1), to receive an amount is transferred by the estate of the decedent or a person who received such right by reason of the death of the decedent or by bequest, devise, or inheritance from the decedent, there shall be included in the gross income of the estate or such person, as the case may be, for the taxable period in which the transfer occurs, the fair market value of such right at the time of such transfer plus the amount by which any consideration for the transfer exceeds such fair market value. For purposes of this paragraph, the term “transfer” includes sale, exchange, or other disposition, or the satisfaction of an installment obligation at other than face value, but does not include transmission at death to the estate of the decedent or a transfer to a person pursuant to the right of such person to receive such amount by reason of the death of the decedent or by bequest, devise, or inheritance from the decedent. The right, described in paragraph (1), to receive an amount shall be treated, in the hands of the estate of the decedent or any person who acquired such right by reason of the death of the decedent, or by bequest, devise, or inheritance from the decedent, as if it had been acquired by the estate or such person in the transaction in which the right to receive the income was originally derived and the amount includible in gross income under paragraph (1) or (2) shall be considered in the hands of the estate or such person to have the character which it would have had in the hands of the decedent if the decedent had lived and received such amount. In the case of an installment obligation reportable by the decedent on the installment method under section 453, if such obligation is acquired by the decedent’s estate from the decedent or by any person by reason of the death of the decedent or by bequest, devise, or inheritance from the decedent— an amount equal to the excess of the face amount of such obligation over the basis of the obligation in the hands of the decedent (determined under section 453B) shall, for the purpose of paragraph (1), be considered as an item of gross income in respect of the decedent; and such obligation shall, for purposes of paragraphs (2) and (3), be considered a right to receive an item of gross income in respect of the decedent, but the amount includible in gross income under paragraph (2) shall be reduced by an amount equal to the basis of the obligation in the hands of the decedent (determined under section 453B). In the case of an installment obligation reportable by the decedent on the installment method under section 453, for purposes of paragraph (2)— the second sentence of paragraph (2) shall be applied by inserting “(other than the obligor)” after “or a transfer to a person”, any cancellation of such an obligation shall be treated as a transfer, and any cancellation of such an obligation occurring at the death of the decedent shall be treated as a transfer by the estate of the decedent (or, if held by a person other than the decedent before the death of the decedent, by such person). In any case to which the first sentence of paragraph (2) applies by reason of subparagraph (A), if the decedent and the obligor were related persons (within the meaning of section 453(f)(1)), the fair market value of the installment obligation shall be treated as not less than its face amount. For purposes of subparagraph (A), an installment obligation which becomes unenforceable shall be treated as if it were canceled.

(b) Allowance of deductions and credit The amount of any deduction specified in section 162, 163, 164, 212, or 611 (relating to deductions for expenses, interest, taxes, and depletion) or credit specified in section 27 (relating to foreign tax credit), in respect of a decedent which is not properly allowable to the decedent in respect of the taxable period in which falls the date of his death, or a prior period, shall be allowed: In the case of a deduction specified in section 162, 163, 164, or 212 and a credit specified in section 27, in the taxable year when paid— to the estate of the decedent; except that if the estate of the decedent is not liable to discharge the obligation to which the deduction or credit relates, to the person who, by reason of the death of the decedent or by bequest, devise, or inheritance acquires, subject to such obligation, from the decedent an interest in property of the decedent. In the case of the deduction specified in section 611, to the person described in subsection (a)(1)(A), (B), or (C) who, in the manner described therein, receives the income to which the deduction relates, in the taxable year when such income is received.

(c) Deduction for estate tax A person who includes an amount in gross income under subsection (a) shall be allowed, for the same taxable year, as a deduction an amount which bears the same ratio to the estate tax attributable to the net value for estate tax purposes of all the items described in subsection (a)(1) as the value for estate tax purposes of the items of gross income or portions thereof in respect of which such person included the amount in gross income (or the amount included in gross income, whichever is lower) bears to the value for estate tax purposes of all the items described in subsection (a)(1). In the case of an estate or trust, the amount allowed as a deduction under subparagraph (A) shall be computed by excluding from the gross income of the estate or trust the portion (if any) of the items described in subsection (a)(1) which is properly paid, credited, or to be distributed to the beneficiaries during the taxable year. For purposes of paragraph (1)— The term “estate tax” means the tax imposed on the estate of the decedent or any prior decedent under section 2001 or 2101, reduced by the credits against such tax. The net value for estate tax purposes of all the items described in subsection (a)(1) shall be the excess of the value for estate tax purposes of all the items described in subsection (a)(1) over the deductions from the gross estate in respect of claims which represent the deductions and credit described in subsection (b). Such net value shall be determined with respect to the provisions of section 421(c)(2), relating to the deduction for estate tax with respect to stock options to which part II of subchapter D applies. The estate tax attributable to such net value shall be an amount equal to the excess of the estate tax over the estate tax computed without including in the gross estate such net value. In the case of any tax imposed by chapter 13 on a taxable termination or a direct skip occurring as a result of the death of the transferor, there shall be allowed a deduction (under principles similar to the principles of this subsection) for the portion of such tax attributable to items of gross income of the trust which were not properly includible in the gross income of the trust for periods before the date of such termination. For purposes of sections 1(h), 1202, and 1211, the amount taken into account with respect to any item described in subsection (a)(1) shall be reduced (but not below zero) by the amount of the deduction allowable under paragraph (1) of this subsection with respect to such item.

(d) Amounts received by surviving annuitant under joint and survivor annuity contract For purposes of computing the deduction under subsection (c)(1)(A), amounts received by a surviving annuitant— as an annuity under a joint and survivor annuity contract where the decedent annuitant died after the annuity starting date (as defined in section 72(c)(4)), and during the surviving annuitant’s life expectancy period, shall, to the extent included in gross income under section 72, be considered as amounts included in gross income under subsection (a). In determining the net value for estate tax purposes under subsection (c)(2)(B) for purposes of this subsection, the value for estate tax purposes of the items described in paragraph (1) of this subsection shall be computed— by determining the excess of the value of the annuity at the date of the death of the deceased annuitant over the total amount excludable from the gross income of the surviving annuitant under section 72 during the surviving annuitant’s life expectancy period, and by multiplying the figure so obtained by the ratio which the value of the annuity for estate tax purposes bears to the value of the annuity at the date of the death of the deceased. For purposes of this subsection— The term “life expectancy period” means the period beginning with the first day of the first period for which an amount is received by the surviving annuitant under the contract and ending with the close of the taxable year with or in which falls the termination of the life expectancy of the surviving annuitant. For purposes of this subparagraph, the life expectancy of the surviving annuitant shall be determined, as of the date of the death of the deceased annuitant, with reference to actuarial tables prescribed by the Secretary. The surviving annuitant’s expected return under the contract shall be computed, as of the death of the deceased annuitant, with reference to actuarial tables prescribed by the Secretary.

(e) Cross reference For application of this section to income in respect of a deceased partner, see section 753.

§ 692 Income taxes of members of Armed Forces, astronauts, and victims of certain terrorist attacks on death

(a) General rule In the case of any individual who dies while in active service as a member of the Armed Forces of the United States, if such death occurred while serving in a combat zone (as determined under section 112) or as a result of wounds, disease, or injury incurred while so serving— any tax imposed by this subtitle shall not apply with respect to the taxable year in which falls the date of his death, or with respect to any prior taxable year ending on or after the first day he so served in a combat zone; and any tax under this subtitle and under the corresponding provisions of prior revenue laws for taxable years preceding those specified in paragraph (1) which is unpaid at the date of his death (including interest, additions to the tax, and additional amounts) shall not be assessed, and if assessed the assessment shall be abated, and if collected shall be credited or refunded as an overpayment.

(b) Individuals in missing status For purposes of this section, in the case of an individual who was in a missing status within the meaning of section 6013(f)(3)(A), the date of his death shall be treated as being not earlier than the date on which a determination of his death is made under section 556 of title 37 of the United States Code. Except in the case of the combat zone designated for purposes of the Vietnam conflict, the preceding sentence shall not cause subsection (a)(1) to apply for any taxable year beginning more than 2 years after the date designated under section 112 as the date of termination of combatant activities in a combat zone.

(c) Certain military or civilian employees of the United States dying as a result of injuries In the case of any individual who dies while a military or civilian employee of the United States, if such death occurs as a result of wounds or injury which was incurred while the individual was a military or civilian employee of the United States and which was incurred in a terroristic or military action, any tax imposed by this subtitle shall not apply— with respect to the taxable year in which falls the date of his death, and with respect to any prior taxable year in the period beginning with the last taxable year ending before the taxable year in which the wounds or injury were incurred. For purposes of paragraph (1), the term “terroristic or military action” means— any terroristic activity which a preponderance of the evidence indicates was directed against the United States or any of its allies, and any military action involving the Armed Forces of the United States and resulting from violence or aggression against the United States or any of its allies (or threat thereof). For purposes of the preceding sentence, the term “military action” does not include training exercises. For purposes of paragraph (2), any multinational force in which the United States is participating shall be treated as an ally of the United States.

(d) Individuals dying as a result of certain attacks In the case of a specified terrorist victim, any tax imposed by this chapter shall not apply— with respect to the taxable year in which falls the date of death, and with respect to any prior taxable year in the period beginning with the last taxable year ending before the taxable year in which the wounds, injury, or illness referred to in paragraph (3) were incurred. If, but for this paragraph, the amount of tax not imposed by paragraph (1) with respect to a specified terrorist victim is less than $10, 000, t h e n s u c h v i c t im s ha ll b e t re a t e d a s ha v in g ma d e a p a y m e n t a g ain s tt h e t a x im p ose d b y t hi sc ha pt er f ors u c h v i c t im ’ s l a s tt a x ab l eye a r inanam o u n t e q u a lt o t h ee x cesso f$ 10,000 over the amount of tax not so imposed. Subject to such rules as the Secretary may prescribe, paragraph (1) shall not apply to the amount of any tax imposed by this chapter which would be computed by only taking into account the items of income, gain, or other amounts attributable to— deferred compensation which would have been payable after death if the individual had died other than as a specified terrorist victim, or amounts payable in the taxable year which would not have been payable in such taxable year but for an action taken after September 11, 2001 . For purposes of this subsection, the term “specified terrorist victim” means any decedent— who dies as a result of wounds or injury incurred as a result of the terrorist attacks against the United States on April 19, 1995 , or September 11, 2001 , or who dies as a result of illness incurred as a result of an attack involving anthrax occurring on or after September 11, 2001 , and before January 1, 2002 . Such term shall not include any individual identified by the Attorney General to have been a participant or conspirator in any such attack or a representative of such an individual. The provisions of this subsection shall apply to any astronaut whose death occurs in the line of duty, except that paragraph (3)(B) shall be applied by using the date of the death of the astronaut rather than September 11, 2001 .

§ 701 Partners, not partnership, subject to tax

A partnership as such shall not be subject to the income tax imposed by this chapter. Persons carrying on business as partners shall be liable for income tax only in their separate or individual capacities. ( Aug. 16, 1954, ch. 736 , 68A Stat. 239 .)

§ 702 Income and credits of partner

(a) General rule In determining his income tax, each partner shall take into account separately his distributive share of the partnership’s— gains and losses from sales or exchanges of capital assets held for not more than 1 year, gains and losses from sales or exchanges of capital assets held for more than 1 year, gains and losses from sales or exchanges of property described in section 1231 (relating to certain property used in a trade or business and involuntary conversions), charitable contributions (as defined in section 170(c)), dividends with respect to which section 1(h)(11) or part VIII of subchapter B applies, taxes, described in section 901, paid or accrued to foreign countries and to possessions of the United States, other items of income, gain, loss, deduction, or credit, to the extent provided by regulations prescribed by the Secretary, and taxable income or loss, exclusive of items requiring separate computation under other paragraphs of this subsection.

(b) Character of items constituting distributive share The character of any item of income, gain, loss, deduction, or credit included in a partner’s distributive share under paragraphs (1) through (7) of subsection (a) shall be determined as if such item were realized directly from the source from which realized by the partnership, or incurred in the same manner as incurred by the partnership.

(c) Gross income of a partner In any case where it is necessary to determine the gross income of a partner for purposes of this title, such amount shall include his distributive share of the gross income of the partnership.

(d) Cross reference For rules relating to procedures for determining the tax treatment of partnership items see subchapter C of chapter 63 (section 6221 and following).

§ 703 Partnership computations

(a) Income and deductions The taxable income of a partnership shall be computed in the same manner as in the case of an individual except that— the items described in section 702(a) shall be separately stated, and the following deductions shall not be allowed to the partnership: the deductions for personal exemptions provided in section 151, the deduction for taxes provided in section 164(a) with respect to taxes, described in section 901, paid or accrued to foreign countries and to possessions of the United States, the deduction for charitable contributions provided in section 170, the net operating loss deduction provided in section 172, the additional itemized deductions for individuals provided in part VII of subchapter B (sec. 211 and following), and the deduction for depletion under section 611 with respect to oil and gas wells.

(b) Elections of the partnership Any election affecting the computation of taxable income derived from a partnership shall be made by the partnership, except that any election under— subsection (b)(5) or (c)(3) of section 108 (relating to income from discharge of indebtedness), section 617 (relating to deduction and recapture of certain mining exploration expenditures), or section 901 (relating to taxes of foreign countries and possessions of the United States), shall be made by each partner separately.

(a) Effect of partnership agreement A partner’s distributive share of income, gain, loss, deduction, or credit shall, except as otherwise provided in this chapter, be determined by the partnership agreement.

(b) Determination of distributive share A partner’s distributive share of income, gain, loss, deduction, or credit (or item thereof) shall be determined in accordance with the partner’s interest in the partnership (determined by taking into account all facts and circumstances), if— the partnership agreement does not provide as to the partner’s distributive share of income, gain, loss, deduction, or credit (or item thereof), or the allocation to a partner under the agreement of income, gain, loss, deduction, or credit (or item thereof) does not have substantial economic effect.

(c) Contributed property Under regulations prescribed by the Secretary— income, gain, loss, and deduction with respect to property contributed to the partnership by a partner shall be shared among the partners so as to take account of the variation between the basis of the property to the partnership and its fair market value at the time of contribution, if any property so contributed is distributed (directly or indirectly) by the partnership (other than to the contributing partner) within 7 years of being contributed— the contributing partner shall be treated as recognizing gain or loss (as the case may be) from the sale of such property in an amount equal to the gain or loss which would have been allocated to such partner under subparagraph (A) by reason of the variation described in subparagraph (A) if the property had been sold at its fair market value at the time of the distribution, the character of such gain or loss shall be determined by reference to the character of the gain or loss which would have resulted if such property had been sold by the partnership to the distributee, and appropriate adjustments shall be made to the adjusted basis of the contributing partner’s interest in the partnership and to the adjusted basis of the property distributed to reflect any gain or loss recognized under this subparagraph, and if any property so contributed has a built-in loss— such built-in loss shall be taken into account only in determining the amount of items allocated to the contributing partner, and except as provided in regulations, in determining the amount of items allocated to other partners, the basis of the contributed property in the hands of the partnership shall be treated as being equal to its fair market value at the time of contribution. For purposes of subparagraph (C), the term “built-in loss” means the excess of the adjusted basis of the property (determined without regard to subparagraph (C)(ii)) over its fair market value at the time of contribution. Under regulations prescribed by the Secretary, if— property contributed by a partner (hereinafter referred to as the “contributing partner”) is distributed by the partnership to another partner, and other property of a like kind (within the meaning of section 1031) is distributed by the partnership to the contributing partner not later than the earlier of— the 180th day after the date of the distribution described in subparagraph (A), or the due date (determined with regard to extensions) for the contributing partner’s return of the tax imposed by this chapter for the taxable year in which the distribution described in subparagraph (A) occurs, then to the extent of the value of the property described in subparagraph (B), paragraph (1)(B) shall be applied as if the contributing partner had contributed to the partnership the property described in subparagraph (B). Under regulations prescribed by the Secretary, rules similar to the rules of paragraph (1) shall apply to contributions by a partner (using the cash receipts and disbursements method of accounting) of accounts payable and other accrued but unpaid items. Any reference in paragraph (1) or (2) to the contributing partner shall be treated as including a reference to any successor of such partner.

(d) Limitation on allowance of losses A partner’s distributive share of partnership loss (including capital loss) shall be allowed only to the extent of the adjusted basis of such partner’s interest in the partnership at the end of the partnership year in which such loss occurred. Any excess of such loss over such basis shall be allowed as a deduction at the end of the partnership year in which such excess is repaid to the partnership. In determining the amount of any loss under paragraph (1), there shall be taken into account the partner’s distributive share of amounts described in paragraphs (4) and (6) of section 702(a). In the case of a charitable contribution of property whose fair market value exceeds its adjusted basis, subparagraph (A) shall not apply to the extent of the partner’s distributive share of such excess.

(e) Partnership interests created by gift In the case of any partnership interest created by gift, the distributive share of the donee under the partnership agreement shall be includible in his gross income, except to the extent that such share is determined without allowance of reasonable compensation for services rendered to the partnership by the donor, and except to the extent that the portion of such share attributable to donated capital is proportionately greater than the share of the donor attributable to the donor’s capital. The distributive share of a partner in the earnings of the partnership shall not be diminished because of absence due to military service. For purposes of this subsection, an interest purchased by one member of a family from another shall be considered to be created by gift from the seller, and the fair market value of the purchased interest shall be considered to be donated capital. The “family” of any individual shall include only his spouse, ancestors, and lineal descendants, and any trusts for the primary benefit of such persons.

(f) Cross reference For rules in the case of the sale, exchange, liquidation, or reduction of a partner’s interest, see section 706(c)(2).

§ 705 Determination of basis of partner’s interest

(a) General rule The adjusted basis of a partner’s interest in a partnership shall, except as provided in subsection (b), be the basis of such interest determined under section 722 (relating to contributions to a partnership) or section 742 (relating to transfers of partnership interests)— increased by the sum of his distributive share for the taxable year and prior taxable years of— taxable income of the partnership as determined under section 703(a), income of the partnership exempt from tax under this title, and the excess of the deductions for depletion over the basis of the property subject to depletion; decreased (but not below zero) by distributions by the partnership as provided in section 733 and by the sum of his distributive share for the taxable year and prior taxable years of— losses of the partnership, and expenditures of the partnership not deductible in computing its taxable income and not properly chargeable to capital account; and decreased (but not below zero) by the amount of the partner’s deduction for depletion for any partnership oil and gas property to the extent such deduction does not exceed the proportionate share of the adjusted basis of such property allocated to such partner under section 613A(c)(7)(D).

(b) Alternative rule The Secretary shall prescribe by regulations the circumstances under which the adjusted basis of a partner’s interest in a partnership may be determined by reference to his proportionate share of the adjusted basis of partnership property upon a termination of the partnership.

§ 706 Taxable years of partner and partnership

(a) Year in which partnership income is includible In computing the taxable income of a partner for a taxable year, the inclusions required by section 702 and section 707(c) with respect to a partnership shall be based on the income, gain, loss, deduction, or credit of the partnership for any taxable year of the partnership ending within or with the taxable year of the partner.

(b) Taxable year The taxable year of a partnership shall be determined as though the partnership were a taxpayer. Except as provided in subparagraph (C), a partnership shall not have a taxable year other than— the majority interest taxable year (as defined in paragraph (4)), if there is no taxable year described in clause (i), the taxable year of all the principal partners of the partnership, or if there is no taxable year described in clause (i) or (ii), the calendar year unless the Secretary by regulations prescribes another period. A partnership may have a taxable year not described in subparagraph (B) if it establishes, to the satisfaction of the Secretary, a business purpose therefor. For purposes of this subparagraph, any deferral of income to partners shall not be treated as a business purpose. A partner may not change to a taxable year other than that of a partnership in which he is a principal partner unless he establishes, to the satisfaction of the Secretary, a business purpose therefor. For the purpose of this subsection, a principal partner is a partner having an interest of 5 percent or more in partnership profits or capital. For purposes of paragraph (1)(B)(i)— The term “majority interest taxable year” means the taxable year (if any) which, on each testing day, constituted the taxable year of 1 or more partners having (on such day) an aggregate interest in partnership profits and capital of more than 50 percent. The testing days shall be— the 1st day of the partnership taxable year (determined without regard to clause (i)), or the days during such representative period as the Secretary may prescribe. Except as provided in regulations necessary to prevent the avoidance of this section, if, by reason of paragraph (1)(B)(i), the taxable year of a partnership is changed, such partnership shall not be required to change to another taxable year for either of the 2 taxable years following the year of change. Except as provided in regulations, for purposes of determining the taxable year to which a partnership is required to change by reason of this subsection, changes in taxable years of other persons required by this subsection, section 441(i), section 584(i), section 644, or section 1378(a) shall be taken into account.

(c) Closing of partnership year Except in the case of a termination of a partnership and except as provided in paragraph (2) of this subsection, the taxable year of a partnership shall not close as the result of the death of a partner, the entry of a new partner, the liquidation of a partner’s interest in the partnership, or the sale or exchange of a partner’s interest in the partnership. The taxable year of a partnership shall close with respect to a partner whose entire interest in the partnership terminates (whether by reason of death, liquidation, or otherwise). The taxable year of a partnership shall not close (other than at the end of a partnership’s taxable year as determined under subsection (b)(1)) with respect to a partner who sells or exchanges less than his entire interest in the partnership or with respect to a partner whose interest is reduced (whether by entry of a new partner, partial liquidation of a partner’s interest, gift, or otherwise).

(d) Determination of distributive share when partner’s interest changes Except as provided in paragraphs (2) and (3), if during any taxable year of the partnership there is a change in any partner’s interest in the partnership, each partner’s distributive share of any item of income, gain, loss, deduction, or credit of the partnership for such taxable year shall be determined by the use of any method prescribed by the Secretary by regulations which takes into account the varying interests of the partners in the partnership during such taxable year. If during any taxable year of the partnership there is a change in any partner’s interest in the partnership, then (except to the extent provided in regulations) each partner’s distributive share of any allocable cash basis item shall be determined— by assigning the appropriate portion of such item to each day in the period to which it is attributable, and by allocating the portion assigned to any such day among the partners in proportion to their interests in the partnership at the close of such day. For purposes of this paragraph, the term “allocable cash basis item” means any of the following items with respect to which the partnership uses the cash receipts and disbursements method of accounting: Interest. Taxes. Payments for services or for the use of property. Any other item of a kind specified in regulations prescribed by the Secretary as being an item with respect to which the application of this paragraph is appropriate to avoid significant misstatements of the income of the partners. If any portion of any allocable cash basis item is attributable to— any period before the beginning of the taxable year, such portion shall be assigned under subparagraph (A)(i) to the first day of the taxable year, or any period after the close of the taxable year, such portion shall be assigned under subparagraph (A)(i) to the last day of the taxable year. If any portion of a deductible cash basis item is assigned under subparagraph (C)(i) to the first day of any taxable year— such portion shall be allocated among persons who are partners in the partnership during the period to which such portion is attributable in accordance with their varying interests in the partnership during such period, and any amount allocated under clause (i) to a person who is not a partner in the partnership on such first day shall be capitalized by the partnership and treated in the manner provided for in section 755. If— during any taxable year of the partnership there is a change in any partner’s interest in the partnership (hereinafter in this paragraph referred to as the “upper tier partnership”), and such partnership is a partner in another partnership (hereinafter in this paragraph referred to as the “lower tier partnership”), then (except to the extent provided in regulations) each partner’s distributive share of any item of the upper tier partnership attributable to the lower tier partnership shall be determined by assigning the appropriate portion (determined by applying principles similar to the principles of subparagraphs (C) and (D) of paragraph (2)) of each such item to the appropriate days during which the upper tier partnership is a partner in the lower tier partnership and by allocating the portion assigned to any such day among the partners in proportion to their interests in the upper tier partnership at the close of such day. For purposes of this subsection, the taxable year of a partnership shall be determined without regard to subsection (c)(2)(A).

§ 707 Transactions between partner and partnership

(a) Partner not acting in capacity as partner If a partner engages in a transaction with a partnership other than in his capacity as a member of such partnership, the transaction shall, except as otherwise provided in this section, be considered as occurring between the partnership and one who is not a partner. Except as provided by the Secretary— If— a partner performs services for a partnership or transfers property to a partnership, there is a related direct or indirect allocation and distribution to such partner, and the performance of such services (or such transfer) and the allocation and distribution, when viewed together, are properly characterized as a transaction occurring between the partnership and a partner acting other than in his capacity as a member of the partnership, such allocation and distribution shall be treated as a transaction described in paragraph (1). If— there is a direct or indirect transfer of money or other property by a partner to a partnership, there is a related direct or indirect transfer of money or other property by the partnership to such partner (or another partner), and the transfers described in clauses (i) and (ii), when viewed together, are properly characterized as a sale or exchange of property, such transfers shall be treated either as a transaction described in paragraph (1) or as a transaction between 2 or more partners acting other than in their capacity as members of the partnership.

(b) Certain sales or exchanges of property with respect to controlled partnerships No deduction shall be allowed in respect of losses from sales or exchanges of property (other than an interest in the partnership), directly or indirectly, between— a partnership and a person owning, directly or indirectly, more than 50 percent of the capital interest, or the profits interest, in such partnership, or two partnerships in which the same persons own, directly or indirectly, more than 50 percent of the capital interests or profits interests. In the case of a subsequent sale or exchange by a transferee described in this paragraph, section 267(d) shall be applicable as if the loss were disallowed under section 267(a)(1). For purposes of section 267(a)(2), partnerships described in subparagraph (B) of this paragraph shall be treated as persons specified in section 267(b). In the case of a sale or exchange, directly or indirectly, of property, which in the hands of the transferee, is property other than a capital asset as defined in section 1221— between a partnership and a person owning, directly or indirectly, more than 50 percent of the capital interest, or profits interest, in such partnership, or between two partnerships in which the same persons own, directly or indirectly, more than 50 percent of the capital interests or profits interests, any gain recognized shall be considered as ordinary income. For purposes of paragraphs (1) and (2) of this subsection, the ownership of a capital or profits interest in a partnership shall be determined in accordance with the rules for constructive ownership of stock provided in section 267(c) other than paragraph (3) of such section.

(c) Guaranteed payments To the extent determined without regard to the income of the partnership, payments to a partner for services or the use of capital shall be considered as made to one who is not a member of the partnership, but only for the purposes of section 61(a) (relating to gross income) and, subject to section 263, for purposes of section 162(a) (relating to trade or business expenses).

§ 708 Continuation of partnership

(a) General rule For purposes of this subchapter, an existing partnership shall be considered as continuing if it is not terminated.

(b) Termination For purposes of subsection (a), a partnership shall be considered as terminated only if no part of any business, financial operation, or venture of the partnership continues to be carried on by any of its partners in a partnership. In the case of the merger or consolidation of two or more partnerships, the resulting partnership shall, for purposes of this section, be considered the continuation of any merging or consolidating partnership whose members own an interest of more than 50 percent in the capital and profits of the resulting partnership. In the case of a division of a partnership into two or more partnerships, the resulting partnerships (other than any resulting partnership the members of which had an interest of 50 percent or less in the capital and profits of the prior partnership) shall, for purposes of this section, be considered a continuation of the prior partnership.

§ 709 Treatment of organization and syndication fees

(a) General rule Except as provided in subsection (b), no deduction shall be allowed under this chapter to the partnership or to any partner for any amounts paid or incurred to organize a partnership or to promote the sale of (or to sell) an interest in such partnership.

(b) Deduction of organization fees If a partnership elects the application of this subsection (in accordance with regulations prescribed by the Secretary) with respect to any organizational expenses— the partnership shall be allowed a deduction for the taxable year in which the partnership begins business in an amount equal to the lesser of— the amount of organizational expenses with respect to the partnership, or $5, 000, re d u ce d (b u t n o t b e l o w zero) b y t h e am o u n t b y w hi c h s u c h or g ani z a t i o na l e x p e n sese x cee d$ 50,000, and the remainder of such organizational expenses shall be allowed as a deduction ratably over the 180-month period beginning with the month in which the partnership begins business. In any case in which a partnership is liquidated before the end of the period to which paragraph (1)(B) applies, any deferred expenses attributable to the partnership which were not allowed as a deduction by reason of this section may be deducted to the extent allowable under section 165. The organizational expenses to which paragraph (1) applies, are expenditures which— are incident to the creation of the partnership; are chargeable to capital account; and are of a character which, if expended incident to the creation of a partnership having an ascertainable life, would be amortized over such life.

§ 721 Nonrecognition of gain or loss on contribution

(a) General rule No gain or loss shall be recognized to a partnership or to any of its partners in the case of a contribution of property to the partnership in exchange for an interest in the partnership.

(b) Special rule Subsection (a) shall not apply to gain realized on a transfer of property to a partnership which would be treated as an investment company (within the meaning of section 351) if the partnership were incorporated.

(c) Regulations relating to certain transfers to partnerships The Secretary may provide by regulations that subsection (a) shall not apply to gain realized on the transfer of property to a partnership if such gain, when recognized, will be includible in the gross income of a person other than a United States person.

(d) Transfers of intangibles For regulatory authority to treat intangibles transferred to a partnership as sold, see section 367(d)(3).

§ 722 Basis of contributing partner’s interest

The basis of an interest in a partnership acquired by a contribution of property, including money, to the partnership shall be the amount of such money and the adjusted basis of such property to the contributing partner at the time of the contribution increased by the amount (if any) of gain recognized under section 721(b) to the contributing partner at such time. ( Aug. 16, 1954, ch. 736 , 68A Stat. 245 ; Pub. L. 94–455, title XXI, § 2131(c) , Oct. 4, 1976 , 90 Stat. 1924 ; Pub. L. 98–369, div. A, title VII, § 722(f)(1) , July 18, 1984 , 98 Stat. 974 .)

§ 723 Basis of property contributed to partnership

The basis of property contributed to a partnership by a partner shall be the adjusted basis of such property to the contributing partner at the time of the contribution increased by the amount (if any) of gain recognized under section 721(b) to the contributing partner at such time. ( Aug. 16, 1954, ch. 736 , 68A Stat. 245 ; Pub. L. 94–455, title XXI, § 2131(c) , Oct. 4, 1976 , 90 Stat. 1924 ; Pub. L. 98–369, div. A, title VII, § 722(f)(1) , July 18, 1984 , 98 Stat. 974 .)

§ 724 Character of gain or loss on contributed unrealized receivables, inventory items, and capital loss property

(a) Contributions of unrealized receivables In the case of any property which— was contributed to the partnership by a partner, and was an unrealized receivable in the hands of such partner immediately before such contribution, any gain or loss recognized by the partnership on the disposition of such property shall be treated as ordinary income or ordinary loss, as the case may be.

(b) Contributions of inventory items In the case of any property which— was contributed to the partnership by a partner, and was an inventory item in the hands of such partner immediately before such contribution, any gain or loss recognized by the partnership on the disposition of such property during the 5-year period beginning on the date of such contribution shall be treated as ordinary income or ordinary loss, as the case may be.

(c) Contributions of capital loss property In the case of any property which— was contributed by a partner to the partnership, and was a capital asset in the hands of such partner immediately before such contribution, any loss recognized by the partnership on the disposition of such property during the 5-year period beginning on the date of such contribution shall be treated as a loss from the sale of a capital asset to the extent that, immediately before such contribution, the adjusted basis of such property in the hands of the partner exceeded the fair market value of such property.

(d) Definitions For purposes of this section— The term “unrealized receivable” has the meaning given such term by section 751(c) (determined by treating any reference to the partnership as referring to the partner). The term “inventory item” has the meaning given such term by section 751(d) (determined by treating any reference to the partnership as referring to the partner and by applying section 1231 without regard to any holding period therein provided). If any property described in subsection (a), (b), or (c) is disposed of in a nonrecognition transaction, the tax treatment which applies to such property under such subsection shall also apply to any substituted basis property resulting from such transaction. A similar rule shall also apply in the case of a series of non-recognition transactions. Subparagraph (A) shall not apply to any stock in a C corporation received in an exchange described in section 351.

§ 731 Extent of recognition of gain or loss on distribution

(a) Partners In the case of a distribution by a partnership to a partner— gain shall not be recognized to such partner, except to the extent that any money distributed exceeds the adjusted basis of such partner’s interest in the partnership immediately before the distribution, and loss shall not be recognized to such partner, except that upon a distribution in liquidation of a partner’s interest in a partnership where no property other than that described in subparagraph (A) or (B) is distributed to such partner, loss shall be recognized to the extent of the excess of the adjusted basis of such partner’s interest in the partnership over the sum of— any money distributed, and the basis to the distributee, as determined under section 732, of any unrealized receivables (as defined in section 751(c)) and inventory (as defined in section 751(d)). Any gain or loss recognized under this subsection shall be considered as gain or loss from the sale or exchange of the partnership interest of the distributee partner.

(b) Partnerships No gain or loss shall be recognized to a partnership on a distribution to a partner of property, including money.

(c) Treatment of marketable securities For purposes of subsection (a)(1) and section 737— the term “money” includes marketable securities, and such securities shall be taken into account at their fair market value as of the date of the distribution. For purposes of this subsection: The term “marketable securities” means financial instruments and foreign currencies which are, as of the date of the distribution, actively traded (within the meaning of section 1092(d)(1)). Such term includes— any interest in— a common trust fund, or a regulated investment company which is offering for sale or has outstanding any redeemable security (as defined in section 2(a)(32) of the Investment Company Act of 1940) of which it is the issuer, any financial instrument which, pursuant to its terms or any other arrangement, is readily convertible into, or exchangeable for, money or marketable securities, any financial instrument the value of which is determined substantially by reference to marketable securities, except to the extent provided in regulations prescribed by the Secretary, any interest in a precious metal which, as of the date of the distribution, is actively traded (within the meaning of section 1092(d)(1)) unless such metal was produced, used, or held in the active conduct of a trade or business by the partnership, except as otherwise provided in regulations prescribed by the Secretary, interests in any entity if substantially all of the assets of such entity consist (directly or indirectly) of marketable securities, money, or both, and to the extent provided in regulations prescribed by the Secretary, any interest in an entity not described in clause (v) but only to the extent of the value of such interest which is attributable to marketable securities, money, or both. The term “financial instrument” includes stocks and other equity interests, evidences of indebtedness, options, forward or futures contracts, notional principal contracts, and derivatives. Paragraph (1) shall not apply to the distribution from a partnership of a marketable security to a partner if— the security was contributed to the partnership by such partner, except to the extent that the value of the distributed security is attributable to marketable securities or money contributed (directly or indirectly) to the entity to which the distributed security relates, to the extent provided in regulations prescribed by the Secretary, the property was not a marketable security when acquired by such partnership, or such partnership is an investment partnership and such partner is an eligible partner thereof. In the case of a distribution of marketable securities to a partner, the amount taken into account under paragraph (1) shall be reduced (but not below zero) by the excess (if any) of— such partner’s distributive share of the net gain which would be recognized if all of the marketable securities of the same class and issuer as the distributed securities held by the partnership were sold (immediately before the transaction to which the distribution relates) by the partnership for fair market value, over such partner’s distributive share of the net gain which is attributable to the marketable securities of the same class and issuer as the distributed securities held by the partnership immediately after the transaction, determined by using the same fair market value as used under clause (i). Under regulations prescribed by the Secretary, all marketable securities held by the partnership may be treated as marketable securities of the same class and issuer as the distributed securities. For purposes of subparagraph (A)(iii): The term “investment partnership” means any partnership which has never been engaged in a trade or business and substantially all of the assets (by value) of which have always consisted of— money, stock in a corporation, notes, bonds, debentures, or other evidences of indebtedness, interest rate, currency, or equity notional principal contracts, foreign currencies, interests in or derivative financial instruments (including options, forward or futures contracts, short positions, and similar financial instruments) in any asset described in any other subclause of this clause or in any commodity traded on or subject to the rules of a board of trade or commodity exchange, other assets specified in regulations prescribed by the Secretary, or any combination of the foregoing. A partnership shall not be treated as engaged in a trade or business by reason of— any activity undertaken as an investor, trader, or dealer in any asset described in clause (i), or any other activity specified in regulations prescribed by the Secretary. The term “eligible partner” means any partner who, before the date of the distribution, did not contribute to the partnership any property other than assets described in clause (i). The term “eligible partner” shall not include the transferor or transferee in a nonrecognition transaction involving a transfer of any portion of an interest in a partnership with respect to which the transferor was not an eligible partner. Except as otherwise provided in regulations prescribed by the Secretary— a partnership shall be treated as engaged in any trade or business engaged in by, and as holding (instead of a partnership interest) a proportionate share of the assets of, any other partnership in which the partnership holds a partnership interest, and a partner who contributes to a partnership an interest in another partnership shall be treated as contributing a proportionate share of the assets of the other partnership. If the preceding sentence does not apply under such regulations with respect to any interest held by a partnership in another partnership, the interest in such other partnership shall be treated as if it were specified in a subclause of clause (i). The basis of marketable securities with respect to which gain is recognized by reason of this subsection shall be— their basis determined under section 732, increased by the amount of such gain. Any increase in basis attributable to the gain described in subparagraph (A)(ii) shall be allocated to marketable securities in proportion to their respective amounts of unrealized appreciation before such increase. Sections 733 and 734 shall be applied as if no gain were recognized, and no adjustment were made to the basis of property, under this subsection. In the case of a distribution of a marketable security which is an unrealized receivable (as defined in section 751(c)) or an inventory item (as defined in section 751(d)), any gain recognized under this subsection shall be treated as ordinary income to the extent of any increase in the basis of such security attributable to the gain described in paragraph (4)(A)(ii). The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this subsection, including regulations to prevent the avoidance of such purposes.

(d) Exceptions This section shall not apply to the extent otherwise provided by section 736 (relating to payments to a retiring partner or a deceased partner’s successor in interest), section 751 (relating to unrealized receivables and inventory items), and section 737 (relating to recognition of precontribution gain in case of certain distributions).

§ 732 Basis of distributed property other than money

(a) Distributions other than in liquidation of a partner’s interest The basis of property (other than money) distributed by a partnership to a partner other than in liquidation of the partner’s interest shall, except as provided in paragraph (2), be its adjusted basis to the partnership immediately before such distribution. The basis to the distributee partner of property to which paragraph (1) is applicable shall not exceed the adjusted basis of such partner’s interest in the partnership reduced by any money distributed in the same transaction.

(b) Distributions in liquidation The basis of property (other than money) distributed by a partnership to a partner in liquidation of the partner’s interest shall be an amount equal to the adjusted basis of such partner’s interest in the partnership reduced by any money distributed in the same transaction.

(c) Allocation of basis The basis of distributed properties to which subsection (a)(2) or (b) is applicable shall be allocated— first to any unrealized receivables (as defined in section 751(c)) and inventory items (as defined in section 751(d)) in an amount equal to the adjusted basis of each such property to the partnership, and if the basis to be allocated is less than the sum of the adjusted bases of such properties to the partnership, then, to the extent any decrease is required in order to have the adjusted bases of such properties equal the basis to be allocated, in the manner provided in paragraph (3), and to the extent of any basis remaining after the allocation under subparagraph (A), to other distributed properties— first by assigning to each such other property such other property’s adjusted basis to the partnership, and then, to the extent any increase or decrease in basis is required in order to have the adjusted bases of such other distributed properties equal such remaining basis, in the manner provided in paragraph (2) or (3), whichever is appropriate. Any increase required under paragraph (1)(B) shall be allocated among the properties— first to properties with unrealized appreciation in proportion to their respective amounts of unrealized appreciation before such increase (but only to the extent of each property’s unrealized appreciation), and then, to the extent such increase is not allocated under subparagraph (A), in proportion to their respective fair market values. Any decrease required under paragraph (1)(A) or (1)(B) shall be allocated— first to properties with unrealized depreciation in proportion to their respective amounts of unrealized depreciation before such decrease (but only to the extent of each property’s unrealized depreciation), and then, to the extent such decrease is not allocated under subparagraph (A), in proportion to their respective adjusted bases (as adjusted under subparagraph (A)).

(d) Special partnership basis to transferee For purposes of subsections (a), (b), and (c), a partner who acquired all or a part of his interest by a transfer with respect to which the election provided in section 754 is not in effect, and to whom a distribution of property (other than money) is made with respect to the transferred interest within 2 years after such transfer, may elect, under regulations prescribed by the Secretary, to treat as the adjusted partnership basis of such property the adjusted basis such property would have if the adjustment provided in section 743(b) were in effect with respect to the partnership property. The Secretary may by regulations require the application of this subsection in the case of a distribution to a transferee partner, whether or not made within 2 years after the transfer, if at the time of the transfer the fair market value of the partnership property (other than money) exceeded 110 percent of its adjusted basis to the partnership.

(e) Exception This section shall not apply to the extent that a distribution is treated as a sale or exchange of property under section 751(b) (relating to unrealized receivables and inventory items).

(f) Corresponding adjustment to basis of assets of a distributed corporation controlled by a corporate partner If— a corporation (hereafter in this subsection referred to as the “corporate partner”) receives a distribution from a partnership of stock in another corporation (hereafter in this subsection referred to as the “distributed corporation”), the corporate partner has control of the distributed corporation immediately after the distribution or at any time thereafter, and the partnership’s adjusted basis in such stock immediately before the distribution exceeded the corporate partner’s adjusted basis in such stock immediately after the distribution, then an amount equal to such excess shall be applied to reduce (in accordance with subsection (c)) the basis of property held by the distributed corporation at such time (or, if the corporate partner does not control the distributed corporation at such time, at the time the corporate partner first has such control). Paragraph (1) shall not apply to any distribution of stock in the distributed corporation if— the corporate partner does not have control of such corporation immediately after such distribution, and the corporate partner establishes to the satisfaction of the Secretary that such distribution was not part of a plan or arrangement to acquire control of the distributed corporation. The amount of the reduction under paragraph (1) shall not exceed the amount by which the sum of the aggregate adjusted bases of the property and the amount of money of the distributed corporation exceeds the corporate partner’s adjusted basis in the stock of the distributed corporation. No reduction under paragraph (1) in the basis of any property shall exceed the adjusted basis of such property (determined without regard to such reduction). If the amount of any reduction under paragraph (1) (determined after the application of paragraph (3)(A)) exceeds the aggregate adjusted bases of the property of the distributed corporation— such excess shall be recognized by the corporate partner as long-term capital gain, and the corporate partner’s adjusted basis in the stock of the distributed corporation shall be increased by such excess. For purposes of this subsection, the term “control” means ownership of stock meeting the requirements of section 1504(a)(2). For purposes of paragraph (1), if a corporation acquires (other than in a distribution from a partnership) stock the basis of which is determined (by reason of being distributed from a partnership) in whole or in part by reference to subsection (a)(2) or (b), the corporation shall be treated as receiving a distribution of such stock from a partnership. If the property held by a distributed corporation is stock in a corporation which the distributed corporation controls, this subsection shall be applied to reduce the basis of the property of such controlled corporation. This subsection shall be reapplied to any property of any controlled corporation which is stock in a corporation which it controls. The Secretary shall prescribe such regulations as may be necessary to carry out the purposes of this subsection, including regulations to avoid double counting and to prevent the abuse of such purposes.

§ 733 Basis of distributee partner’s interest

In the case of a distribution by a partnership to a partner other than in liquidation of a partner’s interest, the adjusted basis to such partner of his interest in the partnership shall be reduced (but not below zero) by— the amount of any money distributed to such partner, and the amount of the basis to such partner of distributed property other than money, as determined under section 732. ( Aug. 16, 1954, ch. 736 , 68A Stat. 247 .)

§ 734 Adjustment to basis of undistributed partnership property where section 754 election or substantial basis reduction

(a) General rule The basis of partnership property shall not be adjusted as the result of a distribution of property to a partner unless the election, provided in section 754 (relating to optional adjustment to basis of partnership property), is in effect with respect to such partnership or unless there is a substantial basis reduction with respect to such distribution.

(b) Method of adjustment In the case of a distribution of property to a partner by a partnership with respect to which the election provided in section 754 is in effect or with respect to which there is a substantial basis reduction, the partnership shall— increase the adjusted basis of partnership property by— the amount of any gain recognized to the distributee partner with respect to such distribution under section 731(a)(1), and in the case of distributed property to which section 732(a)(2) or (b) applies, the excess of the adjusted basis of the distributed property to the partnership immediately before the distribution (as adjusted by section 732(d)) over the basis of the distributed property to the distributee, as determined under section 732, or decrease the adjusted basis of partnership property by— the amount of any loss recognized to the distributee partner with respect to such distribution under section 731(a)(2), and in the case of distributed property to which section 732(b) applies, the excess of the basis of the distributed property to the distributee, as determined under section 732, over the adjusted basis of the distributed property to the partnership immediately before such distribution (as adjusted by section 732(d)). Paragraph (1)(B) shall not apply to any distributed property which is an interest in another partnership with respect to which the election provided in section 754 is not in effect.

(c) Allocation of basis The allocation of basis among partnership properties where subsection (b) is applicable shall be made in accordance with the rules provided in section 755.

(d) Substantial basis reduction For purposes of this section, there is a substantial basis reduction with respect to a distribution if the sum of the amounts described in subparagraphs (A) and (B) of subsection (b)(2) exceeds $250,000. For regulations to carry out this subsection, see section 743(d)(2).

(e) Exception for securitization partnerships For purposes of this section, a securitization partnership (as defined in section 743(f)) shall not be treated as having a substantial basis reduction with respect to any distribution of property to a partner.

§ 735 Character of gain or loss on disposition of distributed property

(a) Sale or exchange of certain distributed property Gain or loss on the disposition by a distributee partner of unrealized receivables (as defined in section 751(c)) distributed by a partnership, shall be considered as ordinary income or as ordinary loss, as the case may be. Gain or loss on the sale or exchange by a distributee partner of inventory items (as defined in section 751(d)) distributed by a partnership shall, if sold or exchanged within 5 years from the date of the distribution, be considered as ordinary income or as ordinary loss, as the case may be.

(b) Holding period for distributed property In determining the period for which a partner has held property received in a distribution from a partnership (other than for purposes of subsection (a)(2)), there shall be included the holding period of the partnership, as determined under section 1223, with respect to such property.

(c) Special rules For purposes of this section, section 751(d) (defining inventory item) shall be applied without regard to any holding period in section 1231(b). If any property described in subsection (a) is disposed of in a nonrecognition transaction, the tax treatment which applies to such property under such subsection shall also apply to any substituted basis property resulting from such transaction. A similar rule shall also apply in the case of a series of nonrecognition transactions. Subparagraph (A) shall not apply to any stock in a C corporation received in an exchange described in section 351.

§ 736 Payments to a retiring partner or a deceased partner’s successor in interest

(a) Payments considered as distributive share or guaranteed payment Payments made in liquidation of the interest of a retiring partner or a deceased partner shall, except as provided in subsection (b), be considered— as a distributive share to the recipient of partnership income if the amount thereof is determined with regard to the income of the partnership, or as a guaranteed payment described in section 707(c) if the amount thereof is determined without regard to the income of the partnership.

(b) Payments for interest in partnership Payments made in liquidation of the interest of a retiring partner or a deceased partner shall, to the extent such payments (other than payments described in paragraph (2)) are determined, under regulations prescribed by the Secretary, to be made in exchange for the interest of such partner in partnership property, be considered as a distribution by the partnership and not as a distributive share or guaranteed payment under subsection (a). For purposes of this subsection, payments in exchange for an interest in partnership property shall not include amounts paid for— unrealized receivables of the partnership (as defined in section 751(c)), or good will of the partnership, except to the extent that the partnership agreement provides for a payment with respect to good will. Paragraph (2) shall apply only if— capital is not a material income-producing factor for the partnership, and the retiring or deceased partner was a general partner in the partnership.

§ 737 Recognition of precontribution gain in case of certain distributions to contributing partner

(a) General rule In the case of any distribution by a partnership to a partner, such partner shall be treated as recognizing gain in an amount equal to the lesser of— the excess (if any) of (A) the fair market value of property (other than money) received in the distribution over (B) the adjusted basis of such partner’s interest in the partnership immediately before the distribution reduced (but not below zero) by the amount of money received in the distribution, or the net precontribution gain of the partner. Gain recognized under the preceding sentence shall be in addition to any gain recognized under section 731. The character of such gain shall be determined by reference to the proportionate character of the net precontribution gain.

(b) Net precontribution gain For purposes of this section, the term “net precontribution gain” means the net gain (if any) which would have been recognized by the distributee partner under section 704(c)(1)(B) if all property which— had been contributed to the partnership by the distributee partner within 7 years of the distribution, and is held by such partnership immediately before the distribution, had been distributed by such partnership to another partner.

(c) Basis rules The adjusted basis of a partner’s interest in a partnership shall be increased by the amount of any gain recognized by such partner under subsection (a). For purposes of determining the basis of the distributed property (other than money), such increase shall be treated as occurring immediately before the distribution. Appropriate adjustments shall be made to the adjusted basis of the partnership in the contributed property referred to in subsection (b) to reflect gain recognized under subsection (a).

(d) Exceptions If any portion of the property distributed consists of property which had been contributed by the distributee partner to the partnership, such property shall not be taken into account under subsection (a)(1) and shall not be taken into account in determining the amount of the net precontribution gain. If the property distributed consists of an interest in an entity, the preceding sentence shall not apply to the extent that the value of such interest is attributable to property contributed to such entity after such interest had been contributed to the partnership. This section shall not apply to the extent section 751(b) applies to such distribution.

(e) Marketable securities treated as money For treatment of marketable securities as money for purposes of this section, see section 731(c).

§ 741 Recognition and character of gain or loss on sale or exchange

In the case of a sale or exchange of an interest in a partnership, gain or loss shall be recognized to the transferor partner. Such gain or loss shall be considered as gain or loss from the sale or exchange of a capital asset, except as otherwise provided in section 751 (relating to unrealized receivables and inventory items). ( Aug. 16, 1954, ch. 736 , 68A Stat. 248 ; Pub. L. 107–147, title IV, § 417(12) , Mar. 9, 2002 , 116 Stat. 56 .)

§ 742 Basis of transferee partner’s interest

The basis of an interest in a partnership acquired other than by contribution shall be determined under part II of subchapter O (sec. 1011 and following). ( Aug. 16, 1954, ch. 736 , 68A Stat. 249 .)

§ 743 Special rules where section 754 election or substantial built-in loss

(a) General rule The basis of partnership property shall not be adjusted as the result of a transfer of an interest in a partnership by sale or exchange or on the death of a partner unless the election provided by section 754 (relating to optional adjustment to basis of partnership property) is in effect with respect to such partnership or unless the partnership has a substantial built-in loss immediately after such transfer.

(b) Adjustment to basis of partnership property In the case of a transfer of an interest in a partnership by sale or exchange or upon the death of a partner, a partnership with respect to which the election provided in section 754 is in effect or which has a substantial built-in loss immediately after such transfer shall— increase the adjusted basis of the partnership property by the excess of the basis to the transferee partner of his interest in the partnership over his proportionate share of the adjusted basis of the partnership property, or decrease the adjusted basis of the partnership property by the excess of the transferee partner’s proportionate share of the adjusted basis of the partnership property over the basis of his interest in the partnership. Under regulations prescribed by the Secretary, such increase or decrease shall constitute an adjustment to the basis of partnership property with respect to the transferee partner only. A partner’s proportionate share of the adjusted basis of partnership property shall be determined in accordance with his interest in partnership capital and, in the case of property contributed to the partnership by a partner, section 704(c) (relating to contributed property) shall apply in determining such share. In the case of an adjustment under this subsection to the basis of partnership property subject to depletion, any depletion allowable shall be determined separately for the transferee partner with respect to his interest in such property.

(c) Allocation of basis The allocation of basis among partnership properties where subsection (b) is applicable shall be made in accordance with the rules provided in section 755.

(d) Substantial built-in loss For purposes of this section, a partnership has a substantial built-in loss with respect to a transfer of an interest in the partnership if— the partnership’s adjusted basis in the partnership property exceeds by more than $250, 000 t h e f ai r ma r k e t v a l u eo f s u c h p ro p er t y, or t h e t r an s f eree p a r t n er w o u l d b e a ll oc a t e d a l osso f m ore t han$ 250,000 if the partnership assets were sold for cash equal to their fair market value immediately after such transfer. The Secretary shall prescribe such regulations as may be appropriate to carry out the purposes of paragraph (1) and section 734(d), including regulations aggregating related partnerships and disregarding property acquired by the partnership in an attempt to avoid such purposes.

(e) Alternative rules for electing investment partnerships For purposes of this section, an electing investment partnership shall not be treated as having a substantial built-in loss with respect to any transfer occurring while the election under paragraph (6)(A) is in effect. In the case of a transfer of an interest in an electing investment partnership, the transferee partner’s distributive share of losses (without regard to gains) from the sale or exchange of partnership property shall not be allowed except to the extent that it is established that such losses exceed the loss (if any) recognized by the transferor (or any prior transferor to the extent not fully offset by a prior disallowance under this paragraph) on the transfer of the partnership interest. Losses disallowed under paragraph (2) shall not decrease the transferee partner’s basis in the partnership interest. In the case of a transferee partner whose basis in property distributed by the partnership is reduced under section 732(a)(2), the amount of the loss recognized by the transferor on the transfer of the partnership interest which is taken into account under paragraph (2) shall be reduced by the amount of such basis reduction. For purposes of this subsection, the term “electing investment partnership” means any partnership if— the partnership makes an election to have this subsection apply, the partnership would be an investment company under section 3(a)(1)(A) of the Investment Company Act of 1940 but for an exemption under paragraph (1) or (7) of section 3(c) of such Act, such partnership has never been engaged in a trade or business, substantially all of the assets of such partnership are held for investment, at least 95 percent of the assets contributed to such partnership consist of money, no assets contributed to such partnership had an adjusted basis in excess of fair market value at the time of contribution, all partnership interests of such partnership are issued by such partnership pursuant to a private offering before the date which is 24 months after the date of the first capital contribution to such partnership, the partnership agreement of such partnership has substantive restrictions on each partner’s ability to cause a redemption of the partner’s interest, and the partnership agreement of such partnership provides for a term that is not in excess of 15 years. The election described in subparagraph (A), once made, shall be irrevocable except with the consent of the Secretary. The Secretary shall prescribe such regulations as may be appropriate to carry out the purposes of this subsection, including regulations for applying this subsection to tiered partnerships.

(f) Exception for securitization partnerships For purposes of this section, a securitization partnership shall not be treated as having a substantial built-in loss with respect to any transfer. For purposes of paragraph (1), the term “securitization partnership” means any partnership the sole business activity of which is to issue securities which provide for a fixed principal (or similar) amount and which are primarily serviced by the cash flows of a discrete pool (either fixed or revolving) of receivables or other financial assets that by their terms convert into cash in a finite period, but only if the sponsor of the pool reasonably believes that the receivables and other financial assets comprising the pool are not acquired so as to be disposed of.

§ 751 Unrealized receivables and inventory items

(a) Sale or exchange of interest in partnership The amount of any money, or the fair market value of any property, received by a transferor partner in exchange for all or a part of his interest in the partnership attributable to— unrealized receivables of the partnership, or inventory items of the partnership, shall be considered as an amount realized from the sale or exchange of property other than a capital asset.

(b) Certain distributions treated as sales or exchanges To the extent a partner receives in a distribution— partnership property which is— unrealized receivables, or inventory items which have appreciated substantially in value, in exchange for all or a part of his interest in other partnership property (including money), or partnership property (including money) other than property described in subparagraph (A)(i) or (ii) in exchange for all or a part of his interest in partnership property described in subparagraph (A)(i) or (ii), such transactions shall, under regulations prescribed by the Secretary, be considered as a sale or exchange of such property between the distributee and the partnership (as constituted after the distribution). Paragraph (1) shall not apply to— a distribution of property which the distributee contributed to the partnership, or payments, described in section 736(a), to a retiring partner or successor in interest of a deceased partner. For purposes of paragraph (1)— Inventory items of the partnership shall be considered to have appreciated substantially in value if their fair market value exceeds 120 percent of the adjusted basis to the partnership of such property. For purposes of subparagraph (A), there shall be excluded any inventory property if a principal purpose for acquiring such property was to avoid the provisions of this subsection relating to inventory items.

(c) Unrealized receivables For purposes of this subchapter, the term “unrealized receivables” includes, to the extent not previously includible in income under the method of accounting used by the partnership, any rights (contractual or otherwise) to payment for— goods delivered, or to be delivered, to the extent the proceeds therefrom would be treated as amounts received from the sale or exchange of property other than a capital asset, or services rendered, or to be rendered. For purposes of this section and sections 731, 732, and 741 (but not for purposes of section 736), such term also includes mining property (as defined in section 617(f)(2)), stock in a DISC (as described in section 992(a)), section 1245 property (as defined in section 1245(a)(3)), stock in certain foreign corporations (as described in section 1248), section 1250 property (as defined in section 1250(c)), farm land (as defined in section 1252(a)), franchises, trademarks, or trade names (referred to in section 1253(a)), and an oil, gas, or geothermal property (described in section 1254) but only to the extent of the amount which would be treated as gain to which section 617(d)(1), 995(c), 1245(a), 1248(a), 1250(a), 1252(a), 1253(a), or 1254(a) would apply if (at the time of the transaction described in this section or section 731, 732, or 741, as the case may be) such property had been sold by the partnership at its fair market value. For purposes of this section and sections 731, 732, and 741 (but not for purposes of section 736), such term also includes any market discount bond (as defined in section 1278) and any short-term obligation (as defined in section 1283) but only to the extent of the amount which would be treated as ordinary income if (at the time of the transaction described in this section or section 731, 732, or 741, as the case may be) such property had been sold by the partnership.

(d) Inventory items For purposes of this subchapter, the term “inventory items” means— property of the partnership of the kind described in section 1221(a)(1), any other property of the partnership which, on sale or exchange by the partnership, would be considered property other than a capital asset and other than property described in section 1231, and any other property held by the partnership which, if held by the selling or distributee partner, would be considered property of the type described in paragraph (1) or (2).

(e) Limitation on tax attributable to deemed sales of section 1248 stock For purposes of applying this section and sections 731 and 741 to any amount resulting from the reference to section 1248(a) in the second sentence of subsection (c), in the case of an individual, the tax attributable to such amount shall be limited in the manner provided by subsection (b) of section 1248 (relating to gain from certain sales or exchanges of stock in certain foreign corporation).

(f) Special rules in the case of tiered partnerships, etc. In determining whether property of a partnership is— an unrealized receivable, or an inventory item, such partnership shall be treated as owning its proportionate share of the property of any other partnership in which it is a partner. Under regulations, rules similar to the rules of the preceding sentence shall also apply in the case of interests in trusts.

§ 752 Treatment of certain liabilities

(a) Increase in partner’s liabilities Any increase in a partner’s share of the liabilities of a partnership, or any increase in a partner’s individual liabilities by reason of the assumption by such partner of partnership liabilities, shall be considered as a contribution of money by such partner to the partnership.

(b) Decrease in partner’s liabilities Any decrease in a partner’s share of the liabilities of a partnership, or any decrease in a partner’s individual liabilities by reason of the assumption by the partnership of such individual liabilities, shall be considered as a distribution of money to the partner by the partnership.

(c) Liability to which property is subject For purposes of this section, a liability to which property is subject shall, to the extent of the fair market value of such property, be considered as a liability of the owner of the property.

(d) Sale or exchange of an interest In the case of a sale or exchange of an interest in a partnership, liabilities shall be treated in the same manner as liabilities in connection with the sale or exchange of property not associated with partnerships.

§ 753 Partner receiving income in respect of decedent

The amount includible in the gross income of a successor in interest of a deceased partner under section 736(a) shall be considered income in respect of a decedent under section 691. ( Aug. 16, 1954, ch. 736 , 68A Stat. 251 .)

§ 754 Manner of electing optional adjustment to basis of partnership property

If a partnership files an election, in accordance with regulations prescribed by the Secretary, the basis of partnership property shall be adjusted, in the case of a distribution of property, in the manner provided in section 734 and, in the case of a transfer of a partnership interest, in the manner provided in section 743. Such an election shall apply with respect to all distributions of property by the partnership and to all transfers of interests in the partnership during the taxable year with respect to which such election was filed and all subsequent taxable years. Such election may be revoked by the partnership, subject to such limitations as may be provided by regulations prescribed by the Secretary. ( Aug. 16, 1954, ch. 736 , 68A Stat. 251 ; Pub. L. 94–455, title XIX, § 1906(b)(13)(A) , Oct. 4, 1976 , 90 Stat. 1834 .)

§ 755 Rules for allocation of basis

(a) General rule Any increase or decrease in the adjusted basis of partnership property under section 734(b) (relating to the optional adjustment to the basis of undistributed partnership property) or section 743(b) (relating to the optional adjustment to the basis of partnership property in the case of a transfer of an interest in a partnership) shall, except as provided in subsection (b), be allocated— in a manner which has the effect of reducing the difference between the fair market value and the adjusted basis of partnership properties, or in any other manner permitted by regulations prescribed by the Secretary.

(b) Special rule In applying the allocation rules provided in subsection (a), increases or decreases in the adjusted basis of partnership property arising from a distribution of, or a transfer of an interest attributable to, property consisting of— capital assets and property described in section 1231(b), or any other property of the partnership, shall be allocated to partnership property of a like character except that the basis of any such partnership property shall not be reduced below zero. If, in the case of a distribution, the adjustment to basis of property described in paragraph (1) or (2) is prevented by the absence of such property or by insufficient adjusted basis for such property, such adjustment shall be applied to subsequently acquired property of a like character in accordance with regulations prescribed by the Secretary.

(c) No allocation of basis decrease to stock of corporate partner In making an allocation under subsection (a) of any decrease in the adjusted basis of partnership property under section 734(b)— no allocation may be made to stock in a corporation (or any person related (within the meaning of sections 267(b) and 707(b)(1)) to such corporation) which is a partner in the partnership, and any amount not allocable to stock by reason of paragraph (1) shall be allocated under subsection (a) to other partnership property. Gain shall be recognized to the partnership to the extent that the amount required to be allocated under paragraph (2) to other partnership property exceeds the aggregate adjusted basis of such other property immediately before the allocation required by paragraph (2).

§ 761 Terms defined

(a) Partnership For purposes of this subtitle, the term “partnership” includes a syndicate, group, pool, joint venture, or other unincorporated organization through or by means of which any business, financial operation, or venture is carried on, and which is not, within the meaning of this title, a corporation or a trust or estate. Under regulations the Secretary may, at the election of all the members of an unincorporated organization, exclude such organization from the application of all or part of this subchapter, if it is availed of— for investment purposes only and not for the active conduct of a business, for the joint production, extraction, or use of property, but not for the purpose of selling services or property produced or extracted, or by dealers in securities for a short period for the purpose of underwriting, selling, or distributing a particular issue of securities, if the income of the members of the organization may be adequately determined without the computation of partnership taxable income.

(b) Partner For purposes of this subtitle, the term “partner” means a member of a partnership. In the case of a capital interest in a partnership in which capital is a material income-producing factor, whether a person is a partner with respect to such interest shall be determined without regard to whether such interest was derived by gift from any other person.

(c) Partnership agreement For purposes of this subchapter, a partnership agreement includes any modifications of the partnership agreement made prior to, or at, the time prescribed by law for the filing of the partnership return for the taxable year (not including extensions) which are agreed to by all the partners, or which are adopted in such other manner as may be provided by the partnership agreement.

(d) Liquidation of a partner’s interest For purposes of this subchapter, the term “liquidation of a partner’s interest” means the termination of a partner’s entire interest in a partnership by means of a distribution, or a series of distributions, to the partner by the partnership.

(e) Distributions of partnership interests treated as exchanges Except as otherwise provided in regulations, for purposes of— section 708 (relating to continuation of partnership), section 743 (relating to optional adjustment to basis of partnership property), and any other provision of this subchapter specified in regulations prescribed by the Secretary, any distribution of an interest in a partnership (not otherwise treated as an exchange) shall be treated as an exchange.

(f) Qualified joint venture In the case of a qualified joint venture conducted by a husband and wife who file a joint return for the taxable year, for purposes of this title— such joint venture shall not be treated as a partnership, all items of income, gain, loss, deduction, and credit shall be divided between the spouses in accordance with their respective interests in the venture, and each spouse shall take into account such spouse’s respective share of such items as if they were attributable to a trade or business conducted by such spouse as a sole proprietor. For purposes of paragraph (1), the term “qualified joint venture” means any joint venture involving the conduct of a trade or business if— the only members of such joint venture are a husband and wife, both spouses materially participate (within the meaning of section 469(h) without regard to paragraph (5) thereof) in such trade or business, and both spouses elect the application of this subsection.

(g) Cross reference For rules in the case of the sale, exchange, liquidation, or reduction of a partner’s interest, see sections 704(b) and 706(c)(2).

[§§ 771 to 777 Repealed. Pub. L. 114–74, title XI, § 1101(b)(1), Nov. 2, 2015, 129 Stat. 625]

§ 801 Tax imposed

(a) Tax imposed A tax is hereby imposed for each taxable year on the life insurance company taxable income of every life insurance company. Such tax shall consist of a tax computed as provided in section 11 as though the life insurance company taxable income were the taxable income referred to in section 11.

(b) Life insurance company taxable income For purposes of this part, the term “life insurance company taxable income” means— life insurance gross income, reduced by life insurance deductions.

§ 803 Life insurance gross income

(a) In general For purposes of this part, the term “life insurance gross income” means the sum of the following amounts: The gross amount of premiums and other consideration on insurance and annuity contracts, less return premiums, and premiums and other consideration arising out of indemnity reinsurance. Each net decrease in reserves which is required by section 807(a) to be taken into account under this paragraph. All amounts not includible under paragraph (1) or (2) which under this subtitle are includible in gross income.

(b) Special rules for premiums For purposes of subsection (a)(1)(A), the term “gross amount of premiums and other consideration” includes— advance premiums, deposits, fees, assessments, consideration in respect of assuming liabilities under contracts not issued by the taxpayer, and the amount of policyholder dividends reimbursable to the taxpayer by a reinsurer in respect of reinsured policies, on insurance and annuity contracts. For purposes of subsection (a)(1)(B)— Except as provided in subparagraph (B), the term “return premiums” does not include any policyholder dividends. Subparagraph (A) shall not apply to amounts of premiums or other consideration returned to another life insurance company in respect of indemnity reinsurance.

§ 804 Life insurance deductions

For purposes of this part, the term “life insurance deductions” means the general deductions provided in section 805. (Added Pub. L. 98–369, div. A, title II, § 211(a) , July 18, 1984 , 98 Stat. 722 ; amended Pub. L. 99–514, title X, § 1011(b)(2) , Oct. 22, 1986 , 100 Stat. 2389 ; Pub. L. 115–97, title I, § 13512(b)(4) , Dec. 22, 2017 , 131 Stat. 2143 .)

§ 805 General deductions

(a) General rule For purposes of this part, there shall be allowed the following deductions: All claims and benefits accrued, and all losses incurred (whether or not ascertained), during the taxable year on insurance and annuity contracts. The net increase in reserves which is required by section 807(b) to be taken into account under this paragraph. The deduction for policyholder dividends (determined under section 808(c)). The deductions provided by sections 243 and 245 (as modified by subparagraph (B))— for 100 percent dividends received, and for the life insurance company’s share of the dividends (other than 100 percent dividends) received. In applying section 246(b) (relating to limitation on aggregate amount of deductions for dividends received) for purposes of subparagraph (A), the limit on the aggregate amount of the deductions allowed by sections 243(a)(1) and 245 shall be the percentage determined under section 246(b)(3) of the life insurance company taxable income (and such limitation shall be applied as provided in section 246(b)(3)), computed without regard to— the deduction allowed under section 172, the deductions allowed by sections 243(a)(1) and 245, and any capital loss carryback to the taxable year under section 1212(a)(1), but such limit shall not apply for any taxable year for which there is a loss from operations. For purposes of subparagraph (A)— Except as provided in clause (ii), the term “100 percent dividend” means any dividend if the percentage used for purposes of determining the deduction allowable under section 243 or 245(b) is 100 percent. The term “100 percent dividend” does not include any distribution by a corporation which is not an insurance company to the extent such distribution is out of tax-exempt interest, or out of the increase for the taxable year in policy cash values (within the meaning of subparagraph (F)) of life insurance policies and annuity and endowment contracts to which section 264(f) applies, or out of dividends which are not 100 percent dividends (determined with the application of this clause as if it applies to distributions by all corporations including insurance companies). In the case of any 100 percent dividend paid to any life insurance company out of the earnings and profits for any taxable year beginning after December 31, 1983 , of another life insurance company if— the paying company’s share determined under section 812 for such taxable year, exceeds the receiving company’s share determined under section 812 for its taxable year in which the dividend is received or accrued, the deduction allowed under section 243 or 245(b) (as the case may be) shall be reduced as provided in clause (ii). The reduction under this clause for a dividend is an amount equal to— the portion of such dividend attributable to prorated amounts, multiplied by the percentage obtained by subtracting the share described in subclause (II) of clause (i) from the share described in subclause (I) of such clause. For purposes of this subparagraph, the term “prorated amounts” means tax-exempt interest, the increase for the taxable year in policy cash values (within the meaning of subparagraph (F)) of life insurance policies and annuity and endowment contracts to which section 264(f) applies, and dividends other than 100 percent dividends. For purposes of this subparagraph, in determining the portion of any dividend attributable to prorated amounts— any dividend by the paying corporation shall be treated as paid first out of earnings and profits for taxable years beginning after December 31, 1983 , attributable to prorated amounts (to the extent thereof), and by determining the portion of earnings and profits so attributable without any reduction for the tax imposed by this chapter. Rules similar to the rules of this subsection shall apply in the case of 100 percent dividends paid by an insurance company which is not a life insurance company. Subparagraph (A)(i) (and not subparagraph (A)(ii)) shall apply to any dividend received by a foreign corporation from a domestic corporation which would be a 100 percent dividend if section 1504(b)(3) did not apply for purposes of applying section 243(b)(2). For purposes of subparagraphs (C) and (D)— The increase in the policy cash value for any taxable year with respect to policy or contract is the amount of the increase in the adjusted cash value during such taxable year determined without regard to— gross premiums paid during such taxable year, and distributions (other than amounts includible in the policyholder’s gross income) during such taxable year to which section 72(e) applies. For purposes of clause (i), the term “adjusted cash value” means the cash surrender value of the policy or contract increased by the sum of— commissions payable with respect to such policy or contract for the taxable year, and asset management fees, surrender charges, mortality and expense charges, and any other fees or charges specified in regulations prescribed by the Secretary which are imposed (or which would be imposed were the policy or contract canceled) with respect to such policy or contract for the taxable year. The consideration (other than consideration arising out of indemnity reinsurance) in respect of the assumption by another person of liabilities under insurance and annuity contracts. The amount of policyholder dividends which— are paid or accrued by another insurance company in respect of policies the taxpayer has reinsured, and are reimbursable by the taxpayer under the terms of the reinsurance contract. Subject to the modifications provided by subsection (b), all other deductions allowed under this subtitle for purposes of computing taxable income. Except as provided in paragraph (3), no amount shall be allowed as a deduction under this part in respect of policyholder dividends.

(b) Modifications The modifications referred to in subsection (a)(8) are as follows: In applying section 163 (relating to deduction for interest), no deduction shall be allowed for interest in respect of items described in section 807(c). In applying section 170— the limit on the total deductions under such section provided by section 170(b)(2) shall be 10 percent of the life insurance company taxable income computed without regard to— the deduction provided by section 170, the deductions provided by paragraphs (3) and (4) of subsection (a), any net operating loss carryback to the taxable year under section 172, and any capital loss carryback to the taxable year under section 1212(a)(1), and under regulations prescribed by the Secretary, a rule similar to the rule contained in section 170(d)(2)(B) 1 (relating to special rule for net operating loss carryovers) shall be applied. Section 171 shall not apply. For rules relating to amortizable bond premium, see section 811(b). Except as provided in subsection (a)(4), the deductions for dividends received provided by sections 243 and 245 shall not be allowed.

[§ 806 Repealed. Pub. L. 115–97, title I, § 13512(a), Dec. 22, 2017, 131 Stat. 2142]

§ 807 Rules for certain reserves

(a) Decrease treated as gross income If for any taxable year— the opening balance for the items described in subsection (c), exceeds the closing balance for such items, reduced by the amount of the policyholders’ share of tax-exempt interest and the amount of the policyholder’s share of the increase for the taxable year in policy cash values (within the meaning of section 805(a)(4)(F)) of life insurance policies and annuity and endowment contracts to which section 264(f) applies, such excess shall be included in gross income under section 803(a)(2).

(b) Increase treated as deduction If for any taxable year— the closing balance for the items described in subsection (c), reduced by the amount of the policyholders’ share of tax-exempt interest and the amount of the policyholder’s share of the increase for the taxable year in policy cash values (within the meaning of section 805(a)(4)(F)) of life insurance policies and annuity and endowment contracts to which section 264(f) applies, exceeds the opening balance for such items, such excess shall be taken into account as a deduction under section 805(a)(2).

(c) Items taken into account The items referred to in subsections (a) and (b) are as follows: The life insurance reserves (as defined in section 816(b)). The unearned premiums and unpaid losses included in total reserves under section 816(c)(2). The amounts (discounted at the appropriate rate of interest) necessary to satisfy the obligations under insurance and annuity contracts, but only if such obligations do not involve (at the time with respect to which the computation is made under this paragraph) life, accident, or health contingencies. Dividend accumulations, and other amounts, held at interest in connection with insurance and annuity contracts. Premiums received in advance, and liabilities for premium deposit funds. Reasonable special contingency reserves under contracts of group term life insurance or group accident and health insurance which are established and maintained for the provision of insurance on retired lives, for premium stabilization, or for a combination thereof. For purposes of paragraph (3), the appropriate rate of interest is the highest rate or rates permitted to be used to discount the obligations by the National Association of Insurance Commissioners as of the date the reserve is determined. In no case shall the amount determined under paragraph (3) for any contract be less than the net surrender value of such contract. For purposes of paragraph (2) and section 805(a)(1), the amount of the unpaid losses (other than losses on life insurance contracts) shall be the amount of the discounted unpaid losses as defined in section 846.

(d) Method of computing reserves for purposes of determining income For purposes of this part (other than section 816), the amount of the life insurance reserves for any contract (other than a contract to which subparagraph (B) applies) shall be the greater of— the net surrender value of such contract, or 92.81 percent of the reserve determined under paragraph (2). For purposes of this part (other than section 816), the amount of the life insurance reserves for a variable contract shall be equal to the sum of— the greater of— the net surrender value of such contract, or the portion of the reserve that is separately accounted for under section 817, plus 92.81 percent of the excess (if any) of the reserve determined under paragraph (2) over the amount in clause (i). In no event shall the reserves determined under subparagraphs (A) or (B) for any contract as of any time exceed the amount which would be taken into account with respect to such contract as of such time in determining statutory reserves (as defined in paragraph (4)). In no event shall any amount or item be taken into account more than once in determining any reserve under this subchapter. The amount of the reserve determined under this paragraph with respect to any contract shall be determined by using the tax reserve method applicable to such contract. For purposes of this subsection— The term “tax reserve method” means— The CRVM in the case of a contract covered by the CRVM. The CARVM in the case of a contract covered by the CARVM. In the case of any noncancellable accident and health insurance contract, the reserve method prescribed by the National Association of Insurance Commissioners which covers such contract as of the date the reserve is determined. In the case of any contract not described in clause (i), (ii), or (iii)— the reserve method prescribed by the National Association of Insurance Commissioners which covers such contract (as of the date the reserve is determined), or if no reserve method has been prescribed by the National Association of Insurance Commissioners which covers such contract, a reserve method which is consistent with the reserve method required under clause (i), (ii), or (iii) or under subclause (I) of this clause as of the date the reserve is determined for such contract (whichever is most appropriate). For purposes of this paragraph— The term “CRVM” means the Commissioners’ Reserve Valuation Method prescribed by the National Association of Insurance Commissioners which is applicable to the contract and in effect as of the date the reserve is determined. The term “CARVM” means the Commissioners’ Annuities Reserve Valuation Method prescribed by the National Association of Insurance Commissioners which is applicable to the contract and in effect as of the date the reserve is determined. Nothing in any reserve method described under this paragraph shall permit any increase in the reserve because the net premium (computed on the basis of assumptions required under this subsection) exceeds the actual premiums or other consideration charged for the benefit. The term “statutory reserves” means the aggregate amount set forth in the annual statement with respect to items described in section 807(c). Such term shall not include any reserve attributable to a deferred and uncollected premium if the establishment of such reserve is not permitted under section 811(c).

(e) Special rules for computing reserves For purposes of this section— The net surrender value of any contract shall be determined— with regard to any penalty or charge which would be imposed on surrender, but without regard to any market value adjustment on surrender. In the case of a pension plan contract, the balance in the policyholder’s fund shall be treated as the net surrender value of such contract. For purposes of the preceding sentence, such balance shall be determined with regard to any penalty or forfeiture which would be imposed on surrender but without regard to any market value adjustment. For purposes of this part, the amount of the life insurance reserve for any qualified supplemental benefit shall be computed separately as though such benefit were under a separate contract. For purposes of this paragraph, the term “qualified supplemental benefit” means any supplemental benefit described in subparagraph (C) if— there is a separately identified premium or charge for such benefit, and any net surrender value under the contract attributable to any other benefit is not available to fund such benefit. For purposes of this paragraph, the supplemental benefits described in this subparagraph are any— guaranteed insurability, accidental death or disability benefit, convertibility, disability waiver benefit, or other benefit prescribed by regulations, which is supplemental to a contract for which there is a reserve described in subsection (c). In the case of any qualified foreign contract, the amount of the reserve shall be not less than the minimum reserve required by the laws, regulations, or administrative guidance of the regulatory authority of the foreign country referred to in subparagraph (B) (but not to exceed the net level reserves for such contract). For purposes of subparagraph (A), the term “qualified foreign contract” means any contract issued by a foreign life insurance branch (which has its principal place of business in a foreign country) of a domestic life insurance company if— such contract is issued on the life or health of a resident of such country, such domestic life insurance company was required by such foreign country (as of the time it began operations in such country) to operate in such country through a branch, and such foreign country is not contiguous to the United States. For purposes of this part— In the case of a life insurance contract issued before January 1, 1989 , under an existing plan of insurance, the life insurance reserve for any benefit to which this paragraph applies shall be computed separately under subsection (d)(1) from any other reserve under the contract. This paragraph applies to any term insurance or annuity benefit with respect to which the requirements of clauses (i) and (ii) of paragraph (3)(C) are met. For purposes of this paragraph, the term “existing plan of insurance” means, with respect to any contract, any plan of insurance which was filed by the company using such contract in one or more States before January 1, 1984 , and is on file in the appropriate State for such contract. The amount taken into account for purposes of subsections (a) and (b) as— the opening balance of the items referred to in subparagraph (B), and the closing balance of such items, shall be 80 percent of the amount which (without regard to this subparagraph) would have been taken into account as such opening or closing balance, as the case may be. For purposes of this paragraph, the items referred to in this subparagraph are the items described in subsection (c) which consist of unearned premiums and premiums received in advance under insurance contracts not described in section 816(b)(1)(B). The Secretary shall require reporting (at such time and in such manner as the Secretary shall prescribe) with respect to the opening balance and closing balance of reserves and with respect to the method of computing reserves for purposes of determining income.

(f) Adjustment for change in computing reserves If the basis for determining any item referred to in subsection (c) as of the close of any taxable year differs from the basis for such determination as of the close of the preceding taxable year, then so much of the difference between— the amount of the item at the close of the taxable year, computed on the new basis, and the amount of the item at the close of the taxable year, computed on the old basis, as is attributable to contracts issued before the taxable year shall be taken into account under section 481 as adjustments attributable to a change in method of accounting initiated by the taxpayer and made with the consent of the Secretary. Except as provided in section 381(c)(22) (relating to carryovers in certain corporate readjustments), if for any taxable year the taxpayer is not a life insurance company, the balance of any adjustments under this subsection shall be taken into account for the preceding taxable year.

§ 808 Policyholder dividends deduction

(a) Policyholder dividend defined For purposes of this part, the term “policyholder dividend” means any dividend or similar distribution to policyholders in their capacity as such.

(b) Certain amounts included For purposes of this part, the term “policyholder dividend” includes— any amount paid or credited (including as an increase in benefits) where the amount is not fixed in the contract but depends on the experience of the company or the discretion of the management, excess interest, premium adjustments, and experience-rated refunds.

(c) Amount of deduction The deduction for policyholder dividends for any taxable year shall be an amount equal to the policyholder dividends paid or accrued during the taxable year.

(d) Definitions For purposes of this section— The term “excess interest” means any amount in the nature of interest— paid or credited to a policyholder in his capacity as such, and in excess of interest determined at the prevailing State assumed rate for such contract. The term “premium adjustment” means any reduction in the premium under an insurance or annuity contract which (but for the reduction) would have been required to be paid under the contract. The term “experience-rated refund” means any refund or credit based on the experience of the contract or group involved.

(e) Treatment of policyholder dividends For purposes of this part, any policyholder dividend which— increases the cash surrender value of the contract or other benefits payable under the contract, or reduces the premium otherwise required to be paid, shall be treated as paid to the policyholder and returned by the policyholder to the company as a premium.

(f) Coordination of 1984 fresh-start adjustment with acceleration of policyholder dividends deduction through change in business practice The amount determined under paragraph (1) of subsection (c) for the year of change shall (before any reduction under paragraph (2) of subsection (c)) be reduced by so much of the accelerated policyholder dividends deduction for such year as does not exceed the 1984 fresh-start adjustment for policyholder dividends (to the extent such adjustment was not previously taken into account under this subsection). For purposes of this subsection, the term “year of change” means the taxable year in which the change in business practices which results in the accelerated policyholder dividends deduction takes effect. For purposes of this subsection, the term “accelerated policyholder dividends deduction” means the amount which (but for this subsection) would be determined for the taxable year under paragraph (1) of subsection (c) but which would have been determined (under such paragraph) for a later taxable year under the business practices of the taxpayer as in effect at the close of the preceding taxable year. For purposes of this subsection, the term “1984 fresh-start adjustment for policyholder dividends” means the amounts held as of December 31, 1983 , by the taxpayer as reserves for dividends to policyholders under section 811(b) (as in effect on the day before the date of the enactment of the Tax Reform Act of 1984) other than for dividends which accrued before January 1, 1984 . Such amounts shall be properly reduced to reflect the amount of previously nondeductible policyholder dividends (as determined under section 809(f) as in effect on the day before the date of the enactment of the Tax Reform Act of 1984). This subsection shall be applied separately with respect to each line of business of the taxpayer. This subsection shall not apply to a mere change in the amount of policyholder dividends. This subsection shall not apply to any policyholder dividend paid or accrued with respect to a policy issued after December 31, 1983 . For purposes of subparagraph (A), any policy issued after December 31, 1983 , in exchange for a substantially similar policy issued on or before such date shall be treated as issued before January 1, 1984 . A similar rule shall apply in the case of a series of exchanges. This subsection shall not apply to any policyholder dividend paid or accrued with respect to a group policy issued in connection with a plan to provide welfare benefits to employees (within the meaning of section 419(e)(2)).

(g) Prevailing State assumed interest rate For purposes of this subchapter— The term “prevailing State assumed interest rate” means, with respect to any contract, the highest assumed interest rate permitted to be used in computing life insurance reserves for insurance contracts or annuity contracts (as the case may be) under the insurance laws of at least 26 States. For purposes of the preceding sentence, the effect of nonforfeiture laws of a State on interest rates for reserves shall not be taken into account. The prevailing State assumed interest rate with respect to any contract shall be determined as of the beginning of the calendar year in which the contract was issued.

[§ 809 Repealed. Pub. L. 108–218, title II, § 205(a), Apr. 10, 2004, 118 Stat. 610]

[§ 810 Repealed. Pub. L. 115–97, title I, § 13511(b)(1), Dec. 22, 2017, 131 Stat. 2142]

§ 811 Accounting provisions

(a) Method of accounting All computations entering into the determination of the taxes imposed by this part shall be made— under an accrual method of accounting, or to the extent permitted under regulations prescribed by the Secretary, under a combination of an accrual method of accounting with any other method permitted by this chapter (other than the cash receipts and disbursements method). To the extent not inconsistent with the preceding sentence or any other provision of this part, all such computations shall be made in a manner consistent with the manner required for purposes of the annual statement approved by the National Association of Insurance Commissioners.

(b) Amortization of premium and accrual of discount The appropriate items of income, deductions, and adjustments under this part shall be adjusted to reflect the appropriate amortization of premium and the appropriate accrual of discount attributable to the taxable year on bonds, notes, debentures, or other evidences of indebtedness held by a life insurance company. Such amortization and accrual shall be determined— in accordance with the method regularly employed by such company, if such method is reasonable, and in all other cases, in accordance with regulations prescribed by the Secretary. In the case of any bond (as defined in section 171(d)), the amount of bond premium, and the amortizable bond premium for the taxable year, shall be determined under section 171(b) as if the election set forth in section 171(c) had been made. In no case shall the amount of premium on a convertible evidence of indebtedness include any amount attributable to the conversion features of the evidence of indebtedness. No accrual of discount shall be required under paragraph (1) on any bond (as defined in section 171(d)), except in the case of discount which is— interest to which section 103 applies, or original issue discount (as defined in section 1273).

(c) No double counting Nothing in this part shall permit— a reserve to be established for any item unless the gross amount of premiums and other consideration attributable to such item are required to be included in life insurance gross income, the same item to be counted more than once for reserve purposes, or any item to be deducted (either directly or as an increase in reserves) more than once.

(d) Method of computing reserves on contract where interest is guaranteed beyond end of taxable year For purposes of this part (other than section 816), amounts in the nature of interest to be paid or credited under any contract for any period which is computed at a rate which— exceeds the interest rate in effect under section 808(g) for the contract for such period, and is guaranteed beyond the end of the taxable year on which the reserves are being computed, shall be taken into account in computing the reserves with respect to such contract as if such interest were guaranteed only up to the end of the taxable year.

(e) Short taxable years If any return of a corporation made under this part is for a period of less than the entire calendar year (referred to in this subsection as “short period”), then section 443 shall not apply in respect to such period, but life insurance company taxable income shall be determined, under regulations prescribed by the Secretary, on an annual basis by a ratable daily projection of the appropriate figures for the short period.

(a) Company’s share For purposes of section 805(a)(4), the term “company’s share” means, with respect to any taxable year beginning after December 31, 2017 , 70 percent.

(b) Policyholder’s share For purposes of section 807, the term “policyholder’s share” means, with respect to any taxable year beginning after December 31, 2017 , 30 percent.

[§ 813 Repealed. Pub. L. 100–203, title X, § 10242(c)(1), Dec. 22, 1987, 101 Stat. 1330–423]

§ 814 Contiguous country branches of domestic life insurance companies

(a) Exclusion of items In the case of a domestic mutual insurance company which— is a life insurance company, has a contiguous country life insurance branch, and makes the election provided by subsection (g) with respect to such branch, there shall be excluded from each item involved in the determination of life insurance company taxable income the items separately accounted for in accordance with subsection (c).

(b) Contiguous country life insurance branch For purposes of this section, the term contiguous country life insurance branch means a branch which— issues insurance contracts insuring risks in connection with the lives or health of residents of a country which is contiguous to the United States, has its principal place of business in such contiguous country, and would constitute a mutual life insurance company if such branch were a separate domestic insurance company. For purposes of this section, the term “insurance contract” means any life, health, accident, or annuity contract or reinsurance contract or any contract relating thereto.

(c) Separate accounting required Any taxpayer which makes the election provided by subsection (g) shall establish and maintain a separate account for the various income, exclusion, deduction, asset, reserve, liability, and surplus items properly attributable to the contracts described in subsection (b). Such separate accounting shall be made— in accordance with the method regularly employed by such company, if such method clearly reflects income derived from, and the other items attributable to, the contracts described in subsection (b), and in all other cases, in accordance with regulations prescribed by the Secretary.

(d) Recognition of gain on assets in branch account If the aggregate fair market value of all the invested assets and tangible property which are separately accounted for by the domestic life insurance company in the branch account established pursuant to subsection (c) exceeds the aggregate adjusted basis of such assets for purposes of determining gain, then the domestic life insurance company shall be treated as having sold all such assets on the first day of the first taxable year for which the election is in effect at their fair market value on such first day. Notwithstanding any other provision of this chapter, the net gain shall be recognized to the domestic life insurance company on the deemed sale described in the preceding sentence.

(e) Transactions between contiguous country branch and domestic life insurance company Any payment, transfer, reimbursement, credit, or allowance which is made from a separate account established pursuant to subsection (c) to one or more other accounts of a domestic life insurance company as reimbursement for costs incurred for or with respect to the insurance (or reinsurance) of risks accounted for in such separate account shall be taken into account by the domestic life insurance company in the same manner as if such payment, transfer, reimbursement, credit, or allowance had been received from a separate person. Except as provided in subparagraph (B), any amount directly or indirectly transferred or credited from a branch account established pursuant to subsection (c) to one or more other accounts of such company shall, unless such transfer or credit is a reimbursement to which paragraph (1) applies, be added to the income of the domestic life insurance company. The addition provided by subparagraph (A) for the taxable year with respect to any contiguous country life insurance branch shall not exceed the amount by which— the aggregate decrease in the tentative LICTI of the domestic life insurance company for the taxable year and for all prior taxable years resulting solely from the application of subsection (a) of this section with respect to such branch, exceeds the amount of additions to tentative LICTI pursuant to subparagraph (A) with respect to such contiguous country branch for all prior taxable years. For purposes of this paragraph, in the case of a prior taxable year beginning before January 1, 1984 , the term “tentative LICTI” means life insurance company taxable income determined under this part (as in effect for such year) without regard to this paragraph.

(f) Other rules No income, war profits, or excess profits taxes paid or accrued to any foreign country or possession of the United States which is attributable to income excluded under subsection (a) shall be taken into account for purposes of subpart A of part III of subchapter N (relating to foreign tax credit) or allowable as a deduction. For purposes of sections 881, 882, and 1442, each contiguous country life insurance branch shall be treated as a foreign corporation. Such sections shall be applied to each such branch in the same manner as if such sections contained the provisions of any treaty to which the United States and the contiguous country are parties, to the same extent such provisions would apply if such branch were incorporated in such contiguous country.

(g) Election A taxpayer may make the election provided by this subsection with respect to any contiguous country for any taxable year. An election made under this subsection for any taxable year shall remain in effect for all subsequent taxable years, except that it may be revoked with the consent of the Secretary. The election provided by this subsection shall be made not later than the time prescribed by law for filing the return for the taxable year (including extensions thereof) with respect to which such election is made, and such election and any approved revocation thereof shall be made in the manner provided by the Secretary.

(h) Special rule for domestic stock life insurance companies At the election of a domestic stock life insurance company which has a contiguous country life insurance branch described in subsection (b) (without regard to the mutual requirement in subsection (b)(3)), the assets of such branch may be transferred to a foreign corporation organized under the laws of the contiguous country without the application of section 367. Subsection (a) shall apply to the stock of such foreign corporation as if such domestic company were a mutual company and as if the stock were an item described in subsection (c). Subsection (e)(2) shall apply to amounts transferred or credited to such domestic company as if such domestic company and such foreign corporation constituted one domestic mutual life insurance company. The insurance contracts which may be transferred pursuant to this subsection shall include only those which are similar to the types of insurance contracts issued by a mutual life insurance company. Notwithstanding the first sentence of this subsection, if the aggregate fair market value of the invested assets and tangible property which are separately accounted for by the domestic life insurance company in the branch account exceeds the aggregate adjusted basis of such assets for purposes of determining gain, the domestic life insurance company shall be deemed to have sold all such assets on the first day of the taxable year for which the election under this subsection applies and the net gain shall be recognized to the domestic life insurance company on the deemed sale, but not in excess of the proportion of such net gain which equals the proportion which the aggregate fair market value of such assets which are transferred pursuant to this subsection is of the aggregate fair market value of all such assets.

[§ 815 Repealed. Pub. L. 115–97, title I, § 13514(a), Dec. 22, 2017, 131 Stat. 2143]

§ 816 Life insurance company defined

(a) Life insurance company defined For purposes of this subtitle, the term “life insurance company” means an insurance company which is engaged in the business of issuing life insurance and annuity contracts (either separately or combined with accident and health insurance), or noncancellable contracts of health and accident insurance, if— its life insurance reserves (as defined in subsection (b)), plus unearned premiums, and unpaid losses (whether or not ascertained), on noncancellable life, accident, or health policies not included in life insurance reserves, comprise more than 50 percent of its total reserves (as defined in subsection (c)). For purposes of the preceding sentence, the term “insurance company” means any company more than half of the business of which during the taxable year is the issuing of insurance or annuity contracts or the reinsuring of risks underwritten by insurance companies.

(b) Life insurance reserves defined For purposes of this part, the term “life insurance reserves” means amounts— which are computed or estimated on the basis of recognized mortality or morbidity tables and assumed rates of interest, and which are set aside to mature or liquidate, either by payment or reinsurance, future unaccrued claims arising from life insurance, annuity, and noncancellable accident and health insurance contracts (including life insurance or annuity contracts combined with noncancellable accident and health insurance) involving, at the time with respect to which the reserve is computed, life, accident, or health contingencies. Except— in the case of policies covering life, accident, and health insurance combined in one policy issued on the weekly premium payment plan, continuing for life and not subject to cancellation, and as provided in paragraph (3), in addition to the requirements set forth in paragraph (1), life insurance reserves must be required by law. In the case of an assessment life insurance company or association, the term “life insurance reserves” includes— sums actually deposited by such company or association with State officers pursuant to law as guaranty or reserve funds, and any funds maintained, under the charter or articles of incorporation or association (or bylaws approved by a State insurance commissioner) of such company or association, exclusively for the payment of claims arising under certificates of membership or policies issued on the assessment plan and not subject to any other use. For purposes of this subsection, subsection (a), and subsection (c), the amount of any reserve (or portion thereof) for any taxable year shall be the mean of such reserve (or portion thereof) at the beginning and end of the taxable year.

(c) Total reserves defined For purposes of subsection (a), the term “total reserves” means— life insurance reserves, unearned premiums, and unpaid losses (whether or not ascertained), not included in life insurance reserves, and all other insurance reserves required by law.

(d) Adjustments in reserves for policy loans For purposes only of determining under subsection (a) whether or not an insurance company is a life insurance company, the life insurance reserves, and the total reserves, shall each be reduced by an amount equal to the mean of the aggregates, at the beginning and end of the taxable year, of the policy loans outstanding with respect to contracts for which life insurance reserves are maintained.

(e) Guaranteed renewable contracts For purposes of this part, guaranteed renewable life, accident, and health insurance shall be treated in the same manner as noncancellable life, accident, and health insurance.

(f) Amounts not involving life, accident, or health contingencies For purposes only of determining under subsection (a) whether or not an insurance company is a life insurance company, amounts set aside and held at interest to satisfy obligations under contracts which do not contain permanent guarantees with respect to life, accident, or health contingencies shall not be included in reserves described in paragraph (1) or (3) of subsection (c).

(g) Burial and funeral benefit insurance companies A burial or funeral benefit insurance company engaged directly in the manufacture of funeral supplies or the performance of funeral services shall not be taxable under this part but shall be taxable under section 831.

(h) Treatment of deficiency reserves For purposes of this section and section 842(b)(2)(B)(i), the terms “life insurance reserves” and “total reserves” shall not include deficiency reserves.

§ 817 Treatment of variable contracts

(a) Increases and decreases in reserves For purposes of subsections (a) and (b) of section 807, the sum of the items described in section 807(c) taken into account as of the close of the taxable year with respect to any variable contract shall, under regulations prescribed by the Secretary, be adjusted— by subtracting therefrom an amount equal to the sum of the amounts added from time to time (for the taxable year) to the reserves separately accounted for in accordance with subsection (c) by reason of appreciation in value of assets (whether or not the assets have been disposed of), and by adding thereto an amount equal to the sum of the amounts subtracted from time to time (for the taxable year) from such reserves by reason of depreciation in value of assets (whether or not the assets have been disposed of). The deduction allowable for items described in paragraphs (1) and (6) of section 805(a) with respect to variable contracts shall be reduced to the extent that the amount of such items is increased for the taxable year by appreciation (or increased to the extent that the amount of such items is decreased for the taxable year by depreciation) not reflected in adjustments under the preceding sentence.

(b) Adjustment to basis of assets held in segregated asset account In the case of variable contracts, the basis of each asset in a segregated asset account shall (in addition to all other adjustments to basis) be— increased by the amount of any appreciation in value, and decreased by the amount of any depreciation in value, to the extent such appreciation and depreciation are from time to time reflected in the increases and decreases in reserves or other items referred to in subsection (a) with respect to such contracts.

(c) Separate accounting For purposes of this part, a life insurance company which issues variable contracts shall separately account for the various income, exclusion, deduction, asset, reserve, and other liability items properly attributable to such variable contracts. For such items as are not accounted for directly, separate accounting shall be made— in accordance with the method regularly employed by such company, if such method is reasonable, and in all other cases, in accordance with regulations prescribed by the Secretary.

(d) Variable contract defined For purposes of this part, the term “variable contract” means a contract— which provides for the allocation of all or part of the amounts received under the contract to an account which, pursuant to State law or regulation, is segregated from the general asset accounts of the company, which— provides for the payment of annuities, is a life insurance contract, or provides for funding of insurance on retired lives as described in section 807(c)(6), and under which— in the case of an annuity contract, the amounts paid in, or the amount paid out, reflect the investment return and the market value of the segregated asset account, in the case of a life insurance contract, the amount of the death benefit (or the period of coverage) is adjusted on the basis of the investment return and the market value of the segregated asset account, or in the case of funds held under a contract described in paragraph (2)(C), the amounts paid in, or the amounts paid out, reflect the investment return and the market value of the segregated asset account. If a contract ceases to reflect current investment return and current market value, such contract shall not be considered as meeting the requirements of paragraph (3) after such cessation. Paragraph (3) shall be applied without regard to whether there is a guarantee, and obligations under such guarantee which exceed obligations under the contract without regard to such guarantee shall be accounted for as part of the company’s general account.

(e) Pension plan contracts treated as paying annuity A pension plan contract which is not a life, accident, or health, property, casualty, or liability insurance contract shall be treated as a contract which provides for the payments of annuities for purposes of subsection (d).

(f) Other special rules For purposes of subsection (b)(1)(A) of section 816, the reflection of the investment return and the market value of the segregated asset account shall be considered an assumed rate of interest. Under regulations prescribed by the Secretary, such additional separate computations shall be made, with respect to the items separately accounted for in accordance with subsection (c), as may be necessary to carry out the purposes of this section and this part.

(g) Variable annuity contracts treated as annuity contracts For purposes of this part, the term “annuity contract” includes a contract which provides for the payment of a variable annuity computed on the basis of— recognized mortality tables, and the investment experience of a segregated asset account, or the company-wide investment experience of the company. Paragraph (2)(B) shall not apply to any company which issues contracts which are not variable contracts.

(h) Treatment of certain nondiversified contracts For purposes of subchapter L, section 72 (relating to annuities), and section 7702(a) (relating to definition of life insurance contract), a variable contract (other than a pension plan contract) which is otherwise described in this section and which is based on a segregated asset account shall not be treated as an annuity, endowment, or life insurance contract for any period (and any subsequent period) for which the investments made by such account are not, in accordance with regulations prescribed by the Secretary, adequately diversified. A segregated asset account shall be treated as meeting the requirements of paragraph (1) for any quarter of a taxable year if as of the close of such quarter— it meets the requirements of section 851(b)(3), and no more than 55 percent of the value of the total assets of the account are assets described in section 851(b)(3)(A)(i). To the extent that any segregated asset account with respect to a variable life insurance contract is invested in securities issued by the United States Treasury, the investments made by such account shall be treated as adequately diversified for purposes of paragraph (1). For purposes of this subsection, if all of the beneficial interests in a regulated investment company or in a trust are held by 1 or more— insurance companies (or affiliated companies) in their general account or in segregated asset accounts, or fund managers (or affiliated companies) in connection with the creation or management of the regulated investment company or trust, the diversification requirements of paragraph (1) shall be applied by taking into account the assets held by such regulated investment company or trust. Nothing in this subsection shall be construed as prohibiting the use of independent investment advisors. In determining whether a segregated asset account is adequately diversified for purposes of paragraph (1), each United States Government agency or instrumentality shall be treated as a separate issuer.

§ 817A Special rules for modified guaranteed contracts

(a) Computation of reserves In the case of a modified guaranteed contract, clause (ii) of section 807(e)(1)(A) shall not apply.

(b) Segregated assets under modified guaranteed contracts marked to market In the case of any life insurance company, for purposes of this subtitle— Any gain or loss with respect to a segregated asset shall be treated as ordinary income or loss, as the case may be. If any segregated asset is held by such company as of the close of any taxable year— such company shall recognize gain or loss as if such asset were sold for its fair market value on the last business day of such taxable year, and any such gain or loss shall be taken into account for such taxable year. Proper adjustment shall be made in the amount of any gain or loss subsequently realized for gain or loss taken into account under the preceding sentence. The Secretary may provide by regulations for the application of this subparagraph at times other than the times provided in this subparagraph. For purposes of paragraph (1), the term “segregated asset” means any asset held as part of a segregated account referred to in subsection (d)(1) under a modified guaranteed contract.

(c) Special rule in computing life insurance reserves For purposes of applying section 816(b)(1)(A) to any modified guaranteed contract, an assumed rate of interest shall include a rate of interest determined, from time to time, with reference to a market rate of interest.

(d) Modified guaranteed contract defined For purposes of this section, the term “modified guaranteed contract” means a contract not described in section 817— all or part of the amounts received under which are allocated to an account which, pursuant to State law or regulation, is segregated from the general asset accounts of the company and is valued from time to time with reference to market values, which— provides for the payment of annuities, is a life insurance contract, or is a pension plan contract which is not a life, accident, or health, property, casualty, or liability contract, for which reserves are valued at market for annual statement purposes, and which provides for a net surrender value or a policyholder’s fund (as defined in section 807(e)(1)). If only a portion of a contract is not described in section 817, such portion shall be treated for purposes of this section as a separate contract.

(e) Regulations The Secretary may prescribe regulations— to provide for the treatment of market value adjustments under sections 72, 7702, 7702A, and 807(e)(1)(B), to determine the interest rates applicable under sections 807(c)(3) and 807(d)(2)(B) with respect to a modified guaranteed contract annually, in a manner appropriate for modified guaranteed contracts and, to the extent appropriate for such a contract, to modify or waive the applicability of section 811(d), to provide rules to limit ordinary gain or loss treatment to assets constituting reserves for modified guaranteed contracts (and not other assets) of the company, to provide appropriate treatment of transfers of assets to and from the segregated account, and as may be necessary or appropriate to carry out the purposes of this section.

§ 818 Other definitions and special rules

(a) Pension plan contracts For purposes of this part, the term “pension plan contract” means any contract— entered into with trusts which (as of the time the contracts were entered into) were deemed to be trusts described in section 401(a) and exempt from tax under section 501(a) (or trusts exempt from tax under section 165 of the Internal Revenue Code of 1939 or the corresponding provisions of prior revenue laws); entered into under plans which (as of the time the contracts were entered into) were deemed to be plans described in section 403(a), or plans meeting the requirements of paragraphs (3), (4), (5), and (6) of section 165(a) of the Internal Revenue Code of 1939; provided for employees of the life insurance company under a plan which, for the taxable year, meets the requirements of paragraphs (3), (4), (5), (6), (7), (8), (11), (12), (13), (14), (15), (16), (17), (19), (20), (22), (26), and (27) of section 401(a); purchased to provide retirement annuities for its employees by an organization which (as of the time the contracts were purchased) was an organization described in section 501(c)(3) which was exempt from tax under section 501(a) (or was an organization exempt from tax under section 101(6) of the Internal Revenue Code of 1939 or the corresponding provisions of prior revenue laws), or purchased to provide retirement annuities for employees described in section 403(b)(1)(A)(ii) by an employer which is a State, a political subdivision of a State, or an agency or instrumentality of any one or more of the foregoing; entered into with trusts which (at the time the contracts were entered into) were individual retirement accounts described in section 408(a) or under contracts entered into with individual retirement annuities described in section 408(b); or purchased by— a governmental plan (within the meaning of section 414(d)) or an eligible deferred compensation plan (within the meaning of section 457(b)), or the Government of the United States, the government of any State or political subdivision thereof, or by any agency or instrumentality of the foregoing, or any organization (other than a governmental unit) exempt from tax under this subtitle, for use in satisfying an obligation of such government, political subdivision, agency or instrumentality, or organization to provide a benefit under a plan described in subparagraph (A).

(b) Treatment of capital gains and losses, etc. In the case of a life insurance company— in applying section 1231(a), the term “property used in the trade or business” shall be treated as including only— property used in carrying on an insurance business, of a character which is subject to the allowance for depreciation provided in section 167, held for more than 1 year, and real property used in carrying on an insurance business, held for more than 1 year, which is not described in section 1231(b)(1)(A), (B), or (C), and property described in section 1231(b)(2), and in applying section 1221(a)(2), the reference to property used in trade or business shall be treated as including only property used in carrying on an insurance business.

(c) Gain on property held on December 31, 1958 and certain substituted property acquired after 1958 In the case of property held by the taxpayer on December 31, 1958 , if— the fair market value of such property on such date exceeds the adjusted basis for determining gain as of such date, and the taxpayer has been a life insurance company at all times on and after December 31, 1958 , the gain on the sale or other disposition of such property shall be treated as an amount (not less than zero) equal to the amount by which the gain (determined without regard to this subsection) exceeds the difference between the fair market value on December 31, 1958 , and the adjusted basis for determining gain as of such date. In the case of property acquired after December 31, 1958 , and having a substituted basis (within the meaning of section 1016(b))— for purposes of paragraph (1), such property shall be deemed held continuously by the taxpayer since the beginning of the holding period thereof, determined with reference to section 1223, the fair market value and adjusted basis referred to in paragraph (1) shall be that of that property for which the holding period taken into account includes December 31, 1958 , paragraph (1) shall apply only if the property or properties the holding periods of which are taken into account were held only by life insurance companies after December 31, 1958 , during the holding periods so taken into account, the difference between the fair market value and adjusted basis referred to in paragraph (1) shall be reduced (to not less than zero) by the excess of (i) the gain that would have been recognized but for this subsection on all prior sales or dispositions after December 31, 1958 , of properties referred to in subparagraph (C), over (ii) the gain which was recognized on such sales or other dispositions, and the basis of such property shall be determined as if the gain which would have been recognized but for this subsection were recognized gain. For purposes of paragraphs (1) and (2), the term “property” does not include insurance and annuity contracts and property described in paragraph (1) of section 1221(a).

(d) Insurance or annuity contract includes contracts supplementary thereto For purposes of this part, the term “insurance or annuity contract” includes any contract supplementary thereto.

(e) Special rules for consolidated returns If an election under section 1504(c)(2) is in effect with respect to an affiliated group for the taxable year, all items of the members of such group which are not life insurance companies shall not be taken into account in determining the amount of the tentative LICTI of members of such group which are life insurance companies. In the case of a life insurance company filing or required to file a consolidated return under section 1501 with respect to any affiliated group for any taxable year, any determination under this part with respect to any dividend paid by one member of such group to another member of such group shall be made as if such group was not filing a consolidated return.

(f) Allocation of certain items for purposes of foreign tax credit, etc. Under regulations, in applying sections 861, 862, and 863 to a life insurance company, the deduction for policyholder dividends (determined under section 808(c)), reserve adjustments under subsections (a) and (b) of section 807, and death benefits and other amounts described in section 805(a)(1) shall be treated as items which cannot definitely be allocated to an item or class of gross income. On or before September 15, 1985 , any life insurance company may elect to treat items described in paragraph (1) as properly apportioned or allocated among items of gross income to the extent (and in the manner) prescribed in regulations. Any election under subparagraph (A), once made, may be revoked only with the consent of the Secretary. For purposes of part I of subchapter N, items described in any paragraph of section 807(c) shall be treated as amounts which are not interest.

(g) Qualified accelerated death benefit riders treated as life insurance For purposes of this part— Any reference to a life insurance contract shall be treated as including a reference to a qualified accelerated death benefit rider on such contract. For purposes of this subsection, the term “qualified accelerated death benefit rider” means any rider on a life insurance contract if the only payments under the rider are payments meeting the requirements of section 101(g). Paragraph (1) shall not apply to any rider which is treated as a long-term care insurance contract under section 7702B.

§ 831 Tax on insurance companies other than life insurance companies

(a) General rule Taxes computed as provided in section 11 shall be imposed for each taxable year on the taxable income of every insurance company other than a life insurance company.

(b) Alternative tax for certain small companies In lieu of the tax otherwise applicable under subsection (a), there is hereby imposed for each taxable year on the income of every insurance company to which this subsection applies a tax computed by multiplying the taxable investment income of such company for such taxable year by the rates provided in section 11(b). This subsection shall apply to every insurance company other than life if— the net written premiums (or, if greater, direct written premiums) for the taxable year do not exceed 50,000, such amount shall be rounded to the next lowest multiple of $50,000. For purposes of this part, a net operating loss (as defined in section 172) shall not be carried— to or from any taxable year for which the insurance company is not subject to the tax imposed by subsection (a), or to any taxable year if, between the taxable year from which such loss is being carried and such taxable year, there is an intervening taxable year for which the insurance company was not subject to the tax imposed by subsection (a).

(c) Insurance company defined For purposes of this section, the term “insurance company” has the meaning given to such term by section 816(a).

(d) Reporting Every insurance company for which an election is in effect under subsection (b) for any taxable year shall furnish to the Secretary at such time and in such manner as the Secretary shall prescribe such information for such taxable year as the Secretary shall require with respect to the requirements of subsection (b)(2)(A)(ii).

(e) Cross references For taxation of foreign corporations carrying on an insurance business within the United States, see section 842. For exemption from tax for certain insurance companies other than life, see section 501(c)(15).

§ 832 Insurance company taxable income

(a) Definition of taxable income In the case of an insurance company subject to the tax imposed by section 831, the term “taxable income” means the gross income as defined in subsection (b)(1) less the deductions allowed by subsection (c).

(b) Definitions In the case of an insurance company subject to the tax imposed by section 831— The term “gross income” means the sum of— the combined gross amount earned during the taxable year, from investment income and from underwriting income as provided in this subsection, computed on the basis of the underwriting and investment exhibit of the annual statement approved by the National Association of Insurance Commissioners, gain during the taxable year from the sale or other disposition of property, all other items constituting gross income under subchapter B, except that, in the case of a mutual fire insurance company exclusively issuing perpetual policies, the amount of single deposit premiums paid to such company shall not be included in gross income, in the case of a mutual fire or flood insurance company whose principal business is the issuance of policies— for which the premium deposits are the same (regardless of the length of the term for which the policies are written), and under which the unabsorbed portion of such premium deposits not required for losses, expenses, or establishment of reserves is returned or credited to the policyholder on cancellation or expiration of the policy, an amount equal to 2 percent of the premiums earned on insurance contracts during the taxable year with respect to such policies after deduction of premium deposits returned or credited during the same taxable year, and in the case of a company which writes mortgage guaranty insurance, the amount required by subsection (e)(5) to be subtracted from the mortgage guaranty account. The term “investment income” means the gross amount of income earned during the taxable year from interest, dividends, and rents, computed as follows: To all interest, dividends, and rents received during the taxable year, add interest, dividends, and rents due and accrued at the end of the taxable year, and deduct all interest, dividends, and rents due and accrued at the end of the preceding taxable year. The term “underwriting income” means the premiums earned on insurance contracts during the taxable year less losses incurred and expenses incurred. The term “premiums earned on insurance contracts during the taxable year” means an amount computed as follows: From the amount of gross premiums written on insurance contracts during the taxable year, deduct return premiums and premiums paid for reinsurance. To the result so obtained, add 80 percent of the unearned premiums on outstanding business at the end of the preceding taxable year and deduct 80 percent of the unearned premiums on outstanding business at the end of the taxable year. To the result so obtained, in the case of a taxable year beginning after December 31, 1986 , and before January 1, 1993 , add an amount equal to 3⅓ percent of unearned premiums on outstanding business at the end of the most recent taxable year beginning before January 1, 1987 . For purposes of this subsection, unearned premiums shall include life insurance reserves, as defined in section 816(b) but determined as provided in section 807. For purposes of this subsection, unearned premiums of mutual fire or flood insurance companies described in paragraph (1)(D) means (with respect to the policies described in paragraph (1)(D)) the amount of unabsorbed premium deposits which the company would be obligated to return to its policyholders at the close of the taxable year if all of its policies were terminated at such time; and the determination of such amount shall be based on the schedule of unabsorbed premium deposit returns for each such company then in effect. Premiums paid by the subscriber of a mutual flood insurance company described in paragraph (1)(D) or issuing exclusively perpetual policies shall be treated, for purposes of computing the taxable income of such subscriber, in the same manner as premiums paid by a policyholder to a mutual fire insurance company described in subparagraph (C) or (D) of paragraph (1). The term “losses incurred” means losses incurred during the taxable year on insurance contracts computed as follows: To losses paid during the taxable year, deduct salvage and reinsurance recovered during the taxable year. To the result so obtained, add all unpaid losses on life insurance contracts plus all discounted unpaid losses (as defined in section 846) outstanding at the end of the taxable year and deduct all unpaid losses on life insurance contracts plus all discounted unpaid losses outstanding at the end of the preceding taxable year. To the results so obtained, add estimated salvage and reinsurance recoverable as of the end of the preceding taxable year and deduct estimated salvage and reinsurance recoverable as of the end of the taxable year. The amount of estimated salvage recoverable shall be determined on a discounted basis in accordance with procedures established by the Secretary. The amount which would (but for this subparagraph) be taken into account under subparagraph (A) shall be reduced by an amount equal to the applicable percentage of the sum of— tax-exempt interest received or accrued during such taxable year, the aggregate amount of deductions provided by sections 243 and 245 for— dividends (other than 100 percent dividends) received during the taxable year, and 100 percent dividends received during the taxable year to the extent attributable (directly or indirectly) to prorated amounts, and the increase for the taxable year in policy cash values (within the meaning of section 805(a)(4)(F)) of life insurance policies and annuity and endowment contracts to which section 264(f) applies. In the case of a 100 percent dividend paid by an insurance company, the portion attributable to prorated amounts shall be determined under subparagraph (E)(ii). For purposes of this subparagraph, the applicable percentage is 5.25 percent divided by the highest rate in effect under section 11(b). Except as provided in clause (ii), subparagraph (B) shall not apply to any dividend or interest received or accrued on any stock or obligation acquired before August 8, 1986 . For purposes of clause (i), the portion of any 100 percent dividend which is attributable to prorated amounts shall be treated as received with respect to stock acquired on the later of— the date the payor acquired the stock or obligation to which the prorated amounts are attributable, or the 1st day on which the payor and payee were members of the same affiliated group (as defined in section 243(b)(2)). For purposes of this paragraph— The term “prorated amounts” means tax-exempt interest and dividends with respect to which a deduction is allowable under section 243 or 245 (other than 100 percent dividends). The term “100 percent dividend” means any dividend if the percentage used for purposes of determining the deduction allowable under section 243 or 245(b) is 100 percent. A dividend received by a foreign corporation from a domestic corporation which would be a 100 percent dividend if section 1504(b)(3) did not apply for purposes of applying section 243(b)(2) shall be treated as a 100 percent dividend. In the case of any 100 percent dividend paid to an insurance company to which this part applies by any insurance company, the amount of the decrease in the deductions of the payee company by reason of the portion of such dividend attributable to prorated amounts shall be reduced (but not below zero) by the amount of the decrease in the deductions (or increase in income) of the payor company attributable to the application of this section or section 805(a)(4)(A) to such amounts. For purposes of this subparagraph, in determining the portion of any dividend attributable to prorated amounts— any dividend by the paying corporation shall be treated as paid first out of earnings and profits attributable to prorated amounts (to the extent thereof), and by determining the portion of earnings and profits so attributable without any reduction for the tax imposed by this chapter. The term “expenses incurred” means all expenses shown on the annual statement approved by the National Association of Insurance Commissioners, and shall be computed as follows: To all expenses paid during the taxable year, add expenses unpaid at the end of the taxable year and deduct expenses unpaid at the end of the preceding taxable year. For purposes of this subchapter, the term “expenses unpaid” shall not include any unpaid loss adjustment expenses shown on the annual statement, but such unpaid loss adjustment expenses shall be included in unpaid losses. For the purpose of computing the taxable income subject to the tax imposed by section 831, there shall be deducted from expenses incurred (as defined in this paragraph) all expenses incurred which are not allowed as deductions by subsection (c). Subparagraph (B) of paragraph (4) shall be applied with respect to insurance contracts described in section 816(b)(1)(B) by substituting “100 percent” for “80 percent” each place it appears in such subparagraph (B), and subparagraph (C) of paragraph (4) shall be applied by not taking such contracts into account. In the case of premiums attributable to insurance against default in the payment of principal or interest on securities described in section 165(g)(2)(C) with maturities of more than 5 years— subparagraph (B) of paragraph (4) shall be applied by substituting “90 percent” for “80 percent” each place it appears, and subparagraph (C) of paragraph (4) shall be applied by substituting “1⅔ percent” for “3⅓ percent”. Except as provided in section 381(c)(22) (relating to carryovers in certain corporate readjustments), if, for any taxable year beginning before January 1, 1993 , the taxpayer ceases to be an insurance company taxable under section 831(a), the aggregate adjustments which would be made under paragraph (4)(C) for such taxable year and subsequent taxable years but for such cessation shall be made for the taxable year preceding such cessation year. Subparagraph (C) of paragraph (4) shall not apply to any insurance company which, for each taxable year beginning before January 1, 1987 , was not subject to the tax imposed by section 821(a) 1 or 831(a) (as in effect on the day before the date of the enactment of the Tax Reform Act of 1986) by reason of being— subject to tax under section 821(c) 1 (as so in effect), or described in section 501(c) (as so in effect) and exempt from tax under section 501(a). In the case of an insurance company— which was not subject to the tax imposed by section 831(a) for its 1st taxable year beginning after December 31, 1986 , by reason of being subject to tax under section 831(b), or described in section 501(c) and exempt from tax under section 501(a), and which, for any taxable year beginning before January 1, 1987 , was subject to the tax imposed by section 821(a) 1 or 831(a) (as in effect on the day before the date of the enactment of the Tax Reform Act of 1986), subparagraph (C) of paragraph (4) shall apply beginning with the 1st taxable year beginning after December 31, 1986 , for which such company is subject to the tax imposed by section 831(a) and shall be applied by substituting the last day of the preceding taxable year for “ December 31, 1986 ” and the 1st day of the 7th succeeding taxable year for “ January 1, 1993 ”. In the case of a reciprocal (within the meaning of section 835(a)) which reports (as required by State law) on its annual statement reserves on unearned premiums net of premium acquisition expenses— subparagraph (B) of paragraph (4) shall be applied by treating unearned premiums as including an amount equal to such expenses, and appropriate adjustments shall be made under subparagraph (c) of paragraph (4) to reflect the amount by which— such reserves at the close of the most recent taxable year beginning before January 1, 1987 , are greater or less than, 80 percent of the sum of the amount under subclause (I) plus such premium acquisition expenses. In the case of premiums attributable to title insurance— subparagraph (B) of paragraph (4) shall be applied by substituting “the discounted unearned premiums” for “80 percent of the unearned premiums” each place it appears, and subparagraph (C) of paragraph (4) shall not apply. For purposes of subparagraph (A), the amount of the discounted unearned premiums as of the end of any taxable year shall be the present value of such premiums (as of such time and separately with respect to premiums received in each calendar year) determined by using— the amount of the undiscounted unearned premiums at such time, the applicable interest rate, and the applicable statutory premium recognition pattern. In determining the amount of the discounted unearned premiums as of the end of any taxable year— The term “undiscounted unearned premiums” means the unearned premiums shown in the yearly statement filed by the taxpayer for the year ending with or within such taxable year. The term “applicable interest rate” means the annual rate determined under 846(c)(2) for the calendar year in which the premiums are received. The term “applicable statutory premium recognition pattern” means the statutory premium recognition pattern— which is in effect for the calendar year in which the premiums are received, and which is based on the statutory premium recognition pattern which applies to premiums received by the taxpayer in such calendar year. For purposes of the preceding sentence, premiums received during any calendar year shall be treated as received in the middle of such year.

(c) Deductions allowed In computing the taxable income of an insurance company subject to the tax imposed by section 831, there shall be allowed as deductions: all ordinary and necessary expenses incurred, as provided in section 162 (relating to trade or business expenses); all interest, as provided in section 163; taxes, as provided in section 164; losses incurred, as defined in subsection (b)(5) of this section; capital losses to the extent provided in subchapter P (relating to capital gains and losses) plus losses from capital assets sold or exchanged in order to obtain funds to meet abnormal insurance losses and to provide for the payment of dividends and similar distributions to policyholders. Capital assets shall be considered as sold or exchanged in order to obtain funds to meet abnormal insurance losses and to provide for the payment of dividends and similar distributions to policyholders to the extent that the gross receipts from their sale or exchange are not greater than the excess, if any, for the taxable year of the sum of dividends and similar distributions paid to policyholders in their capacity as such, losses paid, and expenses paid over the sum of the items described in section 834(b) (other than paragraph (1)(D) thereof) and net premiums received. In the application of section 1212 for purposes of this section, the net capital loss for the taxable year shall be the amount by which losses for such year from sales or exchanges of capital assets exceeds the sum of the gains from such sales or exchanges and whichever of the following amounts is the lesser: the taxable income (computed without regard to gains or losses from sales or exchanges of capital assets); or losses from the sale or exchange of capital assets sold or exchanged to obtain funds to meet abnormal insurance losses and to provide for the payment of dividends and similar distributions to policyholders; debts in the nature of agency balances and bills receivable which become worthless within the taxable year; the amount of interest earned during the taxable year which under section 103 is excluded from gross income; the depreciation deduction allowed by section 167 and the deduction allowed by section 611 (relating to depletion); charitable, etc., contributions, as provided in section 170; deductions (other than those specified in this subsection) as provided in part VI of subchapter B (sec. 161 and following, relating to itemized deductions for individuals and corporations) and in part I of subchapter D (sec. 401 and following, relating to pension, profit-sharing, stock bonus plans, etc.); dividends and similar distributions paid or declared to policyholders in their capacity as such, except in the case of a mutual fire insurance company described in subsection (b)(1)(C). For purposes of the preceding sentence, the term “dividends and similar distributions” includes amounts returned or credited to policyholders on cancellation or expiration of policies described in subsection (b)(1)(D). For purposes of this paragraph, the term “paid or declared” shall be construed according to the method of accounting regularly employed in keeping the books of the insurance company; the special deductions allowed by part VIII of subchapter B (sec. 241 and following, relating to dividends received); and in the case of a company which writes mortgage guaranty insurance, the deduction allowed by subsection (e).

(d) Double deductions Nothing in this section shall permit the same item to be deducted more than once.

(e) Special deduction and income account In the case of a company which writes mortgage guaranty insurance— There shall be allowed as a deduction for the taxable year, if bonds are purchased as required by paragraph (2), the sum of— an amount representing the amount required by State law or regulation to be set aside in a reserve for mortgage guaranty insurance losses resulting from adverse economic cycles; and an amount representing the aggregate of amounts so set aside in such reserve for the 8 preceding taxable years to the extent such amounts were not deducted under this paragraph in such preceding taxable years, except that the deduction allowable for the taxable year under this paragraph shall not exceed the taxable income for the taxable year computed without regard to this paragraph or to any carryback of a net operating loss. For purposes of this paragraph, the amount required by State law or regulation to be so set aside in any taxable year shall not exceed 50 percent of premiums earned on insurance contracts (as defined in subsection (b)(4)) with respect to mortgage guaranty insurance for such year. For purposes of this subsection, all amounts shall be taken into account on a first-in-time basis. The computation and deduction under this section of losses incurred (including losses resulting from adverse economic cycles) shall not be affected by the provisions of this subsection. For purposes of this subsection, the terms “preceding taxable years” and “preceding taxable year” shall not include taxable years which began before January 1, 1967 . The deduction under paragraph (1) shall be allowed only to the extent that tax and loss bonds are purchased in an amount equal to the tax benefit attributable to such deduction, as determined under regulations prescribed by the Secretary, on or before the date that any taxes (determined without regard to this subsection) due for the taxable year for which the deduction is allowed are due to be paid. If a deduction would be allowed but for the fact that tax and loss bonds were not timely purchased, such deduction shall be allowed to the extent such purchases are made within a reasonable time, as determined by the Secretary, if all interest and penalties, computed as if this sentence did not apply, are paid. Each company which writes mortgage guaranty insurance shall, for purposes of this part, establish and maintain a mortgage guaranty account. There shall be added to the mortgage guaranty account for each taxable year an amount equal to the amount allowed as a deduction for the taxable year under paragraph (1). After applying paragraph (4), there shall be subtracted for the taxable year from the mortgage guaranty account and included in gross income— the amount (if any) remaining which was added to the account for the tenth preceding taxable year, the excess (if any) of the aggregate amount in the mortgage guaranty account over the aggregate amount in the reserve referred to in paragraph (1)(A). For purposes of determining such excess, the aggregate amount in the mortgage guaranty account shall be determined after applying subparagraph (A), and the aggregate amount in the reserve referred to in paragraph (1)(A) shall be determined by disregarding any amounts remaining in such reserve added for taxable years beginning before January 1, 1967 , an amount (if any) equal to the net operating loss for the taxable year computed without regard to this subparagraph, and any amount improperly subtracted from the account under subparagraph (A), (B), or (C) to the extent that tax and loss bonds were redeemed with respect to such amount. If a company liquidates or otherwise terminates its mortgage guaranty insurance business and does not transfer or distribute such business in an acquisition of assets referred to in section 381(a), the entire amount remaining in such account shall be subtracted. Except in the case where a company transfers or distributes its mortgage guaranty insurance in an acquisition of assets referred to in section 381(a), if the company is not subject to the tax imposed by section 831 for any taxable year, the entire amount in the account at the close of the preceding taxable year shall be subtracted from the account in such preceding taxable year. The provisions of this subsection shall also apply in all respects to a company which writes lease guaranty insurance or insurance on obligations the interest on which is excludable from gross income under section 103. In applying this subsection to such a company, any reference to mortgage guaranty insurance contained in this section shall be deemed to be a reference also to lease guaranty insurance and to insurance on obligations the interest on which is excludable from gross income under section 103; and in the case of insurance on obligations the interest on which is excludable from gross income under section 103, the references in paragraph (1) to “losses resulting from adverse economic cycles” include losses from declining revenues related to such obligations (as well as losses resulting from adverse economic cycles), and the time specified in subparagraph (A) of paragraph (5) shall be the twentieth preceding taxable year.

(f) Interinsurers In the case of a mutual insurance company which is an interinsurer or reciprocal underwriter— there shall be allowed as a deduction the increase for the taxable year in savings credited to subscriber accounts, or there shall be included as an item of gross income the decrease for the taxable year in savings credited to subscriber accounts. For purposes of the preceding sentence, the term “savings credited to subscriber accounts” means such portion of the surplus as is credited to the individual accounts of subscribers before the 16th day of the 3rd month following the close of the taxable year, but only if the company would be obligated to pay such amount promptly to such subscriber if he terminated his contract at the close of the company’s taxable year. For purposes of determining his taxable income, the subscriber shall treat any such savings credited to his account as a dividend paid or declared.

(g) Dividends within group In the case of an insurance company subject to tax under section 831(a) filing or required to file a consolidated return under section 1501 with respect to any affiliated group for any taxable year, any determination under this part with respect to any dividend paid by one member of such group to another member of such group shall be made as if such group were not filing a consolidated return.

“For purposes of section 832(b)(5)(C)(i) of the 1986 Code, any stock or obligation acquired on or after August 8, 1986 , by an insurance company subject to the tax imposed by section 831 of the 1986 Code (hereinafter in this paragraph referred to as the ‘acquiring company’) from another insurance company so subject (hereinafter in this paragraph referred to as the ‘transferor company’) shall be treated as acquired on the date on which such stock or obligation was acquired by the transferor company if— the transferor company acquired such stock or obligation before August 8, 1986 , and at all times after the date on which such stock or obligation was acquired by the transferor company and before the date of the acquisition by the acquiring company, the transferor company and the acquiring company were members of the same affiliated group filing a consolidated return. For purposes of the preceding sentence, the date on which the stock or obligation was acquired by the transferor company shall be determined with regard to any prior application of the preceding sentence. For purposes of this paragraph, if the acquiring corporation or transferor corporation was a party to a reorganization described in section 368(a)(1)(F) of the 1986 Code, any reference to such corporation shall include a reference to any predecessor thereof involved in such reorganization.”

§ 833 Treatment of Blue Cross and Blue Shield organizations, etc.

(a) General rule In the case of any organization to which this section applies— Such organization shall be taxable under this part in the same manner as if it were a stock insurance company. The deduction determined under subsection (b) for any taxable year shall be allowed. Subparagraph (B) of paragraph (4) of section 832(b) shall be applied by substituting “100 percent” for “80 percent”, and subparagraph (C) of such paragraph (4) shall not apply.

(b) Amount of deduction Except as provided in paragraph (2), the deduction determined under this subsection for any taxable year is the excess (if any) of— 25 percent of the sum of— the claims incurred during the taxable year and liabilities incurred during the taxable year under cost-plus contracts, and the expenses incurred during the taxable year in connection with the administration, adjustment, or settlement of claims or in connection with the administration of cost-plus contracts, over the adjusted surplus as of the beginning of the taxable year. The deduction determined under paragraph (1) for any taxable year shall not exceed taxable income for such taxable year (determined without regard to such deduction). For purposes of this subsection— The adjusted surplus as of the beginning of any taxable year is an amount equal to the adjusted surplus as of the beginning of the preceding taxable year— increased by the amount of any adjusted taxable income for such preceding taxable year, or decreased by the amount of any adjusted net operating loss for such preceding taxable year. The adjusted surplus as of the beginning of the organization’s 1st taxable year beginning after December 31, 1986 , shall be its surplus as of such time. For purposes of the preceding sentence and subsection (c)(3)(C), the term “surplus” means the excess of the total assets over total liabilities as shown on the annual statement. The term “adjusted taxable income” means taxable income determined— without regard to the deduction determined under this subsection, without regard to any carryforward or carryback to such taxable year, and by increasing gross income by an amount equal to the net exempt income for the taxable year. The term “adjusted net operating loss” means the net operating loss for any taxable year determined with the adjustments set forth in subparagraph (C). The term “net exempt income” means— any tax-exempt interest received or accrued during the taxable year, reduced by any amount (not otherwise deductible) which would have been allowable as a deduction for the taxable year if such interest were not tax-exempt, and the aggregate amount allowed as a deduction for the taxable year under sections 243 and 245. The amount determined under clause (ii) shall be reduced by the amount of any decrease in deductions allowable for the taxable year by reason of section 832(b)(5)(B) to the extent such decrease is attributable to deductions under sections 243 and 245. Any determination under this subsection shall be made by only taking into account items attributable to the health-related business of the taxpayer.

(c) Organizations to which section applies This section shall apply to— any existing Blue Cross or Blue Shield organization, and any other organization meeting the requirements of paragraph (3). The term “existing Blue Cross or Blue Shield organization” means any Blue Cross or Blue Shield organization if— such organization was in existence on August 16, 1986 , such organization is determined to be exempt from tax for its last taxable year beginning before January 1, 1987 , and no material change has occurred in the operations of such organization or in its structure after August 16, 1986 , and before the close of the taxable year. To the extent permitted by the Secretary, any successor to an organization meeting the requirements of the preceding sentence, and any organization resulting from the merger or consolidation of organizations each of which met such requirements, shall be treated as an existing Blue Cross or Blue Shield organization. An organization meets the requirements of this paragraph for any taxable year if— substantially all the activities of such organization involve the providing of health insurance, at least 10 percent of the health insurance provided by such organization is provided to individuals and small groups (not taking into account any medicare supplemental coverage), such organization provides continuous full-year open enrollment (including conversions) for individuals and small groups, such organization’s policies covering individuals provide full coverage of pre-existing conditions of high-risk individuals without a price differential (with a reasonable waiting period), and coverage is provided without regard to age, income, or employment status of individuals under age 65, at least 35 percent of its premiums are determined on a community rated basis, and no part of its net earnings inures to the benefit of any private shareholder or individual. For purposes of subparagraph (A), the term “small group” means the lesser of— 15 individuals, or the number of individuals required for a small group under applicable State law. For purposes of subsection (b), the adjusted surplus of any organization meeting the requirements of this paragraph as of the beginning of the 1st taxable year for which it meets such requirements shall be its surplus as of such time. Paragraph (2) shall be applied to an organization described in subparagraph (B) as if it were a Blue Cross or Blue Shield organization. An organization is described in this subparagraph if it— is organized under, and governed by, State laws which are specifically and exclusively applicable to not-for-profit health insurance or health service type organizations, and is not a Blue Cross or Blue Shield organization or health maintenance organization. Notwithstanding the preceding paragraphs, paragraphs (2) and (3) of subsection (a) shall not apply to any organization unless such organization’s percentage of total premium revenue expended on reimbursement for clinical services and for activities that improve health care quality provided to enrollees under its policies during such taxable year (as reported under section 2718 of the Public Health Service Act) is not less than 85 percent.

§ 834 Determination of taxable investment income

(a) General rule For purposes of section 831(b), the term “taxable investment income” means the gross investment income, minus the deductions provided in subsection (c).

(b) Gross investment income For purposes of subsection (a), the term “gross investment income” means the sum of the following: The gross amount of income during the taxable year from— interest, dividends, rents, and royalties, the entering into of any lease, mortgage, or other instrument or agreement from which the insurance company derives interest, rents, or royalties, the alteration or termination of any instrument or agreement described in subparagraph (B), and gains from sales or exchanges of capital assets to the extent provided in subchapter P (relating to capital gains and losses). The gross income during the taxable year from any trade or business (other than an insurance business) carried on by the insurance company, or by a partnership of which the insurance company is a partner. In computing gross income under this paragraph, there shall be excluded any item described in paragraph (1).

(c) Deductions In computing taxable investment income, the following deductions shall be allowed: The amount of interest which under section 103 is excluded for the taxable year from gross income. Investment expenses paid or accrued during the taxable year. If any general expenses are in part assigned to or included in the investment expenses, the total deduction under this paragraph shall not exceed one-fourth of 1 percent of the mean of the book value of the invested assets held at the beginning and end of the taxable year plus one-fourth of the amount by which taxable investment income (computed without any deduction for investment expenses allowed by this paragraph, for tax-free interest allowed by paragraph (1), or for dividends received allowed by paragraph (7)), exceeds 3¾ percent of the book value of the mean of the invested assets held at the beginning and end of the taxable year. Taxes (as provided in section 164), and other expenses, paid or accrued during the taxable year exclusively on or with respect to the real estate owned by the company. No deduction shall be allowed under this paragraph for any amount paid out for new buildings, or for permanent improvements or betterments made to increase the value of any property. The depreciation deduction allowed by section 167. All interest paid or accrued within the taxable year on indebtedness, except on indebtedness incurred or continued to purchase or carry obligations the interest on which is wholly exempt from taxation under this subtitle. Capital losses to the extent provided in subchapter P (sec. 1201 and following) plus losses from capital assets sold or exchanged in order to obtain funds to meet abnormal insurance losses and to provide for the payment of dividends and similar distributions to policyholders. Capital assets shall be considered as sold or exchanged in order to obtain funds to meet abnormal insurance losses and to provide for the payment of dividends and similar distributions to policyholders to the extent that the gross receipts from their sale or exchange are not greater than the excess, if any, for the taxable year of the sum of dividends and similar distributions paid to policyholders, losses paid, and expenses paid over the sum of the items described in subsection (b) (other than paragraph (1)(D) thereof) and net premiums received. In the application of section 1212 for purposes of this section, the net capital loss for the taxable year shall be the amount by which losses for such year from sales or exchanges of capital assets exceeds the sum of the gains from such sales or exchanges and whichever of the following amounts is the lesser: the taxable investment income (computed without regard to gains or losses from sales or exchanges of capital assets); or losses from the sale or exchange of capital assets sold or exchanged to obtain funds to meet abnormal insurance losses and to provide for the payment of dividends and similar distributions to policyholders. The special deductions allowed by part VIII (except section 248) of subchapter B (sec. 241 and following, relating to dividends received). In applying section 246(b) (relating to limitation on aggregate amount of deductions for dividends received) for purposes of this paragraph, the reference in such section to “taxable income” shall be treated as a reference to “taxable investment income”. The deductions allowed by this subtitle (without regard to this part) which are attributable to any trade or business (other than an insurance business) carried on by the insurance company, or by a partnership of which the insurance company is a partner; except that for purposes of this paragraph— any item, to the extent attributable to the carrying on of the insurance business, shall not be taken into account, and the deduction for net operating losses provided in section 172 shall not be allowed. The deduction allowed by section 611 (relating to depletion).

(d) Other applicable rules The deduction under subsection (c)(3) or (4) on account of any real estate owned and occupied in whole or in part by a mutual insurance company subject to the tax imposed by section 831 shall be limited to an amount which bears the same ratio to such deduction (computed without regard to this paragraph) as the rental value of the space not so occupied bears to the rental value of the entire property. The gross amount of income during the taxable year from interest and the deduction provided in subsection (c)(1) shall each be decreased to reflect the appropriate amortization of premium and increased to reflect the appropriate accrual of discount attributable to the taxable year on bonds, notes, debentures, or other evidences of indebtedness held by a mutual insurance company subject to the tax imposed by section 831. Such amortization and accrual shall be determined— in accordance with the method regularly employed by such company, if such method is reasonable, and in all other cases, in accordance with regulations prescribed by the Secretary. No accrual of discount shall be required under this paragraph on any bond (as defined in section 171(d)) except in the case of discount which is original issue discount (as defined in section 1273). Nothing in this part shall permit the same item to be deducted more than once.

(e) Definitions For purposes of this part— The term “net premiums” means gross premiums (including deposits and assessments) written or received on insurance contracts during the taxable year less return premiums and premiums paid or incurred for reinsurance. Amounts returned where the amount is not fixed in the insurance contract but depends on the experience of the company or the discretion of the management shall not be included in return premiums but shall be treated as dividends to policyholders under paragraph (2). The term “dividends to policyholders” means dividends and similar distributions paid or declared to policyholders. For purposes of the preceding sentence, the term “paid or declared” shall be construed according to the method regularly employed in keeping the books of the insurance company.

§ 835 Election by reciprocal

(a) In general Except as otherwise provided in this section, any mutual insurance company which is an interinsurer or reciprocal underwriter (hereinafter in this section referred to as a “reciprocal”) subject to the taxes imposed by section 831(a) may, under regulations prescribed by the Secretary, elect to be subject to the limitation provided in subsection (b). Such election shall be effective for the taxable year for which made and for all succeeding taxable years, and shall not be revoked except with the consent of the Secretary.

(b) Limitation The deduction for amounts paid or incurred in the taxable year to the attorney-in-fact by a reciprocal making the election provided in subsection (a) shall be limited to, but in no case increased by, the deductions of the attorney-in-fact allocable, in accordance with regulations prescribed by the Secretary, to the income received by the attorney-in-fact from the reciprocal.

(c) Exception An election may not be made by a reciprocal under subsection (a) unless the attorney-in-fact of such reciprocal— is subject to the tax imposed by section 11; consents in such manner as the Secretary shall prescribe by regulations to make available such information as may be required during the period in which the election provided in subsection (a) is in effect, under regulations prescribed by the Secretary; reports the income received from the reciprocal and the deductions allocable thereto under the same method of accounting under which the reciprocal reports deductions for amounts paid to the attorney-in-fact; and files its return on the calendar year basis.

(d) Credit Any reciprocal electing to be subject to the limitation provided in subsection (b) shall be credited with so much of the tax paid by the attorney-in-fact as is attributable, under regulations prescribed by the Secretary, to the income received by the attorney-in-fact from the reciprocal in such taxable year.

(e) Benefits of graduated rates denied Any increase in the taxable income of a reciprocal attributable to the limits provided in subsection (b) shall be taxed at the highest rate of tax specified in section 11(b).

(f) Adjustment for refund If for any taxable year an attorney-in-fact is allowed a credit or refund for taxes paid with respect to which credit or refund to the reciprocal resulted under subsection (d), the taxes of such reciprocal for such taxable year shall be properly adjusted under regulations prescribed by the Secretary.

(g) Taxes of attorney-in-fact unaffected Nothing in this section shall increase or decrease the taxes imposed by this chapter on the income of the attorney-in-fact.

§ 841 Credit for foreign taxes

The taxes imposed by foreign countries or possessions of the United States shall be allowed as a credit against the tax of a domestic insurance company subject to the tax imposed by section 801 or 831, to the extent provided in the case of a domestic corporation in section 901 (relating to foreign tax credit). For purposes of the preceding sentence (and for purposes of applying section 906 with respect to a foreign corporation subject to tax under this subchapter), the term “taxable income” as used in section 904 means— in the case of the tax imposed by section 801, the life insurance company taxable income (as defined in section 801(b)), and in the case of the tax imposed by section 831, the taxable income (as defined in section 832(a)). ( Aug. 16, 1954, ch. 736 , 68A Stat. 267 ; Mar. 13, 1956, ch. 83, § 5(4) , 70 Stat. 49 ; Pub. L. 86–69, § 3(b) , June 25, 1959 , 73 Stat. 139 ; Pub. L. 87–834, § 8(g)(1) , Oct. 16, 1962 , 76 Stat. 998 ; Pub. L. 89–809, title I, § 104(i)(8) , Nov. 13, 1966 , 80 Stat. 1562 ; Pub. L. 98–369, div. A, title II, § 211(b)(10) , July 18, 1984 , 98 Stat. 755 ; Pub. L. 99–514, title X, § 1024(c)(10) , Oct. 22, 1986 , 100 Stat. 2407 .)

§ 842 Foreign companies carrying on insurance business

(a) Taxation under this subchapter If a foreign company carrying on an insurance business within the United States would qualify under part I or II of this subchapter for the taxable year if (without regard to income not effectively connected with the conduct of any trade or business within the United States) it were a domestic corporation, such company shall be taxable under such part on its income effectively connected with its conduct of any trade or business within the United States. With respect to the remainder of its income which is from sources within the United States, such a foreign company shall be taxable as provided in section 881.

(b) Minimum effectively connected net investment income In the case of a foreign company taxable under part I or II of this subchapter for the taxable year, its net investment income for such year which is effectively connected with the conduct of an insurance business within the United States shall be not less than the product of— the required United States assets of such company, and the domestic investment yield applicable to such company for such year. For purposes of paragraph (1), the required United States assets of any foreign company for any taxable year is an amount equal to the product of— the mean of such foreign company’s total insurance liabilities on United States business, and the domestic asset/liability percentage applicable to such foreign company for such year. For purposes of this paragraph— In the case of a company taxable under part I, the term “total insurance liabilities” means the sum of the total reserves (as defined in section 816(c)) plus (to the extent not included in total reserves) the items referred to in paragraphs (3), (4), (5), and (6) of section 807(c). In the case of a company taxable under part II, the term “total insurance liabilities” means the sum of unearned premiums and unpaid losses. The domestic asset/liability percentage applicable for purposes of subparagraph (A)(ii) to any foreign company for any taxable year is a percentage determined by the Secretary on the basis of a ratio— the numerator of which is the mean of the assets of domestic insurance companies taxable under the same part of this subchapter as such foreign company, and the denominator of which is the mean of the total insurance liabilities of the same companies. The domestic investment yield applicable for purposes of paragraph (1)(B) to any foreign company for any taxable year is the percentage determined by the Secretary on the basis of a ratio— the numerator of which is the net investment income of domestic insurance companies taxable under the same part of this subchapter as such foreign company, and the denominator of which is the mean of the assets of the same companies. If the foreign company makes an election under this paragraph, such company’s worldwide current investment yield shall be taken into account in lieu of the domestic investment yield for purposes of paragraph (1)(B). For purposes of subparagraph (A), the term “worldwide current investment yield” means the percentage obtained by dividing— the net investment income of the company from all sources, by the mean of all assets of the company (whether or not held in the United States). An election under this paragraph shall apply to the taxable year for which made and all subsequent taxable years unless revoked with the consent of the Secretary. For purposes of this subsection, the term “net investment income” means— gross investment income (within the meaning of section 834(b)), reduced by expenses allocable to such income.

(c) Special rules for purposes of subsection (b) The tax under section 881 (determined without regard to this paragraph) shall be reduced (but not below zero) by an amount which bears the same ratio to such tax as— the amount of the increase in effectively connected income of the company resulting from subsection (b), bears to the amount which would be subject to tax under section 881 if the amount taxable under such section were determined without regard to sections 103 and 894. The reduction under subparagraph (A) shall not exceed the increase in taxes under part I or II (as the case may be) by reason of the increase in effectively connected income of the company resulting from subsection (b). Each domestic asset/liability percentage, and each domestic investment yield, for any taxable year shall be based on such representative data with respect to domestic insurance companies for the second preceding taxable year as the Secretary considers appropriate.

(d) Regulations The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section, including regulations— providing for the proper treatment of segregated asset accounts, providing for proper adjustments in succeeding taxable years where the company’s actual net investment income for any taxable year which is effectively connected with the conduct of an insurance business within the United States exceeds the amount required under subsection (b)(1), providing for the proper treatment of investments in domestic subsidiaries, and which may provide that, in the case of companies taxable under part II of this subchapter, determinations under subsection (b) will be made separately for categories of such companies established in such regulations.

§ 843 Annual accounting period

For purposes of this subtitle, the annual accounting period for each insurance company subject to a tax imposed by this subchapter shall be the calendar year. Under regulations prescribed by the Secretary, an insurance company which joins in the filing of a consolidated return (or is required to so file) may adopt the taxable year of the common parent corporation even though such year is not a calendar year. (Added Mar. 13, 1956, ch. 83, § 4(a) , 70 Stat. 48 ; amended Pub. L. 94–455, title XV, § 1507(b)(2) , Oct. 4, 1976 , 90 Stat. 1740 .)

[§ 844 Repealed. Pub. L. 115–97, title I, § 13511(b)(2)(A), Dec. 22, 2017, 131 Stat. 2142]

§ 845 Certain reinsurance agreements

(a) Allocation in case of reinsurance agreement involving tax avoidance or evasion In the case of 2 or more related persons (within the meaning of section 482) who are parties to a reinsurance agreement (or where one of the parties to a reinsurance agreement is, with respect to any contract covered by the agreement, in effect an agent of another party to such agreement or a conduit between related persons), the Secretary may— allocate between or among such persons income (whether investment income, premium, or otherwise), deductions, assets, reserves, credits, and other items related to such agreement, recharacterize any such items, or make any other adjustment, if he determines that such allocation, recharacterization, or adjustment is necessary to reflect the proper amount, source, or character of the taxable income (or any item described in paragraph (1) relating to such taxable income) of each such person.

(b) Reinsurance contract having significant tax avoidance effect If the Secretary determines that any reinsurance contract has a significant tax avoidance effect on any party to such contract, the Secretary may make proper adjustments with respect to such party to eliminate such tax avoidance effect (including treating such contract with respect to such party as terminated on December 31 of each year and reinstated on January 1 of the next year).

§ 846 Discounted unpaid losses defined

(a) Discounted losses determined The amount of the discounted unpaid losses as of the end of any taxable year shall be the sum of the discounted unpaid losses (as of such time) separately computed under this section with respect to unpaid losses in each line of business attributable to each accident year. The amount of the discounted unpaid losses as of the end of any taxable year attributable to any accident year shall be the present value of such losses (as of such time) determined by using— the amount of the undiscounted unpaid losses as of such time, the applicable interest rate, and the applicable loss payment pattern. In no event shall the amount of the discounted unpaid losses with respect to any line of business attributable to any accident year exceed the aggregate amount of unpaid losses with respect to such line of business for such accident year included on the annual statement filed by the taxpayer for the year ending with or within the taxable year. In determining the amount of the discounted unpaid losses attributable to any accident year— the applicable interest rate shall be the interest rate determined under subsection (c) for the calendar year with which such accident year ends, and the applicable loss payment pattern shall be the loss payment pattern determined under subsection (d) which is in effect for the calendar year with which such accident year ends.

(b) Determination of undiscounted unpaid losses For purposes of this section— Except as otherwise provided in this subsection, the term “undiscounted unpaid losses” means the unpaid losses shown in the annual statement filed by the taxpayer for the year ending with or within the taxable year of the taxpayer. If— the amount of unpaid losses shown in the annual statement is determined on a discounted basis, and the extent to which the losses were discounted can be determined on the basis of information disclosed on or with the annual statement, the amount of the unpaid losses shall be determined without regard to any reduction attributable to such discounting.

(c) Rate of interest For purposes of this section, the rate of interest determined under this subsection shall be the annual rate determined by the Secretary under paragraph (2). The annual rate determined by the Secretary under this paragraph for any calendar year shall be a rate determined on the basis of the corporate bond yield curve (as defined in section 430(h)(2)(D)(i), determined by substituting “60-month period” for “24-month period” therein).

(d) Loss payment pattern For each determination year, the Secretary shall determine a loss payment pattern for each line of business by reference to the historical loss payment pattern applicable to such line of business. Any loss payment pattern determined by the Secretary shall apply to the accident year ending with the determination year and to each of the 4 succeeding accident years. Determinations under paragraph (1) for any determination year shall be made by the Secretary— by using the aggregate experience reported on the annual statements of insurance companies, on the basis of the most recent published aggregate data from such annual statements relating to loss payment patterns available on the 1st day of the determination year, as if all losses paid or treated as paid during any year are paid in the middle of such year, and in accordance with the computational rules prescribed in paragraph (3). For purposes of this subsection— Except as otherwise provided in this paragraph, the loss payment pattern for any line of business shall be based on the assumption that all losses are paid— during the accident year and the 3 calendar years following the accident year, or in the case of any line of business reported in the schedule or schedules of the annual statement relating to auto liability, other liability, medical malpractice, workers’ compensation, and multiple peril lines, during the accident year and the 10 calendar years following the accident year. In the case of any line of business not described in subparagraph (A)(ii), losses paid after the 1st year following the accident year shall be treated as paid equally in the 2nd and 3rd year following the accident year. The period taken into account under subparagraph (A)(ii) shall be extended to the extent required under subclause (II). The amount of losses which would have been treated as paid in the 10th year after the accident year shall be treated as paid in such 10th year and each subsequent year in an amount equal to the amount of the average of the losses treated as paid in the 7th, 8th, and 9th years after the accident year (or, if lesser, the portion of the unpaid losses not theretofore taken into account). To the extent such unpaid losses have not been treated as paid before the 24th year after the accident year, they shall be treated as paid in such 24th year. For purposes of this section, the term “determination year” means calendar year 1987 and each 5th calendar year thereafter.

(e) Other definitions and special rules For purposes of this section— The term “accident year” means the calendar year in which the incident occurs which gives rise to the related unpaid loss. The term “unpaid losses” includes any unpaid loss adjustment expenses shown on the annual statement. The term “annual statement” means the annual statement approved by the National Association of Insurance Commissioners which the taxpayer is required to file with insurance regulatory authorities of a State. The term “line of business” means a category for the reporting of loss payment patterns determined on the basis of the annual statement for fire and casualty insurance companies for the calendar year ending with or within the taxable year, except that the multiple peril lines shall be treated as a single line of business. The term “multiple peril lines” means the lines of business relating to farmowners multiple peril, homeowners multiple peril, commercial multiple peril, ocean marine, aircraft (all perils) and boiler and machinery. Any determination under subsection (a) with respect to unpaid losses relating to accident and health insurance lines of businesses (other than credit disability insurance) shall be made— in the case of unpaid losses relating to disability income, by using the general rules prescribed under section 807(d) applicable to noncancellable accident and health insurance contracts and using a mortality or morbidity table reflecting the taxpayer’s experience; except that the limitation of subsection (a)(3) shall apply, and in all other cases, by using an assumption (in lieu of a loss payment pattern) that unpaid losses are paid in the middle of the year following the accident year.

(f) Regulations The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section, including— regulations providing proper treatment of allocated reinsurance, and regulations providing appropriate adjustments in the application of this section to a taxpayer having a taxable year which is not the calendar year.

“For the first taxable year beginning after December 31, 2017 — the unpaid losses and the expenses unpaid (as defined in paragraphs (5)(B) and (6) of section 832(b) of the Internal Revenue Code of 1986) at the end of the preceding taxable year, and the unpaid losses as defined in sections 807(c)(2) and 805(a)(1) of such Code at the end of the preceding taxable year, shall be determined as if the amendments made by this section [amending this section] had applied to such unpaid losses and expenses unpaid in the preceding taxable year and by using the interest rate and loss payment patterns applicable to accident years ending with calendar year 2018, and any adjustment shall be taken into account ratably in such first taxable year and the 7 succeeding taxable years. For subsequent taxable years, such amendments shall be applied with respect to such unpaid losses and expenses unpaid by using the interest rate and loss payment patterns applicable to accident years ending with calendar year 2018.”

[§ 847 Repealed. Pub. L. 115–97, title I, § 13516(a), Dec. 22, 2017, 131 Stat. 2144]

§ 848 Capitalization of certain policy acquisition expenses

(a) General rule In the case of an insurance company— specified policy acquisition expenses for any taxable year shall be capitalized, and such expenses shall be allowed as a deduction ratably over the 180-month period beginning with the first month in the second half of such taxable year.

**(b) 5-year amortization for first $5, 000, 000 o f s p ec i f i e d p o l i cy a c q u i s i t i o n e x p e n ses * * P a r a g r a p h (2) o f s u b sec t i o n (a) s ha ll b e a ppl i e d w i t h res p ec tt oso m u c h o f t h es p ec i f i e d p o l i cy a c q u i s i t i o n e x p e n seso f anin s u r an ceco m p an y f or an y t a x ab l eye a r a s d oes n o t e x cee d$ 5,000,000 by substituting “60-month” for “180-month”. If the specified policy acquisition expenses of an insurance company exceed $10, 000, 000 f or an y t a x ab l eye a r, t h e$ 5,000,000 amount under paragraph (1) shall be reduced (but not below zero) by the amount of such excess. In the case of any controlled group— all insurance companies which are members of such group shall be treated as 1 company for purposes of this subsection, and the amount to which paragraph (1) applies shall be allocated among such companies in such manner as the Secretary may prescribe. For purposes of the preceding sentence, the term “controlled group” means any controlled group of corporations as defined in section 1563(a); except that subsections (a)(4) and (b)(2)(D) of section 1563 shall not apply, and subsection (b)(2)(C) of section 1563 shall not apply to the extent it excludes a foreign corporation to which section 842 applies. Paragraph (1) shall not apply to any specified policy acquisition expenses for any taxable year which are attributable to premiums or other consideration under any reinsurance contract.

(c) Specified policy acquisition expenses For purposes of this section— The term “specified policy acquisition expenses” means, with respect to any taxable year, so much of the general deductions for such taxable year as does not exceed the sum of— 2.09 percent of the net premiums for such taxable year on specified insurance contracts which are annuity contracts, 2.45 percent of the net premiums for such taxable year on specified insurance contracts which are group life insurance contracts, and 9.2 percent of the net premiums for such taxable year on specified insurance contracts not described in subparagraph (A) or (B). The term “general deductions” means the deductions provided in part VI of subchapter B (sec. 161 and following, relating to itemized deductions) and in part I of subchapter D (sec. 401 and following, relating to pension, profit sharing, stock bonus plans, etc.).

(d) Net premiums For purposes of this section— The term “net premiums” means, with respect to any category of specified insurance contracts set forth in subsection (c)(1), the excess (if any) of— the gross amount of premiums and other consideration on such contracts, over return premiums on such contracts and premiums and other consideration incurred for reinsurance of such contracts. The rules of section 803(b) shall apply for purposes of the preceding sentence. In the case of an insurance company subject to tax under part II of this subchapter, all computations entering into determinations of net premiums for any taxable year shall be made in the manner required under section 811(a) for life insurance companies. Net premiums shall be determined without regard to section 808(e) and without regard to other similar amounts treated as paid to, and returned by, the policyholder. Premiums and other consideration incurred for reinsurance shall be taken into account under paragraph (1)(B) only to the extent such premiums and other consideration are includible in the gross income of an insurance company taxable under this subchapter or are subject to tax under this chapter by reason of subpart F of part III of subchapter N. The Secretary shall prescribe such regulations as may be necessary to ensure that premiums and other consideration with respect to reinsurance are treated consistently by the ceding company and the reinsurer.

(e) Classification of contracts For purposes of this section— Except as otherwise provided in this paragraph, the term “specified insurance contract” means any life insurance, annuity, or noncancellable accident and health insurance contract (or any combination thereof). The term “specified insurance contract” shall not include— any pension plan contract (as defined in section 818(a)), any flight insurance or similar contract, any qualified foreign contract (as defined in section 807(e)(3) without regard to paragraph (5) of this subsection), any contract which is an Archer MSA (as defined in section 220(d)), and any contract which is a health savings account (as defined in section 223(d)). The term “group life insurance contract” means any life insurance contract— which covers a group of individuals defined by reference to employment relationship, membership in an organization, or similar factor, the premiums for which are determined on a group basis, and the proceeds of which are payable to (or for the benefit of) persons other than the employer of the insured, an organization to which the insured belongs, or other similar person. Any annuity contract combined with noncancellable accident and health insurance shall be treated as a noncancellable accident and health insurance contract and not as an annuity contract. The rules of section 816(e) shall apply for purposes of this section. A contract which reinsures another contract shall be treated in the same manner as the reinsured contract. An annuity or life insurance contract which includes a qualified long-term care insurance contract as a part of or a rider on such annuity or life insurance contract shall be treated as a specified insurance contract not described in subparagraph (A) or (B) of subsection (c)(1).

(f) Special rule where negative net premiums If for any taxable year there is a negative capitalization amount with respect to any category of specified insurance contracts set forth in subsection (c)(1)— the amount otherwise required to be capitalized under this section for such taxable year with respect to any other category of specified insurance contracts shall be reduced (but not below zero) by such negative capitalization amount, and such negative capitalization amount (to the extent not taken into account under subparagraph (A))— shall reduce (but not below zero) the unamortized balance (as of the beginning of such taxable year) of the amounts previously capitalized under subsection (a) (beginning with the amount capitalized for the most recent taxable year), and to the extent taken into account as such a reduction, shall be allowed as a deduction for such taxable year. For purposes of paragraph (1), the term “negative capitalization amount” means, with respect to any category of specified insurance contracts, the percentage (applicable under subsection (c)(1) to such category) of the amount (if any) by which— the amount determined under subparagraph (B) of subsection (d)(1) with respect to such category, exceeds the amount determined under subparagraph (A) of subsection (d)(1) with respect to such category.

(g) Treatment of certain ceding commissions Nothing in any provision of law (other than this section or section 197) shall require the capitalization of any ceding commission incurred on or after September 30, 1990 , under any contract which reinsures a specified insurance contract.

(h) Secretarial authority to adjust capitalization amounts Except as provided in paragraph (2), the Secretary may provide that a type of insurance contract will be treated as a separate category for purposes of this section (and prescribe a percentage applicable to such category) if the Secretary determines that the deferral of acquisition expenses for such type of contract which would otherwise result under this section is substantially greater than the deferral of acquisition expenses which would have resulted if actual acquisition expenses (including indirect expenses) and the actual useful life for such type of contract had been used. If the Secretary exercises his authority with respect to any type of contract under paragraph (1), the Secretary shall adjust the percentage which would otherwise have applied under subsection (c)(1) to the category which includes such type of contract so that the exercise of such authority does not result in a decrease in the amount of revenue received under this chapter by reason of this section for any fiscal year.

§ 851 Definition of regulated investment company

(a) General rule For purposes of this subtitle, the term “regulated investment company” means any domestic corporation— which, at all times during the taxable year— is registered under the Investment Company Act of 1940, as amended ( 15 U.S.C. 80a–1 to 80b–2) as a management company or unit investment trust, or has in effect an election under such Act to be treated as a business development company, or which is a common trust fund or similar fund excluded by section 3(c)(3) of such Act ( 15 U.S.C. 80a–3(c) ) from the definition of “investment company” and is not included in the definition of “common trust fund” by section 584(a).

(b) Limitations A corporation shall not be considered a regulated investment company for any taxable year unless— it files with its return for the taxable year an election to be a regulated investment company or has made such election for a previous taxable year; at least 90 percent of its gross income is derived from— dividends, interest, payments with respect to securities loans (as defined in section 512(a)(5)), and gains from the sale or other disposition of stock or securities (as defined in section 2(a)(36) of the Investment Company Act of 1940, as amended) or foreign currencies, or other income (including but not limited to gains from options, futures or forward contracts) derived with respect to its business of investing in such stock, securities, or currencies, and net income derived from an interest in a qualified publicly traded partnership (as defined in subsection (h)); and at the close of each quarter of the taxable year— at least 50 percent of the value of its total assets is represented by— cash and cash items (including receivables), Government securities and securities of other regulated investment companies, and other securities for purposes of this calculation limited, except and to the extent provided in subsection (e), in respect of any one issuer to an amount not greater in value than 5 percent of the value of the total assets of the taxpayer and to not more than 10 percent of the outstanding voting securities of such issuer, and not more than 25 percent of the value of its total assets is invested in— the securities (other than Government securities or the securities of other regulated investment companies) of any one issuer, the securities (other than the securities of other regulated investment companies) of two or more issuers which the taxpayer controls and which are determined, under regulations prescribed by the Secretary, to be engaged in the same or similar trades or businesses or related trades or businesses, or the securities of one or more qualified publicly traded partnerships (as defined in subsection (h)). For purposes of paragraph (2), there shall be treated as dividends amounts included in gross income under section 951(a)(1)(A) or 1293(a) for the taxable year to the extent that, under section 959(a)(1) or 1293(c) (as the case may be), there is a distribution out of the earnings and profits of the taxable year which are attributable to the amounts so included. For purposes of paragraph (2), the Secretary may by regulation exclude from qualifying income foreign currency gains which are not directly related to the company’s principal business of investing in stock or securities (or options and futures with respect to stock or securities). For purposes of paragraph (2), amounts excludable from gross income under section 103(a) shall be treated as included in gross income. Income derived from a partnership (other than a qualified publicly traded partnership as defined in subsection (h)) or trust shall be treated as described in paragraph (2) only to the extent such income is attributable to items of income of the partnership or trust (as the case may be) which would be described in paragraph (2) if realized by the regulated investment company in the same manner as realized by the partnership or trust.

(c) Rules applicable to subsection (b)(3) For purposes of subsection (b)(3) and this subsection— In ascertaining the value of the taxpayer’s investment in the securities of an issuer, for the purposes of subparagraph (B), there shall be included its proper proportion of the investment of any other corporation, a member of a controlled group, in the securities of such issuer, as determined under regulations prescribed by the Secretary. The term “controls” means the ownership in a corporation of 20 percent or more of the total combined voting power of all classes of stock entitled to vote. The term “controlled group” means one or more chains of corporations connected through stock ownership with the taxpayer if— 20 percent or more of the total combined voting power of all classes of stock entitled to vote of each of the corporations (except the taxpayer) is owned directly by one or more of the other corporations, and the taxpayer owns directly 20 percent or more of the total combined voting power of all classes of stock entitled to vote, of at least one of the other corporations. The term “value” means, with respect to securities (other than those of majority-owned subsidiaries) for which market quotations are readily available, the market value of such securities; and with respect to other securities and assets, fair value as determined in good faith by the board of directors, except that in the case of securities of majority-owned subsidiaries which are investment companies such fair value shall not exceed market value or asset value, whichever is higher. The term “outstanding voting securities of such issuer” shall include the equity securities of a qualified publicly traded partnership (as defined in subsection (h)). All other terms shall have the same meaning as when used in the Investment Company Act of 1940, as amended.

(d) Determination of status A corporation which meets the requirements of subsections (b)(3) and (c) at the close of any quarter shall not lose its status as a regulated investment company because of a discrepancy during a subsequent quarter between the value of its various investments and such requirements unless such discrepancy exists immediately after the acquisition of any security or other property and is wholly or partly the result of such acquisition. A corporation which does not meet such requirements at the close of any quarter by reason of a discrepancy existing immediately after the acquisition of any security or other property which is wholly or partly the result of such acquisition during such quarter shall not lose its status for such quarter as a regulated investment company if such discrepancy is eliminated within 30 days after the close of such quarter and in such cases it shall be considered to have met such requirements at the close of such quarter for purposes of applying the preceding sentence. If paragraph (1) does not preserve a corporation’s status as a regulated investment company for any particular quarter— A corporation that fails to meet the requirements of subsection (b)(3) (other than a failure described in subparagraph (B)(i) of this paragraph) for such quarter shall nevertheless be considered to have satisfied the requirements of such subsection for such quarter if— following the corporation’s identification of the failure to satisfy the requirements of such subsection for such quarter, a description of each asset that causes the corporation to fail to satisfy the requirements of such subsection at the close of such quarter is set forth in a schedule for such quarter filed in the manner provided by the Secretary, the failure to meet the requirements of such subsection for such quarter is due to reasonable cause and not due to willful neglect, and the corporation disposes of the assets set forth on the schedule specified in clause (i) within 6 months after the last day of the quarter in which the corporation’s identification of the failure to satisfy the requirements of such subsection occurred or such other time period prescribed by the Secretary and in the manner prescribed by the Secretary, or the requirements of such subsection are otherwise met within the time period specified in subclause (I). A corporation that fails to meet the requirements of subsection (b)(3) for such quarter shall nevertheless be considered to have satisfied the requirements of such subsection for such quarter if— such failure is due to the ownership of assets the total value of which does not exceed the lesser of— 1 percent of the total value of the corporation’s assets at the end of the quarter for which such measurement is done, or $10, 000, 000, an d t h ecor p or a t i o n, f o ll o w in g t h e i d e n t i f i c a t i o n o f s u c h f ai l u re, d i s p oseso f a sse t s in or d er t o m ee tt h ere q u i re m e n t so f s u c h s u b sec t i o n w i t hin 6 m o n t h s a f t er t h e l a s t d a yo f t h e q u a r t er in w hi c h t h ecor p or a t i o n ’ s i d e n t i f i c a t i o n o f t h e f ai l u re t os a t i s f y t h ere q u i re m e n t so f s u c h s u b sec t i o n occ u rre d ors u c h o t h er t im e p er i o d p rescr ib e d b y t h e S ecre t a ry an d in t h e mann er p rescr ib e d b y t h e S ecre t a ry, or t h ere q u i re m e n t so f s u c h s u b sec t i o na reo t h er w i se m e tw i t hin t h e t im e p er i o d s p ec i f i e d in s u b c l a u se (I) . I f s u b p a r a g r a p h (A) a ppl i es t o a cor p or a t i o n f or an y q u a r t er, t h ere i s h ere b y im p ose d o n s u c h cor p or a t i o na t a x inanam o u n t e q u a lt o t h e g re a t ero f —$ 50,000, or the amount determined (pursuant to regulations promulgated by the Secretary) by multiplying the net income generated by the assets described in the schedule specified in subparagraph (A)(i) for the period specified in clause (ii) by the highest rate of tax specified in section 11. For purposes of clause (i)(II), the period described in this clause is the period beginning on the first date that the failure to satisfy the requirements of subsection (b)(3) occurs as a result of the ownership of such assets and ending on the earlier of the date on which the corporation disposes of such assets or the end of the first quarter when there is no longer a failure to satisfy such subsection. For purposes of subtitle F, a tax imposed by this subparagraph shall be treated as an excise tax with respect to which the deficiency procedures of such subtitle apply.

(e) Investment companies furnishing capital to development corporations If the Securities and Exchange Commission determines, in accordance with regulations issued by it, and certifies to the Secretary not earlier than 60 days prior to the close of the taxable year of a management company or a business development company described in subsection (a)(1), that such investment company is principally engaged in the furnishing of capital to other corporations which are principally engaged in the development or exploitation of inventions, technological improvements, new processes, or products not previously generally available, such investment company may, in the computation of 50 percent of the value of its assets under subparagraph (A) of subsection (b)(3) for any quarter of such taxable year, include the value of any securities of an issuer, whether or not the investment company owns more than 10 percent of the outstanding voting securities of such issuer, the basis of which, when added to the basis of the investment company for securities of such issuer previously acquired, did not exceed 5 percent of the value of the total assets of the investment company at the time of the subsequent acquisition of securities. The preceding sentence shall not apply to the securities of an issuer if the investment company has continuously held any security of such issuer (or of any predecessor company of such issuer as determined under regulations prescribed by the Secretary) for 10 or more years preceding such quarter of such taxable year. The provisions of this subsection shall not apply at the close of any quarter of a taxable year to an investment company if at the close of such quarter more than 25 percent of the value of its total assets is represented by securities of issuers with respect to each of which the investment company holds more than 10 percent of the outstanding voting securities of such issuer and in respect of each of which or any predecessor thereof the investment company has continuously held any security for 10 or more years preceding such quarter unless the value of its total assets so represented is reduced to 25 percent or less within 30 days after the close of such quarter. For purposes of this subsection, unless the Securities and Exchange Commission determines otherwise, a corporation shall be considered to be principally engaged in the development or exploitation of inventions, technological improvements, new processes, or products not previously generally available, for at least 10 years after the date of the first acquisition of any security in such corporation or any predecessor thereof by such investment company if at the date of such acquisition the corporation or its predecessor was principally so engaged, and an investment company shall be considered at any date to be furnishing capital to any company whose securities it holds if within 10 years prior to such date it has acquired any of such securities, or any securities surrendered in exchange therefor, from such other company or predecessor thereof. For purposes of the certification under this subsection, the Securities and Exchange Commission shall have authority to issue such rules, regulations and orders, and to conduct such investigations and hearings, either public or private, as it may deem appropriate. The terms used in this subsection shall have the same meaning as in subsections (b)(3) and (c) of this section.

(f) Certain unit investment trusts For purposes of this title— A unit investment trust (as defined in the Investment Company Act of 1940)— which is registered under such Act and issues periodic payment plan certificates (as defined in such Act) in one or more series, substantially all of the assets of which, as to all such series, consist of (i) securities issued by a single management company (as defined in such Act) and securities acquired pursuant to subparagraph (C), or (ii) securities issued by a single other corporation, and which has no power to invest in any other securities except securities issued by a single other management company, when permitted by such Act or the rules and regulations of the Securities and Exchange Commission, shall not be treated as a person. In the case of a unit investment trust described in paragraph (1)— each holder of an interest in such trust shall, to the extent of such interest, be treated as owning a proportionate share of the assets of such trust; the basis of the assets of such trust which are treated under subparagraph (A) as being owned by a holder of an interest in such trust shall be the same as the basis of his interest in such trust; and in determining the period for which the holder of an interest in such trust has held the assets of the trust which are treated under subparagraph (A) as being owned by him, there shall be included the period for which such holder has held his interest in such trust. This subsection shall not apply in the case of a unit investment trust which is a segregated asset account under the insurance laws or regulations of a State.

(g) Special rule for series funds In the case of a regulated investment company (within the meaning of subsection (a)) having more than one fund, each fund of such regulated investment company shall be treated as a separate corporation for purposes of this title (except with respect to the definitional requirement of subsection (a)). For purposes of paragraph (1) the term “fund” means a segregated portfolio of assets, the beneficial interests in which are owned by the holders of a class or series of stock of the regulated investment company that is preferred over all other classes or series in respect of such portfolio of assets.

(h) Qualified publicly traded partnership For purposes of this section, the term “qualified publicly traded partnership” means a publicly traded partnership described in section 7704(b) other than a partnership which would satisfy the gross income requirements of section 7704(c)(2) if qualifying income included only income described in subsection (b)(2)(A).

(i) Failure to satisfy gross income test A corporation that fails to meet the requirement of paragraph (2) of subsection (b) for any taxable year shall nevertheless be considered to have satisfied the requirement of such paragraph for such taxable year if— following the corporation’s identification of the failure to meet such requirement for such taxable year, a description of each item of its gross income described in such paragraph is set forth in a schedule for such taxable year filed in the manner provided by the Secretary, and the failure to meet such requirement is due to reasonable cause and not due to willful neglect. If paragraph (1) applies to a regulated investment company for any taxable year, there is hereby imposed on such company a tax in an amount equal to the excess of— the gross income of such company which is not derived from sources referred to in subsection (b)(2), over ⅑ of the gross income of such company which is derived from such sources.

§ 852 Taxation of regulated investment companies and their shareholders

(a) Requirements applicable to regulated investment companies The provisions of this part (other than subsection (c) of this section) shall not be applicable to a regulated investment company for a taxable year unless— the deduction for dividends paid during the taxable year (as defined in section 561, but without regard to capital gain dividends) equals or exceeds the sum of— 90 percent of its investment company taxable income for the taxable year determined without regard to subsection (b)(2)(D); and 90 percent of the excess of (i) its interest income excludable from gross income under section 103(a) over (ii) its deductions disallowed under sections 265 and 171(a)(2), and either— the provisions of this part applied to the investment company for all taxable years ending on or after November 8, 1983 , or as of the close of the taxable year, the investment company has no earnings and profits accumulated in any taxable year to which the provisions of this part (or the corresponding provisions of prior law) did not apply to it. The Secretary may waive the requirements of paragraph (1) for any taxable year if the regulated investment company establishes to the satisfaction of the Secretary that it was unable to meet such requirements by reason of distributions previously made to meet the requirements of section 4982.

(b) Method of taxation of companies and shareholders There is hereby imposed for each taxable year upon the investment company taxable income of every regulated investment company a tax computed as provided in section 11, as though the investment company taxable income were the taxable income referred to in section 11. The investment company taxable income shall be the taxable income of the regulated investment company adjusted as follows: There shall be excluded the amount of the net capital gain, if any. The net operating loss deduction provided in section 172 shall not be allowed. The deductions for corporations provided in part VIII (except section 248) in subchapter B (section 241 and following, relating to the deduction for dividends received, etc.) shall not be allowed. The deduction for dividends paid (as defined in section 561) shall be allowed, but shall be computed without regard to capital gain dividends and exempt-interest dividends. The taxable income shall be computed without regard to section 443(b) (relating to computation of tax on change of annual accounting period). The taxable income shall be computed without regard to section 454(b) (relating to short-term obligations issued on a discount basis) if the company so elects in a manner prescribed by the Secretary. There shall be deducted an amount equal to the tax imposed by subsections (d)(2) and (i) of section 851 for the taxable year. There is hereby imposed for each taxable year in the case of every regulated investment company a tax, determined as provided in section 11(b), on the excess, if any, of the net capital gain over the deduction for dividends paid (as defined in section 561) determined with reference to capital gain dividends only. A capital gain dividend shall be treated by the shareholders as a gain from the sale or exchange of a capital asset held for more than 1 year. For purposes of this part— Except as provided in clause (ii), a capital gain dividend is any dividend, or part thereof, which is reported by the company as a capital gain dividend in written statements furnished to its shareholders. If the aggregate reported amount with respect to the company for any taxable year exceeds the net capital gain of the company for such taxable year, a capital gain dividend is the excess of— the reported capital gain dividend amount, over the excess reported amount which is allocable to such reported capital gain dividend amount. Except as provided in subclause (II), the excess reported amount (if any) which is allocable to the reported capital gain dividend amount is that portion of the excess reported amount which bears the same ratio to the excess reported amount as the reported capital gain dividend amount bears to the aggregate reported amount. In the case of any taxable year which does not begin and end in the same calendar year, if the post-December reported amount equals or exceeds the excess reported amount for such taxable year, subclause (I) shall be applied by substituting “post-December reported amount” for “aggregate reported amount” and no excess reported amount shall be allocated to any dividend paid on or before December 31 of such taxable year. For purposes of this subparagraph— The term “reported capital gain dividend amount” means the amount reported to its shareholders under clause (i) as a capital gain dividend. The term “excess reported amount” means the excess of the aggregate reported amount over the net capital gain of the company for the taxable year. The term “aggregate reported amount” means the aggregate amount of dividends reported by the company under clause (i) as capital gain dividends for the taxable year (including capital gain dividends paid after the close of the taxable year described in section 855). The term “post-December reported amount” means the aggregate reported amount determined by taking into account only dividends paid after December 31 of the taxable year. If there is an increase in the excess described in subparagraph (A) for the taxable year which results from a determination (as defined in section 860(e)), the company may, subject to the limitations of this subparagraph, increase the amount of capital gain dividends reported under clause (i). For special rule for certain losses after October 31, see paragraph (8). Every shareholder of a regulated investment company at the close of the company’s taxable year shall include, in computing his long-term capital gains in his return for his taxable year in which the last day of the company’s taxable year falls, such amount as the company shall designate in respect of such shares in a written notice mailed to its shareholders at any time prior to the expiration of 60 days after close of its taxable year, but the amount so includible by any shareholder shall not exceed that part of the amount subjected to tax in subparagraph (A) which he would have received if all of such amount had been distributed as capital gain dividends by the company to the holders of such shares at the close of its taxable year. For purposes of this title, every such shareholder shall be deemed to have paid, for his taxable year under clause (i), the tax imposed by subparagraph (A) on the amounts required by this subparagraph to be included in respect of such shares in computing his long-term capital gains for that year; and such shareholder shall be allowed credit or refund, as the case may be, for the tax so deemed to have been paid by him. The adjusted basis of such shares in the hands of the shareholder shall be increased, with respect to the amounts required by this subparagraph to be included in computing his long-term capital gains, by the difference between the amount of such includible gains and the tax deemed paid by such shareholder in respect of such shares under clause (ii). In the event of such designation the tax imposed by subparagraph (A) shall be paid by the regulated investment company within 30 days after close of its taxable year. The earnings and profits of such regulated investment company, and the earnings and profits of any such shareholder which is a corporation, shall be appropriately adjusted in accordance with regulations prescribed by the Secretary. In the case of a distribution to which section 897 does not apply by reason of the second sentence of section 897(h)(1), the amount of such distribution which would be included in computing long-term capital gains for the shareholder under subparagraph (B) or (D) (without regard to this subparagraph)— shall not be included in computing such shareholder’s long-term capital gains, and shall be included in such shareholder’s gross income as a dividend from the regulated investment company. If— subparagraph (B) or (D) of paragraph (3) provides that any amount with respect to any share is to be treated as long-term capital gain, and such share is held by the taxpayer for 6 months or less, then any loss (to the extent not disallowed under subparagraph (B)) on the sale or exchange of such share shall, to the extent of the amount described in clause (i), be treated as a long-term capital loss. If— a shareholder of a regulated investment company receives an exempt-interest dividend with respect to any share, and such share is held by the taxpayer for 6 months or less, then any loss on the sale or exchange of such share shall, to the extent of the amount of such exempt-interest dividend, be disallowed. For purposes of this paragraph, in determining the period for which the taxpayer has held any share of stock— the rules of paragraphs (3) and (4) of section 246(c) shall apply, and there shall not be taken into account any day which is more than 6 months after the date on which such share becomes ex-dividend. To the extent provided in regulations, subparagraphs (A) and (B) shall not apply to losses incurred on the sale or exchange of shares of stock in a regulated investment company pursuant to a plan which provides for the periodic liquidation of such shares. Except as otherwise provided by regulations, subparagraph (B) shall not apply with respect to a regular dividend paid by a regulated investment company which declares exempt-interest dividends on a daily basis in an amount equal to at least 90 percent of its net tax-exempt interest and distributes such dividends on a monthly or more frequent basis. In the case of a regulated investment company (other than a company described in clause (i)) which regularly distributes at least 90 percent of its net tax-exempt interest, the Secretary may by regulations prescribe that subparagraph (B) (and subparagraph (C) to the extent it relates to subparagraph (B)) shall be applied on the basis of a holding period requirement shorter than 6 months; except that such shorter holding period requirement shall not be shorter than the greater of 31 days or the period between regular distributions of exempt-interest dividends. If, at the close of each quarter of its taxable year, at least 50 percent of the value (as defined in section 851(c)(4)) of the total assets of the regulated investment company consists of obligations described in section 103(a), such company shall be qualified to pay exempt-interest dividends, as defined herein, to its shareholders. Except as provided in clause (ii), an exempt-interest dividend is any dividend or part thereof (other than a capital gain dividend) paid by a regulated investment company and reported by the company as an exempt-interest dividend in written statements furnished to its shareholders. If the aggregate reported amount with respect to the company for any taxable year exceeds the exempt interest of the company for such taxable year, an exempt-interest dividend is the excess of— the reported exempt-interest dividend amount, over the excess reported amount which is allocable to such reported exempt-interest dividend amount. Except as provided in subclause (II), the excess reported amount (if any) which is allocable to the reported exempt-interest dividend amount is that portion of the excess reported amount which bears the same ratio to the excess reported amount as the reported exempt-interest dividend amount bears to the aggregate reported amount. In the case of any taxable year which does not begin and end in the same calendar year, if the post-December reported amount equals or exceeds the excess reported amount for such taxable year, subclause (I) shall be applied by substituting “post-December reported amount” for “aggregate reported amount” and no excess reported amount shall be allocated to any dividend paid on or before December 31 of such taxable year. For purposes of this subparagraph— The term “reported exempt-interest dividend amount” means the amount reported to its shareholders under clause (i) as an exempt-interest dividend. The term “excess reported amount” means the excess of the aggregate reported amount over the exempt interest of the company for the taxable year. The term “aggregate reported amount” means the aggregate amount of dividends reported by the company under clause (i) as exempt-interest dividends for the taxable year (including exempt-interest dividends paid after the close of the taxable year described in section 855). The term “post-December reported amount” means the aggregate reported amount determined by taking into account only dividends paid after December 31 of the taxable year. The term “exempt interest” means, with respect to any regulated investment company, the excess of the amount of interest excludable from gross income under section 103(a) over the amounts disallowed as deductions under sections 265 and 171(a)(2). An exempt-interest dividend shall be treated by the shareholders for all purposes of this subtitle as an item of interest excludable from gross income under section 103(a). Such purposes include but are not limited to— the determination of gross income and taxable income, the determination of distributable net income under subchapter J, the allowance of, or calculation of the amount of, any credit or deduction, and the determination of the basis in the hands of any shareholder of any share of stock of the company. Section 311(b) shall not apply to any distribution by a regulated investment company to which this part applies, if such distribution is in redemption of its stock upon the demand of the shareholder. For purposes of this title, any dividend declared by a regulated investment company in October, November, or December of any calendar year and payable to shareholders of record on a specified date in such a month shall be deemed— to have been received by each shareholder on December 31 of such calendar year, and to have been paid by such company on December 31 of such calendar year (or, if earlier, as provided in section 855). The preceding sentence shall apply only if such dividend is actually paid by the company during January of the following calendar year. Except as otherwise provided by the Secretary, a regulated investment company may elect for any taxable year to treat any portion of any qualified late-year loss for such taxable year as arising on the first day of the following taxable year for purposes of this title. For purposes of this paragraph, the term “qualified late-year loss” means— any post-October capital loss, and any late-year ordinary loss. For purposes of this paragraph, the term “post-October capital loss” means— any net capital loss attributable to the portion of the taxable year after October 31, or if there is no such loss— any net long-term capital loss attributable to such portion of the taxable year, or any net short-term capital loss attributable to such portion of the taxable year. For purposes of this paragraph, the term “late-year ordinary loss” means the sum of any post-October specified loss and any post-December ordinary loss. For purposes of this paragraph, the term “post-October specified loss” means the excess (if any) of— the specified losses (as defined in section 4982(e)(5)(B)(ii)) attributable to the portion of the taxable year after October 31, over the specified gains (as defined in section 4982(e)(5)(B)(i)) attributable to such portion of the taxable year. For purposes of this paragraph, the term “post-December ordinary loss” means the excess (if any) of— the ordinary losses not described in subparagraph (E)(i) and attributable to the portion of the taxable year after December 31, over the ordinary income not described in subparagraph (E)(ii) and attributable to such portion of the taxable year. In the case of a company to which an election under section 4982(e)(4) applies— if such company’s taxable year ends with the month of November, the amount of qualified late-year losses (if any) shall be computed without regard to any income, gain, or loss described in subparagraphs (C) and (E), and if such company’s taxable year ends with the month of December, subparagraph (A) shall not apply. For purposes of this title, if a regulated investment company is the holder of record of any share of stock on the record date for any dividend payable with respect to such stock, such dividend shall be included in gross income by such company as of the later of— the date such share became ex-dividend with respect to such dividend, or the date such company acquired such share.

(c) Earnings and profits If a regulated investment company has a net capital loss for any taxable year— such net capital loss shall not be taken into account for purposes of determining the company’s earnings and profits, and any capital loss arising on the first day of the next taxable year by reason of clause (ii) or (iii) of section 1212(a)(3)(A) shall be treated as so arising for purposes of determining earnings and profits. The earnings and profits of a regulated investment company for any taxable year (but not its accumulated earnings and profits) shall not be reduced by any amount which is not allowable as a deduction (other than by reason of section 265 or 171(a)(2)) in computing its taxable income for such taxable year. Clause (i) shall not apply to a net capital loss to which subparagraph (A) applies. For purposes of applying this chapter to distributions made by a regulated investment company with respect to any calendar year, the earnings and profits of such company shall be determined without regard to any net capital loss attributable to the portion of the taxable year after October 31, without regard to any late-year ordinary loss (as defined in subsection (b)(8)(D)), without regard to any capital loss arising on the first day of the taxable year by reason of clauses (ii) and (iii) of section 1212(a)(3)(A), and with such other adjustments as the Secretary may prescribe. The preceding sentence shall apply— only to the extent that the amount distributed by the company with respect to the calendar year does not exceed the required distribution for such calendar year (as determined under section 4982 by substituting “100 percent” for each percentage set forth in section 4982(b)(1)), and except as provided in regulations, only if an election under section 4982(e)(4) is not in effect with respect to such company. Any distribution which is made in order to comply with the requirements of subsection (a)(2)(B)— shall be treated for purposes of this subsection and subsection (a)(2)(B) as made from earnings and profits which, but for the distribution, would result in a failure to meet such requirements (and allocated to such earnings on a first-in, first-out basis), and to the extent treated under subparagraph (A) as made from accumulated earnings and profits, shall not be treated as a distribution for purposes of subsection (b)(2)(D) and section 855. For purposes of this subsection, the term “regulated investment company” includes a domestic corporation which is a regulated investment company determined without regard to the requirements of subsection (a).

(d) Distributions in redemption of interests in unit investment trusts In the case of a unit investment trust— which is registered under the Investment Company Act of 1940 ( 15 U.S.C. 80a–1 and following) and issues periodic payment plan certificates (as defined in such Act), and substantially all of the assets of which consist of securities issued by a management company (as defined in such Act), section 562(c) (relating to preferential dividends) shall not apply to a distribution by such trust to a holder of an interest in such trust in redemption of part or all of such interest, with respect to the capital gain net income of such trust attributable to such redemption.

(e) Procedures similar to deficiency dividend procedures made applicable If— there is a determination that the provisions of this part do not apply to an investment company for any taxable year (hereinafter in this subsection referred to as the “non-RIC year”), and such investment company meets the distribution requirements of paragraph (2) with respect to the non-RIC year, for purposes of applying subsection (a)(2) to subsequent taxable years, the provisions of this part shall be treated as applying to such investment company for the non-RIC year. If the determination under subparagraph (A) is solely as a result of the failure to meet the requirements of subsection (a)(2), the preceding sentence shall also apply for purposes of applying subsection (a)(2) to the non-RIC year and the amount referred to in paragraph (2)(A)(i) shall be the portion of the accumulated earnings and profits which resulted in such failure. The distribution requirements of this paragraph are met with respect to any non-RIC year if, within the 90-day period beginning on the date of the determination (or within such longer period as the Secretary may permit), the investment company makes 1 or more qualified designated distributions and the amount of such distributions is not less than the excess of— the portion of the accumulated earnings and profits of the investment company (as of the date of the determination) which are attributable to the non-RIC year, over any interest payable under paragraph (3). For purposes of this paragraph, the term “qualified designated distribution” means any distribution made by the investment company if— section 301 applies to such distribution, and such distribution is designated (at such time and in such manner as the Secretary shall by regulations prescribe) as being taken into account under this paragraph with respect to the non-RIC year. Any qualified designated distribution shall not be included in the amount of dividends paid for purposes of computing the dividends paid deduction for any taxable year. If paragraph (1) applies to any non-RIC year of an investment company, such investment company shall pay interest at the underpayment rate established under section 6621— on an amount equal to 50 percent of the amount referred to in paragraph (2)(A)(i), for the period— which begins on the last day prescribed for payment of the tax imposed for the non-RIC year (determined without regard to extensions), and which ends on the date the determination is made. Any interest payable under subparagraph (A) may be assessed and collected at any time during the period during which any tax imposed for the taxable year in which the determination is made may be assessed and collected. The provisions of this subsection shall not apply if the determination contains a finding that the failure to meet any requirement of this part was due to fraud with intent to evade tax. For purposes of this subsection, the term “determination” has the meaning given to such term by section 860(e). Such term also includes a determination by the investment company filed with the Secretary that the provisions of this part do not apply to the investment company for a taxable year.

(f) Treatment of certain load charges If— the taxpayer incurs a load charge in acquiring stock in a regulated investment company and, by reason of incurring such charge or making such acquisition, the taxpayer acquires a reinvestment right, such stock is disposed of before the 91st day after the date on which such stock was acquired, and the taxpayer acquires, during the period beginning on the date of the disposition referred to in subparagraph (B) and ending on January 31 of the calendar year following the calendar year that includes the date of such disposition, stock in such regulated investment company or in another regulated investment company and the otherwise applicable load charge is reduced by reason of the reinvestment right, the load charge referred to in subparagraph (A) (to the extent it does not exceed the reduction referred to in subparagraph (C)) shall not be taken into account for purposes of determining the amount of gain or loss on the disposition referred to in subparagraph (B). To the extent such charge is not taken into account in determining the amount of such gain or loss, such charge shall be treated as incurred in connection with the acquisition referred to in subparagraph (C) (including for purposes of reapplying this paragraph). For purposes of this subsection— The term “load charge” means any sales or similar charge incurred by a person in acquiring stock of a regulated investment company. Such term does not include any charge incurred by reason of the reinvestment of a dividend. The term “reinvestment right” means any right to acquire stock of 1 or more regulated investment companies without the payment of a load charge or with the payment of a reduced charge. If the taxpayer acquires stock in a regulated investment company from another person in a transaction in which gain or loss is not recognized, the taxpayer shall succeed to the treatment of such other person under this subsection.

(g) Special rules for fund of funds In the case of a qualified fund of funds— such fund shall be qualified to pay exempt-interest dividends to its shareholders without regard to whether such fund satisfies the requirements of the first sentence of subsection (b)(5), and such fund may elect the application of section 853 (relating to foreign tax credit allowed to shareholders) without regard to the requirement of subsection (a)(1) thereof. For purposes of this subsection, the term “qualified fund of funds” means a regulated investment company if (at the close of each quarter of the taxable year) at least 50 percent of the value of its total assets is represented by interests in other regulated investment companies.

§ 853 Foreign tax credit allowed to shareholders

(a) General rule A regulated investment company— more than 50 percent of the value (as defined in section 851(c)(4)) of whose total assets at the close of the taxable year consists of stock or securities in foreign corporations, and which meets the requirements of section 852(a) for the taxable year, may, for such taxable year, elect the application of this section with respect to income, war profits, and excess profits taxes described in section 901(b)(1), which are paid by the investment company during such taxable year to foreign countries and possessions of the United States.

(b) Effect of election If the election provided in subsection (a) is effective for a taxable year— the regulated investment company— shall not, with respect to such taxable year, be allowed a deduction under section 164(a) or a credit under section 901 for taxes to which subsection (a) is applicable, and shall be allowed as an addition to the dividends paid deduction for such taxable year the amount of such taxes; each shareholder of such investment company shall— include in gross income and treat as paid by him his proportionate share of such taxes, and treat as gross income from sources within the respective foreign countries and possessions of the United States, for purposes of applying subpart A of part III of subchapter N, the sum of his proportionate share of such taxes and the portion of any dividend paid by such investment company which represents income derived from sources within foreign countries or possessions of the United States.

(c) Statements to shareholders The amounts to be treated by the shareholder, for purposes of subsection (b)(2), as his proportionate share of— taxes paid to any foreign country or possession of the United States, and gross income derived from sources within any foreign country or possession of the United States, shall not exceed the amounts so reported by the company in a written statement furnished to such shareholder.

(d) Manner of making election The election provided in subsection (a) shall be made in such manner as the Secretary may prescribe by regulations.

(e) Treatment of certain taxes not allowed as a credit under section 901 This section shall not apply to any tax with respect to which the regulated investment company is not allowed a credit under section 901 by reason of subsection (k) or ( l ) of such section.

(f) Cross references For treatment by shareholders of taxes paid to foreign countries and possessions of the United States, see section 164(a) and section 901. For definition of foreign corporation, see section 7701(a)(5).

§ 853A Credits from tax credit bonds allowed to shareholders

(a) General rule A regulated investment company— which holds (directly or indirectly) one or more tax credit bonds on one or more applicable dates during the taxable year, and which meets the requirements of section 852(a) for the taxable year (determined after the application of this section), may elect the application of this section with respect to some or all of the credits allowable (determined without regard to this section and sections 54(c), 54A(c)(1), 54AA(c)(1), and 1397E(c)) 1 to the investment company during such taxable year with respect to such bonds.

(b) Effect of election If the election provided in subsection (a) is in effect with respect to any credits for any taxable year— the regulated investment company— shall not be allowed such credits, shall include in gross income (as interest) for such taxable year the amount which would have been so included with respect to such credits had the application of this section not been elected, shall include in earnings and profits the amount so included in gross income, and shall be treated as making one or more distributions of money with respect to its stock equal to the amount of such credits on the date or dates (on or after the applicable date for any such credit) during such taxable year (or following the close of the taxable year pursuant to section 855) selected by the company, and each shareholder of such investment company shall— be treated as receiving such shareholder’s proportionate share of any distribution of money which is treated as made by such investment company under paragraph (1)(D), and be allowed credits against the tax imposed by this chapter equal to the amount of such distribution, subject to the provisions of this title applicable to the credit involved.

(c) Statements 22 See 2010 Amendment note below. to shareholders The amount treated as a distribution of money received by a shareholder under subsection (b)(2)(A) (and as credits allowed to such shareholder under subsection (b)(2)(B)) shall not exceed the amount so reported by the regulated investment company in a written statement furnished to such shareholder.

(d) Manner of making election The election provided in subsection (a) shall be made in such manner as the Secretary may prescribe.

(e) Definitions and special rules For purposes of this subsection— The term “tax credit bond” means— a qualified tax credit bond (as defined in section 54A(d)), 1 a build America bond (as defined in section 54AA(d)) 1 other than a qualified bond described in section 54AA(g), 1 and any bond for which a credit is allowable under subpart H of part IV of subchapter A of this chapter. 1 The term “applicable date” means— in the case of a qualified tax credit bond or a bond described in subparagraph (A)(iii), any credit allowance date (as defined in section 54A(e)(1)), 1 and in the case of a build America bond (as defined in section 54AA(d)), 1 any interest payment date (as defined in section 54AA(e)). 1 If the ownership of a tax credit bond is separated from the credit with respect to such bond, subsection (a) shall be applied by reference to the instruments evidencing the entitlement to the credit rather than the tax credit bond.

(f) Regulations, etc. The Secretary shall prescribe such regulations or other guidance as may be necessary or appropriate to carry out the purposes of this section, including methods for determining a shareholder’s proportionate share of credits.

§ 854 Limitations applicable to dividends received from regulated investment company

(a) Capital gain dividend For purposes of section 1(h)(11) (relating to maximum rate of tax on dividends) and section 243 (relating to deductions for dividends received by corporations), a capital gain dividend (as defined in section 852(b)(3)) received from a regulated investment company shall not be considered as a dividend.

(b) Other dividends In any case in which— a dividend is received from a regulated investment company (other than a dividend to which subsection (a) applies), and such investment company meets the requirements of section 852(a) for the taxable year during which it paid such dividend, then, in computing any deduction under section 243, there shall be taken into account only that portion of such dividend reported by the regulated investment company as eligible for such deduction in written statements furnished to its shareholders and such dividend shall be treated as received from a corporation which is not a 20-percent owned corporation. In any case in which— a dividend is received from a regulated investment company (other than a dividend to which subsection (a) applies), such investment company meets the requirements of section 852(a) for the taxable year during which it paid such dividend, and the qualified dividend income of such investment company for such taxable year is less than 95 percent of its gross income, then, in computing qualified dividend income, there shall be taken into account only that portion of such dividend reported by the regulated investment company as qualified dividend income in written statements furnished to its shareholders. For purposes of clause (i), in the case of 1 or more sales or other dispositions of stock or securities, the term “gross income” includes only the excess of— the net short-term capital gain from such sales or dispositions, over the net long-term capital loss from such sales or dispositions. The aggregate amount which may be reported as dividends under subparagraph (A) shall not exceed the aggregate dividends received by the company for the taxable year. The aggregate amount which may be reported as qualified dividend income under subparagraph (B) shall not exceed the sum of— the qualified dividend income of the company for the taxable year, and the amount of any earnings and profits which were distributed by the company for such taxable year and accumulated in a taxable year with respect to which this part did not apply. For purposes of this subsection— In computing the amount of aggregate dividends received, there shall only be taken into account dividends received from domestic corporations. For purposes of subparagraph (A), the term “dividend” shall not include any distribution from— a corporation which, for the taxable year of the corporation in which the distribution is made, or for the next preceding taxable year of the corporation, is a corporation exempt from tax under section 501 (relating to certain charitable, etc., organizations) or section 521 (relating to farmers’ cooperative associations), or a real estate investment trust which, for the taxable year of the trust in which the dividend is paid, qualifies under part II of subchapter M (section 856 and following). In determining the amount of any dividend for purposes of this paragraph, a dividend received from a regulated investment company shall be subject to the limitations prescribed in this section. For purposes of subparagraph (A) of paragraph (1), an amount shall be treated as a dividend for the purpose of paragraph (1) only if a deduction would have been allowable under section 243 to the regulated investment company determined— as if section 243 applied to dividends received by a regulated investment company, after the application of section 246 (but without regard to subsection (b) thereof), and after the application of section 246A. For purposes of this subsection, the term “qualified dividend income” has the meaning given such term by section 1(h)(11)(B).

§ 855 Dividends paid by regulated investment company after close of taxable year

(a) General rule For purposes of this chapter, if a regulated investment company— declares a dividend on or before the later of— the 15th day of the 9th month following the close of the taxable year, or in the case of an extension of time for filing the company’s return for the taxable year, the due date for filing such return taking into account such extension, and distributes the amount of such dividend to shareholders in the 12-month period following the close of such taxable year and not later than the date of the first dividend payment of the same type of dividend made after such declaration, the amount so declared and distributed shall, to the extent the company elects in such return in accordance with regulations prescribed by the Secretary, be considered as having been paid during such taxable year, except as provided in subsections (b) and (c). For purposes of paragraph (2), a dividend attributable to any short-term capital gain with respect to which a notice is required under the Investment Company Act of 1940 shall be treated as the same type of dividend as a capital gain dividend.

(b) Receipt by shareholder Except as provided in section 852(b)(7), amounts to which subsection (a) is applicable shall be treated as received by the shareholder in the taxable year in which the distribution is made.

(c) Foreign tax election If an investment company to which section 853 is applicable for the taxable year makes a distribution as provided in subsection (a) of this section, the shareholders shall consider the amounts described in section 853(b)(2) allocable to such distribution as paid or received, as the case may be, in the taxable year in which the distribution is made.

§ 856 Definition of real estate investment trust

(a) In general For purposes of this title, the term “real estate investment trust” means a corporation, trust, or association— which is managed by one or more trustees or directors; the beneficial ownership of which is evidenced by transferable shares, or by transferable certificates of beneficial interest; which (but for the provisions of this part) would be taxable as a domestic corporation; which is neither (A) a financial institution referred to in section 582(c)(2), nor (B) an insurance company to which subchapter L applies; the beneficial ownership of which is held by 100 or more persons; subject to the provisions of subsection (k), which is not closely held (as determined under subsection (h)); and which meets the requirements of subsection (c).

(b) Determination of status The conditions described in paragraphs (1) to (4), inclusive, of subsection (a) must be met during the entire taxable year, and the condition described in paragraph (5) must exist during at least 335 days of a taxable year of 12 months, or during a proportionate part of a taxable year of less than 12 months.

(c) Limitations A corporation, trust, or association shall not be considered a real estate investment trust for any taxable year unless— it files with its return for the taxable year an election to be a real estate investment trust or has made such election for a previous taxable year, and such election has not been terminated or revoked under subsection (g); at least 95 percent (90 percent for taxable years beginning before January 1, 1980 ) of its gross income (excluding gross income from prohibited transactions) is derived from— dividends; interest; rents from real property; gain from the sale or other disposition of stock, securities, and real property (including interests in real property and interests in mortgages on real property) which is not property described in section 1221(a)(1); abatements and refunds of taxes on real property; income and gain derived from foreclosure property (as defined in subsection (e)); amounts (other than amounts the determination of which depends in whole or in part on the income or profits of any person) received or accrued as consideration for entering into agreements (i) to make loans secured by mortgages on real property or on interests in real property or (ii) to purchase or lease real property (including interests in real property and interests in mortgages on real property); gain from the sale or other disposition of a real estate asset which is not a prohibited transaction solely by reason of section 857(b)(6); and mineral royalty income earned in the first taxable year beginning after the date of the enactment of this subparagraph from real property owned by a timber real estate investment trust and held, or once held, in connection with the trade or business of producing timber by such real estate investment trust; at least 75 percent of its gross income (excluding gross income from prohibited transactions) is derived from— rents from real property; interest on obligations secured by mortgages on real property or on interests in real property; gain from the sale or other disposition of real property (including interests in real property and interests in mortgages on real property) which is not property described in section 1221(a)(1); dividends or other distributions on, and gain (other than gain from prohibited transactions) from the sale or other disposition of, transferable shares (or transferable certificates of beneficial interest) in other real estate investment trusts which meet the requirements of this part; abatements and refunds of taxes on real property; income and gain derived from foreclosure property (as defined in subsection (e)); amounts (other than amounts the determination of which depends in whole or in part on the income or profits of any person) received or accrued as consideration for entering into agreements (i) to make loans secured by mortgages on real property or on interests in real property or (ii) to purchase or lease real property (including interests in real property and interests in mortgages on real property); gain from the sale or other disposition of a real estate asset (other than a nonqualified publicly offered REIT debt instrument) which is not a prohibited transaction solely by reason of section 857(b)(6); and qualified temporary investment income; and at the close of each quarter of the taxable year— at least 75 percent of the value of its total assets is represented by real estate assets, cash and cash items (including receivables), and Government securities; and not more than 25 percent of the value of its total assets is represented by securities (other than those includible under subparagraph (A)), not more than 25 percent of the value of its total assets is represented by securities of one or more taxable REIT subsidiaries, not more than 25 percent of the value of its total assets is represented by nonqualified publicly offered REIT debt instruments, and except with respect to a taxable REIT subsidiary and securities includible under subparagraph (A)— not more than 5 percent of the value of its total assets is represented by securities of any one issuer, the trust does not hold securities possessing more than 10 percent of the total voting power of the outstanding securities of any one issuer, and the trust does not hold securities having a value of more than 10 percent of the total value of the outstanding securities of any one issuer. A real estate investment trust which meets the requirements of this paragraph at the close of any quarter shall not lose its status as a real estate investment trust because of a discrepancy during a subsequent quarter between the value of its various investments and such requirements (including a discrepancy caused solely by the change in the foreign currency exchange rate used to value a foreign asset) unless such discrepancy exists immediately after the acquisition of any security or other property and is wholly or partly the result of such acquisition. A real estate investment trust which does not meet such requirements at the close of any quarter by reason of a discrepancy existing immediately after the acquisition of any security or other property which is wholly or partly the result of such acquisition during such quarter shall not lose its status for such quarter as a real estate investment trust if such discrepancy is eliminated within 30 days after the close of such quarter and in such cases it shall be considered to have met such requirements at the close of such quarter for purposes of applying the preceding sentence. For purposes of this part— The term “value” means, with respect to securities for which market quotations are readily available, the market value of such securities; and with respect to other securities and assets, fair value as determined in good faith by the trustees, except that in the case of securities of real estate investment trusts such fair value shall not exceed market value or asset value, whichever is higher. The term “real estate assets” means real property (including interests in real property and interests in mortgages on real property or on interests in real property), shares (or transferable certificates of beneficial interest) in other real estate investment trusts which meet the requirements of this part, and debt instruments issued by publicly offered REITs. Such term also includes any property (not otherwise a real estate asset) attributable to the temporary investment of new capital, but only if such property is stock or a debt instrument, and only for the 1-year period beginning on the date the real estate trust receives such capital. The term “interests in real property” includes fee ownership and co-ownership of land or improvements thereon, leaseholds of land or improvements thereon, options to acquire land or improvements thereon, and options to acquire leaseholds of land or improvements thereon, but does not include mineral, oil, or gas royalty interests. The term “qualified temporary investment income” means any income which— is attributable to stock or a debt instrument (within the meaning of section 1275(a)(1)), is attributable to the temporary investment of new capital, and is received or accrued during the 1-year period beginning on the date on which the real estate investment trust receives such capital. The term “new capital” means any amount received by the real estate investment trust— in exchange for stock (or certificates of beneficial interests) in such trust (other than amounts received pursuant to a dividend reinvestment plan), or in a public offering of debt obligations of such trust which have maturities of at least 5 years. A regular or residual interest in a REMIC shall be treated as a real estate asset, and any amount includible in gross income with respect to such an interest shall be treated as interest on an obligation secured by a mortgage on real property; except that, if less than 95 percent of the assets of such REMIC are real estate assets (determined as if the real estate investment trust held such assets), such real estate investment trust shall be treated as holding directly (and as receiving directly) its proportionate share of the assets and income of the REMIC. For purposes of determining whether any interest in a REMIC qualifies under the preceding sentence, any interest held by such REMIC in another REMIC shall be treated as a real estate asset under principles similar to the principles of the preceding sentence, except that, if such REMIC’s are part of a tiered structure, they shall be treated as one REMIC for purposes of this subparagraph. All other terms shall have the same meaning as when used in the Investment Company Act of 1940, as amended ( 15 U.S.C. 80a–1 and following). Except to the extent as determined by the Secretary— any income of a real estate investment trust from a hedging transaction (as defined in clause (ii) or (iii) of section 1221(b)(2)(A)), including gain from the sale or disposition of such a transaction, shall not constitute gross income under paragraphs (2) and (3) to the extent that the transaction hedges any indebtedness incurred or to be incurred by the trust to acquire or carry real estate assets, any income of a real estate investment trust from a transaction entered into by the trust primarily to manage risk of currency fluctuations with respect to any item of income or gain described in paragraph (2) or (3) (or any property which generates such income or gain), including gain from the termination of such a transaction, shall not constitute gross income under paragraphs (2) and (3), if— a real estate investment trust enters into one or more positions described in clause (i) with respect to indebtedness described in clause (i) or one or more positions described in clause (ii) with respect to property which generates income or gain described in paragraph (2) or (3), any portion of such indebtedness is extinguished or any portion of such property is disposed of, and in connection with such extinguishment or disposition, such trust enters into one or more transactions which would be hedging transactions described in clause (ii) or (iii) of section 1221(b)(2)(A) with respect to any position referred to in subclause (I) if such position were ordinary property, any income of such trust from any position referred to in subclause (I) and from any transaction referred to in subclause (III) (including gain from the termination of any such position or transaction) shall not constitute gross income under paragraphs (2) and (3) to the extent that such transaction hedges such position, and clauses (i), (ii), and (iii) shall not apply with respect to any transaction unless such transaction satisfies the identification requirement described in section 1221(a)(7) (determined after taking into account any curative provisions provided under the regulations referred to therein). Gain from the sale of real property described in paragraph (2)(D) and (3)(C) shall include gain which is— recognized by an election under section 631(a) from timber owned by the real estate investment trust, the cutting of which is provided by a taxable REIT subsidiary of the real estate investment trust; recognized under section 631(b); or income which would constitute gain under subclause (I) or (II) but for the failure to meet the 1-year holding period requirement. For purposes of this subtitle, cut timber, the gain from which is recognized by a real estate investment trust pursuant to an election under section 631(a) described in clause (i)(I) or so much of clause (i)(III) as relates to clause (i)(I), shall be deemed to be sold to the taxable REIT subsidiary of the real estate investment trust on the first day of the taxable year. For purposes of this subtitle, income described in this subparagraph shall not be treated as gain from the sale of property described in section 1221(a)(1). This subparagraph shall not apply to dispositions after the termination date. The term “timber real estate investment trust” means a real estate investment trust in which more than 50 percent in value of its total assets consists of real property held in connection with the trade or business of producing timber. To the extent necessary to carry out the purposes of this part, the Secretary is authorized to determine, solely for purposes of this part, whether any item of income or gain which— does not otherwise qualify under paragraph (2) or (3) may be considered as not constituting gross income for purposes of paragraphs (2) or (3), or otherwise constitutes gross income not qualifying under paragraph (2) or (3) may be considered as gross income which qualifies under paragraph (2) or (3). If the real estate investment trust or its qualified business unit (as defined in section 989) uses any foreign currency as its functional currency (as defined in section 985(b)), the term “cash” includes such foreign currency but only to the extent such foreign currency— is held for use in the normal course of the activities of the trust or qualified business unit which give rise to items of income or gain described in paragraph (2) or (3) of subsection (c) or are directly related to acquiring or holding assets described in subsection (c)(4), and is not held in connection with an activity described in subsection (n)(4). The term “publicly offered REIT” has the meaning given such term by section 562(c)(2). The term “nonqualified publicly offered REIT debt instrument” means any real estate asset which would cease to be a real estate asset if subparagraph (B) were applied without regard to the reference to “debt instruments issued by publicly offered REITs”. A corporation, trust, or association which fails to meet the requirements of paragraph (2) or (3), or of both such paragraphs, for any taxable year shall nevertheless be considered to have satisfied the requirements of such paragraphs for such taxable year if— following the corporation, trust, or association’s identification of the failure to meet the requirements of paragraph (2) or (3), or of both such paragraphs, for any taxable year, a description of each item of its gross income described in such paragraphs is set forth in a schedule for such taxable year filed in accordance with regulations prescribed by the Secretary, and the failure to meet the requirements of paragraph (2) or (3), or of both such paragraphs, is due to reasonable cause and not due to willful neglect. A corporation, trust, or association that fails to meet the requirements of paragraph (4) (other than a failure to meet the requirements of paragraph (4)(B)(iv) which is described in subparagraph (B)(i) of this paragraph) for a particular quarter shall nevertheless be considered to have satisfied the requirements of such paragraph for such quarter if— following the corporation, trust, or association’s identification of the failure to satisfy the requirements of such paragraph for a particular quarter, a description of each asset that causes the corporation, trust, or association to fail to satisfy the requirements of such paragraph at the close of such quarter of any taxable year is set forth in a schedule for such quarter filed in accordance with regulations prescribed by the Secretary, the failure to meet the requirements of such paragraph for a particular quarter is due to reasonable cause and not due to willful neglect, and the corporation, trust, or association disposes of the assets set forth on the schedule specified in clause (i) within 6 months after the last day of the quarter in which the corporation, trust or association’s identification of the failure to satisfy the requirements of such paragraph occurred or such other time period prescribed by the Secretary and in the manner prescribed by the Secretary, or the requirements of such paragraph are otherwise met within the time period specified in subclause (I). A corporation, trust, or association that fails to meet the requirements of paragraph (4)(B)(iv) for a particular quarter shall nevertheless be considered to have satisfied the requirements of such paragraph for such quarter if— such failure is due to the ownership of assets the total value of which does not exceed the lesser of— 1 percent of the total value of the trust’s assets at the end of the quarter for which such measurement is done, and $10, 000, 000, an d t h ecor p or a t i o n, t r u s t, or a ssoc ia t i o n, f o ll o w in g t h e i d e n t i f i c a t i o n o f s u c h f ai l u re, d i s p oseso f a sse t s in or d er t o m ee tt h ere q u i re m e n t so f s u c h p a r a g r a p h w i t hin 6 m o n t h s a f t er t h e l a s t d a yo f t h e q u a r t er in w hi c h t h ecor p or a t i o n, t r u s t or a ssoc ia t i o n ’ s i d e n t i f i c a t i o n o f t h e f ai l u re t os a t i s f y t h ere q u i re m e n t so f s u c h p a r a g r a p h occ u rre d ors u c h o t h er t im e p er i o d p rescr ib e d b y t h e S ecre t a ry an d in t h e mann er p rescr ib e d b y t h e S ecre t a ry, or t h ere q u i re m e n t so f s u c h p a r a g r a p ha reo t h er w i se m e tw i t hin t h e t im e p er i o d s p ec i f i e d in s u b c l a u se (I) . I f s u b p a r a g r a p h (A) a ppl i es t o a cor p or a t i o n, t r u s t, or a ssoc ia t i o n f or an y t a x ab l eye a r, t h ere i s h ere b y im p ose d o n s u c h cor p or a t i o n, t r u s t, or a ssoc ia t i o na t a x inanam o u n t e q u a lt o t h e g re a t ero f —$ 50,000, or the amount determined (pursuant to regulations promulgated by the Secretary) by multiplying the net income generated by the assets described in the schedule specified in subparagraph (A)(i) for the period specified in clause (ii) by the highest rate of tax specified in section 11. For purposes of clause (i)(II), the period described in this clause is the period beginning on the first date that the failure to satisfy the requirements of such paragraph (4) occurs as a result of the ownership of such assets and ending on the earlier of the date on which the trust disposes of such assets or the end of the first quarter when there is no longer a failure to satisfy such paragraph (4). For purposes of subtitle F, the taxes imposed by this subparagraph shall be treated as excise taxes with respect to which the deficiency procedures of such subtitle apply. If a corporation was a distributing corporation or a controlled corporation (other than a controlled corporation with respect to a distribution described in section 355(h)(2)(A)) with respect to any distribution to which section 355 (or so much of section 356 as relates to section 355) applied, such corporation (and any successor corporation) shall not be eligible to make any election under paragraph (1) for any taxable year beginning before the end of the 10-year period beginning on the date of such distribution. Personal property shall be treated as a real estate asset for purposes of paragraph (4)(A) to the extent that rents attributable to such personal property are treated as rents from real property under subsection (d)(1)(C). If— personal property is leased under, or in connection with, a lease of real property, for a period of not less than 1 year, and rents attributable to such personal property are treated as rents from real property under subsection (d)(1)(C), any portion of such personal property and any portion of such real property are sold, or otherwise disposed of, in a single disposition (or contemporaneously in separate dispositions), and the fair market value of the personal property so sold or contemporaneously disposed of (determined at the time of disposition) does not exceed 15 percent of the total fair market value of all of the personal and real property so sold or contemporaneously disposed of (determined at the time of disposition), any gain from such dispositions shall be treated for purposes of paragraphs (2)(H) and (3)(H) as gain from the disposition of a real estate asset. In the case of an obligation secured by a mortgage on both real property and personal property, if the fair market value of such personal property does not exceed 15 percent of the total fair market value of all such property, such obligation shall be treated— for purposes of paragraph (3)(B), as an obligation described therein, for purposes of paragraph (4)(A), as a real estate asset, and for purposes of paragraphs (2)(D) and (3)(C), as a mortgage on real property. Except as provided in subclause (II), the fair market value of all such property shall be determined for purposes of clause (i) in the same manner as the fair market value of real property is determined for purposes of apportioning interest income between real property and personal property under paragraph (3)(B). For purposes of applying clause (i)(III), fair market value shall be determined at the time of sale or other disposition. For purposes of this subsection, the term “termination date” means, with respect to any taxpayer, the last day of the taxpayer’s first taxable year beginning after the date of the enactment of this paragraph and before the date that is 1 year after such date of enactment.

(d) Rents from real property defined For purposes of paragraphs (2) and (3) of subsection (c), the term “rents from real property” includes (subject to paragraph (2))— rents from interests in real property, charges for services customarily furnished or rendered in connection with the rental of real property, whether or not such charges are separately stated, and rent attributable to personal property which is leased under, or in connection with, a lease of real property, but only if the rent attributable to such personal property for the taxable year does not exceed 15 percent of the total rent for the taxable year attributable to both the real and personal property leased under, or in connection with, such lease. For purposes of subparagraph (C), with respect to each lease of real property, rent attributable to personal property for the taxable year is that amount which bears the same ratio to total rent for the taxable year as the average of the fair market values of the personal property at the beginning and at the end of the taxable year bears to the average of the aggregate fair market values of both the real property and the personal property at the beginning and at the end of such taxable year. For purposes of paragraphs (2) and (3) of subsection (c), the term “rents from real property” does not include— except as provided in paragraphs (4) and (6), any amount received or accrued, directly or indirectly, with respect to any real or personal property, if the determination of such amount depends in whole or in part on the income or profits derived by any person from such property (except that any amount so received or accrued shall not be excluded from the term “rents from real property” solely by reason of being based on a fixed percentage or percentages of receipts or sales); except as provided in paragraph (8), any amount received or accrued directly or indirectly from any person if the real estate investment trust owns, directly or indirectly— in the case of any person which is a corporation, stock of such person possessing 10 percent or more of the total combined voting power of all classes of stock entitled to vote, or 10 percent or more of the total value of shares of all classes of stock of such person; or in the case of any person which is not a corporation, an interest of 10 percent or more in the assets or net profits of such person; and any impermissible tenant service income (as defined in paragraph (7)). For purposes of this subsection and subsection (e), the term “independent contractor” means any person— who does not own, directly or indirectly, more than 35 percent of the shares, or certificates of beneficial interest, in the real estate investment trust; and if such person is a corporation, not more than 35 percent of the total combined voting power of whose stock (or 35 percent of the total shares of all classes of whose stock), or, if such person is not a corporation, not more than 35 percent of the interest in whose assets or net profits is owned, directly or indirectly, by one or more persons owning 35 percent or more of the shares or certificates of beneficial interest in the trust. In the event that any class of stock of either the real estate investment trust or such person is regularly traded on an established securities market, only persons who own, directly or indirectly, more than 5 percent of such class of stock shall be taken into account as owning any of the stock of such class for purposes of applying the 35 percent limitation set forth in subparagraph (B) (but all of the outstanding stock of such class shall be considered outstanding in order to compute the denominator for purpose of determining the applicable percentage of ownership). Where a real estate investment trust receives or accrues, with respect to real or personal property, any amount which would be excluded from the term “rents from real property” solely because the tenant of the real estate investment trust receives or accrues, directly or indirectly, from subtenants any amount the determination of which depends in whole or in part on the income or profits derived by any person from such property, only a proportionate part (determined pursuant to regulations prescribed by the Secretary) of the amount received or accrued by the real estate investment trust from that tenant will be excluded from the term “rents from real property”. For purposes of this subsection, the rules prescribed by section 318(a) for determining the ownership of stock shall apply in determining the ownership of stock, assets, or net profits of any person; except that— “10 percent” shall be substituted for “50 percent” in subparagraph (C) of paragraphs (2) and (3) of section 318(a), and section 318(a)(3)(A) shall be applied in the case of a partnership by taking into account only partners who own (directly or indirectly) 25 percent or more of the capital interest, or the profits interest, in the partnership. If— a real estate investment trust receives or accrues, with respect to real or personal property, amounts from a tenant which derives substantially all of its income with respect to such property from the subleasing of substantially all of such property, and a portion of the amount such tenant receives or accrues, directly or indirectly, from subtenants consists of qualified rents, then the amounts which the trust receives or accrues from the tenant shall not be excluded from the term “rents from real property” by reason of being based on the income or profits of such tenant to the extent the amounts so received or accrued are attributable to qualified rents received or accrued by such tenant. For purposes of subparagraph (A), the term “qualified rents” means any amount which would be treated as rents from real property if received by the real estate investment trust. For purposes of paragraph (2)(C)— The term “impermissible tenant service income” means, with respect to any real or personal property, any amount received or accrued directly or indirectly by the real estate investment trust for— services furnished or rendered by the trust to the tenants of such property, or managing or operating such property. If the amount described in subparagraph (A) with respect to a property for any taxable year exceeds 1 percent of all amounts received or accrued during such taxable year directly or indirectly by the real estate investment trust with respect to such property, the impermissible tenant service income of the trust with respect to the property shall include all such amounts. For purposes of subparagraph (A)— services furnished or rendered, or management or operation provided, through an independent contractor from whom the trust itself does not derive or receive any income or through a taxable REIT subsidiary of such trust shall not be treated as furnished, rendered, or provided by the trust, and there shall not be taken into account any amount which would be excluded from unrelated business taxable income under section 512(b)(3) if received by an organization described in section 511(a)(2). For purposes of subparagraph (A), the amount treated as received for any service (or management or operation) shall not be less than 150 percent of the direct cost of the trust in furnishing or rendering the service (or providing the management or operation). For purposes of paragraphs (2) and (3) of subsection (c), amounts described in subparagraph (A) shall be included in the gross income of the corporation, trust, or association. For purposes of this subsection, amounts paid to a real estate investment trust by a taxable REIT subsidiary of such trust shall not be excluded from rents from real property by reason of paragraph (2)(B) if the requirements of either of the following subparagraphs are met: The requirements of this subparagraph are met with respect to any property if at least 90 percent of the leased space of the property is rented to persons other than taxable REIT subsidiaries of such trust and other than persons described in paragraph (2)(B). Clause (i) shall apply only to the extent that the amounts paid to the trust as rents from real property (as defined in paragraph (1) without regard to paragraph (2)(B)) from such property are substantially comparable to such rents paid by the other tenants of the trust’s property for comparable space. The substantial comparability requirement of clause (ii) shall be treated as met with respect to a lease to a taxable REIT subsidiary of the trust if such requirement is met under the terms of the lease— at the time such lease is entered into, at the time of each extension of the lease, including a failure to exercise a right to terminate, and at the time of any modification of the lease between the trust and the taxable REIT subsidiary if the rent under such lease is effectively increased pursuant to such modification. With respect to subclause (III), if the taxable REIT subsidiary of the trust is a controlled taxable REIT subsidiary of the trust, the term “rents from real property” shall not in any event include rent under such lease to the extent of the increase in such rent on account of such modification. For purposes of clause (iii), the term “controlled taxable REIT subsidiary” means, with respect to any real estate investment trust, any taxable REIT subsidiary of such trust if such trust owns directly or indirectly— stock possessing more than 50 percent of the total voting power of the outstanding stock of such subsidiary, or stock having a value of more than 50 percent of the total value of the outstanding stock of such subsidiary. If the requirements of clause (i) are met at a time referred to in clause (iii), such requirements shall continue to be treated as met so long as there is no increase in the space leased to any taxable REIT subsidiary of such trust or to any person described in paragraph (2)(B). If there is an increase referred to in clause (v) during any calendar quarter with respect to any property, the requirements of clause (iii) shall be treated as met during the quarter and the succeeding quarter if such requirements are met at the close of such succeeding quarter. The requirements of this subparagraph are met with respect to an interest in real property which is a qualified lodging facility (as defined in paragraph (9)(D)) or a qualified health care property (as defined in subsection (e)(6)(D)(i)) leased by the trust to a taxable REIT subsidiary of the trust if the property is operated on behalf of such subsidiary by a person who is an eligible independent contractor. For purposes of this section, a taxable REIT subsidiary is not considered to be operating or managing a qualified health care property or qualified lodging facility solely because it— directly or indirectly possesses a license, permit, or similar instrument enabling it to do so, or employs individuals working at such facility or property located outside the United States, but only if an eligible independent contractor is responsible for the daily supervision and direction of such individuals on behalf of the taxable REIT subsidiary pursuant to a management agreement or similar service contract. For purposes of paragraph (8)(B)— The term “eligible independent contractor” means, with respect to any qualified lodging facility or qualified health care property (as defined in subsection (e)(6)(D)(i)), any independent contractor if, at the time such contractor enters into a management agreement or other similar service contract with the taxable REIT subsidiary to operate such qualified lodging facility or qualified health care property, such contractor (or any related person) is actively engaged in the trade or business of operating qualified lodging facilities or qualified health care properties, respectively, for any person who is not a related person with respect to the real estate investment trust or the taxable REIT subsidiary. Solely for purposes of this paragraph and paragraph (8)(B), a person shall not fail to be treated as an independent contractor with respect to any qualified lodging facility or qualified health care property (as so defined) by reason of the following: The taxable REIT subsidiary bears the expenses for the operation of such qualified lodging facility or qualified health care property pursuant to the management agreement or other similar service contract. The taxable REIT subsidiary receives the revenues from the operation of such qualified lodging facility or qualified health care property, net of expenses for such operation and fees payable to the operator pursuant to such agreement or contract. The real estate investment trust receives income from such person with respect to another property that is attributable to a lease of such other property to such person that was in effect as of the later of— January 1, 1999 , or the earliest date that any taxable REIT subsidiary of such trust entered into a management agreement or other similar service contract with such person with respect to such qualified lodging facility or qualified health care property. For purposes of subparagraph (B)(iii)— a lease shall be treated as in effect on January 1, 1999 , without regard to its renewal after such date, so long as such renewal is pursuant to the terms of such lease as in effect on whichever of the dates under subparagraph (B)(iii) is the latest, and a lease of a property entered into after whichever of the dates under subparagraph (B)(iii) is the latest shall be treated as in effect on such date if— on such date, a lease of such property from the trust was in effect, and under the terms of the new lease, such trust receives a substantially similar or lesser benefit in comparison to the lease referred to in subclause (I). For purposes of this paragraph— The term “qualified lodging facility” means any lodging facility unless wagering activities are conducted at or in connection with such facility by any person who is engaged in the business of accepting wagers and who is legally authorized to engage in such business at or in connection with such facility. The term “lodging facility” means a— hotel, motel, or other establishment more than one-half of the dwelling units in which are used on a transient basis. The term “lodging facility” includes customary amenities and facilities operated as part of, or associated with, the lodging facility so long as such amenities and facilities are customary for other properties of a comparable size and class owned by other owners unrelated to such real estate investment trust. References in this paragraph to operating a property shall be treated as including a reference to managing the property. Persons shall be treated as related to each other if such persons are treated as a single employer under subsection (a) or (b) of section 52.

(e) Special rules for foreclosure property For purposes of this part, the term “foreclosure property” means any real property (including interests in real property), and any personal property incident to such real property, acquired by the real estate investment trust as the result of such trust having bid in such property at foreclosure, or having otherwise reduced such property to ownership or possession by agreement or process of law, after there was default (or default was imminent) on a lease of such property or on an indebtedness which such property secured. Such term does not include property acquired by the real estate investment trust as a result of indebtedness arising from the sale or other disposition of property of the trust described in section 1221(a)(1) which was not originally acquired as foreclosure property. Except as provided in paragraph (3), property shall cease to be foreclosure property with respect to the real estate investment trust as of the close of the 3d taxable year following the taxable year in which the trust acquired such property. If the real estate investment trust establishes to the satisfaction of the Secretary that an extension of the grace period is necessary for the orderly liquidation of the trust’s interests in such property, the Secretary may grant one extension of the grace period for such property. Any such extension shall not extend the grace period beyond the close of the 3d taxable year following the last taxable year in the period under paragraph (2). Any foreclosure property shall cease to be such on the first day (occurring on or after the day on which the real estate investment trust acquired the property) on which— a lease is entered into with respect to such property which, by its terms, will give rise to income which is not described in subsection (c)(3) (other than subparagraph (F) of such subsection), or any amount is received or accrued, directly or indirectly, pursuant to a lease entered into on or after such day which is not described in such subsection, any construction takes place on such property (other than completion of a building, or completion of any other improvement, where more than 10 percent of the construction of such building or other improvement was completed before default became imminent), or if such day is more than 90 days after the day on which such property was acquired by the real estate investment trust and the property is used in a trade or business which is conducted by the trust (other than through an independent contractor (within the meaning of section (d)(3)) from whom the trust itself does not derive or receive any income or through a taxable REIT subsidiary). For purposes of subparagraph (C), property shall not be treated as used in a trade or business by reason of any activities of the real estate investment trust with respect to such property to the extent that such activities would not result in amounts received or accrued, directly or indirectly, with respect to such property being treated as other than rents from real property. Property shall be treated as foreclosure property for purposes of this part only if the real estate investment trust so elects (in the manner provided in regulations prescribed by the Secretary) on or before the due date (including any extensions of time) for filing its return of tax under this chapter for the taxable year in which such trust acquires such property. A real estate investment trust may revoke any such election for a taxable year by filing the revocation (in the manner provided by the Secretary) on or before the due date (including any extension of time) for filing its return of tax under this chapter for the taxable year. If a trust revokes an election for any property, no election may be made by the trust under this paragraph with respect to the property for any subsequent taxable year. For purposes of this subsection— The term “foreclosure property” shall include any qualified health care property acquired by a real estate investment trust as the result of the termination of a lease of such property (other than a termination by reason of a default, or the imminence of a default, on the lease). In the case of a qualified health care property which is foreclosure property solely by reason of subparagraph (A), in lieu of applying paragraphs (2) and (3)— the qualified health care property shall cease to be foreclosure property as of the close of the second taxable year after the taxable year in which such trust acquired such property, and if the real estate investment trust establishes to the satisfaction of the Secretary that an extension of the grace period in clause (i) is necessary to the orderly leasing or liquidation of the trust’s interest in such qualified health care property, the Secretary may grant one or more extensions of the grace period for such qualified health care property. Any such extension shall not extend the grace period beyond the close of the 6th year after the taxable year in which such trust acquired such qualified health care property. For purposes of applying paragraph (4)(C) with respect to qualified health care property which is foreclosure property by reason of subparagraph (A) or paragraph (1), income derived or received by the trust from an independent contractor shall be disregarded to the extent such income is attributable to— any lease of property in effect on the date the real estate investment trust acquired the qualified health care property (without regard to its renewal after such date so long as such renewal is pursuant to the terms of such lease as in effect on such date), or any lease of property entered into after such date if— on such date, a lease of such property from the trust was in effect, and under the terms of the new lease, such trust receives a substantially similar or lesser benefit in comparison to the lease referred to in subclause (I). The term “qualified health care property” means any real property (including interests therein), and any personal property incident to such real property, which— is a health care facility, or is necessary or incidental to the use of a health care facility. For purposes of clause (i), the term “health care facility” means a hospital, nursing facility, assisted living facility, congregate care facility, qualified continuing care facility (as defined in section 7872(g)(4)), or other licensed facility which extends medical or nursing or ancillary services to patients and which, immediately before the termination, expiration, default, or breach of the lease of or mortgage secured by such facility, was operated by a provider of such services which was eligible for participation in the medicare program under title XVIII of the Social Security Act with respect to such facility.

(f) Interest For purposes of paragraphs (2)(B) and (3)(B) of subsection (c), the term “interest” does not include any amount received or accrued, directly or indirectly, if the determination of such amount depends in whole or in part on the income or profits of any person except that— any amount so received or accrued shall not be excluded from the term “interest” solely by reason of being based on a fixed percentage or percentages of receipts or sales, and where a real estate investment trust receives any amount which would be excluded from the term “interest” solely because the debtor of the real estate investment trust receives or accrues any amount the determination of which depends in whole or in part on the income or profits of any person, only a proportionate part (determined pursuant to regulations prescribed by the Secretary) of the amount received or accrued by the real estate investment trust from the debtor will be excluded from the term “interest”. If— a real estate investment trust receives or accrues with respect to an obligation secured by a mortgage on real property or an interest in real property amounts from a debtor which derives substantially all of its gross income with respect to such property (not taking into account any gain on any disposition) from the leasing of substantially all of its interests in such property to tenants, and a portion of the amount which such debtor receives or accrues, directly or indirectly, from tenants consists of qualified rents (as defined in subsection (d)(6)(B)), then the amounts which the trust receives or accrues from such debtor shall not be excluded from the term “interest” by reason of being based on the income or profits of such debtor to the extent the amounts so received are attributable to qualified rents received or accrued by such debtor.

(g) Termination of election An election under subsection (c)(1) made by a corporation, trust, or association shall terminate if the corporation, trust, or association is not a real estate investment trust to which the provisions of this part apply for the taxable year with respect to which the election is made, or for any succeeding taxable year unless paragraph (5) applies. Such termination shall be effective for the taxable year for which the corporation, trust, or association is not a real estate investment trust to which the provisions of this part apply, and for all succeeding taxable years. An election under subsection (c)(1) made by a corporation, trust, or association may be revoked by it for any taxable year after the first taxable year for which the election is effective. A revocation under this paragraph shall be effective for the taxable year in which made and for all succeeding taxable years. Such revocation must be made on or before the 90th day after the first day of the first taxable year for which the revocation is to be effective. Such revocation shall be made in such manner as the Secretary shall prescribe by regulations. Except as provided in paragraph (4), if a corporation, trust, or association has made an election under subsection (c)(1) and such election has been terminated or revoked under paragraph (1) or paragraph (2), such corporation, trust, or association (and any successor corporation, trust, or association) shall not be eligible to make an election under subsection (c)(1) for any taxable year prior to the fifth taxable year which begins after the first taxable year for which such termination or revocation is effective. If the election of a corporation, trust, or association has been terminated under paragraph (1), paragraph (3) shall not apply if— the corporation, trust, or association does not willfully fail to file within the time prescribed by law an income tax return for the taxable year with respect to which the termination of the election under subsection (c)(1) occurs; the inclusion of any incorrect information in the return referred to in subparagraph (A) is not due to fraud with intent to evade tax; and the corporation, trust, or association establishes to the satisfaction of the Secretary that its failure to qualify as a real estate investment trust to which the provisions of this part apply is due to reasonable cause and not due to willful neglect. This paragraph applies to a corporation, trust, or association— which is not a real estate investment trust to which the provisions of this part apply for the taxable year due to one or more failures to comply with one or more of the provisions of this part (other than paragraph (2), (3), or (4) of subsection (c)), such failures are due to reasonable cause and not due to willful neglect, and if such corporation, trust, or association pays (as prescribed by the Secretary in regulations and in the same manner as tax) a penalty of $50,000 for each failure to satisfy a provision of this part due to reasonable cause and not willful neglect.

(h) Closely held determinations For purposes of subsection (a)(6), a corporation, trust, or association is closely held if the stock ownership requirement of section 542(a)(2) is met. For purposes of subparagraph (A)— paragraph (2) of section 544(a) shall be applied as if such paragraph did not contain the phrase “or by or for his partner”, and sections 544(a)(4)(A) and 544(b)(1) shall be applied by substituting “the entity meet the stock ownership requirement of section 542(a)(2)” for “the corporation a personal holding company”. Paragraphs (5) and (6) of subsection (a) shall not apply to the 1st taxable year for which an election is made under subsection (c)(1) by any corporation, trust, or association. Except as provided in clause (ii), in determining whether the stock ownership requirement of section 542(a)(2) is met for purposes of paragraph (1)(A), any stock held by a qualified trust shall be treated as held directly by its beneficiaries in proportion to their actuarial interests in such trust and shall not be treated as held by such trust. Clause (i) shall not apply to any qualified trust if one or more disqualified persons (as defined in section 4975(e)(2), without regard to subparagraphs (B) and (I) thereof) with respect to such qualified trust hold in the aggregate 5 percent or more in value of the interests in the real estate investment trust and such real estate investment trust has accumulated earnings and profits attributable to any period for which it did not qualify as a real estate investment trust. If any entity qualifies as a real estate investment trust for any taxable year by reason of subparagraph (A), such entity shall not be treated as a personal holding company for such taxable year for purposes of part II of subchapter G of this chapter. If any qualified trust holds more than 10 percent (by value) of the interests in any pension-held REIT at any time during a taxable year, the trust shall be treated as having for such taxable year gross income from an unrelated trade or business in an amount which bears the same ratio to the aggregate dividends paid (or treated as paid) by the REIT to the trust for the taxable year of the REIT with or within which the taxable year of the trust ends (the “REIT year”) as— the gross income (less direct expenses related thereto) of the REIT for the REIT year from unrelated trades or businesses (determined as if the REIT were a qualified trust), bears to the gross income (less direct expenses related thereto) of the REIT for the REIT year. This subparagraph shall apply only if the ratio determined under the preceding sentence is at least 5 percent. The purposes of subparagraph (C)— A real estate investment trust is a pension-held REIT if such trust would not have qualified as a real estate investment trust but for the provisions of this paragraph and if such trust is predominantly held by qualified trusts. For purposes of clause (i), a real estate investment trust is predominantly held by qualified trusts if— at least 1 qualified trust holds more than 25 percent (by value) of the interests in such real estate investment trust, or 1 or more qualified trusts (each of whom own more than 10 percent by value of the interests in such real estate investment trust) hold in the aggregate more than 50 percent (by value) of the interests in such real estate investment trust. For purposes of this paragraph, the term “qualified trust” means any trust described in section 401(a) and exempt from tax under section 501(a).

(i) Treatment of certain wholly owned subsidiaries For purposes of this title— a corporation which is a qualified REIT subsidiary shall not be treated as a separate corporation, and all assets, liabilities, and items of income, deduction, and credit of a qualified REIT subsidiary shall be treated as assets, liabilities, and such items (as the case may be) of the real estate investment trust. For purposes of this subsection, the term “qualified REIT subsidiary” means any corporation if 100 percent of the stock of such corporation is held by the real estate investment trust. Such term shall not include a taxable REIT subsidiary. For purposes of this subtitle, if any corporation which was a qualified REIT subsidiary ceases to meet the requirements of paragraph (2), such corporation shall be treated as a new corporation acquiring all of its assets (and assuming all of its liabilities) immediately before such cessation from the real estate investment trust in exchange for its stock.

(j) Treatment of shared appreciation mortgages Solely for purposes of subsection (c) of this section and section 857(b)(6), any income derived from a shared appreciation provision shall be treated as gain recognized on the sale of the secured property. For purposes of applying subsection (c) of this section and section 857(b)(6) to any income described in paragraph (1)— the real estate investment trust shall be treated as holding the secured property for the period during which it held the shared appreciation provision (or, if shorter, for the period during which the secured property was held by the person holding such property), and the secured property shall be treated as property described in section 1221(a)(1) if it is so described in the hands of the person holding the secured property (or it would be so described if held by the real estate investment trust). For purposes of section 857(b)(6)(C)— the real estate investment trust shall be treated as having sold the secured property when it recognizes any income described in paragraph (1), and any expenditures made by any holder of the secured property shall be treated as made by the real estate investment trust. For purposes of section 857(b)(6)(C), if a real estate investment trust is treated as having sold secured property under paragraph (3)(A), the trust shall be treated as having held such property for at least 4 years if— the secured property is sold or otherwise disposed of pursuant to a case under title 11 of the United States Code, the seller is under the jurisdiction of the court in such case, and the disposition is required by the court or is pursuant to a plan approved by the court. Subparagraph (A) shall not apply if— the secured property was acquired by the seller with the intent to evict or foreclose, or the trust knew or had reason to know that default on the obligation described in paragraph (5)(A) would occur. For purposes of this subsection— The term “shared appreciation provision” means any provision— which is in connection with an obligation which is held by the real estate investment trust and is secured by an interest in real property, and which entitles the real estate investment trust to receive a specified portion of any gain realized on the sale or exchange of such real property (or of any gain which would be realized if the property were sold on a specified date) or appreciation in value as of any specified date. The term “secured property” means the real property referred to in subparagraph (A).

(k) Requirement that entity not be closely held treated as met in certain cases A corporation, trust, or association— which for a taxable year meets the requirements of section 857(f)(1), and which does not know, or exercising reasonable diligence would not have known, whether the entity failed to meet the requirement of subsection (a)(6), shall be treated as having met the requirement of subsection (a)(6) for the taxable year.

(l) Taxable REIT subsidiary For purposes of this part— The term “taxable REIT subsidiary” means, with respect to a real estate investment trust, a corporation (other than a real estate investment trust) if— such trust directly or indirectly owns stock in such corporation, and such trust and such corporation jointly elect that such corporation shall be treated as a taxable REIT subsidiary of such trust for purposes of this part. Such an election, once made, shall be irrevocable unless both such trust and corporation consent to its revocation. Such election, and any revocation thereof, may be made without the consent of the Secretary. The term “taxable REIT subsidiary” includes, with respect to any real estate investment trust, any corporation (other than a real estate investment trust) with respect to which a taxable REIT subsidiary of such trust owns directly or indirectly— securities possessing more than 35 percent of the total voting power of the outstanding securities of such corporation, or securities having a value of more than 35 percent of the total value of the outstanding securities of such corporation. The preceding sentence shall not apply to a qualified REIT subsidiary (as defined in subsection (i)(2)). For purposes of subparagraph (B), securities described in subsection (m)(2)(A) shall not be taken into account. The term “taxable REIT subsidiary” shall not include— any corporation which directly or indirectly operates or manages a lodging facility or a health care facility, and any corporation which directly or indirectly provides to any other person (under a franchise, license, or otherwise) rights to any brand name under which any lodging facility or health care facility is operated. Subparagraph (B) shall not apply to rights provided to an eligible independent contractor to operate or manage a lodging facility or a health care facility if such rights are held by such corporation as a franchisee, licensee, or in a similar capacity and such lodging facility or health care facility is either owned by such corporation or is leased to such corporation from the real estate investment trust. For purposes of paragraph (3)— The term “lodging facility” has the meaning given to such term by subsection (d)(9)(D)(ii). The term “health care facility” has the meaning given to such term by subsection (e)(6)(D)(ii).

(m) Safe harbor in applying subsection (c)(4) In applying subclause (III) of subsection (c)(4)(B)(iv), except as otherwise determined by the Secretary in regulations, the following shall not be considered securities held by the trust: Straight debt securities of an issuer which meet the requirements of paragraph (2). Any loan to an individual or an estate. Any section 467 rental agreement (as defined in section 467(d)), other than with a person described in subsection (d)(2)(B). Any obligation to pay rents from real property (as defined in subsection (d)(1)). Any security issued by a State or any political subdivision thereof, the District of Columbia, a foreign government or any political subdivision thereof, or the Commonwealth of Puerto Rico, but only if the determination of any payment received or accrued under such security does not depend in whole or in part on the profits of any entity not described in this subparagraph or payments on any obligation issued by such an entity, Any security issued by a real estate investment trust. Any other arrangement as determined by the Secretary. For purposes of paragraph (1)(A), securities meet the requirements of this paragraph if such securities are straight debt, as defined in section 1361(c)(5) (without regard to subparagraph (B)(iii) thereof). For purposes of subparagraph (A), any interest or principal shall not be treated as failing to satisfy section 1361(c)(5)(B)(i) solely by reason of the fact that— the time of payment of such interest or principal is subject to a contingency, but only if— any such contingency does not have the effect of changing the effective yield to maturity, as determined under section 1272, other than a change in the annual yield to maturity which does not exceed the greater of ¼ of 1 percent or 5 percent of the annual yield to maturity, or neither the aggregate issue price nor the aggregate face amount of the issuer’s debt instruments held by the trust exceeds $1,000,000 and not more than 12 months of unaccrued interest can be required to be prepaid thereunder, or the time or amount of payment is subject to a contingency upon a default or the exercise of a prepayment right by the issuer of the debt, but only if such contingency is consistent with customary commercial practice. In the case of an issuer which is a corporation or a partnership, securities that otherwise would be described in paragraph (1)(A) shall be considered not to be so described if the trust holding such securities and any of its controlled taxable REIT subsidiaries (as defined in subsection (d)(8)(A)(iv)) hold any securities of the issuer which— are not described in paragraph (1) (prior to the application of this subparagraph), and have an aggregate value greater than 1 percent of the issuer’s outstanding securities determined without regard to paragraph (3)(A)(i). For purposes of applying subclause (III) of subsection (c)(4)(B)(iv)— a trust’s interest as a partner in a partnership (as defined in section 7701(a)(2)) shall not be considered a security, and the trust shall be deemed to own its proportionate share of each of the assets of the partnership. For purposes of subparagraph (A), with respect to any taxable year beginning after the date of the enactment of this subparagraph— the trust’s interest in the partnership assets shall be the trust’s proportionate interest in any securities issued by the partnership (determined without regard to subparagraph (A)(i) and paragraph (4), but not including securities described in paragraph (1)), and the value of any debt instrument shall be the adjusted issue price thereof, as defined in section 1272(a)(4). For purposes of applying subclause (III) of subsection (c)(4)(B)(iv)— any debt instrument issued by a partnership and not described in paragraph (1) shall not be considered a security to the extent of the trust’s interest as a partner in the partnership, and any debt instrument issued by a partnership and not described in paragraph (1) shall not be considered a security if at least 75 percent of the partnership’s gross income (excluding gross income from prohibited transactions) is derived from sources referred to in subsection (c)(3). The Secretary is authorized to provide guidance (including through the issuance of a written determination, as defined in section 6110(b)) that an arrangement shall not be considered a security held by the trust for purposes of applying subclause (III) of subsection (c)(4)(B)(iv) notwithstanding that such arrangement otherwise could be considered a security under subparagraph (F) of subsection (c)(5).

(n) Rules regarding foreign currency transactions For purposes of this part— passive foreign exchange gain for any taxable year shall not constitute gross income for purposes of subsection (c)(2), and real estate foreign exchange gain for any taxable year shall not constitute gross income for purposes of subsection (c)(3). For purposes of this subsection, the term “real estate foreign exchange gain” means— foreign currency gain (as defined in section 988(b)(1)) which is attributable to— any item of income or gain described in subsection (c)(3), the acquisition or ownership of obligations secured by mortgages on real property or on interests in real property (other than foreign currency gain attributable to any item of income or gain described in clause (i)), or becoming or being the obligor under obligations secured by mortgages on real property or on interests in real property (other than foreign currency gain attributable to any item of income or gain described in clause (i)), section 987 gain attributable to a qualified business unit (as defined by section 989) of the real estate investment trust, but only if such qualified business unit meets the requirements under— subsection (c)(3) for the taxable year, and subsection (c)(4)(A) at the close of each quarter that the real estate investment trust has directly or indirectly held the qualified business unit, and any other foreign currency gain as determined by the Secretary. For purposes of this subsection, the term “passive foreign exchange gain” means— real estate foreign exchange gain, foreign currency gain (as defined in section 988(b)(1)) which is not described in subparagraph (A) and which is attributable to— any item of income or gain described in subsection (c)(2), the acquisition or ownership of obligations (other than foreign currency gain attributable to any item of income or gain described in clause (i)), or becoming or being the obligor under obligations (other than foreign currency gain attributable to any item of income or gain described in clause (i)), and any other foreign currency gain as determined by the Secretary. Notwithstanding this subsection or any other provision of this part, any section 988 gain derived by a corporation, trust, or association from dealing, or engaging in substantial and regular trading, in securities (as defined in section 475(c)(2)) shall constitute gross income which does not qualify under paragraph (2) or (3) of subsection (c). This paragraph shall not apply to income which does not constitute gross income by reason of subsection (c)(5)(G).

§ 857 Taxation of real estate investment trusts and their beneficiaries

(a) Requirements applicable to real estate investment trusts The provisions of this part (other than subsection (d) of this section and subsection (g) of section 856) shall not apply to a real estate investment trust for a taxable year unless— the deduction for dividends paid during the taxable year (as defined in section 561, but determined without regard to capital gains dividends) equals or exceeds— the sum of— 90 percent of the real estate investment trust taxable income for the taxable year (determined without regard to the deduction for dividends paid (as defined in section 561) and by excluding any net capital gain); and 90 percent of the excess of the net income from foreclosure property over the tax imposed on such income by subsection (b)(4)(A); minus any excess noncash income (as determined under subsection (e)); and either— the provisions of this part apply to the real estate investment trust for all taxable years beginning after February 28, 1986 , or as of the close of the taxable year, the real estate investment trust has no earnings and profits accumulated in any non-REIT year. For purposes of the preceding sentence, the term “non-REIT year” means any taxable year to which the provisions of this part did not apply with respect to the entity. The Secretary may waive the requirements of paragraph (1) for any taxable year if the real estate investment trust establishes to the satisfaction of the Secretary that it was unable to meet such requirements by reason of distributions previously made to meet the requirements of section 4981.

(b) Method of taxation of real estate investment trusts and holders of shares or certificates of beneficial interest There is hereby imposed for each taxable year on the real estate investment trust taxable income of every real estate investment trust a tax computed as provided in section 11, as though the real estate investment trust taxable income were the taxable income referred to in section 11. For purposes of this part, the term “real estate investment trust taxable income” means the taxable income of the real estate investment trust, adjusted as follows: The deductions for corporations provided in part VIII (except section 248) of subchapter B (section 241 and following, relating to the deduction for dividends received, etc.) shall not be allowed. The deduction for dividends paid (as defined in section 561) shall be allowed, but shall be computed without regard to that portion of such deduction which is attributable to the amount excluded under subparagraph (D). The taxable income shall be computed without regard to section 443(b) (relating to computation of tax on change of annual accounting period). There shall be excluded an amount equal to the net income from foreclosure property. There shall be deducted an amount equal to the tax imposed by paragraphs (5) and (7) of this subsection, section 856(c)(7)(C), and section 856(g)(5) for the taxable year. There shall be excluded an amount equal to any net income derived from prohibited transactions. A capital gain dividend shall be treated by the shareholders or holders of beneficial interests as a gain from the sale or exchange of a capital asset held for more than 1 year. For purposes of this part, a capital gain dividend is any dividend, or part thereof, which is designated by the real estate investment trust as a capital gain dividend in a written notice mailed to its shareholders or holders of beneficial interests at any time before the expiration of 30 days after the close of its taxable year (or mailed to its shareholders or holders of beneficial interests with its annual report for the taxable year); except that, if there is an increase in the excess described in subparagraph (A)(ii) of this paragraph for such year which results from a determination (as defined in section 860(e)), such designation may be made with respect to such increase at any time before the expiration of 120 days after the date of such determination. If the aggregate amount so designated with respect to a taxable year of the trust (including capital gain dividends paid after the close of the taxable year described in section 858) is greater than the net capital gain of the taxable year, the portion of each distribution which shall be a capital gain dividend shall be only that proportion of the amount so designated which such net capital gain bears to the aggregate amount so designated. For purposes of this subparagraph, the amount of the net capital gain for any taxable year which is not a calendar year shall be determined without regard to any net capital loss attributable to transactions after December 31 of such year, and any such net capital loss shall be treated as arising on the 1st day of the next taxable year. To the extent provided in regulations, the preceding sentence shall apply also for purposes of computing the taxable income of the real estate investment trust. Every shareholder of a real estate investment trust at the close of the trust’s taxable year shall include, in computing his long-term capital gains in his return for his taxable year in which the last day of the trust’s taxable year falls, such amount as the trust shall designate in respect of such shares in a written notice mailed to its shareholders at any time prior to the expiration of 60 days after the close of its taxable year (or mailed to its shareholders or holders of beneficial interests with its annual report for the taxable year), but the amount so includible by any shareholder shall not exceed that part of the amount subjected to tax in paragraph (1) which he would have received if all of such amount had been distributed as capital gain dividends by the trust to the holders of such shares at the close of its taxable year. For purposes of this title, every such shareholder shall be deemed to have paid, for his taxable year under clause (i), the tax imposed by paragraph (1) on undistributed capital gain on the amounts required by this subparagraph to be included in respect of such shares in computing his long-term capital gains for that year; and such shareholders shall be allowed credit or refund as the case may be, for the tax so deemed to have been paid by him. The adjusted basis of such shares in the hands of the holder shall be increased with respect to the amounts required by this subparagraph to be included in computing his long-term capital gains, by the difference between the amount of such includible gains and the tax deemed paid by such shareholder in respect of such shares under clause (ii). In the event of such designation, the tax imposed by paragraph (1) on undistributed capital gain shall be paid by the real estate investment trust within 30 days after the close of its taxable year. The earnings and profits of such real estate investment trust, and the earnings and profits of any such shareholder which is a corporation, shall be appropriately adjusted in accordance with regulations prescribed by the Secretary. As used in this subparagraph, the terms “shares” and “shareholders” shall include beneficial interests and holders of beneficial interests, respectively. For purposes of section 172, if a real estate investment trust pays capital gain dividends during any taxable year, the amount of the net capital gain for such taxable year (to the extent such gain does not exceed the amount of such capital gain dividends) shall be excluded in determining— the net operating loss for the taxable year, and the amount of the net operating loss of any prior taxable year which may be carried through such taxable year under section 172(b)(2) to a succeeding taxable year. In the case of a shareholder of a real estate investment trust to whom section 897 does not apply by reason of the second sentence of section 897(h)(1) or subparagraph (A)(ii) or (C) of section 897(k)(2), the amount which would be included in computing long-term capital gains for such shareholder under subparagraph (A) or (C) (without regard to this subparagraph)— shall not be included in computing such shareholder’s long-term capital gains, and shall be included in such shareholder’s gross income as a dividend from the real estate investment trust. For purposes of this paragraph, the term “undistributed capital gain” means the excess of the net capital gain over the deduction for dividends paid (as defined in section 561) determined with reference to capital gain dividends only. A tax is hereby imposed for each taxable year on the net income from foreclosure property of every real estate investment trust. Such tax shall be computed by multiplying the net income from foreclosure property by the highest rate of tax specified in section 11(b). For purposes of this part, the term “net income from foreclosure property” means the excess of— gain (including any foreign currency gain, as defined in section 988(b)(1)) from the sale or other disposition of foreclosure property described in section 1221(a)(1) and the gross income for the taxable year derived from foreclosure property (as defined in section 856(e)), but only to the extent such gross income is not described in (or, in the case of foreign currency gain, not attributable to gross income described in) section 856(c)(3) other than subparagraph (F) thereof, over the deductions allowed by this chapter which are directly connected with the production of the income referred to in clause (i). If section 856(c)(6) applies to a real estate investment trust for any taxable year, there is hereby imposed on such trust a tax in an amount equal to the greater of— the excess of— 95 percent of the gross income (excluding gross income from prohibited transactions) of the real estate investment trust, over the amount of such gross income which is derived from sources referred to in section 856(c)(2); or the excess of— 75 percent of the gross income (excluding gross income from prohibited transactions) of the real estate investment trust, over the amount of such gross income which is derived from sources referred to in section 856(c)(3), multiplied by a fraction the numerator of which is the real estate investment trust taxable income for the taxable year (determined without regard to the deductions provided in paragraphs (2)(B) and (2)(E), without regard to any net operating loss deduction, and by excluding any net capital gain) and the denominator of which is the gross income for the taxable year (excluding gross income from prohibited transactions; gross income and gain from foreclosure property (as defined in section 856(e), but only to the extent such gross income and gain is not described in subparagraph (A), (B), (C), (D), (E), or (G) of section 856(c)(3)); long-term capital gain; and short-term capital gain to the extent of any short-term capital loss). There is hereby imposed for each taxable year of every real estate investment trust a tax equal to 100 percent of the net income derived from prohibited transactions. For purposes of this part— the term “net income derived from prohibited transactions” means the excess of the gain (including any foreign currency gain, as defined in section 988(b)(1)) from prohibited transactions over the deductions (including any foreign currency loss, as defined in section 988(b)(2)) allowed by this chapter which are directly connected with prohibited transactions; in determining the amount of the net income derived from prohibited transactions, there shall not be taken into account any item attributable to any prohibited transaction for which there was a loss; and the term “prohibited transaction” means a sale or other disposition of property described in section 1221(a)(1) which is not foreclosure property. For purposes of this part, the term “prohibited transaction” does not include a sale of property which is a real estate asset (as defined in section 856(c)(5)(B)) if— the trust has held the property for not less than 2 years; aggregate expenditures made by the trust, or any partner of the trust, during the 2-year period preceding the date of sale which are includible in the basis of the property do not exceed 30 percent of the net selling price of the property; during the taxable year the trust does not make more than 7 sales of property (other than sales of foreclosure property or sales to which section 1033 applies), or (II) the aggregate adjusted bases (as determined for purposes of computing earnings and profits) of property (other than sales of foreclosure property or sales to which section 1033 applies) sold during the taxable year does not exceed 10 percent of the aggregate bases (as so determined) of all of the assets of the trust as of the beginning of the taxable year, or (III) the fair market value of property (other than sales of foreclosure property or sales to which section 1033 applies) sold during the taxable year does not exceed 10 percent of the fair market value of all of the assets of the trust as of the beginning of the taxable year, or (IV) the trust satisfies the requirements of subclause (II) applied by substituting “20 percent” for “10 percent” and the 3-year average adjusted bases percentage for the taxable year (as defined in subparagraph (G)) does not exceed 10 percent, or (V) the trust satisfies the requirements of subclause (III) applied by substituting “20 percent” for “10 percent” and the 3-year average fair market value percentage for the taxable year (as defined in subparagraph (H)) does not exceed 10 percent; in the case of property, which consists of land or improvements, not acquired through foreclosure (or deed in lieu of foreclosure), or lease termination, the trust has held the property for not less than 2 years for production of rental income; and if the requirement of clause (iii)(I) is not satisfied, substantially all of the marketing and development expenditures with respect to the property were made through an independent contractor (as defined in section 856(d)(3)) from whom the trust itself does not derive or receive any income or a taxable REIT subsidiary. For purposes of this part, the term “prohibited transaction” does not include a sale of property which is a real estate asset (as defined in section 856(c)(5)(B)) if— the trust held the property for not less than 2 years in connection with the trade or business of producing timber, the aggregate expenditures made by the trust, or a partner of the trust, during the 2-year period preceding the date of sale which— are includible in the basis of the property (other than timberland acquisition expenditures), and are directly related to operation of the property for the production of timber or for the preservation of the property for use as timberland, do not exceed 30 percent of the net selling price of the property, the aggregate expenditures made by the trust, or a partner of the trust, during the 2-year period preceding the date of sale which— are includible in the basis of the property (other than timberland acquisition expenditures), and are not directly related to operation of the property for the production of timber, or for the preservation of the property for use as timberland, do not exceed 5 percent of the net selling price of the property, during the taxable year the trust does not make more than 7 sales of property (other than sales of foreclosure property or sales to which section 1033 applies), or the aggregate adjusted bases (as determined for purposes of computing earnings and profits) of property (other than sales of foreclosure property or sales to which section 1033 applies) sold during the taxable year does not exceed 10 percent of the aggregate bases (as so determined) of all of the assets of the trust as of the beginning of the taxable year, or the fair market value of property (other than sales of foreclosure property or sales to which section 1033 applies) sold during the taxable year does not exceed 10 percent of the fair market value of all of the assets of the trust as of the beginning of the taxable year, or the trust satisfies the requirements of subclause (II) applied by substituting “20 percent” for “10 percent” and the 3-year average adjusted bases percentage for the taxable year (as defined in subparagraph (G)) does not exceed 10 percent, or the trust satisfies the requirements of subclause (III) applied by substituting “20 percent” for “10 percent” and the 3-year average fair market value percentage for the taxable year (as defined in subparagraph (H)) does not exceed 10 percent, in the case that the requirement of clause (iv)(I) is not satisfied, substantially all of the marketing expenditures with respect to the property were made through an independent contractor (as defined in section 856(d)(3)) from whom the trust itself does not derive or receive any income, or a taxable REIT subsidiary, and the sales price of the property sold by the trust is not based in whole or in part on income or profits, including income or profits derived from the sale or operation of such property. In applying subparagraphs (C) and (D) the following special rules apply: The holding period of property acquired through foreclosure (or deed in lieu of foreclosure), or termination of the lease, includes the period for which the trust held the loan which such property secured, or the lease of such property. In the case of a property acquired through foreclosure (or deed in lieu of foreclosure), or termination of a lease, expenditures made by, or for the account of, the mortgagor or lessee after default became imminent will be regarded as made by the trust. Expenditures (including expenditures regarded as made directly by the trust, or indirectly by any partner of the trust, under clause (ii)) will not be taken into account if they relate to foreclosure property and did not cause the property to lose its status as foreclosure property. Expenditures will not be taken into account if they are made solely to comply with standards or requirements of any government or governmental authority having relevant jurisdiction, or if they are made to restore the property as a result of losses arising from fire, storm or other casualty. The term “expenditures” does not include advances on a loan made by the trust. The sale of more than one property to one buyer as part of one transaction constitutes one sale. The term “sale” does not include any transaction in which the net selling price is less than $10,000. The determination of whether property is described in section 1221(a)(1) shall be made without regard to this paragraph. The term “3-year average adjusted bases percentage” means, with respect to any taxable year, the ratio (expressed as a percentage) of— the aggregate adjusted bases (as determined for purposes of computing earnings and profits) of property (other than sales of foreclosure property or sales to which section 1033 applies) sold during the 3 taxable year period ending with such taxable year, divided by the sum of the aggregate adjusted bases (as so determined) of all of the assets of the trust as of the beginning of each of the 3 taxable years which are part of the period referred to in clause (i). The term “3-year average fair market value percentage” means, with respect to any taxable year, the ratio (expressed as a percentage) of— the fair market value of property (other than sales of foreclosure property or sales to which section 1033 applies) sold during the 3 taxable year period ending with such taxable year, divided by the sum of the fair market value of all of the assets of the trust as of the beginning of each of the 3 taxable years which are part of the period referred to in clause (i). In the case of a sale on or before the termination date, the sale of property which is not a prohibited transaction through the application of subparagraph (D) shall be considered property held for investment or for use in a trade or business and not property described in section 1221(a)(1) for all purposes of this subtitle. For purposes of the preceding sentence, the reference to subparagraph (D) shall be a reference to such subparagraph as in effect on the day before the enactment of the Housing Assistance Tax Act of 2008, as modified by subparagraph (G) as so in effect. For purposes of this paragraph, the term “termination date” has the meaning given such term by section 856(c)(10). There is hereby imposed for each taxable year of the real estate investment trust a tax equal to 100 percent of redetermined rents, redetermined deductions, excess interest, and redetermined TRS service income. The term “redetermined rents” means rents from real property (as defined in section 856(d)) to the extent the amount of the rents would (but for subparagraph (F)) be reduced on distribution, apportionment, or allocation under section 482 to clearly reflect income as a result of services furnished or rendered by a taxable REIT subsidiary of the real estate investment trust to a tenant of such trust. Clause (i) shall not apply to amounts described in section 856(d)(7)(A) with respect to a property to the extent such amounts do not exceed the one percent threshold described in section 856(d)(7)(B) with respect to such property. Clause (i) shall not apply to any service rendered by a taxable REIT subsidiary of a real estate investment trust to a tenant of such trust if— such subsidiary renders a significant amount of similar services to persons other than such trust and tenants of such trust who are unrelated (within the meaning of section 856(d)(8)(F)) to such subsidiary, trust, and tenants, but only to the extent the charge for such service so rendered is substantially comparable to the charge for the similar services rendered to persons referred to in subclause (I). Clause (i) shall not apply to any service rendered by a taxable REIT subsidiary of a real estate investment trust to a tenant of such trust if— the rents paid to the trust by tenants (leasing at least 25 percent of the net leasable space in the trust’s property) who are not receiving such service from such subsidiary are substantially comparable to the rents paid by tenants leasing comparable space who are receiving such service from such subsidiary, and the charge for such service from such subsidiary is separately stated. Clause (i) shall not apply to any service rendered by a taxable REIT subsidiary of a real estate investment trust to a tenant of such trust if the gross income of such subsidiary from such service is not less than 150 percent of such subsidiary’s direct cost in furnishing or rendering the service. The Secretary may waive the tax otherwise imposed by subparagraph (A) if the trust establishes to the satisfaction of the Secretary that rents charged to tenants were established on an arms’ length basis even though a taxable REIT subsidiary of the trust provided services to such tenants. The term “redetermined deductions” means deductions (other than redetermined rents) of a taxable REIT subsidiary of a real estate investment trust to the extent the amount of such deductions would (but for subparagraph (F)) be decreased on distribution, apportionment, or allocation under section 482 to clearly reflect income as between such subsidiary and such trust. The term “excess interest” means any deductions for interest payments by a taxable REIT subsidiary of a real estate investment trust to such trust to the extent that the interest payments are in excess of a rate that is commercially reasonable. The term “redetermined TRS service income” means gross income of a taxable REIT subsidiary of a real estate investment trust attributable to services provided to, or on behalf of, such trust (less deductions properly allocable thereto) to the extent the amount of such income (less such deductions) would (but for subparagraph (F)) be increased on distribution, apportionment, or allocation under section 482. Clause (i) shall not apply with respect to gross income attributable to services furnished or rendered to a tenant of the real estate investment trust (or to deductions properly allocable thereto). The imposition of tax under subparagraph (A) shall be in lieu of any distribution, apportionment, or allocation under section 482. The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this paragraph. Until the Secretary prescribes such regulations, real estate investment trusts and their taxable REIT subsidiaries may base their allocations on any reasonable method. If— subparagraph (B) or (D) of paragraph (3) provides that any amount with respect to any share or beneficial interest is to be treated as a long-term capital gain, and the taxpayer has held such share or interest for 6 months or less, then any loss on the sale or exchange of such share or interest shall, to the extent of the amount described in clause (i), be treated as a long-term capital loss. For purposes of this paragraph, in determining the period for which the taxpayer has held any share of stock or beneficial interest— the rules of paragraphs (3) and (4) of section 246(c) shall apply, and there shall not be taken into account any day which is more than 6 months after the date on which such share or interest becomes ex-dividend. To the extent provided in regulations, subparagraph (A) shall not apply to any loss incurred on the sale or exchange of shares of stock of, or beneficial interest in, a real estate investment trust pursuant to a plan which provides for the periodic liquidation of such shares or interests. For purposes of this title, any dividend declared by a real estate investment trust in October, November, or December of any calendar year and payable to shareholders of record on a specified date in such a month shall be deemed— to have been received by each shareholder on December 31 of such calendar year, and to have been paid by such trust on December 31 of such calendar year (or, if earlier, as provided in section 858). The preceding sentence shall apply only if such dividend is actually paid by the company during January of the following calendar year.

(c) Restrictions applicable to dividends received from real estate investment trusts For purposes of section 243 (relating to deductions for dividends received by corporations), a dividend received from a real estate investment trust which meets the requirements of this part shall not be considered a dividend. In any case in which— a dividend is received from a real estate investment trust (other than a capital gain dividend), and such trust meets the requirements of section 856(a) for the taxable year during which it paid such dividend, then, in computing qualified dividend income, there shall be taken into account only that portion of such dividend designated by the real estate investment trust. The aggregate amount which may be designated as qualified dividend income under subparagraph (A) shall not exceed the sum of— the qualified dividend income of the trust for the taxable year, the excess of— the sum of the real estate investment trust taxable income computed under section 857(b)(2) for the preceding taxable year and the income subject to tax by reason of the application of the regulations under section 337(d) for such preceding taxable year, over the sum of the taxes imposed on the trust for such preceding taxable year under section 857(b)(1) and by reason of the application of such regulations, and the amount of any earnings and profits which were distributed by the trust for such taxable year and accumulated in a taxable year with respect to which this part did not apply. The amount of any distribution by a real estate investment trust which may be taken into account as qualified dividend income shall not exceed the amount so designated by the trust in a written notice to its shareholders mailed not later than 60 days after the close of its taxable year. For purposes of this paragraph, the term “qualified dividend income” has the meaning given such term by section 1(h)(11)(B).

(d) Earnings and profits The earnings and profits of a real estate investment trust for any taxable year (but not its accumulated earnings) shall not be reduced by any amount which— is not allowable in computing its taxable income for such taxable year, and was not allowable in computing its taxable income for any prior taxable year. A real estate investment trust shall be treated as having sufficient earnings and profits to treat as a dividend any distribution (other than in a redemption to which section 302(a) applies) which is treated as a dividend by such trust. The preceding sentence shall not apply to the extent that the amount distributed during any calendar year by the trust exceeds the required distribution for such calendar year (as determined under section 4981). Any distribution which is made in order to comply with the requirements of subsection (a)(2)(B)— shall be treated for purposes of this subsection and subsection (a)(2)(B) as made from earnings and profits which, but for the distribution, would result in a failure to meet such requirements (and allocated to such earnings on a first-in, first-out basis), and to the extent treated under subparagraph (A) as made from accumulated earnings and profits, shall not be treated as a distribution for purposes of subsection (b)(2)(B) and section 858. For purposes of this subsection, the term “real estate investment trust” includes a domestic corporation, trust, or association which is a real estate investment trust determined without regard to the requirements of subsection (a). For special rules for determining the earnings and profits of a real estate investment trust for purposes of the deduction for dividends paid, see section 562(e)(1).

(e) Excess noncash income For purposes of subsection (a)(1)(B), the term “excess noncash income” means the excess (if any) of— the amount determined under paragraph (2) for the taxable year, over 5 percent of the real estate investment trust taxable income for the taxable year determined without regard to the deduction for dividends paid (as defined in section 561) and by excluding any net capital gain. The amount determined under this paragraph for the taxable year is the sum of— the amount (if any) by which— the amounts includible in gross income under section 467 (relating to certain payments for the use of property or services), exceed the amounts which would have been includible in gross income without regard to such section, any income on the disposition of a real estate asset if— there is a determination (as defined in section 860(e)) that such income is not eligible for nonrecognition under section 1031, and failure to meet the requirements of section 1031 was due to reasonable cause and not to willful neglect, the amount (if any) by which— the amounts includible in gross income with respect to instruments to which section 860E(a) or 1272 applies, exceed the amount of money and the fair market value of other property received during the taxable year under such instruments, and amounts includible in income by reason of cancellation of indebtedness.

(f) Real estate investment trusts to ascertain ownership Each real estate investment trust shall each taxable year comply with regulations prescribed by the Secretary for the purposes of ascertaining the actual ownership of the outstanding shares, or certificates of beneficial interest, of such trust. If a real estate investment trust fails to comply with the requirements of paragraph (1) for a taxable year, such trust shall pay (on notice and demand by the Secretary and in the same manner as tax) a penalty of $25, 000. I f an y f ai l u re u n d er p a r a g r a p h (1) i s d u e t o in t e n t i o na l d i sre g a r d o f t h ere q u i re m e n t u n d er p a r a g r a p h (1), t h e p e na lt y u n d ers u b p a r a g r a p h (A) s ha ll b e$ 50,000. The Secretary may require a real estate investment trust to take such actions as the Secretary determines appropriate to ascertain actual ownership if the trust fails to meet the requirements of paragraph (1). If the trust fails to take such actions, the trust shall pay (on notice and demand by the Secretary and in the same manner as tax) an additional penalty equal to the penalty determined under subparagraph (A) or (B), whichever is applicable. No penalty shall be imposed under this paragraph with respect to any failure if it is shown that such failure is due to reasonable cause and not to willful neglect.

(g) Limitations on designation of dividends The aggregate amount of dividends designated by a real estate investment trust under subsections (b)(3)(C) and (c)(2)(A) with respect to any taxable year may not exceed the dividends paid by such trust with respect to such year. For purposes of the preceding sentence, dividends paid after the close of the taxable year described in section 858 shall be treated as paid with respect to such year. The Secretary may prescribe regulations or other guidance requiring the proportionality of the designation of particular types of dividends among shares or beneficial interests of a real estate investment trust.

(h) Cross reference For provisions relating to excise tax based on certain real estate investment trust taxable income not distributed during the taxable year, see section 4981.

§ 858 Dividends paid by real estate investment trust after close of taxable year

(a) General rule For purposes of this part, if a real estate investment trust— declares a dividend before the time prescribed by law for the filing of its return for a taxable year (including the period of any extension of time granted for filing such return), and distributes the amount of such dividend to shareholders or holders of beneficial interests in the 12-month period following the close of such taxable year and not later than the date of the first regular dividend payment made after such declaration, the amount so declared and distributed shall, to the extent the trust elects in such return (and specifies in dollar amounts) in accordance with regulations prescribed by the Secretary, be considered as having been paid only during such taxable year, except as provided in subsections (b) and (c).

(b) Receipt by shareholder Except as provided in section 857(b)(9), amounts to which subsection (a) applies shall be treated as received by the shareholder or holder of a beneficial interest in the taxable year in which the distribution is made.

(c) Notice to shareholders In the case of amounts to which subsection (a) applies, any notice to shareholders or holders of beneficial interests required under this part with respect to such amounts shall be made not later than 30 days after the close of the taxable year in which the distribution is made (or mailed to its shareholders or holders of beneficial interests with its annual report for the taxable year).

§ 859 Adoption of annual accounting period

(a) General rule For purposes of this subtitle— a real estate investment trust shall not change to any accounting period other than the calendar year, and a corporation, trust, or association may not elect to be a real estate investment trust for any taxable year beginning after October 4, 1976 , unless its accounting period is the calendar year. Paragraph (2) shall not apply to a corporation, trust, or association which was considered to be a real estate investment trust for any taxable year beginning on or before October 4, 1976 .

(b) Change of accounting period without approval Notwithstanding section 442, an entity which has not engaged in any active trade or business may change its accounting period to a calendar year without the approval of the Secretary if such change is in connection with an election under section 856(c).

§ 860 Deduction for deficiency dividends

(a) General rule If a determination with respect to any qualified investment entity results in any adjustment for any taxable year, a deduction shall be allowed to such entity for the amount of deficiency dividends for purposes of determining the deduction for dividends paid (for purposes of section 852 or 857, whichever applies) for such year.

(b) Qualified investment entity defined For purposes of this section, the term “qualified investment entity” means— a regulated investment company, and a real estate investment trust.

(c) Rules for application of section For purposes of determining interest, additions to tax, and additional amounts— the tax imposed by this chapter (after taking into account the deduction allowed by subsection (a)) on the qualified investment entity for the taxable year with respect to which the determination is made shall be deemed to be increased by an amount equal to the deduction allowed by subsection (a) with respect to such taxable year, the last date prescribed for payment of such increase in tax shall be deemed to have been the last date prescribed for the payment of tax (determined in the manner provided by section 6601(b)) for the taxable year with respect to which the determination is made, and such increase in tax shall be deemed to be paid as of the date the claim for the deficiency dividend deduction is filed. If the allowance of a deficiency dividend deduction results in an overpayment of tax for any taxable year, credit or refund with respect to such overpayment shall be made as if on the date of the determination 2 years remained before the expiration of the period of limitations on the filing of claim for refund for the taxable year to which the overpayment relates.

(d) Adjustment For purposes of this section— In the case of any regulated investment company, the term “adjustment” means— any increase in the investment company taxable income of the regulated investment company (determined without regard to the deduction for dividends paid (as defined in section 561)), any increase in the amount of the excess described in section 852(b)(3)(A) (relating to the excess of the net capital gain over the deduction for capital gain dividends paid), and any decrease in the deduction for dividends paid (as defined in section 561) determined without regard to capital gains dividends. In the case of any real estate investment trust, the term “adjustment” means— any increase in the sum of— the real estate investment trust taxable income of the real estate investment trust (determined without regard to the deduction for dividends paid (as defined in section 561) and by excluding any net capital gain), and the excess of the net income from foreclosure property (as defined in section 857(b)(4)(B)) over the tax on such income imposed by section 857(b)(4)(A), any increase in the amount of the excess described in section 857(b)(3)(A)(ii) 1 (relating to the excess of the net capital gain over the deduction for capital gains dividends paid), and any decrease in the deduction for dividends paid (as defined in section 561) determined without regard to capital gains dividends.

(e) Determination For purposes of this section, the term “determination” means— a decision by the Tax Court, or a judgment, decree, or other order by any court of competent jurisdiction, which has become final; a closing agreement made under section 7121; under regulations prescribed by the Secretary, an agreement signed by the Secretary and by, or on behalf of, the qualified investment entity relating to the liability of such entity for tax; or a statement by the taxpayer attached to its amendment or supplement to a return of tax for the relevant tax year.

(f) Deficiency dividends For purposes of this section, the term “deficiency dividends” means a distribution of property made by the qualified investment entity on or after the date of the determination and before filing claim under subsection (g), which would have been includible in the computation of the deduction for dividends paid under section 561 for the taxable year with respect to which the liability for tax resulting from the determination exists if distributed during such taxable year. No distribution of property shall be considered as deficiency dividends for purposes of subsection (a) unless distributed within 90 days after the determination, and unless a claim for a deficiency dividend deduction with respect to such distribution is filed pursuant to subsection (g). The amount of deficiency dividends (other than deficiency dividends qualifying as capital gain dividends) paid by a qualified investment entity for the taxable year with respect to which the liability for tax resulting from the determination exists shall not exceed the sum of— the excess of the amount of increase referred to in subparagraph (A) of paragraph (1) or (2) of subsection (d) (whichever applies) over the amount of any increase in the deduction for dividends paid (computed without regard to capital gain dividends) for such taxable year which results from such determination, and the amount of decrease referred to in subparagraph (C) of paragraph (1) or (2) of subsection (d) (whichever applies). The amount of deficiency dividends qualifying as capital gain dividends paid by a qualified investment entity for the taxable year with respect to which the liability for tax resulting from the determination exists shall not exceed the amount by which (i) the increase referred to in subparagraph (B) of paragraph (1) or (2) of subsection (d) (whichever applies), exceeds (ii) the amount of any dividends paid during such taxable year which are designated or reported (as the case may be) as capital gain dividends after such determination. Deficiency dividends paid in any taxable year shall not be included in the amount of dividends paid for such year for purposes of computing the dividends paid deduction for such year. Deficiency dividends paid in any taxable year shall not be allowed for purposes of section 855(a) or 858(a) in the computation of the dividends paid deduction for the taxable year preceding the taxable year in which paid.

(g) Claim required No deficiency dividend deduction shall be allowed under subsection (a) unless (under regulations prescribed by the Secretary) claim therefore is filed within 120 days after the date of the determination.

(h) Suspension of statute of limitations and stay of collection If the qualified investment entity files a claim as provided in subsection (g), the running of the statute of limitations provided in section 6501 on the making of assessments, and the bringing of distraint or a proceeding in court for collection, in respect of the deficiency established by a determination under this section, and all interest, additions to tax, additional amounts, or assessable penalties in respect thereof, shall be suspended for a period of 2 years after the date of the determination. In the case of any deficiency established by a determination under this section— the collection of the deficiency, and all interest, additions to tax, additional amounts, and assessable penalties in respect thereof, shall, except in cases of jeopardy, be stayed until the expiration of 120 days after the date of the determination, and if claim for a deficiency dividend deduction is filed under subsection (g), the collection of such part of the deficiency as is not reduced by the deduction for deficiency dividends provided in subsection (a) shall be stayed until the date the claim is disallowed (in whole or in part), and if disallowed in part collection shall be made only with respect to the part disallowed. No distraint or proceeding in court shall be begun for the collection of an amount the collection of which is stayed under subparagraph (A) or (B) during the period for which the collection of such amount is stayed.

(i) Deduction denied in case of fraud No deficiency dividend deduction shall be allowed under subsection (a) if the determination contains a finding that any part of any deficiency attributable to an adjustment with respect to the taxable year is due to fraud with intent to evade tax or to willful failure to file an income tax return within the time prescribed by law or prescribed by the Secretary in pursuance of law.

§ 860A Taxation of REMIC’s

(a) General rule Except as otherwise provided in this part, a REMIC shall not be subject to taxation under this subtitle (and shall not be treated as a corporation, partnership, or trust for purposes of this subtitle).

(b) Income taxable to holders The income of any REMIC shall be taxable to the holders of interests in such REMIC as provided in this part.

§ 860B Taxation of holders of regular interests

(a) General rule In determining the tax under this chapter of any holder of a regular interest in a REMIC, such interest (if not otherwise a debt instrument) shall be treated as a debt instrument.

(b) Holders must use accrual method The amounts includible in gross income with respect to any regular interest in a REMIC shall be determined under the accrual method of accounting.

(c) Portion of gain treated as ordinary income Gain on the disposition of a regular interest shall be treated as ordinary income to the extent such gain does not exceed the excess (if any) of— the amount which would have been includible in the gross income of the taxpayer with respect to such interest if the yield on such interest were 110 percent of the applicable Federal rate (as defined in section 1274(d) without regard to paragraph (2) thereof) as of the beginning of the taxpayer’s holding period, over the amount actually includible in gross income with respect to such interest by the taxpayer.

(d) Cross reference For special rules in determining inclusion of original issue discount on regular interests, see section 1272(a)(6).

§ 860C Taxation of residual interests

(a) Pass-thru of income or loss In determining the tax under this chapter of any holder of a residual interest in a REMIC, such holder shall take into account his daily portion of the taxable income or net loss of such REMIC for each day during the taxable year on which such holder held such interest. The daily portion referred to in paragraph (1) shall be determined— by allocating to each day in any calendar quarter its ratable portion of the taxable income (or net loss) for such quarter, and by allocating the amount so allocated to any day among the holders (on such day) of residual interests in proportion to their respective holdings on such day.

(b) Determination of taxable income or net loss For purposes of this section— The taxable income of a REMIC shall be determined under an accrual method of accounting and, except as provided in regulations, in the same manner as in the case of an individual, except that— regular interests in such REMIC (if not otherwise debt instruments) shall be treated as indebtedness of such REMIC, market discount on any market discount bond shall be included in gross income for the taxable years to which it is attributable as determined under the rules of section 1276(b)(2) (and sections 1276(a) and 1277 shall not apply), there shall not be taken into account any item of income, gain, loss, or deduction allocable to a prohibited transaction, the deductions referred to in section 703(a)(2) (other than any deduction under section 212) shall not be allowed, and the amount of the net income from foreclosure property (if any) shall be reduced by the amount of the tax imposed by section 860G(c). The net loss of any REMIC is the excess of— the deductions allowable in computing the taxable income of such REMIC, over its gross income. Such amount shall be determined with the modifications set forth in paragraph (1).

(c) Distributions Any distribution by a REMIC— shall not be included in gross income to the extent it does not exceed the adjusted basis of the interest, and to the extent it exceeds the adjusted basis of the interest, shall be treated as gain from the sale or exchange of such interest.

(d) Basis rules The basis of any person’s residual interest in a REMIC shall be increased by the amount of the taxable income of such REMIC taken into account under subsection (a) by such person with respect to such interest. The basis of any person’s residual interest in a REMIC shall be decreased (but not below zero) by the sum of the following amounts: any distributions to such person with respect to such interest, and any net loss of such REMIC taken into account under subsection (a) by such person with respect to such interest.

(e) Special rules Any amount taken into account under subsection (a) by any holder of a residual interest in a REMIC shall be treated as ordinary income or ordinary loss, as the case may be. The amount of the net loss of any REMIC taken into account by a holder under subsection (a) with respect to any calendar quarter shall not exceed the adjusted basis of such holder’s residual interest in such REMIC as of the close of such calendar quarter (determined without regard to the adjustment under subsection (d)(2)(B) for such calendar quarter). Any loss disallowed by reason of subparagraph (A) shall be treated as incurred by the REMIC in the succeeding calendar quarter with respect to such holder. For special treatment of income in excess of daily accruals, see section 860E.

§ 860D REMIC defined

(a) General rule For purposes of this title, the terms “real estate mortgage investment conduit” and “REMIC” mean any entity— to which an election to be treated as a REMIC applies for the taxable year and all prior taxable years, all of the interests in which are regular interests or residual interests, which has 1 (and only 1) class of residual interests (and all distributions, if any, with respect to such interests are pro rata), as of the close of the 3rd month beginning after the startup day and at all times thereafter, substantially all of the assets of which consist of qualified mortgages and permitted investments, which has a taxable year which is a calendar year, and with respect to which there are reasonable arrangements designed to ensure that— residual interests in such entity are not held by disqualified organizations (as defined in section 860E(e)(5)), and information necessary for the application of section 860E(e) will be made available by the entity. In the case of a qualified liquidation (as defined in section 860F(a)(4)(A)), paragraph (4) shall not apply during the liquidation period (as defined in section 860F(a)(4)(B)).

(b) Election An entity (otherwise meeting the requirements of subsection (a)) may elect to be treated as a REMIC for its 1st taxable year. Such an election shall be made on its return for such 1st taxable year. Except as provided in paragraph (2), such an election shall apply to the taxable year for which made and all subsequent taxable years. If any entity ceases to be a REMIC at any time during the taxable year, such entity shall not be treated as a REMIC for such taxable year or any succeeding taxable year. If— an entity ceases to be a REMIC, the Secretary determines that such cessation was inadvertent, no later than a reasonable time after the discovery of the event resulting in such cessation, steps are taken so that such entity is once more a REMIC, and such entity, and each person holding an interest in such entity at any time during the period specified pursuant to this subsection, agrees to make such adjustments (consistent with the treatment of such entity as a REMIC or a C corporation) as may be required by the Secretary with respect to such period, then, notwithstanding such terminating event, such entity shall be treated as continuing to be a REMIC (or such cessation shall be disregarded for purposes of subparagraph (A)) whichever the Secretary determines to be appropriate.

§ 860E Treatment of income in excess of daily accruals on residual interests

(a) Excess inclusions may not be offset by net operating losses The taxable income of any holder of a residual interest in a REMIC for any taxable year shall in no event be less than the excess inclusion for such taxable year. All members of an affiliated group filing a consolidated return shall be treated as 1 taxpayer for purposes of this subsection. Any excess inclusion for any taxable year shall not be taken into account— in determining under section 172 the amount of any net operating loss for such taxable year, and in determining taxable income for such taxable year for purposes of subsection (a)(2)(B)(ii)(I) and the second sentence of subsection (b)(2) of section 172. For purposes of part VI of subchapter A of this chapter— the reference in section 55(b)(1)(D) to taxable income shall be treated as a reference to taxable income determined without regard to this subsection, the alternative minimum taxable income of any holder of a residual interest in a REMIC for any taxable year shall in no event be less than the excess inclusion for such taxable year, and any excess inclusion shall be disregarded for purposes of computing the alternative tax net operating loss deduction.

(b) Organizations subject to unrelated business tax If the holder of any residual interest in a REMIC is an organization subject to the tax imposed by section 511, the excess inclusion of such holder for any taxable year shall be treated as unrelated business taxable income of such holder for purposes of section 511.

(c) Excess inclusion For purposes of this section— The term “excess inclusion” means, with respect to any residual interest in a REMIC for any calendar quarter, the excess (if any) of— the amount taken into account with respect to such interest by the holder under section 860C(a), over the sum of the daily accruals with respect to such interest for days during such calendar quarter while held by such holder. To the extent provided in regulations, if residual interests in a REMIC do not have significant value, the excess inclusions with respect to such interests shall be the amount determined under subparagraph (A) without regard to subparagraph (B). For purposes of this subsection, the daily accrual with respect to any residual interest for any day in any calendar quarter shall be determined by allocating to each day in such quarter its ratable portion of the product of— the adjusted issue price of such interest at the beginning of such quarter, and 120 percent of the long-term Federal rate (determined on the basis of compounding at the close of each calendar quarter and properly adjusted for the length of such quarter). For purposes of this paragraph, the adjusted issue price of any residual interest at the beginning of any calendar quarter is the issue price of the residual interest (adjusted for contributions)— increased by the amount of daily accruals for prior quarters, and decreased (but not below zero) by any distribution made with respect to such interest before the beginning of such quarter. For purposes of this paragraph, the term “Federal long-term rate” means the Federal long-term rate which would have applied to the residual interest under section 1274(d) (determined without regard to paragraph (2) thereof) if it were a debt instrument.

(d) Treatment of residual interests held by real estate investment trusts If a residual interest in a REMIC is held by a real estate investment trust, under regulations prescribed by the Secretary— any excess of— the aggregate excess inclusions determined with respect to such interests, over the real estate investment trust taxable income (within the meaning of section 857(b)(2), excluding any net capital gain), shall be allocated among the shareholders of such trust in proportion to the dividends received by such shareholders from such trust, and any amount allocated to a shareholder under paragraph (1) shall be treated as an excess inclusion with respect to a residual interest held by such shareholder. Rules similar to the rules of the preceding sentence shall apply also in the case of regulated investment companies, common trust funds, and organizations to which part I of subchapter T applies.

(e) Tax on transfers of residual interests to certain organizations, etc. A tax is hereby imposed on any transfer of a residual interest in a REMIC to a disqualified organization. The amount of the tax imposed by paragraph (1) on any transfer of a residual interest shall be equal to the product of— the amount (determined under regulations) equal to the present value of the total anticipated excess inclusions with respect to such interest for periods after such transfer, multiplied by the highest rate of tax specified in section 11(b). The tax imposed by paragraph (1) on any transfer shall be paid by the transferor; except that, where such transfer is through an agent for a disqualified organization, such tax shall be paid by such agent. The person (otherwise liable for any tax imposed by paragraph (1)) shall be relieved of liability for the tax imposed by paragraph (1) with respect to any transfer if— the transferee furnishes to such person an affidavit that the transferee is not a disqualified organization, and as of the time of the transfer, such person does not have actual knowledge that such affidavit is false. For purposes of this section, the term “disqualified organization” means— the United States, any State or political subdivision thereof, any foreign government, any international organization, or any agency or instrumentality of any of the foregoing, any organization (other than a cooperative described in section 521) which is exempt from tax imposed by this chapter unless such organization is subject to the tax imposed by section 511, and any organization described in section 1381(a)(2)(C). For purposes of subparagraph (A), the rules of section 168(h)(2)(D) (relating to treatment of certain taxable instrumentalities) shall apply; except that, in the case of the Federal Home Loan Mortgage Corporation, clause (ii) of such section shall not apply. If, at any time during any taxable year of a pass-thru entity, a disqualified organization is the record holder of an interest in such entity, there is hereby imposed on such entity for such taxable year a tax equal to the product of— the amount of excess inclusions for such taxable year allocable to the interest held by such disqualified organization, multiplied by the highest rate of tax specified in section 11(b). For purposes of this paragraph, the term “pass-thru entity” means— any regulated investment company, real estate investment trust, or common trust fund, any partnership, trust, or estate, and any organization to which part I of subchapter T applies. Except as provided in regulations, a person holding an interest in a pass-thru entity as a nominee for another person shall, with respect to such interest, be treated as a pass-thru entity. Any tax imposed by this paragraph with respect to any excess inclusion of any pass-thru entity for any taxable year shall, for purposes of this title (other than this subsection), be applied against (and operate to reduce) the amount included in gross income with respect to the residual interest involved. No tax shall be imposed by subparagraph (A) with respect to any interest in a pass-thru entity for any period if— the record holder of such interest furnishes to such pass-thru entity an affidavit that such record holder is not a disqualified organization, and during such period, the pass-thru entity does not have actual knowledge that such affidavit is false. The Secretary may waive the tax imposed by paragraph (1) on any transfer if— within a reasonable time after discovery that the transfer was subject to tax under paragraph (1), steps are taken so that the interest is no longer held by the disqualified organization, and there is paid to the Secretary such amounts as the Secretary may require. For purposes of subtitle F, the taxes imposed by this subsection shall be treated as excise taxes with respect to which the deficiency procedures of such subtitle apply.

(f) Treatment of variable insurance contracts Except as provided in regulations, with respect to any variable contract (as defined in section 817), there shall be no adjustment in the reserve to the extent of any excess inclusion.

§ 860F Other rules

(a) 100 percent tax on prohibited transactions There is hereby imposed for each taxable year of a REMIC a tax equal to 100 percent of the net income derived from prohibited transactions. For purposes of this part, the term “prohibited transaction” means— The disposition of any qualified mortgage transferred to the REMIC other than a disposition pursuant to— the substitution of a qualified replacement mortgage for a qualified mortgage (or the repurchase in lieu of substitution of a defective obligation), a disposition incident to the foreclosure, default, or imminent default of the mortgage, the bankruptcy or insolvency of the REMIC, or a qualified liquidation. The receipt of any income attributable to any asset which is neither a qualified mortgage nor a permitted investment. The receipt by the REMIC of any amount representing a fee or other compensation for services. Gain from the disposition of any cash flow investment other than pursuant to any qualified liquidation. For purposes of paragraph (1), the term “net income derived from prohibited transactions” means the excess of the gross income from prohibited transactions over the deductions allowed by this chapter which are directly connected with such transactions; except that there shall not be taken into account any item attributable to any prohibited transaction for which there was a loss. For purposes of this part— The term “qualified liquidation” means a transaction in which— the REMIC adopts a plan of complete liquidation, such REMIC sells all its assets (other than cash) within the liquidation period, and all proceeds of the liquidation (plus the cash), less assets retained to meet claims, are credited or distributed to holders of regular or residual interests on or before the last day of the liquidation period. The term “liquidation period” means the period— beginning on the date of the adoption of the plan of liquidation, and ending at the close of the 90th day after such date. Notwithstanding subparagraphs (A) and (D) of paragraph (2), the term “prohibited transaction” shall not include any disposition— required to prevent default on a regular interest where the threatened default resulted from a default on 1 or more qualified mortgages, or to facilitate a clean-up call (as defined in regulations).

(b) Treatment of transfers to the REMIC No gain or loss shall be recognized to the transferor on the transfer of any property to a REMIC in exchange for regular or residual interests in such REMIC. The adjusted bases of the regular and residual interests received in a transfer described in subparagraph (A) shall be equal to the aggregate adjusted bases of the property transferred in such transfer. Such amount shall be allocated among such interests in proportion to their respective fair market values. If the issue price of any regular or residual interest exceeds its adjusted basis as determined under subparagraph (B), for periods during which such interest is held by the transferor (or by any other person whose basis is determined in whole or in part by reference to the basis of such interest in the hand of the transferor)— in the case of a regular interest, such excess shall be included in gross income (as determined under rules similar to rules of section 1276(b)), and in the case of a residual interest, such excess shall be included in gross income ratably over the anticipated period during which the REMIC will be in existence. If the adjusted basis of any regular or residual interest received in a transfer described in subparagraph (A) exceeds its issue price, for periods during which such interest is held by the transferor (or by any other person whose basis is determined in whole or in part by reference to the basis of such interest in the hand of the transferor)— in the case of a regular interest, such excess shall be allowable as a deduction under rules similar to the rules of section 171, and in the case of a residual interest, such excess shall be allowable as a deduction ratably over the anticipated period during which the REMIC will be in existence. The basis of any property received by a REMIC in a transfer described in paragraph (1)(A) shall be its fair market value immediately after such transfer.

(c) Distributions of property If a REMIC makes a distribution of property with respect to any regular or residual interest— notwithstanding any other provision of this subtitle, gain shall be recognized to such REMIC on the distribution in the same manner as if it had sold such property to the distributee at its fair market value, and the basis of the distributee in such property shall be its fair market value.

(d) Coordination with wash sale rules For purposes of section 1091— any residual interest in a REMIC shall be treated as a security, and in applying such section to any loss claimed to have been sustained on the sale or other disposition of a residual interest in a REMIC— except as provided in regulations, any residual interest in any REMIC and any interest in a taxable mortgage pool (as defined in section 7701(i)) comparable to a residual interest in a REMIC shall be treated as substantially identical stock or securities, and subsections (a) and (e) of such section shall be applied by substituting “6 months” for “30 days” each place it appears.

(e) Treatment under subtitle F For purposes of subtitle F, a REMIC shall be treated as a partnership (and holders of residual interests in such REMIC shall be treated as partners). Any return required by reason of the preceding sentence shall include the amount of the daily accruals determined under section 860E(c). Such return shall be filed by the REMIC. The determination of who may sign such return shall be made without regard to the first sentence of this subsection.

§ 860G Other definitions and special rules

(a) Definitions For purposes of this part— The term “regular interest” means any interest in a REMIC which is issued on the startup day with fixed terms and which is designated as a regular interest if— such interest unconditionally entitles the holder to receive a specified principal amount (or other similar amount), and interest payments (or other similar amount), if any, with respect to such interest at or before maturity— are payable based on a fixed rate (or to the extent provided in regulations, at a variable rate), or consist of a specified portion of the interest payments on qualified mortgages and such portion does not vary during the period such interest is outstanding. The interest shall not fail to meet the requirements of subparagraph (A) merely because the timing (but not the amount) of the principal payments (or other similar amounts) may be contingent on the extent of prepayments on qualified mortgages and the amount of income from permitted investments. An interest shall not fail to qualify as a regular interest solely because the specified principal amount of the regular interest (or the amount of interest accrued on the regular interest) can be reduced as a result of the nonoccurrence of 1 or more contingent payments with respect to any reverse mortgage loan held by the REMIC if, on the startup day for the REMIC, the sponsor reasonably believes that all principal and interest due under the regular interest will be paid at or prior to the liquidation of the REMIC. The term “residual interest” means an interest in a REMIC which is issued on the startup day, which is not a regular interest, and which is designated as a residual interest. The term “qualified mortgage” means— any obligation (including any participation or certificate of beneficial ownership therein) which is principally secured by an interest in real property and which— is transferred to the REMIC on the startup day in exchange for regular or residual interests in the REMIC, is purchased by the REMIC within the 3-month period beginning on the startup day if, except as provided in regulations, such purchase is pursuant to a fixed-price contract in effect on the startup day, or represents an increase in the principal amount under the original terms of an obligation described in clause (i) or (ii) if such increase— is attributable to an advance made to the obligor pursuant to the original terms of a reverse mortgage loan or other obligation, occurs after the startup day, and is purchased by the REMIC pursuant to a fixed price contract in effect on the startup day, any qualified replacement mortgage, and any regular interest in another REMIC transferred to the REMIC on the startup day in exchange for regular or residual interests in the REMIC. For purposes of subparagraph (A), any obligation secured by stock held by a person as a tenant-stockholder (as defined in section 216) in a cooperative housing corporation (as so defined) shall be treated as secured by an interest in real property. For purposes of subparagraph (A), any obligation originated by the United States or any State (or any political subdivision, agency, or instrumentality of the United States or any State) shall be treated as principally secured by an interest in real property if more than 50 percent of such obligations which are transferred to, or purchased by, the REMIC are principally secured by an interest in real property (determined without regard to this sentence). The term “qualified replacement mortgage” means any obligation— which would be a qualified mortgage if transferred on the startup day in exchange for regular or residual interests in the REMIC, and which is received for— another obligation within the 3-month period beginning on the startup day, or a defective obligation within the 2-year period beginning on the startup day. The term “permitted investments” means any— cash flow investment, qualified reserve asset, or foreclosure property. The term “cash flow investment” means any investment of amounts received under qualified mortgages for a temporary period before distribution to holders of interests in the REMIC. The term “qualified reserve asset” means any intangible property which is held for investment and as part of a qualified reserve fund. For purposes of subparagraph (A), the term “qualified reserve fund” means any reasonably required reserve to— provide for full payment of expenses of the REMIC or amounts due on regular interests in the event of defaults on qualified mortgages or lower than expected returns on cash flow investments, or provide a source of funds for the purchase of obligations described in clause (ii) or (iii) of paragraph (3)(A). The aggregate fair market value of the assets held in any such reserve shall not exceed 50 percent of the aggregate fair market value of all of the assets of the REMIC on the startup day, and the amount of any such reserve shall be promptly and appropriately reduced to the extent the amount held in such reserve is no longer reasonably required for purposes specified in clause (i) or (ii) of this subparagraph. A reserve shall not be treated as a qualified reserve for any taxable year (and all subsequent taxable years) if more than 30 percent of the gross income from the assets in such fund for the taxable year is derived from the sale or other disposition of property held for less than 3 months. For purposes of the preceding sentence, gain on the disposition of a qualified reserve asset shall not be taken into account if the disposition giving rise to such gain is required to prevent default on a regular interest where the threatened default resulted from a default on 1 or more qualified mortgages. The term “foreclosure property” means property— which would be foreclosure property under section 856(e) (without regard to paragraph (5) thereof) if acquired by a real estate investment trust, and which is acquired in connection with the default or imminent default of a qualified mortgage held by the REMIC. Solely for purposes of section 860D(a), the determination of whether any property is foreclosure property shall be made without regard to section 856(e)(4). The term “startup day” means the day on which the REMIC issues all of its regular and residual interests. To the extent provided in regulations, all interests issued (and all transfers to the REMIC) during any period (not exceeding 10 days) permitted in such regulations shall be treated as occurring on the day during such period selected by the REMIC for purposes of this paragraph. The issue price of any regular or residual interest in a REMIC shall be determined under section 1273(b) in the same manner as if such interest were a debt instrument; except that if the interest is issued for property, paragraph (3) of section 1273(b) shall apply whether or not the requirements of such paragraph are met.

(b) Treatment of nonresident aliens and foreign corporations If the holder of a residual interest in a REMIC is a nonresident alien individual or a foreign corporation, for purposes of sections 871(a), 881, 1441, and 1442— amounts includible in the gross income of such holder under this part shall be taken into account when paid or distributed (or when the interest is disposed of), and no exemption from the taxes imposed by such sections (and no reduction in the rates of such taxes) shall apply to any excess inclusion. The Secretary may by regulations provide that such amounts shall be taken into account earlier than as provided in paragraph (1) where necessary or appropriate to prevent the avoidance of tax imposed by this chapter.

(c) Tax on income from foreclosure property A tax is hereby imposed for each taxable year on the net income from foreclosure property of each REMIC. Such tax shall be computed by multiplying the net income from foreclosure property by the highest rate of tax specified in section 11(b). For purposes of this part, the term “net income from foreclosure property” means the amount which would be the REMIC’s net income from foreclosure property under section 857(b)(4)(B) if the REMIC were a real estate investment trust.

(d) Tax on contributions after startup date Except as provided in paragraph (2), if any amount is contributed to a REMIC after the startup day, there is hereby imposed a tax for the taxable year of the REMIC in which the contribution is received equal to 100 percent of the amount of such contribution. Paragraph (1) shall not apply to any contribution which is made in cash and is described in any of the following subparagraphs: Any contribution to facilitate a clean-up call (as defined in regulations) or a qualified liquidation. Any payment in the nature of a guarantee. Any contribution during the 3-month period beginning on the startup day. Any contribution to a qualified reserve fund by any holder of a residual interest in the REMIC. Any other contribution permitted in regulations.

(e) Regulations The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this part, including regulations— to prevent unreasonable accumulations of assets in a REMIC, permitting determinations of the fair market value of property transferred to a REMIC and issue price of interests in a REMIC to be made earlier than otherwise provided, requiring reporting to holders of residual interests of such information as frequently as is necessary or appropriate to permit such holders to compute their taxable income accurately, providing appropriate rules for treatment of transfers of qualified replacement mortgages to the REMIC where the transferor holds any interest in the REMIC, and providing that a mortgage will be treated as a qualified replacement mortgage only if it is part of a bona fide replacement (and not part of a swap of mortgages).

[§§ 860H to 860L Repealed. Pub. L. 108–357, title VIII, § 835(a), Oct. 22, 2004, 118 Stat. 1593]

§ 861 Income from sources within the United States

(a) Gross income from sources within United States The following items of gross income shall be treated as income from sources within the United States: Interest from the United States or the District of Columbia, and interest on bonds, notes, or other interest-bearing obligations of noncorporate residents or domestic corporations not including— interest— on deposits with a foreign branch of a domestic corporation or a domestic partnership if such branch is engaged in the commercial banking business, and on amounts satisfying the requirements of subparagraph (B) of section 871(i)(3) which are paid by a foreign branch of a domestic corporation or a domestic partnership, and in the case of a foreign partnership, which is predominantly engaged in the active conduct of a trade or business outside the United States, any interest not paid by a trade or business engaged in by the partnership in the United States and not allocable to income which is effectively connected (or treated as effectively connected) with the conduct of a trade or business in the United States. The amount received as dividends— from a domestic corporation, or from a foreign corporation unless less than 25 percent of the gross income from all sources of such foreign corporation for the 3-year period ending with the close of its taxable year preceding the declaration of such dividends (or for such part of such period as the corporation has been in existence) was effectively connected (or treated as effectively connected other than income described in section 884(d)(2)) with the conduct of a trade or business within the United States; but only in an amount which bears the same ratio to such dividends as the gross income of the corporation for such period which was effectively connected (or treated as effectively connected other than income described in section 884(d)(2)) with the conduct of a trade or business within the United States bears to its gross income from all sources; but dividends (other than dividends for which a deduction is allowable under section 245(b)) from a foreign corporation shall, for purposes of subpart A of part III (relating to foreign tax credit), be treated as income from sources without the United States to the extent (and only to the extent) exceeding the amount which is 100/50th of the amount of the deduction allowable under section 245 in respect of such dividends, or from a foreign corporation to the extent that such amount is required by section 243(e) (relating to certain dividends from foreign corporations) to be treated as dividends from a domestic corporation which is subject to taxation under this chapter, and to such extent subparagraph (B) shall not apply to such amount, or from a DISC or former DISC (as defined in section 992(a)) except to the extent attributable (as determined under regulations prescribed by the Secretary) to qualified export receipts described in section 993(a)(1) (other than interest and gains described in section 995(b)(1)). In the case of any dividend from a 20-percent owned corporation (as defined in section 243(c)(2)), subparagraph (B) shall be applied by substituting “100/65th” for “100/50th”. Compensation for labor or personal services performed in the United States; except that compensation for labor or services performed in the United States shall not be deemed to be income from sources within the United States if— the labor or services are performed by a nonresident alien individual temporarily present in the United States for a period or periods not exceeding a total of 90 days during the taxable year, such compensation does not exceed $3,000 in the aggregate, and the compensation is for labor or services performed as an employee of or under a contract with— a nonresident alien, foreign partnership, or foreign corporation, not engaged in trade or business within the United States, or an individual who is a citizen or resident of the United States, a domestic partnership, or a domestic corporation, if such labor or services are performed for an office or place of business maintained in a foreign country or in a possession of the United States by such individual, partnership, or corporation. In addition, compensation for labor or services performed in the United States shall not be deemed to be income from sources within the United States if the labor or services are performed by a nonresident alien individual in connection with the individual’s temporary presence in the United States as a regular member of the crew of a foreign vessel engaged in transportation between the United States and a foreign country or a possession of the United States. Rentals or royalties from property located in the United States or from any interest in such property, including rentals or royalties for the use of or for the privilege of using in the United States patents, copyrights, secret processes and formulas, good will, trade-marks, trade brands, franchises, and other like property. Gains, profits, and income from the disposition of a United States real property interest (as defined in section 897(c)). Gains, profits, and income derived from the purchase of inventory property (within the meaning of section 865(i)(1)) without the United States (other than within a possession of the United States) and its sale or exchange within the United States. Amounts received as underwriting income (as defined in section 832(b)(3)) derived from the issuing (or reinsuring) of any insurance or annuity contract— in connection with property in, liability arising out of an activity in, or in connection with the lives or health of residents of, the United States, or in connection with risks not described in subparagraph (A) as a result of any arrangement whereby another corporation receives a substantially equal amount of premiums or other consideration in respect to issuing (or reinsuring) any insurance or annuity contract in connection with property in, liability arising out of activity in, or in connection with the lives or health of residents of, the United States. Any social security benefit (as defined in section 86(d)). Amounts received, directly or indirectly, from— a noncorporate resident or domestic corporation for the provision of a guarantee of any indebtedness of such resident or corporation, or any foreign person for the provision of a guarantee of any indebtedness of such person, if such amount is connected with income which is effectively connected (or treated as effectively connected) with the conduct of a trade or business in the United States.

(b) Taxable income from sources within United States From the items of gross income specified in subsection (a) as being income from sources within the United States there shall be deducted the expenses, losses, and other deductions properly apportioned or allocated thereto and a ratable part of any expenses, losses, or other deductions which cannot definitely be allocated to some item or class of gross income. The remainder, if any, shall be included in full as taxable income from sources within the United States. In the case of an individual who does not itemize deductions, an amount equal to the standard deduction shall be considered a deduction which cannot definitely be allocated to some item or class of gross income.

(c) Special rule for application of subsection (a)(2)(B) For purposes of subsection (a)(2)(B), if the foreign corporation has no gross income from any source for the 3-year period (or part thereof) specified, the requirements of such subsection shall be applied with respect to the taxable year of such corporation in which the payment of the dividend is made.

(d) Income from certain railroad rolling stock treated as income from sources within the United States For purposes of subsection (a) and section 862(a), if— a taxpayer leases railroad rolling stock which is section 1245 property (as defined in section 1245(a)(3)) to a domestic common carrier by railroad or a corporation which is controlled, directly or indirectly, by one or more such common carriers, and the use under such lease is expected to be use within the United States, all amounts includible in gross income by the taxpayer with respect to such railroad rolling stock (including gain from sale or other disposition of such railroad rolling stock) shall be treated as income from sources within the United States. The requirements of subparagraph (B) of the preceding sentence shall be treated as satisfied if the only expected use outside the United States is use by a person (whether or not a United States person) in Canada or Mexico on a temporary basis which is not expected to exceed a total of 90 days in any taxable year. Paragraph (1) shall not apply to a lease between two members of the same controlled group of corporations (as defined in section 1563) if any member of such group is a domestic common carrier by railroad or a switching or terminal company all of whose stock is owned by one or more domestic common carriers by railroad. No credit shall be allowed under section 901 for any payments to foreign countries with respect to any amount received by the taxpayer with respect to railroad rolling stock which is subject to paragraph (1).

(e) Cross reference For treatment of interest paid by the branch of a foreign corporation, see section 884(f).

§ 862 Income from sources without the United States

(a) Gross income from sources without United States The following items of gross income shall be treated as income from sources without the United States: interest other than that derived from sources within the United States as provided in section 861(a)(1); dividends other than those derived from sources within the United States as provided in section 861(a)(2); compensation for labor or personal services performed without the United States; rentals or royalties from property located without the United States or from any interest in such property, including rentals or royalties for the use of or for the privilege of using without the United States patents, copyrights, secret processes and formulas, good will, trade-marks, trade brands, franchises, and other like properties; gains, profits, and income from the sale or exchange of real property located without the United States; gains, profits, and income derived from the purchase of inventory property (within the meaning of section 865(i)(1)) within the United States and its sale or exchange without the United States; underwriting income other than that derived from sources within the United States as provided in section 861(a)(7); gains, profits, and income from the disposition of a United States real property interest (as defined in section 897(c)) when the real property is located in the Virgin Islands; and amounts received, directly or indirectly, from a foreign person for the provision of a guarantee of indebtedness of such person other than amounts which are derived from sources within the United States as provided in section 861(a)(9).

(b) Taxable income from sources without United States From the items of gross income specified in subsection (a) there shall be deducted the expenses, losses, and other deductions properly apportioned or allocated thereto, and a ratable part of any expenses, losses, or other deductions which cannot definitely be allocated to some item or class of gross income. The remainder, if any, shall be treated in full as taxable income from sources without the United States. In the case of an individual who does not itemize deductions, an amount equal to the standard deduction shall be considered a deduction which cannot definitely be allocated to some item or class of gross income.

§ 863 Special rules for determining source

(a) Allocation under regulations Items of gross income, expenses, losses, and deductions, other than those specified in sections 861(a) and 862(a), shall be allocated or apportioned to sources within or without the United States, under regulations prescribed by the Secretary. Where items of gross income are separately allocated to sources within the United States, there shall be deducted (for the purpose of computing the taxable income therefrom) the expenses, losses, and other deductions properly apportioned or allocated thereto and a ratable part of other expenses, losses, or other deductions which cannot definitely be allocated to some item or class of gross income. The remainder, if any, shall be included in full as taxable income from sources within the United States.

(b) Income partly from within and partly from without the United States In the case of gross income derived from sources partly within and partly without the United States, the taxable income may first be computed by deducting the expenses, losses, or other deductions apportioned or allocated thereto and a ratable part of any expenses, losses, or other deductions which cannot definitely be allocated to some item or class of gross income; and the portion of such taxable income attributable to sources within the United States may be determined by processes or formulas of general apportionment prescribed by the Secretary. Gains, profits, and income— from services rendered partly within and partly without the United States, from the sale or exchange of inventory property (within the meaning of section 865(i)(1)) produced (in whole or in part) by the taxpayer within and sold or exchanged without the United States, or produced (in whole or in part) by the taxpayer without and sold or exchanged within the United States, or derived from the purchase of inventory property (within the meaning of section 865(i)(1)) within a possession of the United States and its sale or exchange within the United States, shall be treated as derived partly from sources within and partly from sources without the United States. Gains, profits, and income from the sale or exchange of inventory property described in paragraph (2) shall be allocated and apportioned between sources within and without the United States solely on the basis of the production activities with respect to the property.

(c) Source rule for certain transportation income All transportation income attributable to transportation which begins and ends in the United States shall be treated as derived from sources within the United States. 50 percent of all transportation income attributable to transportation which— is not described in paragraph (1), and begins or ends in the United States, shall be treated as from sources in the United States. Subparagraph (A) shall not apply to any transportation income which is income derived from personal services performed by the taxpayer, unless such income is attributable to transportation which— begins in the United States and ends in a possession of the United States, or begins in a possession of the United States and ends in the United States. In the case of transportation income derived from, or in connection with, a vessel, this subparagraph shall only apply if the taxpayer is a citizen or resident alien. For purposes of this subsection, the term “transportation income” means any income derived from, or in connection with— the use (or hiring or leasing for use) of a vessel or aircraft, or the performance of services directly related to the use of a vessel or aircraft. For purposes of the preceding sentence, the term “vessel or aircraft” includes any container used in connection with a vessel or aircraft.

(d) Source rules for space and certain ocean activities Except as provided in regulations, any income derived from a space or ocean activity— if derived by a United States person, shall be sourced in the United States, and if derived by a person other than a United States person, shall be sourced outside the United States. For purposes of paragraph (1)— The term “space or ocean activity” means— any activity conducted in space, and any activity conducted on or under water not within the jurisdiction (as recognized by the United States) of a foreign country, possession of the United States, or the United States. Such term includes any activity conducted in Antarctica. The term “space or ocean activity” shall not include— any activity giving rise to transportation income (as defined in section 863(c)), any activity giving rise to international communications income (as defined in subsection (e)(2)), and any activity with respect to mines, oil and gas wells, or other natural deposits to the extent within the United States or any foreign country or possession of the United States (as defined in section 638). For purposes of applying section 638, the jurisdiction of any foreign country shall not include any jurisdiction not recognized by the United States.

(e) International communications income In the case of any United States person, 50 percent of any international communications income shall be sourced in the United States and 50 percent of such income shall be sourced outside the United States. Except as provided in regulations or clause (ii), in the case of any person other than a United States person, any international communications income shall be sourced outside the United States. In the case of any person (other than a United States person) who maintains an office or other fixed place of business in the United States, any international communications income attributable to such office or other fixed place of business shall be sourced in the United States. For purposes of this section, the term “international communications income” includes all income derived from the transmission of communications or data from the United States to any foreign country (or possession of the United States) or from any foreign country (or possession of the United States) to the United States.

§ 864 Definitions and special rules

(a) Produced For purposes of this part, the term “produced” includes created, fabricated, manufactured, extracted, processed, cured, or aged.

(b) Trade or business within the United States For purposes of this part, part II, and chapter 3, the term “trade or business within the United States” includes the performance of personal services within the United States at any time within the taxable year, but does not include— The performance of personal services— for a nonresident alien individual, foreign partnership, or foreign corporation, not engaged in trade or business within the United States, or for an office or place of business maintained in a foreign country or in a possession of the United States by an individual who is a citizen or resident of the United States or by a domestic partnership or a domestic corporation, by a nonresident alien individual temporarily present in the United States for a period or periods not exceeding a total of 90 days during the taxable year and whose compensation for such services does not exceed in the aggregate $3,000. Trading in stocks or securities through a resident broker, commission agent, custodian, or other independent agent. Trading in stocks or securities for the taxpayer’s own account, whether by the taxpayer or his employees or through a resident broker, commission agent, custodian, or other agent, and whether or not any such employee or agent has discretionary authority to make decisions in effecting the transactions. This clause shall not apply in the case of a dealer in stocks or securities. Trading in commodities through a resident broker, commission agent, custodian, or other independent agent. Trading in commodities for the taxpayer’s own account, whether by the taxpayer or his employees or through a resident broker, commission agent, custodian, or other agent, and whether or not any such employee or agent has discretionary authority to make decisions in effecting the transactions. This clause shall not apply in the case of a dealer in commodities. Clauses (i) and (ii) shall apply only if the commodities are of a kind customarily dealt in on an organized commodity exchange and if the transaction is of a kind customarily consummated at such place. Subparagraphs (A)(i) and (B)(i) shall apply only if, at no time during the taxable year, the taxpayer has an office or other fixed place of business in the United States through which or by the direction of which the transactions in stocks or securities, or in commodities, as the case may be, are effected.

(c) Effectively connected income, etc. For purposes of this title— In the case of a nonresident alien individual or a foreign corporation engaged in trade or business within the United States during the taxable year, the rules set forth in paragraphs (2), (3), (4), (6), (7), and (8) shall apply in determining the income, gain, or loss which shall be treated as effectively connected with the conduct of a trade or business within the United States. Except as provided in paragraph (6) 1 (7), or (8) or in section 871(d) or sections 882(d) and (e), in the case of a nonresident alien individual or a foreign corporation not engaged in trade or business within the United States during the taxable year, no income, gain, or loss shall be treated as effectively connected with the conduct of a trade or business within the United States. In determining whether income from sources within the United States of the types described in section 871(a)(1), section 871(h), section 881(a), or section 881(c), or whether gain or loss from sources within the United States from the sale or exchange of capital assets, is effectively connected with the conduct of a trade or business within the United States, the factors taken into account shall include whether— the income, gain, or loss is derived from assets used in or held for use in the conduct of such trade or business, or the activities of such trade or business were a material factor in the realization of the income, gain, or loss. In determining whether an asset is used in or held for use in the conduct of such trade or business or whether the activities of such trade or business were a material factor in realizing an item of income, gain, or loss, due regard shall be given to whether or not such asset or such income, gain, or loss was accounted for through such trade or business. All income, gain, or loss from sources within the United States (other than income, gain, or loss to which paragraph (2) applies) shall be treated as effectively connected with the conduct of a trade or business within the United States. Except as provided in subparagraphs (B) and (C), no income, gain, or loss from sources without the United States shall be treated as effectively connected with the conduct of a trade or business within the United States. Income, gain, or loss from sources without the United States shall be treated as effectively connected with the conduct of a trade or business within the United States by a nonresident alien individual or a foreign corporation if such person has an office or other fixed place of business within the United States to which such income, gain, or loss is attributable and such income, gain, or loss— consists of rents or royalties for the use of or for the privilege of using intangible property described in section 862(a)(4) derived in the active conduct of such trade or business; consists of dividends, interest, or amounts received for the provision of guarantees of indebtedness, and either is derived in the active conduct of a banking, financing, or similar business within the United States or is received by a corporation the principal business of which is trading in stocks or securities for its own account; or is derived from the sale or exchange (outside the United States) through such office or other fixed place of business of personal property described in section 1221(a)(1), except that this clause shall not apply if the property is sold or exchanged for use, consumption, or disposition outside the United States and an office or other fixed place of business of the taxpayer in a foreign country participated materially in such sale. Any income or gain which is equivalent to any item of income or gain described in clause (i), (ii), or (iii) shall be treated in the same manner as such item for purposes of this subparagraph. In the case of a foreign corporation taxable under part I or part II of subchapter L, any income from sources without the United States which is attributable to its United States business shall be treated as effectively connected with the conduct of a trade or business within the United States. No income from sources without the United States shall be treated as effectively connected with the conduct of a trade or business within the United States if it either— consists of dividends, interest, or royalties paid by a foreign corporation in which the taxpayer owns (within the meaning of section 958(a)), or is considered as owning (by applying the ownership rules of section 958(b)), more than 50 percent of the total combined voting power of all classes of stock entitled to vote, or is subpart F income within the meaning of section 952(a). For purposes of subparagraph (B) of paragraph (4)— in determining whether a nonresident alien individual or a foreign corporation has an office or other fixed place of business, an office or other fixed place of business of an agent shall be disregarded unless such agent (i) has the authority to negotiate and conclude contracts in the name of the nonresident alien individual or foreign corporation and regularly exercises that authority or has a stock of merchandise from which he regularly fills orders on behalf of such individual or foreign corporation, and (ii) is not a general commission agent, broker, or other agent of independent status acting in the ordinary course of his business, income, gain, or loss shall not be considered as attributable to an office or other fixed place of business within the United States unless such office or fixed place of business is a material factor in the production of such income, gain, or loss and such office or fixed place of business regularly carries on activities of the type from which such income, gain, or loss is derived, and the income, gain, or loss which shall be attributable to an office or other fixed place of business within the United States shall be the income, gain, or loss property allocable thereto, but, in the case of a sale or exchange described in clause (iii) of such subparagraph, the income which shall be treated as attributable to an office or other fixed place of business within the United States shall not exceed the income which would be derived from sources within the United States if the sale or exchange were made in the United States. For purposes of this title, in the case of any income or gain of a nonresident alien individual or a foreign corporation which— is taken into account for any taxable year, but is attributable to a sale or exchange of property or the performance of services (or any other transaction) in any other taxable year, the determination of whether such income or gain is taxable under section 871(b) or 882 (as the case may be) shall be made as if such income or gain were taken into account in such other taxable year and without regard to the requirement that the taxpayer be engaged in a trade or business within the United States during the taxable year referred to in subparagraph (A). For purposes of this title, if— any property ceases to be used or held for use in connection with the conduct of a trade or business within the United States, and such property is disposed of within 10 years after such cessation, the determination of whether any income or gain attributable to such disposition is taxable under section 871(b) or 882 (as the case may be) shall be made as if such sale or exchange occurred immediately before such cessation and without regard to the requirement that the taxpayer be engaged in a trade or business within the United States during the taxable year for which such income or gain is taken into account. Notwithstanding any other provision of this subtitle, if a nonresident alien individual or foreign corporation owns, directly or indirectly, an interest in a partnership which is engaged in any trade or business within the United States, gain or loss on the sale or exchange of all (or any portion of) such interest shall be treated as effectively connected with the conduct of such trade or business to the extent such gain or loss does not exceed the amount determined under subparagraph (B). The amount determined under this subparagraph with respect to any partnership interest sold or exchanged— in the case of any gain on the sale or exchange of the partnership interest, is— the portion of the partner’s distributive share of the amount of gain which would have been effectively connected with the conduct of a trade or business within the United States if the partnership had sold all of its assets at their fair market value as of the date of the sale or exchange of such interest, or zero if no gain on such deemed sale would have been so effectively connected, and in the case of any loss on the sale or exchange of the partnership interest, is— the portion of the partner’s distributive share of the amount of loss on the deemed sale described in clause (i)(I) which would have been so effectively connected, or zero if no loss on such deemed sale would be have been so effectively connected. For purposes of this subparagraph, a partner’s distributive share of gain or loss on the deemed sale shall be determined in the same manner as such partner’s distributive share of the non-separately stated taxable income or loss of such partnership. If a partnership described in subparagraph (A) holds any United States real property interest (as defined in section 897(c)) at the time of the sale or exchange of the partnership interest, then the gain or loss treated as effectively connected income under subparagraph (A) shall be reduced by the amount so treated with respect to such United States real property interest under section 897. For purposes of this paragraph, the term “sale or exchange” means any sale, exchange, or other disposition. The Secretary shall prescribe such regulations or other guidance as the Secretary determines appropriate for the application of this paragraph, including with respect to exchanges described in section 332, 351, 354, 355, 356, or 361.

(d) Treatment of related person factoring income For purposes of the provisions set forth in paragraph (2), if any person acquires (directly or indirectly) a trade or service receivable from a related person, any income of such person from the trade or service receivable so acquired shall be treated as if it were interest on a loan to the obligor under the receivable. The provisions set forth in this paragraph are as follows: Section 904 (relating to limitation on foreign tax credit). Subpart F of part III of this subchapter (relating to controlled foreign corporations). For purposes of this subsection, the term “trade or service receivable” means any account receivable or evidence of indebtedness arising out of— the disposition by a related person of property described in section 1221(a)(1), or the performance of services by a related person. For purposes of this subsection, the term “related person” means— any person who is a related person (within the meaning of section 267(b)), and any United States shareholder (as defined in section 951(b)) and any person who is a related person (within the meaning of section 267(b)) to such a shareholder. The following provisions shall not apply to any amount treated as interest under paragraph (1) or (6): Section 904(d)(2)(B)(iii)(I) (relating to exceptions for export financing interest). Subparagraph (A) of section 954(b)(3) (relating to exception where foreign base company income is less than 5 percent or $1,000,000). Subparagraph (B) of section 954(c)(2) (relating to certain export financing). Clause (i) of section 954(c)(3)(A) (relating to certain income received from related persons). Any income of a controlled foreign corporation (within the meaning of section 957(a)) from a loan to a person for the purpose of financing— the purchase of property described in section 1221(a)(1) of a related person, or the payment for the performance of services by a related person, shall be treated as interest described in paragraph (1). Paragraph (1) shall not apply to any trade or service receivable acquired by any person from a related person if— the person acquiring such receivable and such related person are created or organized under the laws of the same foreign country and such related person has a substantial part of its assets used in its trade or business located in such same foreign country, and such related person would not have derived any foreign base company income (as defined in section 954(a), determined without regard to section 954(b)(3)(A)), or any income effectively connected with the conduct of a trade or business within the United States, from such receivable if it had been collected by such related person. The Secretary shall prescribe such regulations as may be necessary to prevent the avoidance of the provisions of this subsection or section 956(c)(3).

(e) Rules for allocating interest, etc. For purposes of this subchapter— The taxable income of each member of an affiliated group shall be determined by allocating and apportioning interest expense of each member as if all members of such group were a single corporation. All allocations and apportionments of interest expense shall be determined using the adjusted bases of assets rather than on the basis of the fair market value of the assets or gross income. For purposes of allocating and apportioning any deductible expense, any tax-exempt asset (and any income from such an asset) shall not be taken into account. A similar rule shall apply in the case of the portion of any dividend (other than a qualifying dividend as defined in section 243(b)) equal to the deduction allowable under section 243 or 245(a) with respect to such dividend and in the case of a like portion of any stock the dividends on which would be so deductible and would not be qualifying dividends (as so defined). For purposes of allocating and apportioning expenses on the basis of assets, the adjusted basis of any stock in a nonaffiliated 10-percent owned corporation shall be— increased by the amount of the earnings and profits of such corporation attributable to such stock and accumulated during the period the taxpayer held such stock, or reduced (but not below zero) by any deficit in earnings and profits of such corporation attributable to such stock for such period. For purposes of this paragraph, the term “nonaffiliated 10-percent owned corporation” means any corporation if— such corporation is not included in the taxpayer’s affiliated group, and members of such affiliated group own 10 percent or more of the total combined voting power of all classes of stock of such corporation entitled to vote. If, by reason of holding stock in a nonaffiliated 10-percent owned corporation, the taxpayer is treated under clause (iii) as owning stock in another corporation with respect to which the stock ownership requirements of clause (ii) are met, the adjustment under subparagraph (A) shall include an adjustment for the amount of the earnings and profits (or deficit therein) of such other corporation which are attributable to the stock the taxpayer is so treated as owning and to the period during which the taxpayer is treated as owning such stock. The stock ownership requirements of this clause are met with respect to any corporation if members of the taxpayer’s affiliated group own (directly or through the application of clause (iii)) 10 percent or more of the total combined voting power of all classes of stock of such corporation entitled to vote. For purposes of this subparagraph, stock owned (directly or indirectly) by a corporation, partnership, or trust shall be treated as being owned proportionately by its shareholders, partners, or beneficiaries. Stock considered to be owned by a person by reason of the application of the preceding sentence, shall, for purposes of applying such sentence, be treated as actually owned by such person. For purposes of this paragraph, proper adjustment shall be made to the earnings and profits of any corporation to take into account any earnings and profits included in gross income under section 951 or under any other provision of this title and reflected in the adjusted basis of the stock. For purposes of this subsection— Except as provided in subparagraph (B), the term “affiliated group” has the meaning given such term by section 1504. Notwithstanding the preceding sentence, a foreign corporation shall be treated as a member of the affiliated group if— more than 50 percent of the gross income of such foreign corporation for the taxable year is effectively connected with the conduct of a trade or business within the United States, and at least 80 percent of either the vote or value of all outstanding stock of such foreign corporation is owned directly or indirectly by members of the affiliated group (determined with regard to this sentence). For purposes of subparagraph (A), any corporation described in subparagraph (C) shall be treated as an includible corporation for purposes of section 1504 only for purposes of applying such section separately to corporations so described. This subparagraph shall not apply for purposes of paragraph (6). A corporation is described in this subparagraph if— such corporation is a financial institution described in section 581 or 591, the business of such financial institution is predominantly with persons other than related persons (within the meaning of subsection (d)(4)) or their customers, and such financial institution is required by State or Federal law to be operated separately from any other entity which is not such an institution. To the extent provided in regulations— a bank holding company (within the meaning of section 2(a) of the Bank Holding Company Act of 1956), and any subsidiary of a financial institution described in section 581 or 591 or of any bank holding company if such subsidiary is predominantly engaged (directly or indirectly) in the active conduct of a banking, financing, or similar business, shall be treated as a corporation described in subparagraph (C). Expenses other than interest which are not directly allocable or apportioned to any specific income producing activity shall be allocated and apportioned as if all members of the affiliated group were a single corporation. The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section, including regulations providing— for the resourcing of income of any member of an affiliated group or modifications to the consolidated return regulations to the extent such resourcing or modification is necessary to carry out the purposes of this section, for direct allocation of interest expense incurred to carry out an integrated financial transaction to any interest (or interest-type income) derived from such transaction and in other circumstances where such allocation would be appropriate to carry out the purposes of this subsection, for the apportionment of expenses allocated to foreign source income among the members of the affiliated group and various categories of income described in section 904(d)(1), for direct allocation of interest expense in the case of indebtedness resulting in a disallowance under section 246A, for appropriate adjustments in the application of paragraph (3) in the case of an insurance company, preventing assets or interest expense from being taken into account more than once, and that this subsection shall not apply for purposes of any provision of this subchapter to the extent the Secretary determines that the application of this subsection for such purposes would not be appropriate.

([(f) Repealed. Pub. L. 117–2, title IX, § 9671(a), Mar. 11, 2021, 135 Stat. 184]

(g) Allocation of research and experimental expenditures For purposes of sections 861(b), 862(b), and 863(b), qualified research and experimental expenditures shall be allocated and apportioned as follows: Any qualified research and experimental expenditures expended solely to meet legal requirements imposed by a political entity with respect to the improvement or marketing of specific products or processes for purposes not reasonably expected to generate gross income (beyond de minimis amounts) outside the jurisdiction of the political entity shall be allocated only to gross income from sources within such jurisdiction. In the case of any qualified research and experimental expenditures (not allocated under subparagraph (A)) to the extent— that such expenditures are attributable to activities conducted in the United States, 50 percent of such expenditures shall be allocated and apportioned to income from sources within the United States and deducted from such income in determining the amount of taxable income from sources within the United States, and that such expenditures are attributable to activities conducted outside the United States, 50 percent of such expenditures shall be allocated and apportioned to income from sources outside the United States and deducted from such income in determining the amount of taxable income from sources outside the United States. The remaining portion of qualified research and experimental expenditures (not allocated under subparagraphs (A) and (B)) shall be apportioned, at the annual election of the taxpayer, on the basis of gross sales or gross income, except that, if the taxpayer elects to apportion on the basis of gross income, the amount apportioned to income from sources outside the United States shall at least be 30 percent of the amount which would be so apportioned on the basis of gross sales. For purposes of this section, the term “qualified research and experimental expenditures” means amounts which are foreign research or experimental expenditures within the meaning of section 174 or domestic research or experimental expenditures within the meaning of section 174A. For purposes of this paragraph, rules similar to the rules of subsection (c) of section 174 shall apply. Any qualified research and experimental expenditures allowed as an amortization deduction under section 174(a) or section 174A(c), shall be taken into account under this subsection for the taxable year for which such expenditures are allowed as a deduction under such section (as the case may be). Any qualified research and experimental expenditures described in subparagraph (B)— if incurred by a United States person, shall be allocated and apportioned under this section in the same manner as if they were attributable to activities conducted in the United States, and if incurred by a person other than a United States person, shall be allocated and apportioned under this section in the same manner as if they were attributable to activities conducted outside the United States. For purposes of subparagraph (A), qualified research and experimental expenditures are described in this subparagraph if such expenditures are attributable to activities conducted— in space, on or under water not within the jurisdiction (as recognized by the United States) of a foreign country, possession of the United States, or the United States, or in Antarctica. Except as provided in subparagraph (B), the allocation and apportionment required by paragraph (1) shall be determined as if all members of the affiliated group (as defined in subsection (e)(5)) were a single corporation. For purposes of the allocation and apportionment required by paragraph (1)— sales and gross income from products produced in whole or in part in a possession by an electing corporation (within the meaning of section 936(h)(5)(E)), 2 and dividends from an electing corporation, shall not be taken into account, except that this subparagraph shall not apply to sales of (and gross income and dividends attributable to sales of) products with respect to which an election under section 936(h)(5)(F) 2 is not in effect. The qualified research and experimental expenditures taken into account for purposes of paragraph (1) shall be adjusted to reflect the amount of such expenditures included in computing the cost-sharing amount (determined under section 936(h)(5)(C)(i)(I)). 2 The Secretary may prescribe such regulations as may be necessary to carry out the purposes of this paragraph, including regulations providing for the source of gross income and the allocation and apportionment of deductions to take into account the adjustments required by subparagraph (B) or (C). Paragraph (6) of subsection (e) shall not apply to qualified research and experimental expenditures. The Secretary shall prescribe such regulations as may be appropriate to carry out the purposes of this subsection, including regulations relating to the determination of whether any expenses are attributable to activities conducted in the United States or outside the United States and regulations providing such adjustments to the provisions of this subsection as may be appropriate in the case of cost-sharing arrangements and contract research. This subsection shall apply to the taxpayer’s first taxable year (beginning on or before August 1, 1994 ) following the taxpayer’s last taxable year to which Revenue Procedure 92–56 applies or would apply if the taxpayer elected the benefits of such Revenue Procedure.

§ 865 Source rules for personal property sales

(a) General rule Except as otherwise provided in this section, income from the sale of personal property— by a United States resident shall be sourced in the United States, or by a nonresident shall be sourced outside the United States.

(b) Exception for inventory property In the case of income derived from the sale of inventory property— this section shall not apply, and such income shall be sourced under the rules of sections 861(a)(6), 862(a)(6), and 863. Notwithstanding the preceding sentence, any income from the sale of any unprocessed timber which is a softwood and was cut from an area in the United States shall be sourced in the United States and the rules of sections 862(a)(6) and 863(b) shall not apply to any such income. For purposes of the preceding sentence, the term “unprocessed timber” means any log, cant, or similar form of timber.

(c) Exception for depreciable personal property Gain (not in excess of the depreciation adjustments) from the sale of depreciable personal property shall be allocated between sources in the United States and sources outside the United States— by treating the same proportion of such gain as sourced in the United States as the United States depreciation adjustments with respect to such property bear to the total depreciation adjustments, and by treating the remaining portion of such gain as sourced outside the United States. Gain (in excess of the depreciation adjustments) from the sale of depreciable personal property shall be sourced as if such property were inventory property. For purposes of this subsection— The term “United States depreciation adjustments” means the portion of the depreciation adjustments to the adjusted basis of the property which are attributable to the depreciation deductions allowable in computing taxable income from sources in the United States. Except in the case of property of a kind described in section 168(g)(4), if, for any taxable year— such property is used predominantly in the United States, or such property is used predominantly outside the United States, all of the depreciation deductions allowable for such year shall be treated as having been allocated to income from sources in the United States (or, where clause (ii) applies, from sources outside the United States). For purposes of this subsection— The term “depreciable personal property” means any personal property if the adjusted basis of such property includes depreciation adjustments. The term “depreciation adjustments” means adjustments reflected in the adjusted basis of any property on account of depreciation deductions (whether allowed with respect to such property or other property and whether allowed to the taxpayer or to any other person). The term “depreciation deductions” means any deductions for depreciation or amortization or any other deduction allowable under any provision of this chapter which treats an otherwise capital expenditure as a deductible expense.

(d) Exception for intangibles In the case of any sale of an intangible— this section shall apply only to the extent the payments in consideration of such sale are not contingent on the productivity, use, or disposition of the intangible, and to the extent such payments are so contingent, the source of such payments shall be determined under this part in the same manner as if such payments were royalties. For purposes of paragraph (1), the term “intangible” means any patent, copyright, secret process or formula, goodwill, trademark, trade brand, franchise, or other like property. To the extent this section applies to the sale of goodwill, payments in consideration of such sale shall be treated as from sources in the country in which such goodwill was generated. Notwithstanding paragraph (1), any gain from the sale of an intangible shall be sourced under subsection (c) to the extent such gain does not exceed the depreciation adjustments with respect to such intangible. Paragraph (2) of subsection (c) shall not apply to any gain from the sale of an intangible.

(e) Special rules for sales through offices or fixed places of business In the case of income not sourced under subsection (b), (c), (d)(1)(B) or (3), or (f), if a United States resident maintains an office or other fixed place of business in a foreign country, income from sales of personal property attributable to such office or other fixed place of business shall be sourced outside the United States. Subparagraph (A) shall not apply unless an income tax equal to at least 10 percent of the income from the sale is actually paid to a foreign country with respect to such income. Notwithstanding any other provisions of this part, if a nonresident maintains an office or other fixed place of business in the United States, income from any sale of personal property (including inventory property) attributable to such office or other fixed place of business shall be sourced in the United States. The preceding sentence shall not apply for purposes of section 971 (defining export trade corporation). Subparagraph (A) shall not apply to any sale of inventory property which is sold for use, disposition, or consumption outside the United States if an office or other fixed place of business of the taxpayer in a foreign country materially participated in the sale. The principles of section 864(c)(5) shall apply in determining whether a taxpayer has an office or other fixed place of business and whether a sale is attributable to such an office or other fixed place of business.

(f) Stock of affiliates If— a United States resident sells stock in an affiliate which is a foreign corporation, such sale occurs in a foreign country in which such affiliate is engaged in the active conduct of a trade or business, and more than 50 percent of the gross income of such affiliate for the 3-year period ending with the close of such affiliate’s taxable year immediately preceding the year in which the sale occurred was derived from the active conduct of a trade or business in such foreign country, any gain from such sale shall be sourced outside the United States. For purposes of paragraphs (2) and (3), the United States resident may elect to treat an affiliate and all other corporations which are wholly owned (directly or indirectly) by the affiliate as one corporation.

(g) United States resident; nonresident For purposes of this section— Except as otherwise provided in this subsection— The term “United States resident” means— any individual who— is a United States citizen or a resident alien and does not have a tax home (as defined in section 911(d)(3)) in a foreign country, or is a nonresident alien and has a tax home (as so defined) in the United States, and any corporation, trust, or estate which is a United States person (as defined in section 7701(a)(30)). The term “nonresident” means any person other than a United States resident. For purposes of this section, a United States citizen or resident alien shall not be treated as a nonresident with respect to any sale of personal property unless an income tax equal to at least 10 percent of the gain derived from such sale is actually paid to a foreign country with respect to that gain. Paragraph (2) shall not apply to the sale by an individual who was a bona fide resident of Puerto Rico during the entire taxable year of stock in a corporation if— such corporation is engaged in the active conduct of a trade or business in Puerto Rico, and more than 50 percent of its gross income for the 3-year period ending with the close of such corporation’s taxable year immediately preceding the year in which such sale occurred was derived from the active conduct of a trade or business in Puerto Rico. For purposes of the preceding sentence, the taxpayer may elect to treat a corporation and all other corporations which are wholly owned (directly or indirectly) by such corporation as one corporation.

(h) Treatment of gains from sale of certain stock or intangibles and from certain liquidations In the case of gain to which this subsection applies— such gain shall be sourced outside the United States, but subsections (a), (b), and (c) of section 904 and sections 907 and 960 shall be applied separately with respect to such gain. This subsection shall apply to— Any gain— which is from the sale of stock in a foreign corporation or an intangible (as defined in subsection (d)(2)) and which would otherwise be sourced in the United States under this section, which, under a treaty obligation of the United States (applied without regard to this section), would be sourced outside the United States, and with respect to which the taxpayer chooses the benefits of this subsection. Any gain which is derived from the receipt of any distribution in liquidation of a corporation— which is organized in a possession of the United States, and more than 50 percent of the gross income of which during the 3-taxable year period ending with the close of the taxable year immediately preceding the taxable year in which the distribution is received is from the active conduct of a trade or business in such possession.

(i) Other definitions For purposes of this section— The term “inventory property” means personal property described in paragraph (1) of section 1221(a). The term “sale” includes an exchange or any other disposition. Any possession of the United States shall be treated as a foreign country. The term “affiliate” means a member of the same affiliated group (within the meaning of section 1504(a) without regard to section 1504(b)). In the case of a partnership, except as provided in regulations, this section shall be applied at the partner level.

(j) Regulations The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purpose of this section, including regulations— relating to the treatment of losses from sales of personal property, applying the rules of this section to income derived from trading in futures contracts, forward contracts, options contracts, and other instruments, and providing that, subject to such conditions (which may include provisions comparable to section 877) as may be provided in such regulations, subsections (e)(1)(B) and (g)(2) shall not apply for purposes of sections 931 and 933.

(k) Cross references For provisions relating to the characterization as dividends for source purposes of gains from the sale of stock in certain foreign corporations, see section 1248. For sourcing of income from certain foreign currency transactions, see section 988.

§ 871 Tax on nonresident alien individuals

(a) Income not connected with United States business—30 percent tax Except as provided in subsection (h), there is hereby imposed for each taxable year a tax of 30 percent of the amount received from sources within the United States by a nonresident alien individual as— interest (other than original issue discount as defined in section 1273), dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, and other fixed or determinable annual or periodical gains, profits, and income, gains described in subsection (b) or (c) of section 631, in the case of— a sale or exchange of an original issue discount obligation, the amount of the original issue discount accruing while such obligation was held by the nonresident alien individual (to the extent such discount was not theretofore taken into account under clause (ii)), and a payment on an original issue discount obligation, an amount equal to the original issue discount accruing while such obligation was held by the nonresident alien individual (except that such original issue discount shall be taken into account under this clause only to the extent such discount was not theretofore taken into account under this clause and only to the extent that the tax thereon does not exceed the payment less the tax imposed by subparagraph (A) thereon), and gains from the sale or exchange after October 4, 1966 , of patents, copyrights, secret processes and formulas, good will, trademarks, trade brands, franchises, and other like property, or of any interest in any such property, to the extent such gains are from payments which are contingent on the productivity, use, or disposition of the property or interest sold or exchanged, but only to the extent the amount so received is not effectively connected with the conduct of a trade or business within the United States. In the case of a nonresident alien individual present in the United States for a period or periods aggregating 183 days or more during the taxable year, there is hereby imposed for such year a tax of 30 percent of the amount by which his gains, derived from sources within the United States, from the sale or exchange at any time during such year of capital assets exceed his losses, allocable to sources within the United States, from the sale or exchange at any time during such year of capital assets. For purposes of this paragraph, gains and losses shall be taken into account only if, and to the extent that, they would be recognized and taken into account if such gains and losses were effectively connected with the conduct of a trade or business within the United States, except that such gains and losses shall be determined without regard to section 1202 and such losses shall be determined without the benefits of the capital loss carryover provided in section 1212. Any gain or loss which is taken into account in determining the tax under paragraph (1) or subsection (b) shall not be taken into account in determining the tax under this paragraph. For purposes of the 183-day requirement of this paragraph, a nonresident alien individual not engaged in trade or business within the United States who has not established a taxable year for any prior period shall be treated as having a taxable year which is the calendar year. For purposes of this section and section 1441— 85 percent of any social security benefit (as defined in section 86(d)) shall be included in gross income (notwithstanding section 207 of the Social Security Act), and section 86 shall not apply.

(b) Income connected with United States business—graduated rate of tax A nonresident alien individual engaged in trade or business within the United States during the taxable year shall be taxable as provided in section 1 or 55 on his taxable income which is effectively connected with the conduct of a trade or business within the United States. In determining taxable income for purposes of paragraph (1), gross income includes only gross income which is effectively connected with the conduct of a trade or business within the United States.

(c) Participants in certain exchange or training programs For purposes of this section, a nonresident alien individual who (without regard to this subsection) is not engaged in trade or business within the United States and who is temporarily present in the United States as a nonimmigrant under subparagraph (F), (J), (M), or (Q) of section 101(a)(15) of the Immigration and Nationality Act, as amended ( 8 U.S.C. 1101(a)(15)(F) , (J), (M), or (Q)), shall be treated as a nonresident alien individual engaged in trade or business within the United States, and any income described in the second sentence of section 1441(b) which is received by such individual shall, to the extent derived from sources within the United States, be treated as effectively connected with the conduct of a trade or business within the United States.

(d) Election to treat real property income as income connected with United States business A nonresident alien individual who during the taxable year derives any income— from real property held for the production of income and located in the United States, or from any interest in such real property, including (i) gains from the sale or exchange of such real property or an interest therein, (ii) rents or royalties from mines, wells, or other natural deposits, and (iii) gains described in section 631(b) or (c), and which, but for this subsection, would not be treated as income which is effectively connected with the conduct of a trade or business within the United States, may elect for such taxable year to treat all such income as income which is effectively connected with the conduct of a trade or business within the United States. In such case, such income shall be taxable as provided in subsection (b)(1) whether or not such individual is engaged in trade or business within the United States during the taxable year. An election under this paragraph for any taxable year shall remain in effect for all subsequent taxable years, except that it may be revoked with the consent of the Secretary with respect to any taxable year. If an election has been made under paragraph (1) and such election has been revoked, a new election may not be made under such paragraph for any taxable year before the 5th taxable year which begins after the first taxable year for which such revocation is effective, unless the Secretary consents to such new election. An election under paragraph (1), and any revocation of such an election, may be made only in such manner and at such time as the Secretary may by regulations prescribe.

([(e) Repealed. Pub. L. 99–514, title XII, § 1211(b)(5), Oct. 22, 1986, 100 Stat. 2536]

(f) Certain annuities received under qualified plans For purposes of this section, gross income does not include any amount received as an annuity under a qualified annuity plan described in section 403(a)(1), or from a qualified trust described in section 401(a) which is exempt from tax under section 501(a), if— all of the personal services by reason of which the annuity is payable were either— personal services performed outside the United States by an individual who, at the time of performance of such personal services, was a nonresident alien, or personal services described in section 864(b)(1) performed within the United States by such individual, and at the time the first amount is paid as an annuity under the annuity plan or by the trust, 90 percent or more of the employees for whom contributions or benefits are provided under such annuity plan, or under the plan or plans of which the trust is a part, are citizens or residents of the United States. Income received during the taxable year which would be excluded from gross income under this subsection but for the requirement of paragraph (1)(B) shall not be included in gross income if— the recipient’s country of residence grants a substantially equivalent exclusion to residents and citizens of the United States; or the recipient’s country of residence is a beneficiary developing country under title V of the Trade Act of 1974 ( 19 U.S.C. 2461 et seq.).

(g) Special rules for original issue discount For purposes of this section and section 881— Except as provided in subparagraph (B), the term “original issue discount obligation” means any bond or other evidence of indebtedness having original issue discount (within the meaning of section 1273). The term “original issue discount obligation” shall not include— Any obligation payable 183 days or less from the date of original issue (without regard to the period held by the taxpayer). Any obligation the interest on which is exempt from tax under section 103 or under any other provision of law without regard to the identity of the holder. The determination of the amount of the original issue discount which accrues during any period shall be made under the rules of section 1272 (or the corresponding provisions of prior law) without regard to any exception for short-term obligations. Except to the extent provided in regulations prescribed by the Secretary, the determination of whether any amount described in subsection (a)(1)(C) is from sources within the United States shall be made at the time of the payment (or sale or exchange) as if such payment (or sale or exchange) involved the payment of interest. The provisions of section 1286 (relating to the treatment of stripped bonds and stripped coupons as obligations with original issue discount) shall apply for purposes of this section.

(h) Repeal of tax on interest of nonresident alien individuals received from certain portfolio debt investments In the case of any portfolio interest received by a nonresident individual from sources within the United States, no tax shall be imposed under paragraph (1)(A) or (1)(C) of subsection (a). For purposes of this subsection, the term “portfolio interest” means any interest (including original issue discount) which— would be subject to tax under subsection (a) but for this subsection, and is paid on an obligation— which is in registered form, and with respect to which— the United States person who would otherwise be required to deduct and withhold tax from such interest under section 1441(a) receives a statement (which meets the requirements of paragraph (5)) that the beneficial owner of the obligation is not a United States person, or the Secretary has determined that such a statement is not required in order to carry out the purposes of this subsection. For purposes of this subsection— The term “portfolio interest” shall not include any interest described in paragraph (2) which is received by a 10-percent shareholder. The term “10-percent shareholder” means— in the case of an obligation issued by a corporation, any person who owns 10 percent or more of the total combined voting power of all classes of stock of such corporation entitled to vote, or in the case of an obligation issued by a partnership, any person who owns 10 percent or more of the capital or profits interest in such partnership. For purposes of determining ownership of stock under subparagraph (B)(i) the rules of section 318(a) shall apply, except that— section 318(a)(2)(C) shall be applied without regard to the 50-percent limitation therein, section 318(a)(3)(C) shall be applied— without regard to the 50-percent limitation therein; and in any case where such section would not apply but for subclause (I), by considering a corporation as owning the stock (other than stock in such corporation) which is owned by or for any shareholder of such corporation in that proportion which the value of the stock which such shareholder owns in such corporation bears to the value of all stock in such corporation, and any stock which a person is treated as owning after application of section 318(a)(4) shall not, for purposes of applying paragraphs (2) and (3) of section 318(a), be treated as actually owned by such person. Under regulations prescribed by the Secretary, rules similar to the rules of the preceding sentence shall be applied in determining the ownership of the capital or profits interest in a partnership for purposes of subparagraph (B)(ii). For purposes of this subsection— Except as otherwise provided in this paragraph, the term “portfolio interest” shall not include— any interest if the amount of such interest is determined by reference to— any receipts, sales or other cash flow of the debtor or a related person, any income or profits of the debtor or a related person, any change in value of any property of the debtor or a related person, or any dividend, partnership distributions, or similar payments made by the debtor or a related person, or any other type of contingent interest that is identified by the Secretary by regulation, where a denial of the portfolio interest exemption is necessary or appropriate to prevent avoidance of Federal income tax. The term “related person” means any person who is related to the debtor within the meaning of section 267(b) or 707(b)(1), or who is a party to any arrangement undertaken for a purpose of avoiding the application of this paragraph. Subparagraph (A)(i) shall not apply to— any amount of interest solely by reason of the fact that the timing of any interest or principal payment is subject to a contingency, any amount of interest solely by reason of the fact that the interest is paid with respect to nonrecourse or limited recourse indebtedness, any amount of interest all or substantially all of which is determined by reference to any other amount of interest not described in subparagraph (A) (or by reference to the principal amount of indebtedness on which such other interest is paid), any amount of interest solely by reason of the fact that the debtor or a related person enters into a hedging transaction to manage the risk of interest rate or currency fluctuations with respect to such interest, any amount of interest determined by reference to— changes in the value of property (including stock) that is actively traded (within the meaning of section 1092(d)) other than property described in section 897(c)(1) or (g), the yield on property described in subclause (I), other than a debt instrument that pays interest described in subparagraph (A), or stock or other property that represents a beneficial interest in the debtor or a related person, or changes in any index of the value of property described in subclause (I) or of the yield on property described in subclause (II), and any other type of interest identified by the Secretary by regulation. Subparagraph (A) shall not apply to any interest paid or accrued with respect to any indebtedness with a fixed term— which was issued on or before April 7, 1993 , or which was issued after such date pursuant to a written binding contract in effect on such date and at all times thereafter before such indebtedness was issued. A statement with respect to any obligation meets the requirements of this paragraph if such statement is made by— the beneficial owner of such obligation, or a securities clearing organization, a bank, or other financial institution that holds customers’ securities in the ordinary course of its trade or business. The preceding sentence shall not apply to any statement with respect to payment of interest on any obligation by any person if, at least one month before such payment, the Secretary has published a determination that any statement from such person (or any class including such person) does not meet the requirements of this paragraph. If the Secretary determines that the exchange of information between the United States and a foreign country is inadequate to prevent evasion of the United States income tax by United States persons, the Secretary may provide in writing (and publish a statement) that the provisions of this subsection shall not apply to payments of interest to any person within such foreign country (or payments addressed to, or for the account of, persons within such foreign country) during the period— beginning on the date specified by the Secretary, and ending on the date that the Secretary determines that the exchange of information between the United States and the foreign country is adequate to prevent the evasion of United States income tax by United States persons. Subparagraph (A) shall not apply to the payment of interest on any obligation which is issued on or before the date of the publication of the Secretary’s determination under such subparagraph. For purposes of this subsection, the term “registered form” has the same meaning given such term by section 163(f).

(i) Tax not to apply to certain interest and dividends No tax shall be imposed under paragraph (1)(A) or (1)(C) of subsection (a) on any amount described in paragraph (2). The amounts described in this paragraph are as follows: Interest on deposits, if such interest is not effectively connected with the conduct of a trade or business within the United States. The active foreign business percentage of— any dividend paid by an existing 80/20 company, and any interest paid by an existing 80/20 company. Income derived by a foreign central bank of issue from bankers’ acceptances. Dividends paid by a foreign corporation which are treated under section 861(a)(2)(B) as income from sources within the United States. For purposes of paragraph (2), the term “deposits” means amounts which are— deposits with persons carrying on the banking business, deposits or withdrawable accounts with savings institutions chartered and supervised as savings and loan or similar associations under Federal or State law, but only to the extent that amounts paid or credited on such deposits or accounts are deductible under section 591 (determined without regard to sections 265 and 291) in computing the taxable income of such institutions, and amounts held by an insurance company under an agreement to pay interest thereon.

(j) Exemption for certain gambling winnings No tax shall be imposed under paragraph (1)(A) of subsection (a) on the proceeds from a wager placed in any of the following games: blackjack, baccarat, craps, roulette, or big-6 wheel. The preceding sentence shall not apply in any case where the Secretary determines by regulation that the collection of the tax is administratively feasible.

(k) Exemption for certain dividends of regulated investment companies Except as provided in subparagraph (B), no tax shall be imposed under paragraph (1)(A) of subsection (a) on any interest-related dividend received from a regulated investment company which meets the requirements of section 852(a) for the taxable year with respect to which the dividend is paid. Subparagraph (A) shall not apply— to any interest-related dividend received from a regulated investment company by a person to the extent such dividend is attributable to interest (other than interest described in subparagraph (E)(i) or (iii)) received by such company on indebtedness issued by such person or by any corporation or partnership with respect to which such person is a 10-percent shareholder, to any interest-related dividend with respect to stock of a regulated investment company unless the person who would otherwise be required to deduct and withhold tax from such dividend under chapter 3 receives a statement (which meets requirements similar to the requirements of subsection (h)(5)) that the beneficial owner of such stock is not a United States person, and to any interest-related dividend paid to any person within a foreign country (or any interest-related dividend payment addressed to, or for the account of, persons within such foreign country) during any period described in subsection (h)(6) with respect to such country. Clause (iii) shall not apply to any dividend with respect to any stock which was acquired on or before the date of the publication of the Secretary’s determination under subsection (h)(6). For purposes of this paragraph— Except as provided in clause (ii), an interest related dividend is any dividend, or part thereof, which is reported by the company as an interest related dividend in written statements furnished to its shareholders. If the aggregate reported amount with respect to the company for any taxable year exceeds the qualified net interest income of the company for such taxable year, an interest related dividend is the excess of— the reported interest related dividend amount, over the excess reported amount which is allocable to such reported interest related dividend amount. Except as provided in subclause (II), the excess reported amount (if any) which is allocable to the reported interest related dividend amount is that portion of the excess reported amount which bears the same ratio to the excess reported amount as the reported interest related dividend amount bears to the aggregate reported amount. In the case of any taxable year which does not begin and end in the same calendar year, if the post-December reported amount equals or exceeds the excess reported amount for such taxable year, subclause (I) shall be applied by substituting “post-December reported amount” for “aggregate reported amount” and no excess reported amount shall be allocated to any dividend paid on or before December 31 of such taxable year. For purposes of this subparagraph— The term “reported interest related dividend amount” means the amount reported to its shareholders under clause (i) as an interest related dividend. The term “excess reported amount” means the excess of the aggregate reported amount over the qualified net interest income of the company for the taxable year. The term “aggregate reported amount” means the aggregate amount of dividends reported by the company under clause (i) as interest related dividends for the taxable year (including interest related dividends paid after the close of the taxable year described in section 855). The term “post-December reported amount” means the aggregate reported amount determined by taking into account only dividends paid after December 31 of the taxable year. For purposes of subparagraph (C), the term “qualified net interest income” means the qualified interest income of the regulated investment company reduced by the deductions properly allocable to such income. For purposes of subparagraph (D), the term “qualified interest income” means the sum of the following amounts derived by the regulated investment company from sources within the United States: Any amount includible in gross income as original issue discount (within the meaning of section 1273) on an obligation payable 183 days or less from the date of original issue (without regard to the period held by the company). Any interest includible in gross income (including amounts recognized as ordinary income in respect of original issue discount or market discount or acquisition discount under part V of subchapter P and such other amounts as regulations may provide) on an obligation which is in registered form; except that this clause shall not apply to— any interest on an obligation issued by a corporation or partnership if the regulated investment company is a 10-percent shareholder in such corporation or partnership, and any interest which is treated as not being portfolio interest under the rules of subsection (h)(4). Any interest referred to in subsection (i)(2)(A) (without regard to the trade or business of the regulated investment company). Any interest-related dividend includable in gross income with respect to stock of another regulated investment company. For purposes of this paragraph, the term “10-percent shareholder” has the meaning given such term by subsection (h)(3)(B). Except as provided in subparagraph (B), no tax shall be imposed under paragraph (1)(A) of subsection (a) on any short-term capital gain dividend received from a regulated investment company which meets the requirements of section 852(a) for the taxable year with respect to which the dividend is paid. Subparagraph (A) shall not apply in the case of any nonresident alien individual subject to tax under subsection (a)(2). For purposes of this paragraph— Except as provided in clause (ii), the term “short-term capital gain dividend” means any dividend, or part thereof, which is reported by the company as a short-term capital gain dividend in written statements furnished to its shareholders. If the aggregate reported amount with respect to the company for any taxable year exceeds the qualified short-term gain of the company for such taxable year, the term “short-term capital gain dividend” means the excess of— the reported short-term capital gain dividend amount, over the excess reported amount which is allocable to such reported short-term capital gain dividend amount. Except as provided in subclause (II), the excess reported amount (if any) which is allocable to the reported short-term capital gain dividend amount is that portion of the excess reported amount which bears the same ratio to the excess reported amount as the reported short-term capital gain dividend amount bears to the aggregate reported amount. In the case of any taxable year which does not begin and end in the same calendar year, if the post-December reported amount equals or exceeds the excess reported amount for such taxable year, subclause (I) shall be applied by substituting “post-December reported amount” for “aggregate reported amount” and no excess reported amount shall be allocated to any dividend paid on or before December 31 of such taxable year. For purposes of this subparagraph— The term “reported short-term capital gain dividend amount” means the amount reported to its shareholders under clause (i) as a short-term capital gain dividend. The term “excess reported amount” means the excess of the aggregate reported amount over the qualified short-term gain of the company for the taxable year. The term “aggregate reported amount” means the aggregate amount of dividends reported by the company under clause (i) as short-term capital gain dividends for the taxable year (including short-term capital gain dividends paid after the close of the taxable year described in section 855). The term “post-December reported amount” means the aggregate reported amount determined by taking into account only dividends paid after December 31 of the taxable year. For purposes of subparagraph (C), the term “qualified short-term gain” means the excess of the net short-term capital gain of the regulated investment company for the taxable year over the net long-term capital loss (if any) of such company for such taxable year. For purposes of this subparagraph, the net short-term capital gain of the regulated investment company shall be computed by treating any short-term capital gain dividend includible in gross income with respect to stock of another regulated investment company as a short-term capital gain. In the case of a distribution to which section 897 does not apply by reason of the second sentence of section 897(h)(1), the amount which would be treated as a short-term capital gain dividend to the shareholder (without regard to this subparagraph)— shall not be treated as a short-term capital gain dividend, and shall be included in such shareholder’s gross income as a dividend from the regulated investment company.

(l) Rules relating to existing 80/20 companies For purposes of this subsection and subsection (i)(2)(B)— The term “existing 80/20 company” means any corporation if— such corporation met the 80-percent foreign business requirements of section 861(c)(1) (as in effect before the date of the enactment of this subsection) for such corporation’s last taxable year beginning before January 1, 2011 , such corporation meets the 80-percent foreign business requirements of subparagraph (B) with respect to each taxable year after the taxable year referred to in clause (i), and there has not been an addition of a substantial line of business with respect to such corporation after the date of the enactment of this subsection. Except as provided in clause (iv), a corporation meets the 80-percent foreign business requirements of this subparagraph if it is shown to the satisfaction of the Secretary that at least 80 percent of the gross income from all sources of such corporation for the testing period is active foreign business income. For purposes of clause (i), the term “active foreign business income” means gross income which— is derived from sources outside the United States (as determined under this subchapter), and is attributable to the active conduct of a trade or business in a foreign country or possession of the United States. For purposes of this subsection, the term “testing period” means the 3-year period ending with the close of the taxable year of the corporation preceding the payment (or such part of such period as may be applicable). If the corporation has no gross income for such 3-year period (or part thereof), the testing period shall be the taxable year in which the payment is made. In the case of a taxable year for which the testing period includes 1 or more taxable years beginning before January 1, 2011 — a corporation meets the 80-percent foreign business requirements of this subparagraph if and only if the weighted average of— the percentage of the corporation’s gross income from all sources that is active foreign business income (as defined in subparagraph (B) of section 861(c)(1) (as in effect before the date of the enactment of this subsection)) for the portion of the testing period that includes taxable years beginning before January 1, 2011 , and the percentage of the corporation’s gross income from all sources that is active foreign business income (as defined in clause (ii) of this subparagraph) for the portion of the testing period, if any, that includes taxable years beginning on or after January 1, 2011 , is at least 80 percent, and the active foreign business percentage for such taxable year shall equal the weighted average percentage determined under subclause (I). Except as provided in paragraph (1)(B)(iv), the term “active foreign business percentage” means, with respect to any existing 80/20 company, the percentage which— the active foreign business income of such company for the testing period, is of the gross income of such company for the testing period from all sources. For purposes of applying paragraph (1) (other than subparagraphs (A)(i) and (B)(iv) thereof) and paragraph (2)— The corporation referred to in paragraph (1)(A) and all of such corporation’s subsidiaries shall be treated as one corporation. For purposes of subparagraph (A), the term “subsidiary” means any corporation in which the corporation referred to in subparagraph (A) owns (directly or indirectly) stock meeting the requirements of section 1504(a)(2) (determined by substituting “50 percent” for “80 percent” each place it appears and without regard to section 1504(b)(3)). The Secretary may issue such regulations or other guidance as is necessary or appropriate to carry out the purposes of this section, including regulations or other guidance which provide for the proper application of the aggregation rules described in paragraph (3).

(m) Treatment of dividend equivalent payments For purposes of subsection (a), sections 881 and 4948(a), and chapters 3 and 4, a dividend equivalent shall be treated as a dividend from sources within the United States. For purposes of this subsection, the term “dividend equivalent” means— any substitute dividend made pursuant to a securities lending or a sale-repurchase transaction that (directly or indirectly) is contingent upon, or determined by reference to, the payment of a dividend from sources within the United States, any payment made pursuant to a specified notional principal contract that (directly or indirectly) is contingent upon, or determined by reference to, the payment of a dividend from sources within the United States, and any other payment determined by the Secretary to be substantially similar to a payment described in subparagraph (A) or (B). For purposes of this subsection, the term “specified notional principal contract” means— any notional principal contract if— in connection with entering into such contract, any long party to the contract transfers the underlying security to any short party to the contract, in connection with the termination of such contract, any short party to the contract transfers the underlying security to any long party to the contract, the underlying security is not readily tradable on an established securities market, in connection with entering into such contract, the underlying security is posted as collateral by any short party to the contract with any long party to the contract, or such contract is identified by the Secretary as a specified notional principal contract, in the case of payments made after the date which is 2 years after the date of the enactment of this subsection, any notional principal contract unless the Secretary determines that such contract is of a type which does not have the potential for tax avoidance. For purposes of paragraph (3)(A)— The term “long party” means, with respect to any underlying security of any notional principal contract, any party to the contract which is entitled to receive any payment pursuant to such contract which is contingent upon, or determined by reference to, the payment of a dividend from sources within the United States with respect to such underlying security. The term “short party” means, with respect to any underlying security of any notional principal contract, any party to the contract which is not a long party with respect to such underlying security. The term “underlying security” means, with respect to any notional principal contract, the security with respect to which the dividend referred to in paragraph (2)(B) is paid. For purposes of this paragraph, any index or fixed basket of securities shall be treated as a single security. For purposes of this subsection, the term “payment” includes any gross amount which is used in computing any net amount which is transferred to or from the taxpayer. In the case of any chain of dividend equivalents one or more of which is subject to tax under subsection (a) or section 881, the Secretary may reduce such tax, but only to the extent that the taxpayer can establish that such tax has been paid with respect to another dividend equivalent in such chain, or is not otherwise due, or as the Secretary determines is appropriate to address the role of financial intermediaries in such chain. For purposes of this paragraph, a dividend shall be treated as a dividend equivalent. For purposes of chapters 3 and 4, each person that is a party to any contract or other arrangement that provides for the payment of a dividend equivalent shall be treated as having control of such payment.

(n) Cross references For tax treatment of certain amounts distributed by the United States to nonresident alien individuals, see section 402(e)(2). For taxation of nonresident alien individuals who are expatriate United States citizens, see section 877. For doubling of tax on citizens of certain foreign countries, see section 891. For adjustment of tax in case of nationals or residents of certain foreign countries, see section 896. For withholding of tax at source on nonresident alien individuals, see section 1441. For election to treat married nonresident alien individual as resident of United States in certain cases, see subsections (g) and (h) of section 6013. For special tax treatment of gain or loss from the disposition by a nonresident alien individual of a United States real property interest, see section 897.

§ 872 Gross income

(a) General rule In the case of a nonresident alien individual, except where the context clearly indicates otherwise, gross income includes only— gross income which is derived from sources within the United States and which is not effectively connected with the conduct of a trade or business within the United States, and gross income which is effectively connected with the conduct of a trade or business within the United States.

(b) Exclusions The following items shall not be included in gross income of a nonresident alien individual, and shall be exempt from taxation under this subtitle: Gross income derived by an individual resident of a foreign country from the international operation of a ship or ships if such foreign country grants an equivalent exemption to individual residents of the United States. Gross income derived by an individual resident of a foreign country from the international operation of aircraft if such foreign country grants an equivalent exemption to individual residents of the United States. Compensation paid by a foreign employer to a nonresident alien individual for the period he is temporarily present in the United States as a nonimmigrant under subparagraph (F), (J), or (Q) of section 101(a)(15) of the Immigration and Nationality Act, as amended. For purposes of this paragraph, the term “foreign employer” means— a nonresident alien individual, foreign partnership, or foreign corporation, or an office or place of business maintained in a foreign country or in a possession of the United States by a domestic corporation, a domestic partnership, or an individual who is a citizen or resident of the United States. Income derived by a nonresident alien individual from a series E or series H United States savings bond, if such individual acquired such bond while a resident of the Ryukyu Islands or the Trust Territory of the Pacific Islands. Gross income derived by a nonresident alien individual from a legal wagering transaction initiated outside the United States in a parimutuel pool with respect to a live horse race or dog race in the United States. Income to which paragraphs (1) and (2) apply shall include income which is derived from the rental on a full or bareboat basis of a ship or ships or aircraft, as the case may be. The Secretary may provide that this subsection be applied separately with respect to income from different types of transportation. To the extent provided in regulations, a possession of the United States shall be treated as a foreign country for purposes of this subsection.

§ 873 Deductions

(a) General rule In the case of a nonresident alien individual, the deductions shall be allowed only for purposes of section 871(b) and (except as provided by subsection (b)) only if and to the extent that they are connected with income which is effectively connected with the conduct of a trade or business within the United States; and the proper apportionment and allocation of the deductions for this purpose shall be determined as provided in regulations prescribed by the Secretary.

(b) Exceptions The following deductions shall be allowed whether or not they are connected with income which is effectively connected with the conduct of a trade or business within the United States: The deduction allowed by section 165 for casualty or theft losses described in paragraph (2) or (3) of section 165(c), but only if the loss is of property located within the United States. The deduction for charitable contributions and gifts allowed by section 170. The deduction for personal exemptions allowed by section 151, except that only one exemption shall be allowed under section 151 unless the taxpayer is a resident of a contiguous country or is a national of the United States.

(c) Cross reference For rule that certain foreign taxes are not to be taken into account in determining deduction or credit, see section 906(b)(1).

§ 874 Allowance of deductions and credits

(a) Return prerequisite to allowance A nonresident alien individual shall receive the benefit of the deductions and credits allowed to him in this subtitle only by filing or causing to be filed with the Secretary a true and accurate return, in the manner prescribed in subtitle F (sec. 6001 and following, relating to procedure and administration), including therein all the information which the Secretary may deem necessary for the calculation of such deductions and credits. This subsection shall not be construed to deny the credits provided by sections 31 and 33 for tax withheld at source or the credit provided by section 34 for certain uses of gasoline and special fuels.

(b) Tax withheld at source The benefit of the deduction for exemptions under section 151 may, in the discretion of the Secretary, and under regulations prescribed by the Secretary, be received by a non-resident alien individual entitled thereto, by filing a claim therefor with the withholding agent.

(c) Foreign tax credit Except as provided in section 906, a nonresident alien individual shall not be allowed the credits against the tax for taxes of foreign countries and possessions of the United States allowed by section 901.

§ 875 Partnerships; beneficiaries of estates and trusts

For purposes of this subtitle— a nonresident alien individual or foreign corporation shall be considered as being engaged in a trade or business within the United States if the partnership of which such individual or corporation is a member is so engaged, and a nonresident alien individual or foreign corporation which is a beneficiary of an estate or trust which is engaged in any trade or business within the United States shall be treated as being engaged in such trade or business within the United States. ( Aug. 16, 1954, ch. 736 , 68A Stat. 281 ; Pub. L. 89–809, title I, § 103(e)(1) , Nov. 13, 1966 , 80 Stat. 1551 .)

§ 876 Alien residents of Puerto Rico, Guam, American Samoa, or the Northern Mariana Islands

(a) General rule This subpart shall not apply to any alien individual who is a bona fide resident of Puerto Rico, Guam, American Samoa, or the Northern Mariana Islands during the entire taxable year and such alien shall be subject to the tax imposed by section 1.

(b) Cross references For exclusion from gross income of income derived from sources within— Guam, American Samoa, and the Northern Mariana Islands, see section 931, and Puerto Rico, see section 933.

§ 877 Expatriation to avoid tax

(a) Treatment of expatriates Every nonresident alien individual to whom this section applies and who, within the 10-year period immediately preceding the close of the taxable year, lost United States citizenship shall be taxable for such taxable year in the manner provided in subsection (b) if the tax imposed pursuant to such subsection (after any reduction in such tax under the last sentence of such subsection) exceeds the tax which, without regard to this section, is imposed pursuant to section 871. This section shall apply to any individual if— the average annual net income tax (as defined in section 38(c)(1)) of such individual for the period of 5 taxable years ending before the date of the loss of United States citizenship is greater than $124, 000, t h e n e tw or t h o f t h e in d i v i d u a l a so f s u c h d a t e i s$ 2,000,000 or more, or such individual fails to certify under penalty of perjury that he has met the requirements of this title for the 5 preceding taxable years or fails to submit such evidence of such compliance as the Secretary may require. In the case of the loss of United States citizenship in any calendar year after 2004, such $124, 000 am o u n t s ha ll b e in cre a se d b y anam o u n t e q u a lt os u c h d o ll a r am o u n t m u lt i pl i e d b y t h ecos t - o f - l i v in g a d j u s t m e n t d e t er min e d u n d ersec t i o n 1 (f) (3) f ors u c h c a l e n d a rye a r b ys u b s t i t u t in g “2003” f or “1992” in s u b p a r a g r a p h (B) t h ereo f . A n y in cre a se u n d er t h e p rece d in g se n t e n ces ha ll b ero u n d e d t o t h e n e a res t m u lt i pl eo f$ 1,000.

(b) Alternative tax A nonresident alien individual described in subsection (a) shall be taxable for the taxable year as provided in section 1 or 55, except that— the gross income shall include only the gross income described in section 872(a) (as modified by subsection (d) of this section), and the deductions shall be allowed if and to the extent that they are connected with the gross income included under this section, except that the capital loss carryover provided by section 1212(b) shall not be allowed; and the proper allocation and apportionment of the deductions for this purpose shall be determined as provided under regulations prescribed by the Secretary. For purposes of paragraph (2), the deductions allowed by section 873(b) shall be allowed; and the deduction (for losses not connected with the trade or business if incurred in transactions entered into for profit) allowed by section 165(c)(2) shall be allowed, but only if the profit, if such transaction had resulted in a profit, would be included in gross income under this section. The tax imposed solely by reason of this section shall be reduced (but not below zero) by the amount of any income, war profits, and excess profits taxes (within the meaning of section 903) paid to any foreign country or possession of the United States on any income of the taxpayer on which tax is imposed solely by reason of this section.

(c) Exceptions Subparagraphs (A) and (B) of subsection (a)(2) shall not apply to an individual described in paragraph (2) or (3). An individual is described in this paragraph if— the individual became at birth a citizen of the United States and a citizen of another country and continues to be a citizen of such other country, and the individual has had no substantial contacts with the United States. An individual shall be treated as having no substantial contacts with the United States only if the individual— was never a resident of the United States (as defined in section 7701(b)), has never held a United States passport, and was not present in the United States for more than 30 days during any calendar year which is 1 of the 10 calendar years preceding the individual’s loss of United States citizenship. An individual is described in this paragraph if— the individual became at birth a citizen of the United States, neither parent of such individual was a citizen of the United States at the time of such birth, the individual’s loss of United States citizenship occurs before such individual attains age 18½, and the individual was not present in the United States for more than 30 days during any calendar year which is 1 of the 10 calendar years preceding the individual’s loss of United States citizenship.

(d) Special rules for source, etc. For purposes of subsection (b)— The following items of gross income shall be treated as income from sources within the United States: Gains on the sale or exchange of property (other than stock or debt obligations) located in the United States. Gains on the sale or exchange of stock issued by a domestic corporation or debt obligations of United States persons or of the United States, a State or political subdivision thereof, or the District of Columbia. Any income or gain derived from stock in a foreign corporation but only— if the individual losing United States citizenship owned (within the meaning of section 958(a)), or is considered as owning (by applying the ownership rules of section 958(b)), at any time during the 2-year period ending on the date of the loss of United States citizenship, more than 50 percent of— the total combined voting power of all classes of stock entitled to vote of such corporation, or the total value of the stock of such corporation, and to the extent such income or gain does not exceed the earnings and profits attributable to such stock which were earned or accumulated before the loss of citizenship and during periods that the ownership requirements of clause (i) are met. In the case of any exchange of property to which this paragraph applies, notwithstanding any other provision of this title, such property shall be treated as sold for its fair market value on the date of such exchange, and any gain shall be recognized for the taxable year which includes such date. This paragraph shall apply to any exchange during the 10-year period beginning on the date the individual loses United States citizenship if— gain would not (but for this paragraph) be recognized on such exchange in whole or in part for purposes of this subtitle, income derived from such property was from sources within the United States (or, if no income was so derived, would have been from such sources), and income derived from the property acquired in the exchange would be from sources outside the United States. Subparagraph (A) shall not apply if the individual enters into an agreement with the Secretary which specifies that any income or gain derived from the property acquired in the exchange (or any other property which has a basis determined in whole or part by reference to such property) during such 10-year period shall be treated as from sources within the United States. If the property transferred in the exchange is disposed of by the person acquiring such property, such agreement shall terminate and any gain which was not recognized by reason of such agreement shall be recognized as of the date of such disposition. To the extent provided in regulations prescribed by the Secretary, subparagraph (B) shall be applied by substituting the 15-year period beginning 5 years before the loss of United States citizenship for the 10-year period referred to therein. In the case of any exchange occurring during such 5 years, any gain recognized under this subparagraph shall be recognized immediately after such loss of citizenship. To the extent provided in regulations prescribed by the Secretary— the removal of appreciated tangible personal property from the United States, and any other occurrence which (without recognition of gain) results in a change in the source of the income or gain from property from sources within the United States to sources outside the United States, shall be treated as an exchange to which this paragraph applies. For purposes of determining whether this section applies to any gain on the sale or exchange of any property, the running of the 10-year period described in subsection (a) and the period applicable under paragraph (2) shall be suspended for any period during which the individual’s risk of loss with respect to the property is substantially diminished by— the holding of a put with respect to such property (or similar property), the holding by another person of a right to acquire the property, or a short sale or any other transaction. If— an individual losing United States citizenship contributes property during the 10-year period beginning on the date the individual loses United States citizenship to any corporation which, at the time of the contribution, is described in subparagraph (B), and income derived from such property immediately before such contribution was from sources within the United States (or, if no income was so derived, would have been from such sources), any income or gain on such property (or any other property which has a basis determined in whole or part by reference to such property) received or accrued by the corporation shall be treated as received or accrued directly by such individual and not by such corporation. The preceding sentence shall not apply to the extent the property has been treated under subparagraph (C) as having been sold by such corporation. A corporation is described in this subparagraph with respect to an individual if, were such individual a United States citizen— such corporation would be a controlled foreign corporation (as defined in section 957), and such individual would be a United States shareholder (as defined in section 951(b)) with respect to such corporation. If stock in the corporation referred to in subparagraph (A) (or any other stock which has a basis determined in whole or part by reference to such stock) is disposed of during the 10-year period referred to in subsection (a) and while the property referred to in subparagraph (A) is held by such corporation, a pro rata share of such property (determined on the basis of the value of such stock) shall be treated as sold by the corporation immediately before such disposition. The Secretary shall prescribe such regulations as may be necessary to prevent the avoidance of the purposes of this paragraph, including where— the property is sold to the corporation, and the property taken into account under subparagraph (A) is sold by the corporation. The Secretary shall require such information reporting as is necessary to carry out the purposes of this paragraph.

(e) Comparable treatment of lawful permanent residents who cease to be taxed as residents Any long-term resident of the United States who ceases to be a lawful permanent resident of the United States (within the meaning of section 7701(b)(6)) shall be treated for purposes of this section and sections 2107, 2501, and 6039G in the same manner as if such resident were a citizen of the United States who lost United States citizenship on the date of such cessation or commencement. For purposes of this subsection, the term “long-term resident” means any individual (other than a citizen of the United States) who is a lawful permanent resident of the United States in at least 8 taxable years during the period of 15 taxable years ending with the taxable year during which the event described in paragraph (1) occurs. For purposes of the preceding sentence, an individual shall not be treated as a lawful permanent resident for any taxable year if such individual is treated as a resident of a foreign country for the taxable year under the provisions of a tax treaty between the United States and the foreign country and does not waive the benefits of such treaty applicable to residents of the foreign country. Subsection (c) shall not apply to an individual who is treated as provided in paragraph (1). Solely for purposes of determining any tax imposed by reason of this subsection, property which was held by the long-term resident on the date the individual first became a resident of the United States shall be treated as having a basis on such date of not less than the fair market value of such property on such date. The preceding sentence shall not apply if the individual elects not to have such sentence apply. Such an election, once made, shall be irrevocable. This subsection shall not apply to an individual who is described in a category of individuals prescribed by regulation by the Secretary. The Secretary shall prescribe such regulations as may be appropriate to carry out this subsection, including regulations providing for the application of this subsection in cases where an alien individual becomes a resident of the United States during the 10-year period after being treated as provided in paragraph (1).

(f) Burden of proof If the Secretary establishes that it is reasonable to believe that an individual’s loss of United States citizenship would, but for this section, result in a substantial reduction for the taxable year in the taxes on his probable income for such year, the burden of proving for such taxable year that such loss of citizenship did not have for one of its principal purposes the avoidance of taxes under this subtitle or subtitle B shall be on such individual.

(g) Physical presence This section shall not apply to any individual to whom this section would otherwise apply for any taxable year during the 10-year period referred to in subsection (a) in which such individual is physically present in the United States at any time on more than 30 days in the calendar year ending in such taxable year, and such individual shall be treated for purposes of this title as a citizen or resident of the United States, as the case may be, for such taxable year. In the case of an individual described in any of the following subparagraphs of this paragraph, a day of physical presence in the United States shall be disregarded if the individual is performing services in the United States on such day for an employer. The preceding sentence shall not apply if— such employer is related (within the meaning of section 267 and 707) to such individual, or such employer fails to meet such requirements as the Secretary may prescribe by regulations to prevent the avoidance of the purposes of this paragraph. Not more than 30 days during any calendar year may be disregarded under this subparagraph. An individual is described in this subparagraph if— the individual becomes (not later than the close of a reasonable period after loss of United States citizenship or termination of residency) a citizen or resident of the country in which— such individual was born, if such individual is married, such individual’s spouse was born, or either of such individual’s parents were born, and the individual becomes fully liable for income tax in such country. An individual is described in this subparagraph if, for each year in the 10-year period ending on the date of loss of United States citizenship or termination of residency, the individual was physically present in the United States for 30 days or less. The rule of section 7701(b)(3)(D) shall apply for purposes of this subparagraph.

(h) Termination This section shall not apply to any individual whose expatriation date (as defined in section 877A(g)(3)) is on or after the date of the enactment of this subsection.

§ 877A Tax responsibilities of expatriation

(a) General rules For purposes of this subtitle— All property of a covered expatriate shall be treated as sold on the day before the expatriation date for its fair market value. In the case of any sale under paragraph (1)— notwithstanding any other provision of this title, any gain arising from such sale shall be taken into account for the taxable year of the sale, and any loss arising from such sale shall be taken into account for the taxable year of the sale to the extent otherwise provided by this title, except that section 1091 shall not apply to any such loss. Proper adjustment shall be made in the amount of any gain or loss subsequently realized for gain or loss taken into account under the preceding sentence, determined without regard to paragraph (3). The amount which would (but for this paragraph) be includible in the gross income of any individual by reason of paragraph (1) shall be reduced (but not below zero) by $600, 000. I n t h ec a seo f an y t a x ab l eye a r b e g innin g ina c a l e n d a rye a r a f t er 2008, t h e d o ll a r am o u n t in s u b p a r a g r a p h (A) s ha ll b e in cre a se d b y anam o u n t e q u a lt o — s u c h d o ll a r am o u n t, m u lt i pl i e d b y t h ecos t - o f - l i v in g a d j u s t m e n t d e t er min e d u n d ersec t i o n 1 (f) (3) f or t h ec a l e n d a rye a r in w hi c h t h e t a x ab l eye a r b e g in s, b ys u b s t i t u t in g “ c a l e n d a rye a r 2007” f or “ c a l e n d a rye a r 2016” in s u b p a r a g r a p h (A) (ii) t h ereo f . I f an y am o u n t a s a d j u s t e d u n d erc l a u se (i) i s n o t am u lt i pl eo f$ 1,000, such amount shall be rounded to the nearest multiple of $1,000.

(b) Election to defer tax If the taxpayer elects the application of this subsection with respect to any property treated as sold by reason of subsection (a), the time for payment of the additional tax attributable to such property shall be extended until the due date of the return for the taxable year in which such property is disposed of (or, in the case of property disposed of in a transaction in which gain is not recognized in whole or in part, until such other date as the Secretary may prescribe). For purposes of paragraph (1), the additional tax attributable to any property is an amount which bears the same ratio to the additional tax imposed by this chapter for the taxable year solely by reason of subsection (a) as the gain taken into account under subsection (a) with respect to such property bears to the total gain taken into account under subsection (a) with respect to all property to which subsection (a) applies. The due date for payment of tax may not be extended under this subsection later than the due date for the return of tax imposed by this chapter for the taxable year which includes the date of death of the expatriate (or, if earlier, the time that the security provided with respect to the property fails to meet the requirements of paragraph (4), unless the taxpayer corrects such failure within the time specified by the Secretary). No election may be made under paragraph (1) with respect to any property unless adequate security is provided with respect to such property. For purposes of subparagraph (A), security with respect to any property shall be treated as adequate security if— it is a bond which is furnished to, and accepted by, the Secretary, which is conditioned on the payment of tax (and interest thereon), and which meets the requirements of section 6325, or it is another form of security for such payment (including letters of credit) that meets such requirements as the Secretary may prescribe. No election may be made under paragraph (1) unless the taxpayer makes an irrevocable waiver of any right under any treaty of the United States which would preclude assessment or collection of any tax imposed by reason of this section. An election under paragraph (1) shall only apply to property described in the election and, once made, is irrevocable. For purposes of section 6601, the last date for the payment of tax shall be determined without regard to the election under this subsection.

(c) Exception for certain property Subsection (a) shall not apply to— any deferred compensation item (as defined in subsection (d)(4)), any specified tax deferred account (as defined in subsection (e)(2)), and any interest in a nongrantor trust (as defined in subsection (f)(3)).

(d) Treatment of deferred compensation items In the case of any eligible deferred compensation item, the payor shall deduct and withhold from any taxable payment to a covered expatriate with respect to such item a tax equal to 30 percent thereof. For purposes of subparagraph (A), the term “taxable payment” means with respect to a covered expatriate any payment to the extent it would be includible in the gross income of the covered expatriate if such expatriate continued to be subject to tax as a citizen or resident of the United States. A deferred compensation item shall be taken into account as a payment under the preceding sentence when such item would be so includible. In the case of any deferred compensation item which is not an eligible deferred compensation item— with respect to any deferred compensation item to which clause (ii) does not apply, an amount equal to the present value of the covered expatriate’s accrued benefit shall be treated as having been received by such individual on the day before the expatriation date as a distribution under the plan, and with respect to any deferred compensation item referred to in paragraph (4)(D), the rights of the covered expatriate to such item shall be treated as becoming transferable and not subject to a substantial risk of forfeiture on the day before the expatriation date, no early distribution tax shall apply by reason of such treatment, and appropriate adjustments shall be made to subsequent distributions from the plan to reflect such treatment. For purposes of this subsection, the term “eligible deferred compensation item” means any deferred compensation item with respect to which— the payor of such item is— a United States person, or a person who is not a United States person but who elects to be treated as a United States person for purposes of paragraph (1) and meets such requirements as the Secretary may provide to ensure that the payor will meet the requirements of paragraph (1), and the covered expatriate— notifies the payor of his status as a covered expatriate, and makes an irrevocable waiver of any right to claim any reduction under any treaty with the United States in withholding on such item. For purposes of this subsection, the term “deferred compensation item” means— any interest in a plan or arrangement described in section 219(g)(5), any interest in a foreign pension plan or similar retirement arrangement or program, any item of deferred compensation, and any property, or right to property, which the individual is entitled to receive in connection with the performance of services to the extent not previously taken into account under section 83 or in accordance with section 83. Paragraphs (1) and (2) shall not apply to any deferred compensation item to the extent attributable to services performed outside the United States while the covered expatriate was not a citizen or resident of the United States. Rules similar to the rules of subchapter B of chapter 3 shall apply for purposes of this subsection. Any item subject to the withholding tax imposed under paragraph (1) shall be subject to tax under section 871. Any item subject to withholding under paragraph (1) shall not be subject to withholding under section 1441 or chapter 24.

(e) Treatment of specified tax deferred accounts In the case of any interest in a specified tax deferred account held by a covered expatriate on the day before the expatriation date— the covered expatriate shall be treated as receiving a distribution of his entire interest in such account on the day before the expatriation date, no early distribution tax shall apply by reason of such treatment, and appropriate adjustments shall be made to subsequent distributions from the account to reflect such treatment. For purposes of paragraph (1), the term “specified tax deferred account” means an individual retirement plan (as defined in section 7701(a)(37)) other than any arrangement described in subsection (k) or (p) of section 408, a qualified tuition program (as defined in section 529), a qualified ABLE program (as defined in section 529A), a Coverdell education savings account (as defined in section 530), a health savings account (as defined in section 223), and an Archer MSA (as defined in section 220).

(f) Special rules for nongrantor trusts In the case of a distribution (directly or indirectly) of any property from a nongrantor trust to a covered expatriate— the trustee shall deduct and withhold from such distribution an amount equal to 30 percent of the taxable portion of the distribution, and if the fair market value of such property exceeds its adjusted basis in the hands of the trust, gain shall be recognized to the trust as if such property were sold to the expatriate at its fair market value. For purposes of this subsection, the term “taxable portion” means, with respect to any distribution, that portion of the distribution which would be includible in the gross income of the covered expatriate if such expatriate continued to be subject to tax as a citizen or resident of the United States. For purposes of this subsection, the term “nongrantor trust” means the portion of any trust that the individual is not considered the owner of under subpart E of part I of subchapter J. The determination under the preceding sentence shall be made immediately before the expatriation date. For purposes of this subsection— rules similar to the rules of subsection (d)(6) shall apply, and the covered expatriate shall be treated as having waived any right to claim any reduction under any treaty with the United States in withholding on any distribution to which paragraph (1)(A) applies unless the covered expatriate agrees to such other treatment as the Secretary determines appropriate. This subsection shall apply to a nongrantor trust only if the covered expatriate was a beneficiary of the trust on the day before the expatriation date.

(g) Definitions and special rules relating to expatriation For purposes of this section— The term “covered expatriate” means an expatriate who meets the requirements of subparagraph (A), (B), or (C) of section 877(a)(2). An individual shall not be treated as meeting the requirements of subparagraph (A) or (B) of section 877(a)(2) if— the individual— became at birth a citizen of the United States and a citizen of another country and, as of the expatriation date, continues to be a citizen of, and is taxed as a resident of, such other country, and has been a resident of the United States (as defined in section 7701(b)(1)(A)(ii)) for not more than 10 taxable years during the 15-taxable year period ending with the taxable year during which the expatriation date occurs, or the individual’s relinquishment of United States citizenship occurs before such individual attains age 18½, and the individual has been a resident of the United States (as so defined) for not more than 10 taxable years before the date of relinquishment. In the case of any covered expatriate who is subject to tax as a citizen or resident of the United States for any period beginning after the expatriation date, such individual shall not be treated as a covered expatriate during such period for purposes of subsections (d)(1) and (f) and section 2801. The term “expatriate” means— any United States citizen who relinquishes his citizenship, and any long-term resident of the United States who ceases to be a lawful permanent resident of the United States (within the meaning of section 7701(b)(6)). The term “expatriation date” means— the date an individual relinquishes United States citizenship, or in the case of a long-term resident of the United States, the date on which the individual ceases to be a lawful permanent resident of the United States (within the meaning of section 7701(b)(6)). A citizen shall be treated as relinquishing his United States citizenship on the earliest of— the date the individual renounces his United States nationality before a diplomatic or consular officer of the United States pursuant to paragraph (5) of section 349(a) of the Immigration and Nationality Act ( 8 U.S.C. 1481(a)(5) ), the date the individual furnishes to the United States Department of State a signed statement of voluntary relinquishment of United States nationality confirming the performance of an act of expatriation specified in paragraph (1), (2), (3), or (4) of section 349(a) of the Immigration and Nationality Act ( 8 U.S.C. 1481(a)(1) –(4)), the date the United States Department of State issues to the individual a certificate of loss of nationality, or the date a court of the United States cancels a naturalized citizen’s certificate of naturalization. Subparagraph (A) or (B) shall not apply to any individual unless the renunciation or voluntary relinquishment is subsequently approved by the issuance to the individual of a certificate of loss of nationality by the United States Department of State. The term “long-term resident” has the meaning given to such term by section 877(e)(2). The term “early distribution tax” means any increase in tax imposed under section 72(t), 220(f)(4), 223(f)(4), 409A(a)(1)(B), 529(c)(6), 529A(c)(3), or 530(d)(4).

(h) Other rules In the case of any covered expatriate, notwithstanding any other provision of this title— any time period for acquiring property which would result in the reduction in the amount of gain recognized with respect to property disposed of by the taxpayer shall terminate on the day before the expatriation date, and any extension of time for payment of tax shall cease to apply on the day before the expatriation date and the unpaid portion of such tax shall be due and payable at the time and in the manner prescribed by the Secretary. Solely for purposes of determining any tax imposed by reason of subsection (a), property which was held by an individual on the date the individual first became a resident of the United States (within the meaning of section 7701(b)) shall be treated as having a basis on such date of not less than the fair market value of such property on such date. The preceding sentence shall not apply if the individual elects not to have such sentence apply. Such an election, once made, shall be irrevocable. If the expatriation of any individual would result in the recognition of gain under section 684, this section shall be applied after the application of section 684.

(i) Regulations The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section.

§ 878 Foreign educational, charitable, and certain other exempt organizations

For special provisions relating to foreign educational, charitable, and other exempt organizations, see sections 512(a) and 4948. ( Aug. 16, 1954, ch. 736 , 68A Stat. 282 , § 877; renumbered § 878, Pub. L. 89–809, title I, § 103(f)(1) , Nov. 13, 1966 , 80 Stat. 1551 ; amended Pub. L. 91–172, title I, § 101(j)(20) , Dec. 30, 1969 , 83 Stat. 528 .)

§ 879 Tax treatment of certain community income in the case of nonresident alien individuals

(a) General rule In the case of a married couple 1 or both of whom are nonresident alien individuals and who have community income for the taxable year, such community income shall be treated as follows: Earned income (within the meaning of section 911(d)(2)), other than trade or business income and a partner’s distributive share of partnership income, shall be treated as the income of the spouse who rendered the personal services, Trade or business income, and a partner’s distributive share of partnership income, shall be treated as provided in section 1402(a)(5), Community income not described in paragraph (1) or (2) which is derived from the separate property (as determined under the applicable community property law) of one spouse shall be treated as the income of such spouse, and All other such community income shall be treated as provided in the applicable community property law.

(b) Exception where election under section 6013(g) is in effect Subsection (a) shall not apply for any taxable year for which an election under subsection (g) or (h) of section 6013 (relating to election to treat nonresident alien individual as resident of the United States) is in effect.

(c) Definitions and special rules For purposes of this section— The term “community income” means income which, under applicable community property laws, is treated as community income. The term “community property laws” means the community property laws of a State, a foreign country, or a possession of the United States. The determination of marital status shall be made under section 7703(a).

§ 881 Tax on income of foreign corporations not connected with United States business

(a) Imposition of tax Except as provided in subsection (c), there is hereby imposed for each taxable year a tax of 30 percent of the amount received from sources within the United States by a foreign corporation as— interest (other than original issue discount as defined in section 1273), dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, and other fixed or determinable annual or periodical gains, profits, and income, gains described in section 631(b) or (c), in the case of— a sale or exchange of an original issue discount obligation, the amount of the original issue discount accruing while such obligation was held by the foreign corporation (to the extent such discount was not theretofore taken into account under subparagraph (B)), and a payment on an original issue discount obligation, an amount equal to the original issue discount accruing while such obligation was held by the foreign corporation (except that such original issue discount shall be taken into account under this subparagraph only to the extent such discount was not theretofore taken into account under this subparagraph and only to the extent that the tax thereon does not exceed the payment less the tax imposed by paragraph (1) thereon), and gains from the sale or exchange after October 4, 1966 , of patents, copyrights, secret processes and formulas, good will, trademarks, trade brands, franchises, and other like property, or of any interest in any such property, to the extent such gains are from payments which are contingent on the productivity, use, or disposition of the property or interest sold or exchanged, but only to the extent the amount so received is not effectively connected with the conduct of a trade or business within the United States.

(b) Exception for certain possessions For purposes of this section and section 884, a corporation created or organized in Guam, American Samoa, the Northern Mariana Islands, or the Virgin Islands or under the law of any such possession shall not be treated as a foreign corporation for any taxable year if— at all times during such taxable year less than 25 percent in value of the stock of such corporation is beneficially owned (directly or indirectly) by foreign persons, at least 65 percent of the gross income of such corporation is shown to the satisfaction of the Secretary to be effectively connected with the conduct of a trade or business in such a possession or the United States for the 3-year period ending with the close of the taxable year of such corporation (or for such part of such period as the corporation or any predecessor has been in existence), and no substantial part of the income of such corporation is used (directly or indirectly) to satisfy obligations to persons who are not bona fide residents of such a possession or the United States. If dividends are received during a taxable year by a corporation— created or organized in, or under the law of, the Commonwealth of Puerto Rico, and with respect to which the requirements of subparagraphs (A), (B), and (C) of paragraph (1) are met for the taxable year, subsection (a) shall be applied for such taxable year by substituting “10 percent” for “30 percent”. If, on or after the date of the enactment of this paragraph, an increase in the rate of the Commonwealth of Puerto Rico’s withholding tax which is generally applicable to dividends paid to United States corporations not engaged in a trade or business in the Commonwealth to a rate greater than 10 percent takes effect, this paragraph shall not apply to dividends received on or after the effective date of the increase. For purposes of paragraph (1), the term “foreign person” means any person other than— a United States person, or a person who would be a United States person if references to the United States in section 7701 included references to a possession of the United States. For purposes of paragraph (1), the rules of section 318(a)(2) shall apply except that “5 percent” shall be substituted for “50 percent” in subparagraph (C) thereof.

(c) Repeal of tax on interest of foreign corporations received from certain portfolio debt investments In the case of any portfolio interest received by a foreign corporation from sources within the United States, no tax shall be imposed under paragraph (1) or (3) of subsection (a). For purposes of this subsection, the term “portfolio interest” means any interest (including original issue discount) which— would be subject to tax under subsection (a) but for this subsection, and is paid on an obligation— which is in registered form, and with respect to which— the person who would otherwise be required to deduct and withhold tax from such interest under section 1442(a) receives a statement which meets the requirements of section 871(h)(5) that the beneficial owner of the obligation is not a United States person, or the Secretary has determined that such a statement is not required in order to carry out the purposes of this subsection. For purposes of this subsection, the term “portfolio interest” shall not include any portfolio interest which— except in the case of interest paid on an obligation of the United States, is received by a bank on an extension of credit made pursuant to a loan agreement entered into in the ordinary course of its trade or business, is received by a 10-percent shareholder (within the meaning of section 871(h)(3)(B)), or is received by a controlled foreign corporation from a related person (within the meaning of section 864(d)(4)). For purposes of this subsection, the term “portfolio interest” shall not include any interest which is treated as not being portfolio interest under the rules of section 871(h)(4). In the case of any portfolio interest received by a controlled foreign corporation, the following provisions shall not apply: Subparagraph (A) of section 954(b)(3) (relating to exception where foreign base company income is less than 5 percent or $1,000,000). Paragraph (4) of section 954(b) (relating to exception for certain income subject to high foreign taxes). Clause (i) of section 954(c)(3)(A) (relating to certain income received from related persons). For purposes of this subsection, the term “controlled foreign corporation” has the meaning given to such term by section 957(a). Under rules similar to the rules of section 871(h)(6), the Secretary may provide that this subsection shall not apply to payments of interest described in section 871(h)(6). For purposes of this subsection, the term “registered form” has the meaning given such term by section 163(f).

(d) Tax not to apply to certain interest and dividends No tax shall be imposed under paragraph (1) or (3) of subsection (a) on any amount described in section 871(i)(2).

(e) Tax not to apply to certain dividends of regulated investment companies Except as provided in subparagraph (B), no tax shall be imposed under paragraph (1) of subsection (a) on any interest-related dividend (as defined in section 871(k)(1)) received from a regulated investment company. Subparagraph (A) shall not apply— to any dividend referred to in section 871(k)(1)(B), and to any interest-related dividend received by a controlled foreign corporation (within the meaning of section 957(a)) to the extent such dividend is attributable to interest received by the regulated investment company from a person who is a related person (within the meaning of section 864(d)(4)) with respect to such controlled foreign corporation. The rules of subsection (c)(5)(A) shall apply to any interest-related dividend received by a controlled foreign corporation (within the meaning of section 957(a)) to the extent such dividend is attributable to interest received by the regulated investment company which is described in clause (ii) of section 871(k)(1)(E) (and not described in clause (i) or (iii) of such section). No tax shall be imposed under paragraph (1) of subsection (a) on any short-term capital gain dividend (as defined in section 871(k)(2)) received from a regulated investment company.

(f) Cross reference For doubling of tax on corporations of certain foreign countries, see section 891. For special rules for original issue discount, see section 871(g).

§ 882 Tax on income of foreign corporations connected with United States business

(a) Imposition of tax A foreign corporation engaged in trade or business within the United States during the taxable year shall be taxable as provided in section 11, 55, or 59A, 1 on its taxable income which is effectively connected with the conduct of a trade or business within the United States. In determining taxable income for purposes of paragraph (1), gross income includes only gross income which is effectively connected with the conduct of a trade or business within the United States. For special tax treatment of gain or loss from the disposition by a foreign corporation of a United States real property interest, see section 897.

(b) Gross income In the case of a foreign corporation, except where the context clearly indicates otherwise, gross income includes only— gross income which is derived from sources within the United States and which is not effectively connected with the conduct of a trade or business within the United States, and gross income which is effectively connected with the conduct of a trade or business within the United States.

(c) Allowance of deductions and credits In the case of a foreign corporation, the deductions shall be allowed only for purposes of subsection (a) and (except as provided by subparagraph (B)) only if and to the extent that they are connected with income which is effectively connected with the conduct of a trade or business within the United States; and the proper apportionment and allocation of the deductions for this purpose shall be determined as provided in regulations prescribed by the Secretary. The deduction for charitable contributions and gifts provided by section 170 shall be allowed whether or not connected with income which is effectively connected with the conduct of a trade or business within the United States. A foreign corporation shall receive the benefit of the deductions and credits allowed to it in this subtitle only by filing or causing to be filed with the Secretary a true and accurate return, in the manner prescribed in subtitle F, including therein all the information which the Secretary may deem necessary for the calculation of such deductions and credits. The preceding sentence shall not apply for purposes of the tax imposed by section 541 (relating to personal holding company tax), and shall not be construed to deny the credit provided by section 33 for tax withheld at source or the credit provided by section 34 for certain uses of gasoline. Except as provided by section 906, foreign corporations shall not be allowed the credit against the tax for taxes of foreign countries and possessions of the United States allowed by section 901. For rule that certain foreign taxes are not to be taken into account in determining deduction or credit, see section 906(b)(1).

(d) Election to treat real property income as income connected with United States business A foreign corporation which during the taxable year derives any income— from real property located in the United States, or from any interest in such real property, including (i) gains from the sale or exchange of real property or an interest therein, (ii) rents or royalties from mines, wells, or other natural deposits, and (iii) gains described in section 631(b) or (c), and which, but for this subsection, would not be treated as income effectively connected with the conduct of a trade or business within the United States, may elect for such taxable year to treat all such income as income which is effectively connected with the conduct of a trade or business within the United States. In such case, such income shall be taxable as provided in subsection (a)(1) whether or not such corporation is engaged in trade or business within the United States during the taxable year. An election under this paragraph for any taxable year shall remain in effect for all subsequent taxable years, except that it may be revoked with the consent of the Secretary with respect to any taxable year. Paragraphs (2) and (3) of section 871(d) shall apply in respect of elections under this subsection in the same manner and to the same extent as they apply in respect of elections under section 871(d).

(e) Interest on United States obligations received by banks organized in possessions In the case of a corporation created or organized in, or under the law of, a possession of the United States which is carrying on the banking business in a possession of the United States, interest on obligations of the United States which is not portfolio interest (as defined in section 881(c)(2)) shall— for purposes of this subpart, be treated as income which is effectively connected with the conduct of a trade or business within the United States, and shall be taxable as provided in subsection (a)(1) whether or not such corporation is engaged in trade or business within the United States during the taxable year.

(f) Returns of tax by agent If any foreign corporation has no office or place of business in the United States but has an agent in the United States, the return required under section 6012 shall be made by the agent.

§ 883 Exclusions from gross income

(a) Income of foreign corporations from ships and aircraft The following items shall not be included in gross income of a foreign corporation, and shall be exempt from taxation under this subtitle: Gross income derived by a corporation organized in a foreign country from the international operation of a ship or ships if such foreign country grants an equivalent exemption to corporations organized in the United States. Gross income derived by a corporation organized in a foreign country from the international operation of aircraft if such foreign country grants an equivalent exemption to corporations organized in the United States. Earnings derived from payments by a common carrier for the use on a temporary basis (not expected to exceed a total of 90 days in any taxable year) of railroad rolling stock owned by a corporation of a foreign country which grants an equivalent exemption to corporations organized in the United States. The rules of paragraphs (6), (7), and (8) of section 872(b) shall apply for purposes of this subsection. For purposes of this subsection, there shall not be taken into account any failure of a foreign country to grant an exemption to a corporation organized in the United States if such corporation is subject to tax by such foreign country on a residence basis pursuant to provisions of foreign law which meets such standards (if any) as the Secretary may prescribe.

(b) Earnings derived from communications satellite system The earnings derived from the ownership or operation of a communications satellite system by a foreign entity designated by a foreign government to participate in such ownership or operation shall be exempt from taxation under this subtitle, if the United States, through its designated entity, participates in such system pursuant to the Communications Satellite Act of 1962 ( 47 U.S.C. 701 and following).

(c) Treatment of certain foreign corporations Paragraph (1) or (2) of subsection (a) (as the case may be) shall not apply to any foreign corporation if 50 percent or more of the value of the stock of such corporation is owned by individuals who are not residents of such foreign country or another foreign country meeting the requirements of such paragraph. Paragraph (1) shall not apply to any foreign corporation which is a controlled foreign corporation (as defined in section 957(a)). Paragraph (1) shall not apply to any corporation which is organized in a foreign country meeting the requirements of paragraph (1) or (2) of subsection (a) (as the case may be) and the stock of which is primarily and regularly traded on an established securities market in such foreign country, another foreign country meeting the requirements of such paragraph, or the United States. Any stock in another corporation which is owned (directly or indirectly) by a corporation meeting the requirements of subparagraph (A) shall be treated as owned by individuals who are residents of the foreign country in which the corporation meeting the requirements of subparagraph (A) is organized. For purposes of paragraph (1), stock owned (directly or indirectly) by or for a corporation, partnership, trust, or estate shall be treated as being owned proportionately by its shareholders, partners, or beneficiaries. Stock considered to be owned by a person by reason of the application of the preceding sentence shall, for purposes of applying such sentence, be treated as actually owned by such person.

§ 884 Branch profits tax

(a) Imposition of tax In addition to the tax imposed by section 882 for any taxable year, there is hereby imposed on any foreign corporation a tax equal to 30 percent of the dividend equivalent amount for the taxable year.

(b) Dividend equivalent amount For purposes of subsection (a), the term “dividend equivalent amount” means the foreign corporation’s effectively connected earnings and profits for the taxable year adjusted as provided in this subsection: If— the U.S. net equity of the foreign corporation as of the close of the taxable year, exceeds the U.S. net equity of the foreign corporation as of the close of the preceding taxable year, the effectively connected earnings and profits for the taxable year shall be reduced (but not below zero) by the amount of such excess. If— the U.S. net equity of the foreign corporation as of the close of the preceding taxable year, exceeds the U.S. net equity of the foreign corporation as of the close of the taxable year, the effectively connected earnings and profits for the taxable year shall be increased by the amount of such excess. The increase under subparagraph (A) for any taxable year shall not exceed the accumulated effectively connected earnings and profits as of the close of the preceding taxable year. For purposes of clause (i), the term “accumulated effectively connected earnings and profits” means the excess of— the aggregate effectively connected earnings and profits for preceding taxable years beginning after December 31, 1986 , over the aggregate dividend equivalent amounts determined for such preceding taxable years.

(c) U.S. net equity For purposes of this section— The term “U.S. net equity” means— U.S. assets, reduced (including below zero) by U.S. liabilities. For purposes of paragraph (1)— The term “U.S. assets” means the money and aggregate adjusted bases of property of the foreign corporation treated as connected with the conduct of a trade or business in the United States under regulations prescribed by the Secretary. For purposes of the preceding sentence, the adjusted basis of any property shall be its adjusted basis for purposes of computing earnings and profits. The term “U.S. liabilities” means the liabilities of the foreign corporation treated as connected with the conduct of a trade or business in the United States under regulations prescribed by the Secretary. The regulations prescribed under subparagraphs (A) and (B) shall be consistent with the allocation of deductions under section 882(c)(1).

(d) Effectively connected earnings and profits For purposes of this section— The term “effectively connected earnings and profits” means earnings and profits (without diminution by reason of any distributions made during the taxable year) which are attributable to income which is effectively connected (or treated as effectively connected) with the conduct of a trade or business within the United States. The term “effectively connected earnings and profits” shall not include any earnings and profits attributable to— income not includible in gross income under paragraph (1) or (2) of section 883(a), income treated as effectively connected with the conduct of a trade or business within the United States under section 921(d) or 926(b) (as in effect before their repeal by the FSC Repeal and Extraterritorial Income Exclusion Act of 2000), gain on the disposition of a United States real property interest described in section 897(c)(1)(A)(ii), income treated as effectively connected with the conduct of a trade or business within the United States under section 953(c)(3)(C), or income treated as effectively connected with the conduct of a trade or business within the United States under section 882(e). Property and liabilities of the foreign corporation treated as connected with such income under regulations prescribed by the Secretary shall not be taken into account in determining the U.S. assets or U.S. liabilities of the foreign corporation.

(e) Coordination with income tax treaties; etc. No treaty between the United States and a foreign country shall exempt any foreign corporation from the tax imposed by subsection (a) (or reduce the amount thereof) unless— such treaty is an income tax treaty, and such foreign corporation is a qualified resident of such foreign country. If a foreign corporation is a qualified resident of a foreign country with which the United States has an income tax treaty— the rate of tax under subsection (a) shall be the rate of tax specified in such treaty— on branch profits if so specified, or if not so specified, on dividends paid by a domestic corporation to a corporation resident in such country which wholly owns such domestic corporation, and any other limitations under such treaty on the tax imposed by subsection (a) shall apply. If a foreign corporation is subject to the tax imposed by subsection (a) for any taxable year (determined after the application of any treaty), no tax shall be imposed by section 871(a), 881(a), 1441, or 1442 on any dividends paid by such corporation out of its earnings and profits for such taxable year. If— any dividend described in section 861(a)(2)(B) is received by a foreign corporation, and subparagraph (A) does not apply to such dividend, rules similar to the rules of subparagraphs (A) and (B) of subsection (f)(3) shall apply to such dividend. For purposes of this subsection— Except as otherwise provided in this paragraph, the term “qualified resident” means, with respect to any foreign country, any foreign corporation which is a resident of such foreign country unless— 50 percent or more (by value) of the stock of such foreign corporation is owned (within the meaning of section 883(c)(4)) by individuals who are not residents of such foreign country and who are not United States citizens or resident aliens, or 50 percent or more of its income is used (directly or indirectly) to meet liabilities to persons who are not residents of such foreign country or citizens or residents of the United States. A foreign corporation which is a resident of a foreign country shall be treated as a qualified resident of such foreign country if— the stock of such corporation is primarily and regularly traded on an established securities market in such foreign country, or such corporation is wholly owned (either directly or indirectly) by another foreign corporation which is organized in such foreign country and the stock of which is so traded. A foreign corporation which is a resident of a foreign country shall be treated as a qualified resident of such foreign country if— such corporation is wholly owned (directly or indirectly) by a domestic corporation, and the stock of such domestic corporation is primarily and regularly traded on an established securities market in the United States. The Secretary may, in his sole discretion, treat a foreign corporation as being a qualified resident of a foreign country if such corporation establishes to the satisfaction of the Secretary that such corporation meets such requirements as the Secretary may establish to ensure that individuals who are not residents of such foreign country do not use the treaty between such foreign country and the United States in a manner inconsistent with the purposes of this subsection. This section shall not apply to an international organization (as defined in section 7701(a)(18)).

(f) Treatment of interest allocable to effectively connected income In the case of a foreign corporation engaged in a trade or business in the United States (or having gross income treated as effectively connected with the conduct of a trade or business in the United States), for purposes of this subtitle— any interest paid by such trade or business in the United States shall be treated as if it were paid by a domestic corporation, and to the extent that the allocable interest exceeds the interest described in subparagraph (A), such foreign corporation shall be liable for tax under section 881(a) in the same manner as if such excess were interest paid to such foreign corporation by a wholly owned domestic corporation on the last day of such foreign corporation’s taxable year. To the extent provided in regulations, subparagraph (A) shall not apply to interest in excess of the amounts reasonably expected to be allocable interest. For purposes of this subsection, the term “allocable interest” means any interest which is allocable to income which is effectively connected (or treated as effectively connected) with the conduct of a trade or business in the United States. In the case of any interest described in paragraph (1) which is paid or accrued by a foreign corporation, no benefit under any treaty between the United States and the foreign country of which such corporation is a resident shall apply unless— such treaty is an income tax treaty, and such foreign corporation is a qualified resident of such foreign country. In the case of any interest described in paragraph (1) which is received or accrued by any corporation, no benefit under any treaty between the United States and the foreign country of which such corporation is a resident shall apply unless— such treaty is an income tax treaty, and such foreign corporation is a qualified resident of such foreign country.

(g) Regulations The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section, including regulations providing for appropriate adjustments in the determination of the dividend equivalent amount in connection with the distribution to shareholders or transfer to a controlled corporation of the taxpayer’s U.S. assets and other adjustments in such determination as are necessary or appropriate to carry out the purposes of this section.

§ 885 Cross references

For special provisions relating to foreign corporations carrying on an insurance business within the United States, see section 842. For rules applicable in determining whether any foreign corporation is engaged in trade or business within the United States, see section 864(b). For adjustment of tax in case of corporations of certain foreign countries, see section 896. For allowance of credit against the tax in case of a foreign corporation having income effectively connected with the conduct of a trade or business within the United States, see section 906. For withholding at source of tax on income of foreign corporations, see section 1442. ( Aug. 16, 1954, ch. 736 , 68A Stat. 283 , § 884; Pub. L. 89–809, title I, § 104(m)(1) , Nov. 13, 1966 , 80 Stat. 1563 ; Pub. L. 91–172, title I, § 101(j)(21) , Dec. 30, 1969 , 83 Stat. 528 ; renumbered § 885, Pub. L. 99–514, title XII, § 1241(a) , Oct. 22, 1986 , 100 Stat. 2576 .)

§ 887 Imposition of tax on gross transportation income of nonresident aliens and foreign corporations

(a) Imposition of tax In the case of any nonresident alien individual or foreign corporation, there is hereby imposed for each taxable year a tax equal to 4 percent of such individual’s or corporation’s United States source gross transportation income for such taxable year.

(b) United States source gross transportation income Except as provided in paragraphs (2) and (3), the term “United States source gross transportation income” means any gross income which is transportation income (as defined in section 863(c)(3)) to the extent such income is treated as from sources in the United States under section 863(c)(2). To the extent provided in regulations, such term does not include any income of a kind to which an exemption under paragraph (1) or (2) of section 883(a) would not apply. The term “United States source gross transportation income” shall not include any income taxable under section 871(b) or 882. The term “United States source gross transportation income” does not include any income taxable in a possession of the United States under the provisions of this title as made applicable in such possession. For purposes of this chapter, United States source gross transportation income of any taxpayer shall not be treated as effectively connected with the conduct of a trade or business in the United States unless— the taxpayer has a fixed place of business in the United States involved in the earning of United States source gross transportation income, and substantially all of the United States source gross transportation income (determined without regard to paragraph (2)) of the taxpayer is attributable to regularly scheduled transportation (or, in the case of income from the leasing of a vessel or aircraft, is attributable to a fixed place of business in the United States).

(c) Coordination with other provisions Any income taxable under this section shall not be taxable under section 871, 881, or 882.

§ 891 Doubling of rates of tax on citizens and corporations of certain foreign countries

Whenever the President finds that, under the laws of any foreign country, citizens or corporations of the United States are being subjected to discriminatory or extraterritorial taxes, the President shall so proclaim and the rates of tax imposed by sections 1, 3, 11, 801, 831, 852, 871, and 881 shall, for the taxable year during which such proclamation is made and for each taxable year thereafter, be doubled in the case of each citizen and corporation of such foreign country; but the tax at such doubled rate shall be considered as imposed by such sections as the case may be. In no case shall this section operate to increase the taxes imposed by such sections (computed without regard to this section) to an amount in excess of 80 percent of the taxable income of the taxpayer (computed without regard to the deductions allowable under section 151 and under part VIII of subchapter B). Whenever the President finds that the laws of any foreign country with respect to which the President has made a proclamation under the preceding provisions of this section have been modified so that discriminatory and extraterritorial taxes applicable to citizens and corporations of the United States have been removed, he shall so proclaim, and the provisions of this section providing for doubled rates of tax shall not apply to any citizen or corporation of such foreign country with respect to any taxable year beginning after such proclamation is made. ( Aug. 16, 1954, ch. 736 , 68A Stat. 283 ; Mar. 13, 1956, ch. 83, § 5(6) , 70 Stat. 49 ; Pub. L. 86–69, § 3(f)(1) , June 25, 1959 , 73 Stat. 140 ; Pub. L. 98–369, div. A, title II, § 211(b)(12) , July 18, 1984 , 98 Stat. 755 ; Pub. L. 99–514, title X, § 1024(c)(13) , Oct. 22, 1986 , 100 Stat. 2408 .)

§ 892 Income of foreign governments and of international organizations

(a) Foreign governments The income of foreign governments received from— investments in the United States in— stocks, bonds, or other domestic securities owned by such foreign governments, or financial instruments held in the execution of governmental financial or monetary policy, or interest on deposits in banks in the United States of moneys belonging to such foreign governments, shall not be included in gross income and shall be exempt from taxation under this subtitle. Paragraph (1) shall not apply to any income— derived from the conduct of any commercial activity (whether within or outside the United States), received by a controlled commercial entity or received (directly or indirectly) from a controlled commercial entity, or derived from the disposition of any interest in a controlled commercial entity. For purposes of subparagraph (A), the term “controlled commercial entity” means any entity engaged in commercial activities (whether within or outside the United States) if the government— holds (directly or indirectly) any interest in such entity which (by value or voting interest) is 50 percent or more of the total of such interests in such entity, or holds (directly or indirectly) any other interest in such entity which provides the foreign government with effective control of such entity. For purposes of the preceding sentence, a central bank of issue shall be treated as a controlled commercial entity only if engaged in commercial activities within the United States. For purposes of this title, a foreign government shall be treated as a corporate resident of its country. A foreign government shall be so treated for purposes of any income tax treaty obligation of the United States if such government grants equivalent treatment to the Government of the United States.

(b) International organizations The income of international organizations received from investments in the United States in stocks, bonds, or other domestic securities owned by such international organizations, or from interest on deposits in banks in the United States of moneys belonging to such international organizations, or from any other source within the United States, shall not be included in gross income and shall be exempt from taxation under this subtitle.

(c) Regulations The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section.

§ 893 Compensation of employees of foreign governments or international organizations

(a) Rule for exclusion Wages, fees, or salary of any employee of a foreign government or of an international organization (including a consular or other officer, or a nondiplomatic representative), received as compensation for official services to such government or international organization shall not be included in gross income and shall be exempt from taxation under this subtitle if— such employee is not a citizen of the United States, or is a citizen of the Republic of the Philippines (whether or not a citizen of the United States); and in the case of an employee of a foreign government, the services are of a character similar to those performed by employees of the Government of the United States in foreign countries; and in the case of an employee of a foreign government, the foreign government grants an equivalent exemption to employees of the Government of the United States performing similar services in such foreign country.

(b) Certificate by Secretary of State The Secretary of State shall certify to the Secretary of the Treasury the names of the foreign countries which grant an equivalent exemption to the employees of the Government of the United States performing services in such foreign countries, and the character of the services performed by employees of the Government of the United States in foreign countries.

(c) Limitation on exclusion Subsection (a) shall not apply to— any employee of a controlled commercial entity (as defined in section 892(a)(2)(B)), or any employee of a foreign government whose services are primarily in connection with a commercial activity (whether within or outside the United States) of the foreign government.

§ 894 Income affected by treaty

(a) Treaty provisions The provisions of this title shall be applied to any taxpayer with due regard to any treaty obligation of the United States which applies to such taxpayer. For relationship between treaties and this title, see section 7852(d).

(b) Permanent establishment in United States For purposes of applying any exemption from, or reduction of, any tax provided by any treaty to which the United States is a party with respect to income which is not effectively connected with the conduct of a trade or business within the United States, a nonresident alien individual or a foreign corporation shall be deemed not to have a permanent establishment in the United States at any time during the taxable year. This subsection shall not apply in respect of the tax computed under section 877(b).

(c) Denial of treaty benefits for certain payments through hybrid entities A foreign person shall not be entitled under any income tax treaty of the United States with a foreign country to any reduced rate of any withholding tax imposed by this title on an item of income derived through an entity which is treated as a partnership (or is otherwise treated as fiscally transparent) for purposes of this title if— such item is not treated for purposes of the taxation laws of such foreign country as an item of income of such person, the treaty does not contain a provision addressing the applicability of the treaty in the case of an item of income derived through a partnership, and the foreign country does not impose tax on a distribution of such item of income from such entity to such person. The Secretary shall prescribe such regulations as may be necessary or appropriate to determine the extent to which a taxpayer to which paragraph (1) does not apply shall not be entitled to benefits under any income tax treaty of the United States with respect to any payment received by, or income attributable to any activities of, an entity organized in any jurisdiction (including the United States) that is treated as a partnership or is otherwise treated as fiscally transparent for purposes of this title (including a common investment trust under section 584, a grantor trust, or an entity that is disregarded for purposes of this title) and is treated as fiscally nontransparent for purposes of the tax laws of the jurisdiction of residence of the taxpayer.

§ 895 Income derived by a foreign central bank of issue from obligations of the United States or from bank deposits

Income derived by a foreign central bank of issue from obligations of the United States or of any agency or instrumentality thereof (including beneficial interests, participations, and other instruments issued under section 302(c) of the Federal National Mortgage Association Charter Act ( 12 U.S.C. 1717 )) which are owned by such foreign central bank of issue, or derived from interest on deposits with persons carrying on the banking business, shall not be included in gross income and shall be exempt from taxation under this subtitle unless such obligations or deposits are held for, or used in connection with, the conduct of commercial banking functions or other commercial activities. For purposes of the preceding sentence the Bank for International Settlements shall be treated as a foreign central bank of issue. (Added Pub. L. 87–29, § 1(a) , May 4, 1961 , 75 Stat. 64 ; amended Pub. L. 89–809, title I, § 102(a)(4)(A) , Nov. 13, 1966 , 80 Stat. 1543 .)

§ 896 Adjustment of tax on nationals, residents, and corporations of certain foreign countries

(a) Imposition of more burdensome taxes by foreign country Whenever the President finds that— under the laws of any foreign country, considering the tax system of such foreign country, citizens of the United States not residents of such foreign country or domestic corporations are being subjected to more burdensome taxes, on any item of income received by such citizens or corporations from sources within such foreign country, than taxes imposed by the provisions of this subtitle on similar income derived from sources within the United States by residents or corporations of such foreign country, such foreign country, when requested by the United States to do so, has not acted to revise or reduce such taxes so that they are no more burdensome than taxes imposed by the provisions of this subtitle on similar income derived from sources within the United States by residents or corporations of such foreign country, and it is in the public interest to apply pre-1967 tax provisions in accordance with the provisions of this subsection to residents or corporations of such foreign country, the President shall proclaim that the tax on such similar income derived from sources within the United States by residents or corporations of such foreign country shall, for taxable years beginning after such proclamation, be determined under this subtitle without regard to amendments made to this subchapter and chapter 3 on or after the date of enactment of this section.

(b) Imposition of discriminatory taxes by foreign country Whenever the President finds that— under the laws of any foreign country, citizens of the United States or domestic corporations (or any class of such citizens or corporations) are, with respect to any item of income, being subjected to a higher effective rate of tax than are nationals, residents, or corporations of such foreign country (or a similar class of such nationals, residents, or corporations) under similar circumstances; such foreign country, when requested by the United States to do so, has not acted to eliminate such higher effective rate of tax; and it is in the public interest to adjust, in accordance with the provisions of this subsection, the effective rate of tax imposed by this subtitle on similar income of nationals, residents, or corporations of such foreign country (or such similar class of such nationals, residents, or corporations), the President shall proclaim that the tax on similar income of nationals, residents, or corporations of such foreign country (or such similar class of such nationals, residents, or corporations) shall, for taxable years beginning after such proclamation, be adjusted so as to cause the effective rate of tax imposed by this subtitle on such similar income to be substantially equal to the effective rate of tax imposed by such foreign country on such item of income of citizens of the United States or domestic corporations (or such class of citizens or corporations). In implementing a proclamation made under this subsection, the effective rate of tax imposed by this subtitle on an item of income may be adjusted by the disallowance, in whole or in part, of any deduction, credit, or exemption which would otherwise be allowed with respect to that item of income or by increasing the rate of tax otherwise applicable to that item of income.

(c) Alleviation of more burdensome or discriminatory taxes Whenever the President finds that— the laws of any foreign country with respect to which the President has made a proclamation under subsection (a) have been modified so that citizens of the United States not residents of such foreign country or domestic corporations are no longer subject to more burdensome taxes on the item of income derived by such citizens or corporations from sources within such foreign country, or the laws of any foreign country with respect to which the President has made a proclamation under subsection (b) have been modified so that citizens of the United States or domestic corporations (or any class of such citizens or corporations) are no longer subject to a higher effective rate of tax on the item of income, he shall proclaim that the tax imposed by this subtitle on the similar income of nationals, residents, or corporations of such foreign country shall, for any taxable year beginning after such proclamation, be determined under this subtitle without regard to such subsection.

(d) Notification of Congress required No proclamation shall be issued by the President pursuant to this section unless, at least 30 days prior to such proclamation, he has notified the Senate and the House of Representatives of his intention to issue such proclamation.

(e) Implementation by regulations The Secretary shall prescribe such regulations as he deems necessary or appropriate to implement this section.

§ 897 Disposition of investment in United States real property

(a) General rule For purposes of this title, gain or loss of a nonresident alien individual or a foreign corporation from the disposition of a United States real property interest shall be taken into account— in the case of a nonresident alien individual, under section 871(b)(1), or in the case of a foreign corporation, under section 882(a)(1), as if the taxpayer were engaged in a trade or business within the United States during the taxable year and as if such gain or loss were effectively connected with such trade or business. In the case of any nonresident alien individual, the taxable excess for purposes of section 55(b)(1) shall not be less than the lesser of— the individual’s alternative minimum taxable income (as defined in section 55(b)(1)(D)) for the taxable year, or the individual’s net United States real property gain for the taxable year. For purposes of subparagraph (A), the term “net United States real property gain” means the excess of— the aggregate of the gains for the taxable year from dispositions of United States real property interests, over the aggregate of the losses for the taxable year from dispositions of such interests.

(b) Limitation on losses of individuals In the case of an individual, a loss shall be taken into account under subsection (a) only to the extent such loss would be taken into account under section 165(c) (determined without regard to subsection (a) of this section).

(c) United States real property interest For purposes of this section— Except as provided in subparagraph (B) or subsection (k), the term “United States real property interest” means— an interest in real property (including an interest in a mine, well, or other natural deposit) located in the United States or the Virgin Islands, and any interest (other than an interest solely as a creditor) in any domestic corporation unless the taxpayer establishes (at such time and in such manner as the Secretary by regulations prescribes) that such corporation was at no time a United States real property holding corporation during the shorter of— the period after June 18, 1980 , during which the taxpayer held such interest, or the 5-year period ending on the date of the disposition of such interest. The term “United States real property interest” does not include any interest in a corporation if— as of the date of the disposition of such interest, such corporation did not hold any United States real property interests, all of the United States real property interests held by such corporation at any time during the shorter of the periods described in subparagraph (A)(ii)— were disposed of in transactions in which the full amount of the gain (if any) was recognized, or ceased to be United States real property interests by reason of the application of this subparagraph to 1 or more other corporations, and neither such corporation nor any predecessor of such corporation was a regulated investment company or a real estate investment trust at any time during the shorter of the periods described in subparagraph (A)(ii). The term “United States real property holding corporation” means any corporation if— the fair market value of its United States real property interests equals or exceeds 50 percent of the fair market value of— its United States real property interests, its interests in real property located outside the United States, plus any other of its assets which are used or held for use in a trade or business. If any class of stock of a corporation is regularly traded on an established securities market, stock of such class shall be treated as a United States real property interest only in the case of a person who, at some time during the shorter of the periods described in paragraph (1)(A)(ii), held more than 5 percent of such class of stock. For purposes of determining whether any corporation is a United States real property holding corporation— Paragraph (1)(A)(ii) shall be applied by substituting “any corporation (whether foreign or domestic)” for “any domestic corporation”. Under regulations prescribed by the Secretary, assets held by a partnership, trust, or estate shall be treated as held proportionately by its partners or beneficiaries. Any asset treated as held by a partner or beneficiary by reason of this subparagraph which is used or held for use by the partnership, trust, or estate in a trade or business shall be treated as so used or held by the partner or beneficiary. Any asset treated as held by a partner or beneficiary by reason of this subparagraph shall be so treated for purposes of applying this subparagraph successively to partnerships, trusts, or estates which are above the first partnership, trust, or estate in a chain thereof. Under regulations, for purposes of determining whether any corporation is a United States real property holding corporation, if any corporation (hereinafter in this paragraph referred to as the “first corporation”) holds a controlling interest in a second corporation— the stock which the first corporation holds in the second corporation shall not be taken into account, the first corporation shall be treated as holding a portion of each asset of the second corporation equal to the percentage of the fair market value of the stock of the second corporation represented by the stock held by the first corporation, and any asset treated as held by the first corporation by reason of clause (ii) which is used or held for use by the second corporation in a trade or business shall be treated as so used or held by the first corporation. Any asset treated as held by the first corporation by reason of the preceding sentence shall be so treated for purposes of applying the preceding sentence successively to corporations which are above the first corporation in a chain of corporations. For purposes of subparagraph (A), the term “controlling interest” means 50 percent or more of the fair market value of all classes of stock of a corporation. The term “interest in real property” includes fee ownership and co-ownership of land or improvements thereon, leaseholds of land or improvements thereon, options to acquire land or improvements thereon, and options to acquire leaseholds of land or improvements thereon. The term “real property” includes movable walls, furnishings, and other personal property associated with the use of the real property. For purposes of determining under paragraph (3) whether any person holds more than 5 percent of any class of stock and of determining under paragraph (5) whether a person holds a controlling interest in any corporation, section 318(a) shall apply (except that paragraphs (2)(C) and (3)(C) of section 318(a) shall be applied by substituting “5 percent” for “50 percent”).

(d) Treatment of distributions by foreign corporations Except to the extent otherwise provided in regulations, notwithstanding any other provision of this chapter, gain shall be recognized by a foreign corporation on the distribution (including a distribution in liquidation or redemption) of a United States real property interest in an amount equal to the excess of the fair market value of such interest (as of the time of the distribution) over its adjusted basis. Gain shall not be recognized under paragraph (1)— if— at the time of the receipt of the distributed property, the distributee would be subject to taxation under this chapter on a subsequent disposition of the distributed property, and the basis of the distributed property in the hands of the distributee is no greater than the adjusted basis of such property before the distribution, increased by the amount of gain (if any) recognized by the distributing corporation, or if such nonrecognition is provided in regulations prescribed by the Secretary under subsection (e)(2).

(e) Coordination with nonrecognition provisions Except to the extent otherwise provided in subsection (d) and paragraph (2) of this subsection, any nonrecognition provision shall apply for purposes of this section to a transaction only in the case of an exchange of a United States real property interest for an interest the sale of which would be subject to taxation under this chapter. The Secretary shall prescribe regulations (which are necessary or appropriate to prevent the avoidance of Federal income taxes) providing— the extent to which nonrecognition provisions shall, and shall not, apply for purposes of this section, and the extent to which— transfers of property in reorganization, and changes in interests in, or distributions from, a partnership, trust, or estate, shall be treated as sales of property at fair market value. For purposes of this subsection, the term “nonrecognition provision” means any provision of this title for not recognizing gain or loss.

([(f) Repealed. Pub. L. 104–188, title I, § 1702(g)(2), Aug. 20, 1996, 110 Stat. 1873]

(g) Special rule for sales of interest in partnerships, trusts, and estates Under regulations prescribed by the Secretary, the amount of any money, and the fair market value of any property, received by a nonresident alien individual or foreign corporation in exchange for all or part of its interest in a partnership, trust, or estate shall, to the extent attributable to United States real property interests, be considered as an amount received from the sale or exchange in the United States of such property.

(h) Special rules for certain investment entities For purposes of this section— Any distribution by a qualified investment entity to a nonresident alien individual, a foreign corporation, or other qualified investment entity shall, to the extent attributable to gain from sales or exchanges by the qualified investment entity of United States real property interests, be treated as gain recognized by such nonresident alien individual, foreign corporation, or other qualified investment entity from the sale or exchange of a United States real property interest. Notwithstanding the preceding sentence, any distribution by a qualified investment entity to a nonresident alien individual or a foreign corporation with respect to any class of stock which is regularly traded on an established securities market located in the United States shall not be treated as gain recognized from the sale or exchange of a United States real property interest if such individual or corporation did not own more than 5 percent of such class of stock at any time during the 1-year period ending on the date of such distribution. The term “United States real property interest” does not include any interest in a domestically controlled qualified investment entity. In the case of a domestically controlled qualified investment entity, rules similar to the rules of subsection (d) shall apply to the foreign ownership percentage of any gain. The term “qualified investment entity” means— any real estate investment trust, and any regulated investment company which is a United States real property holding corporation or which would be a United States real property holding corporation if the exceptions provided in subsections (c)(3) and (h)(2) did not apply to interests in any real estate investment trust or regulated investment company. The term “domestically controlled qualified investment entity” means any qualified investment entity in which at all times during the testing period less than 50 percent in value of the stock was held directly or indirectly by foreign persons. The term “foreign ownership percentage” means that percentage of the stock of the qualified investment entity which was held (directly or indirectly) by foreign persons at the time during the testing period during which the direct and indirect ownership of stock by foreign persons was greatest. The term “testing period” means whichever of the following periods is the shortest: the period beginning on June 19, 1980 , and ending on the date of the disposition or of the distribution, as the case may be, the 5-year period ending on the date of the disposition or of the distribution, as the case may be, or the period during which the qualified investment entity was in existence. For purposes of determining the holder of stock under subparagraphs (B) and (C)— in the case of any class of stock of the qualified investment entity which is regularly traded on an established securities market in the United States, a person holding less than 5 percent of such class of stock at all times during the testing period shall be treated as a United States person unless the qualified investment entity has actual knowledge that such person is not a United States person, any stock in the qualified investment entity held by another qualified investment entity— any class of stock of which is regularly traded on an established securities market, or which is a regulated investment company which issues redeemable securities (within the meaning of section 2 of the Investment Company Act of 1940), shall be treated as held by a foreign person, except that if such other qualified investment entity is domestically controlled (determined after application of this subparagraph), such stock shall be treated as held by a United States person, and any stock in the qualified investment entity held by any other qualified investment entity not described in subclause (I) or (II) of clause (ii) shall only be treated as held by a United States person in proportion to the stock of such other qualified investment entity which is (or is treated under clause (ii) or (iii) as) held by a United States person. If an interest in a domestically controlled qualified investment entity is disposed of in an applicable wash sale transaction, the taxpayer shall, for purposes of this section, be treated as having gain from the sale or exchange of a United States real property interest in an amount equal to the portion of the distribution described in subparagraph (B) with respect to such interest which, but for the disposition, would have been treated by the taxpayer as gain from the sale or exchange of a United States real property interest under paragraph (1). For purposes of this paragraph— The term “applicable wash sales transaction” means any transaction (or series of transactions) under which a nonresident alien individual, foreign corporation, or qualified investment entity— disposes of an interest in a domestically controlled qualified investment entity during the 30-day period preceding the ex-dividend date of a distribution which is to be made with respect to the interest and any portion of which, but for the disposition, would have been treated by the taxpayer as gain from the sale or exchange of a United States real property interest under paragraph (1), and acquires, or enters into a contract or option to acquire, a substantially identical interest in such entity during the 61-day period beginning with the 1st day of the 30-day period described in subclause (I). For purposes of subclause (II), a nonresident alien individual, foreign corporation, or qualified investment entity shall be treated as having acquired any interest acquired by a person related (within the meaning of section 267(b) or 707(b)(1)) to the individual, corporation, or entity, and any interest which such person has entered into any contract or option to acquire. Subparagraph (A) shall apply to— any substitute dividend payment (within the meaning of section 861), or any other similar payment specified in regulations which the Secretary determines necessary to prevent avoidance of the purposes of this paragraph. The portion of any such payment treated by the taxpayer as gain from the sale or exchange of a United States real property interest under subparagraph (A) by reason of this clause shall be equal to the portion of the distribution such payment is in lieu of which would have been so treated but for the transaction giving rise to such payment. A transaction shall not be treated as an applicable wash sales transaction if the nonresident alien individual, foreign corporation, or qualified investment entity receives the distribution described in clause (i)(I) with respect to either the interest which was disposed of, or acquired, in the transaction. A transaction shall not be treated as an applicable wash sales transaction if it involves the disposition of any class of stock in a qualified investment entity which is regularly traded on an established securities market within the United States but only if the nonresident alien individual, foreign corporation, or qualified investment entity did not own more than 5 percent of such class of stock at any time during the 1-year period ending on the date of the distribution described in clause (i)(I).

(i) Election by foreign corporation to be treated as domestic corporation If— a foreign corporation holds a United States real property interest, and under any treaty obligation of the United States the foreign corporation is entitled to nondiscriminatory treatment with respect to that interest, then such foreign corporation may make an election to be treated as a domestic corporation for purposes of this section, section 1445, and section 6039C. Any election under paragraph (1), once made, may be revoked only with the consent of the Secretary. An election under paragraph (1) may be made only— if all of the owners of all classes of interests (other than interests solely as a creditor) in the foreign corporation at the time of the election consent to the making of the election and agree that gain, if any, from the disposition of such interest after June 18, 1980 , which would be taken into account under subsection (a) shall be taxable notwithstanding any provision to the contrary in a treaty to which the United States is a party, and subject to such other conditions as the Secretary may prescribe by regulations with respect to the corporation or its shareholders. In the case of a class of interest (other than an interest solely as a creditor) which is regularly traded on an established securities market, the consent described in subparagraph (A) need only be made by any person if such person held more than 5 percent of such class of interest at some time during the shorter of the periods described in subsection (c)(1)(A)(ii). The constructive ownership rules of subsection (c)(6)(C) shall apply in determining whether a person held more than 5 percent of a class of interest. The election provided by paragraph (1) shall be the exclusive remedy for any person claiming discriminatory treatment with respect to this section, section 1445, and section 6039C.

(j) Certain contributions to capital Except to the extent otherwise provided in regulations, gain shall be recognized by a nonresident alien individual or foreign corporation on the transfer of a United States real property interest to a foreign corporation if the transfer is made as paid in surplus or as a contribution to capital, in the amount of the excess of— the fair market value of such property transferred, over the sum of— the adjusted basis of such property in the hands of the transferor, plus the amount of gain, if any, recognized to the transferor under any other provision at the time of the transfer.

(k) Special rules relating to real estate investment trusts In the case of any disposition of stock in a real estate investment trust, paragraphs (3) and (6)(C) of subsection (c) shall each be applied by substituting “more than 10 percent” for “more than 5 percent”. In the case of any distribution from a real estate investment trust, subsection (h)(1) shall be applied by substituting “10 percent” for “5 percent”. Except as provided in subparagraph (B)— stock of a real estate investment trust which is held directly (or indirectly through 1 or more partnerships) by a qualified shareholder shall not be treated as a United States real property interest, and notwithstanding subsection (h)(1), any distribution to a qualified shareholder shall not be treated as gain recognized from the sale or exchange of a United States real property interest to the extent the stock of the real estate investment trust held by such qualified shareholder is not treated as a United States real property interest under clause (i). In the case of a qualified shareholder with one or more applicable investors— subparagraph (A)(i) shall not apply to the applicable percentage of the stock of the real estate investment trust held by the qualified shareholder, and the applicable percentage of the amounts realized by the qualified shareholder with respect to any disposition of stock in the real estate investment trust or with respect to any distribution from the real estate investment trust attributable to gain from sales or exchanges of a United States real property interest shall be treated as amounts realized from the disposition of United States real property interests. If a distribution by a real estate investment trust is treated as a sale or exchange of stock under section 301(c)(3), 302, or 331 with respect to a qualified shareholder— in the case of an applicable investor, subparagraph (B) shall apply with respect to such distribution, and in the case of any other person, such distribution shall be treated under section 857(b)(3)(F) 1 as a dividend from a real estate investment trust notwithstanding any other provision of this title. For purposes of this subsection, the term “applicable investor” means, with respect to any qualified shareholder holding stock in a real estate investment trust, a person (other than a qualified shareholder) which— holds an interest (other than an interest solely as a creditor) in such qualified shareholder, and holds more than 10 percent of the stock of such real estate investment trust (whether or not by reason of the person’s ownership interest in the qualified shareholder). For purposes of subparagraphs (B)(i) and (D), the constructive ownership rules under subsection (c)(6)(C) shall apply. For purposes of subparagraph (B), the term “applicable percentage” means the percentage of the value of the interests (other than interests held solely as a creditor) in the qualified shareholder held by applicable investors. For purposes of this subsection— The term “qualified shareholder” means a foreign person which— is eligible for benefits of a comprehensive income tax treaty with the United States which includes an exchange of information program and the principal class of interests of which is listed and regularly traded on 1 or more recognized stock exchanges (as defined in such comprehensive income tax treaty), or is a foreign partnership that is created or organized under foreign law as a limited partnership in a jurisdiction that has an agreement for the exchange of information with respect to taxes with the United States and has a class of limited partnership units which is regularly traded on the New York Stock Exchange or Nasdaq Stock Market and such class of limited partnership units value is greater than 50 percent of the value of all the partnership units, is a qualified collective investment vehicle, and maintains records on the identity of each person who, at any time during the foreign person’s taxable year, holds directly 5 percent or more of the class of interest described in subclause (I) or (II) of clause (i), as the case may be. For purposes of this subsection, the term “qualified collective investment vehicle” means a foreign person— which— is eligible for benefits under the comprehensive income tax treaty described in subparagraph (A)(i)(I), but only if the dividends article of such treaty imposes conditions on the benefits allowable in the case of dividends paid by a real estate investment trust, and is eligible under such treaty for a reduced rate of withholding with respect to ordinary dividends paid by a real estate investment trust even if such person holds more than 10 percent of the stock of such real estate investment trust, which— is a publicly traded partnership (as defined in section 7704(b)) to which subsection (a) of section 7704 does not apply, is a withholding foreign partnership for purposes of chapters 3, 4, and 61, and if such foreign partnership were a domestic corporation, would be a United States real property holding corporation (determined without regard to paragraph (1)) at any time during the 5-year period ending on the date of disposition of, or distribution with respect to, such partnership’s interests in a real estate investment trust, or which is designated as a qualified collective investment vehicle by the Secretary and is either— fiscally transparent within the meaning of section 894, or required to include dividends in its gross income, but entitled to a deduction for distributions to persons holding interests (other than interests solely as a creditor) in such foreign person. For the purposes of this subsection, in the case of an applicable investor who is a nonresident alien individual or a foreign corporation and is a partner in a partnership that is a qualified shareholder, if such partner’s proportionate share of USRPI gain for the taxable year exceeds such partner’s distributive share of USRPI gain for the taxable year, then such partner’s distributive share of the amount of gain taken into account under subsection (a)(1) by the partner for the taxable year (determined without regard to this paragraph) shall be increased by the amount of such excess, and such partner’s distributive share of items of income or gain for the taxable year that are not treated as gain taken into account under subsection (a)(1) (determined without regard to this paragraph) shall be decreased (but not below zero) by the amount of such excess. For the purposes of this paragraph, the term “USRPI gain” means the excess (if any) of— the sum of— any gain recognized from the disposition of a United States real property interest, and any distribution by a real estate investment trust that is treated as gain recognized from the sale or exchange of a United States real property interest, over any loss recognized from the disposition of a United States real property interest. For purposes of this paragraph, an applicable investor’s proportionate share of USRPI gain shall be determined on the basis of such investor’s share of partnership items of income or gain (excluding gain allocated under section 704(c)), whichever results in the largest proportionate share. If the investor’s share of partnership items of income or gain (excluding gain allocated under section 704(c)) may vary during the period such investor is a partner in the partnership, such share shall be the highest share such investor may receive.

(l) Exception for qualified foreign pension funds For purposes of this section, a qualified foreign pension fund shall not be treated as a nonresident alien individual or a foreign corporation. For purposes of the preceding sentence, an entity all the interests of which are held by a qualified foreign pension fund shall be treated as such a fund. For purposes of this subsection, the term “qualified foreign pension fund” means any trust, corporation, or other organization or arrangement— which is created or organized under the law of a country other than the United States, which is established— by such country (or one or more political subdivisions thereof) to provide retirement or pension benefits to participants or beneficiaries that are current or former employees (including self-employed individuals) or persons designated by such employees, as a result of services rendered by such employees to their employers, or by one or more employers to provide retirement or pension benefits to participants or beneficiaries that are current or former employees (including self-employed individuals) or persons designated by such employees in consideration for services rendered by such employees to such employers, which does not have a single participant or beneficiary with a right to more than five percent of its assets or income, which is subject to government regulation and with respect to which annual information about its beneficiaries is provided, or is otherwise available, to the relevant tax authorities in the country in which it is established or operates, and with respect to which, under the laws of the country in which it is established or operates— contributions to such trust, corporation, organization, or arrangement which would otherwise be subject to tax under such laws are deductible or excluded from the gross income of such entity or arrangement or taxed at a reduced rate, or taxation of any investment income of such trust, corporation, organization or arrangement is deferred, or such income is excluded from the gross income of such entity or arrangement or is taxed at a reduced rate. The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this subsection.

§ 898 Taxable year of certain foreign corporations

(a) General rule For purposes of this title, the taxable year of any specified foreign corporation shall be the required year determined under subsection (c).

(b) Specified foreign corporation For purposes of this section— The term “specified foreign corporation” means any foreign corporation— which is treated as a controlled foreign corporation for any purpose under subpart F of part III of this subchapter, and with respect to which the ownership requirements of paragraph (2) are met. The ownership requirements of this paragraph are met with respect to any foreign corporation if a United States shareholder owns, on each testing day, more than 50 percent of— the total voting power of all classes of stock of such corporation entitled to vote, or the total value of all classes of stock of such corporation. For purposes of subparagraph (A), the rules of subsections (a) and (b) of section 958 shall apply in determining ownership. The term “United States shareholder” has the meaning given to such term by section 951(b), except that, in the case of a foreign corporation having related person insurance income (as defined in section 953(c)(2)), the Secretary may treat any person as a United States shareholder for purposes of this section if such person is treated as a United States shareholder under section 953(c)(1).

(c) Determination of required year The required year is— the majority U.S. shareholder year, or if there is no majority U.S. shareholder year, the taxable year prescribed under regulations. For purposes of this subsection, the term “majority U.S. shareholder year” means the taxable year (if any) which, on each testing day, constituted the taxable year of— each United States shareholder described in subsection (b)(2)(A), and each United States shareholder not described in clause (i) whose stock was treated as owned under subsection (b)(2)(B) by any shareholder described in such clause. The testing days shall be— the first day of the corporation’s taxable year (determined without regard to this section), or the days during such representative period as the Secretary may prescribe.

§ 901 Taxes of foreign countries and of possessions of United States

(a) Allowance of credit If the taxpayer chooses to have the benefits of this subpart, the tax imposed by this chapter shall, subject to the limitation of section 904, be credited with the amounts provided in the applicable paragraph of subsection (b) plus, in the case of a corporation, the taxes deemed to have been paid under section 960. Such choice for any taxable year may be made or changed at any time before the expiration of the period prescribed for making a claim for credit or refund of the tax imposed by this chapter for such taxable year. The credit shall not be allowed against any tax treated as a tax not imposed by this chapter under section 26(b).

(b) Amount allowed Subject to the limitation of section 904, the following amounts shall be allowed as the credit under subsection (a): In the case of a citizen of the United States and of a domestic corporation, the amount of any income, war profits, and excess profits taxes paid or accrued during the taxable year to any foreign country or to any possession of the United States; and In the case of a resident of the United States and in the case of an individual who is a bona fide resident of Puerto Rico during the entire taxable year, the amount of any such taxes paid or accrued during the taxable year to any possession of the United States; and In the case of an alien resident of the United States and in the case of an alien individual who is a bona fide resident of Puerto Rico during the entire taxable year, the amount of any such taxes paid or accrued during the taxable year to any foreign country; and In the case of any nonresident alien individual not described in section 876 and in the case of any foreign corporation, the amount determined pursuant to section 906; and In the case of any person described in paragraph (1), (2), (3), or (4), who is a member of a partnership or a beneficiary of an estate or trust, the amount of his proportionate share of the taxes (described in such paragraph) of the partnership or the estate or trust paid or accrued during the taxable year to a foreign country or to any possession of the United States, as the case may be. Under rules or regulations prescribed by the Secretary, in the case of any foreign trust of which the settlor or another person would be treated as owner of any portion of the trust under subpart E but for section 672(f), the allocable amount of any income, war profits, and excess profits taxes imposed by any foreign country or possession of the United States on the settlor or such other person in respect of trust income.

(c) Similar credit required for certain alien residents Whenever the President finds that— a foreign country, in imposing income, war profits, and excess profits taxes, does not allow to citizens of the United States residing in such foreign country a credit for any such taxes paid or accrued to the United States or any foreign country, as the case may be, similar to the credit allowed under subsection (b)(3), such foreign country, when requested by the United States to do so, has not acted to provide such a similar credit to citizens of the United States residing in such foreign country, and it is in the public interest to allow the credit under subsection (b)(3) to citizens or subjects of such foreign country only if it allows such a similar credit to citizens of the United States residing in such foreign country, the President shall proclaim that, for taxable years beginning while the proclamation remains in effect, the credit under subsection (b)(3) shall be allowed to citizens or subjects of such foreign country only if such foreign country, in imposing income, war profits, and excess profits taxes, allows to citizens of the United States residing in such foreign country such a similar credit.

(d) Treatment of dividends from a DISC or former DISC For purposes of this subpart, dividends from a DISC or former DISC (as defined in section 992(a)) shall be treated as dividends from a foreign corporation to the extent such dividends are treated under part I as income from sources without the United States.

(e) Foreign taxes on mineral income Notwithstanding subsection (b), the amount of any income, war profits, and excess profits taxes paid or accrued during the taxable year to any foreign country or possession of the United States with respect to foreign mineral income from sources within such country or possession which would (but for this paragraph) be allowed under such subsection shall be reduced by the amount (if any) by which— the amount of such taxes (or, if smaller, the amount of the tax which would be computed under this chapter with respect to such income determined without the deduction allowed under section 613), exceeds the amount of the tax computed under this chapter with respect to such income. For purposes of paragraph (1), the term “foreign mineral income” means income derived from the extraction of minerals from mines, wells, or other natural deposits, the processing of such minerals into their primary products, and the transportation, distribution, or sale of such minerals or primary products. Such term includes, but is not limited to 1 that portion of the taxpayer’s distributive share of the income of partnerships attributable to foreign mineral income.

(f) Certain payments for oil or gas not considered as taxes Notwithstanding subsection (b) and section 960, the amount of any income, or profits, and excess profits taxes paid or accrued during the taxable year to any foreign country in connection with the purchase and sale of oil or gas extracted in such country is not to be considered as tax for purposes of section 275(a) and this section if— the taxpayer has no economic interest in the oil or gas to which section 611(a) applies, and either such purchase or sale is at a price which differs from the fair market value for such oil or gas at the time of such purchase or sale.

(g) Certain taxes paid with respect to distributions from possessions corporations For purposes of this chapter, any tax of a foreign country or possession of the United States which is paid or accrued with respect to any distribution from a corporation— to the extent that such distribution is attributable to periods during which such corporation is a possessions corporation, and if a dividends received deduction is allowable with respect to such distribution under part VIII of subchapter B, or to the extent that such distribution is received in connection with a liquidation or other transaction with respect to which gain or loss is not recognized, shall not be treated as income, war profits, or excess profits taxes paid or accrued to a foreign country or possession of the United States, and no deduction shall be allowed under this title with respect to any amount so paid or accrued. For purposes of paragraph (1), a corporation shall be treated as a possessions corporation for any period during which an election under section 936 (as in effect on the day before the date of the enactment of the Tax Technical Corrections Act of 2018) applied to such corporation, during which section 931 (as in effect on the day before the date of the enactment of the Tax Reform Act of 1976) applied to such corporation, or during which section 957(c) (as in effect on the day before the date of the enactment of the Tax Reform Act of 1986) applied to such corporation.

([(h) Repealed. Pub. L. 110–172, § 11(g)(9), Dec. 29, 2007, 121 Stat. 2490]

(i) Taxes used to provide subsidies Any income, war profits, or excess profits tax shall not be treated as a tax for purposes of this title to the extent— the amount of such tax is used (directly or indirectly) by the country imposing such tax to provide a subsidy by any means to the taxpayer, a related person (within the meaning of section 482), or any party to the transaction or to a related transaction, and such subsidy is determined (directly or indirectly) by reference to the amount of such tax, or the base used to compute the amount of such tax.

(j) Denial of foreign tax credit, etc., with respect to certain foreign countries Notwithstanding any other provision of this part— no credit shall be allowed under subsection (a) for any income, war profits, or excess profits taxes paid or accrued (or deemed paid under section 960) to any country if such taxes are with respect to income attributable to a period during which this subsection applies to such country, and subsections (a), (b), and (c) of section 904 and section 960 shall be applied separately with respect to income attributable to such a period from sources within such country. This subsection shall apply to any foreign country— the government of which the United States does not recognize, unless such government is otherwise eligible to purchase defense articles or services under the Arms Export Control Act, with respect to which the United States has severed diplomatic relations, with respect to which the United States has not severed diplomatic relations but does not conduct such relations, or which the Secretary of State has, pursuant to section 6(j) 2 of the Export Administration Act of 1979, as amended, designated as a foreign country which repeatedly provides support for acts of international terrorisms. This subsection shall apply to any foreign country described in subparagraph (A) during the period— beginning on the later of— January 1, 1987 , or 6 months after such country becomes a country described in subparagraph (A), and ending on the date the Secretary of State certifies to the Secretary of the Treasury that such country is no longer described in subparagraph (A). Sections 275 and 78 shall not apply to any tax which is not allowable as a credit under subsection (a) by reason of this subsection. The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this subsection, including regulations which treat income paid through 1 or more entities as derived from a foreign country to which this subsection applies if such income was, without regard to such entities, derived from such country. Paragraph (1) shall not apply with respect to taxes paid or accrued to a country if the President— determines that a waiver of the application of such paragraph is in the national interest of the United States and will expand trade and investment opportunities for United States companies in such country; and reports such waiver under subparagraph (B). Not less than 30 days before the date on which a waiver is granted under this paragraph, the President shall report to Congress— the intention to grant such waiver; and the reason for the determination under subparagraph (A)(i).

(k) Minimum holding period for certain taxes on dividends In no event shall a credit be allowed under subsection (a) for any withholding tax on a dividend with respect to stock in a corporation if— such stock is held by the recipient of the dividend for 15 days or less during the 31-day period beginning on the date which is 15 days before the date on which such share becomes ex-dividend with respect to such dividend, or to the extent that the recipient of the dividend is under an obligation (whether pursuant to a short sale or otherwise) to make related payments with respect to positions in substantially similar or related property. For purposes of this paragraph, the term “withholding tax” includes any tax determined on a gross basis; but does not include any tax which is in the nature of a prepayment of a tax imposed on a net basis. In the case of income, war profits, or excess profits taxes deemed paid under section 853 or 960 through a chain of ownership of stock in 1 or more corporations, no credit shall be allowed under subsection (a) for such taxes if— any stock of any corporation in such chain (the ownership of which is required to obtain credit under subsection (a) for such taxes) is held for less than the period described in paragraph (1)(A)(i), or the corporation holding the stock is under an obligation referred to in paragraph (1)(A)(ii). In the case of stock having preference in dividends and dividends with respect to such stock which are attributable to a period or periods aggregating in excess of 366 days, paragraph (1)(A)(i) shall be applied— by substituting “45 days” for “15 days” each place it appears, and by substituting “91-day period” for “31-day period”. Paragraphs (1) and (2) shall not apply to any qualified tax with respect to any security held in the active conduct in a foreign country of a business as a securities dealer of any person— who is registered as a securities broker or dealer under section 15(a) of the Securities Exchange Act of 1934, who is registered as a Government securities broker or dealer under section 15C(a) of such Act, or who is licensed or authorized in such foreign country to conduct securities activities in such country and is subject to bona fide regulation by a securities regulating authority of such country. For purposes of subparagraph (A), the term “qualified tax” means a tax paid to a foreign country (other than the foreign country referred to in subparagraph (A)) if— the dividend to which such tax is attributable is subject to taxation on a net basis by the country referred to in subparagraph (A), and such country allows a credit against its net basis tax for the full amount of the tax paid to such other foreign country. The Secretary may prescribe such regulations as may be appropriate to carry out this paragraph, including regulations to prevent the abuse of the exception provided by this paragraph and to treat other taxes as qualified taxes. For purposes of this subsection, the rules of paragraphs (3) and (4) of section 246(c) shall apply. If a person’s holding period is reduced by reason of the application of the rules of section 246(c)(4) to any contract for the bona fide sale of stock, the determination of whether such person’s holding period meets the requirements of paragraph (2) with respect to taxes deemed paid under section 960 shall be made as of the date such contract is entered into. Sections 275 and 78 shall not apply to any tax which is not allowable as a credit under subsection (a) by reason of this subsection.

(l) Minimum holding period for withholding taxes on gain and income other than dividends etc. In no event shall a credit be allowed under subsection (a) for any withholding tax (as defined in subsection (k)) on any item of income or gain with respect to any property if— such property is held by the recipient of the item for 15 days or less during the 31-day period beginning on the date which is 15 days before the date on which the right to receive payment of such item arises, or to the extent that the recipient of the item is under an obligation (whether pursuant to a short sale or otherwise) to make related payments with respect to positions in substantially similar or related property. This paragraph shall not apply to any dividend to which subsection (k) applies. Paragraph (1) shall not apply to any qualified tax with respect to any property held in the active conduct in a foreign country of a business as a dealer in such property. For purposes of subparagraph (A), the term “qualified tax” means a tax paid to a foreign country (other than the foreign country referred to in subparagraph (A)) if— the item to which such tax is attributable is subject to taxation on a net basis by the country referred to in subparagraph (A), and such country allows a credit against its net basis tax for the full amount of the tax paid to such other foreign country. For purposes of subparagraph (A), the term “dealer” means— with respect to a security, any person to whom paragraphs (1) and (2) of subsection (k) would not apply by reason of paragraph (4) thereof, and with respect to any other property, any person with respect to whom such property is described in section 1221(a)(1). The Secretary may prescribe such regulations as may be appropriate to carry out this paragraph, including regulations to prevent the abuse of the exception provided by this paragraph and to treat other taxes as qualified taxes. The Secretary may by regulation provide that paragraph (1) shall not apply to property where the Secretary determines that the application of paragraph (1) to such property is not necessary to carry out the purposes of this subsection. Rules similar to the rules of paragraphs (5), (6), and (7) of subsection (k) shall apply for purposes of this subsection. Holding periods shall be determined for purposes of this subsection without regard to section 1235 or any similar rule.

(m) Denial of foreign tax credit with respect to foreign income not subject to United States taxation by reason of covered asset acquisitions In the case of a covered asset acquisition, the disqualified portion of any foreign income tax determined with respect to the income or gain attributable to the relevant foreign assets— shall not be taken into account in determining the credit allowed under subsection (a), and in the case of a foreign income tax paid by a foreign corporation, shall not be taken into account for purposes of section 960. For purposes of this section, the term “covered asset acquisition” means— a qualified stock purchase (as defined in section 338(d)(3)) to which section 338(a) applies, any transaction which— is treated as an acquisition of assets for purposes of this chapter, and is treated as the acquisition of stock of a corporation (or is disregarded) for purposes of the foreign income taxes of the relevant jurisdiction, any acquisition of an interest in a partnership which has an election in effect under section 754, and to the extent provided by the Secretary, any other similar transaction. For purposes of this section— The term “disqualified portion” means, with respect to any covered asset acquisition, for any taxable year, the ratio (expressed as a percentage) of— the aggregate basis differences (but not below zero) allocable to such taxable year under subparagraph (B) with respect to all relevant foreign assets, divided by the income on which the foreign income tax referred to in paragraph (1) is determined (or, if the taxpayer fails to substantiate such income to the satisfaction of the Secretary, such income shall be determined by dividing the amount of such foreign income tax by the highest marginal tax rate applicable to such income in the relevant jurisdiction). For purposes of subparagraph (A)(i)— The basis difference with respect to any relevant foreign asset shall be allocated to taxable years using the applicable cost recovery method under this chapter. Except as otherwise provided by the Secretary, in the case of the disposition of any relevant foreign asset— the basis difference allocated to the taxable year which includes the date of such disposition shall be the excess of the basis difference with respect to such asset over the aggregate basis difference with respect to such asset which has been allocated under clause (i) to all prior taxable years, and no basis difference with respect to such asset shall be allocated under clause (i) to any taxable year thereafter. The term “basis difference” means, with respect to any relevant foreign asset, the excess of— the adjusted basis of such asset immediately after the covered asset acquisition, over the adjusted basis of such asset immediately before the covered asset acquisition. In the case of a relevant foreign asset with respect to which the amount described in clause (i)(II) exceeds the amount described in clause (i)(I), such excess shall be taken into account under this subsection as a basis difference of a negative amount. In the case of a covered asset acquisition described in paragraph (2)(A), the covered asset acquisition shall be treated for purposes of this subparagraph as occurring at the close of the acquisition date (as defined in section 338(h)(2)). For purposes of this section, the term “relevant foreign asset” means, with respect to any covered asset acquisition, any asset (including any goodwill, going concern value, or other intangible) with respect to such acquisition if income, deduction, gain, or loss attributable to such asset is taken into account in determining the foreign income tax referred to in paragraph (1). For purposes of this section, the term “foreign income tax” means any income, war profits, or excess profits tax paid or accrued to any foreign country or to any possession of the United States. Sections 275 and 78 shall not apply to any tax which is not allowable as a credit under subsection (a) by reason of this subsection. The Secretary may issue such regulations or other guidance as is necessary or appropriate to carry out the purposes of this subsection, including to exempt from the application of this subsection certain covered asset acquisitions, and relevant foreign assets with respect to which the basis difference is de minimis.

(n) Cross reference For deductions of income, war profits, and excess profits taxes paid to a foreign country or a possession of the United States, see sections 164 and 275. For right of each partner to make election under this section, see section 703(b). For right of estate or trust to the credit for taxes imposed by foreign countries and possessions of the United States under this section, see section 642(a). For reduction of credit for failure of a United States person to furnish certain information with respect to a foreign corporation or partnership controlled by him, see section 6038.

[§ 902 Repealed. Pub. L. 115–97, title I, § 14301(a), Dec. 22, 2017, 131 Stat. 2221]

§ 903 Credit for taxes in lieu of income, etc., taxes

For purposes of this part and of sections 164(a) and 275(a), the term “income, war profits, and excess profits taxes” shall include a tax paid in lieu of a tax on income, war profits, or excess profits otherwise generally imposed by any foreign country or by any possession of the United States. ( Aug. 16, 1954, ch. 736 , 68A Stat. 287 ; Pub. L. 88–272, title II, § 207(b)(8) , Feb. 26, 1964 , 78 Stat. 42 ; Pub. L. 100–647, title I, § 1012(v)(9) , Nov. 10, 1988 , 102 Stat. 3530 ; Pub. L. 106–519, § 4(4) , Nov. 15, 2000 , 114 Stat. 2433 ; Pub. L. 108–357, title I, § 101(b)(7) , Oct. 22, 2004 , 118 Stat. 1423 .)

§ 904 Limitation on credit

(a) Limitation The total amount of the credit taken under section 901(a) shall not exceed the same proportion of the tax against which such credit is taken which the taxpayer’s taxable income from sources without the United States (but not in excess of the taxpayer’s entire taxable income) bears to his entire taxable income for the same taxable year.

(b) Taxable income for purpose of computing limitation For purposes of subsection (a), the taxable income in the case of an individual, estate, or trust shall be computed without any deduction for personal exemptions under section 151 or 642(b). For purposes of this section— Taxable income from sources outside the United States shall include gain from the sale or exchange of capital assets only to the extent of foreign source capital gain net income. In the case of any taxable year for which there is a capital gain rate differential— in lieu of applying subparagraph (A), the taxable income from sources outside the United States shall include gain from the sale or exchange of capital assets only in an amount equal to foreign source capital gain net income reduced by the rate differential portion of foreign source net capital gain, the entire taxable income shall include gain from the sale or exchange of capital assets only in an amount equal to capital gain net income reduced by the rate differential portion of net capital gain, and for purposes of determining taxable income from sources outside the United States, any net capital loss (and any amount which is a short-term capital loss under section 1212(a)) from sources outside the United States to the extent taken into account in determining capital gain net income for the taxable year shall be reduced by an amount equal to the rate differential portion of the excess of net capital gain from sources within the United States over net capital gain. The Secretary may by regulations modify the application of this paragraph and paragraph (3) to the extent necessary to properly reflect any capital gain rate differential under section 1(h) and the computation of net capital gain. For purposes of this subsection— The term “foreign source capital gain net income” means the lesser of— capital gain net income from sources without the United States, or capital gain net income. The term “foreign source net capital gain” means the lesser of— net capital gain from sources without the United States, or net capital gain. The term “gain from the sale or exchange of capital assets” includes any gain so treated under section 1231. There is a capital gain rate differential for any year if subsection (h) of section 1 applies to such taxable year. The rate differential portion of foreign source net capital gain, net capital gain, or the excess of net capital gain from sources within the United States over net capital gain, as the case may be, is the same proportion of such amount as— the excess of— the highest rate of tax set forth in subsection (a), (b), (c), (d), or (e) of section 1 (whichever applies), over the alternative rate of tax determined under section 1(h), bears to that rate referred to in subclause (I). For purposes of subsection (a), in the case of a domestic corporation which is a United States shareholder with respect to a specified 10-percent owned foreign corporation, such shareholder’s taxable income from sources without the United States (and entire taxable income) shall be determined without regard to— the foreign-source portion of any dividend received from such foreign corporation, and any deductions properly allocable or apportioned to— income (other than amounts includible under section 951(a)(1) or 951A(a)) with respect to stock of such specified 10-percent owned foreign corporation, or such stock to the extent income with respect to such stock is other than amounts includible under section 951(a)(1) or 951A(a). Any term which is used in section 245A and in this paragraph shall have the same meaning for purposes of this paragraph as when used in such section. Solely for purposes of the application of subsection (a) with respect to amounts described in subsection (d)(1)(A), the taxpayer’s taxable income from sources without the United States shall be determined by allocating and apportioning— any deduction allowed under section 250(a)(1)(B) (and any deduction allowed under section 164(a)(3) for taxes imposed on amounts described in section 250(a)(1)(B)) to such income, no amount of interest expense or research and experimental expenditures to such income, and any other deduction to such income only if such deduction is directly allocable to such income. Any amount or deduction which would (but for subparagraphs (B) and (C)) have been allocated or apportioned to such income shall only be allocated or apportioned to income which is from sources within the United States. For purposes of this section, if a United States person maintains an office or other fixed place of business in a foreign country (determined under rules similar to the rules of section 864(c)(5)), the portion of income which— is from the sale or exchange outside the United States of inventory property (within the meaning of section 865(i)(1))— which is produced in the United States, which is for use outside the United States, and to which the third sentence of section 863(b) applies, and is attributable (determined under rules similar to the rules of section 864(c)(5)) to such office or other fixed place of business, shall be treated as from sources without the United States, except that the amount so treated shall not exceed 50 percent of the income from the sale or exchange of such inventory property.

(c) Carryback and carryover of excess tax paid Any amount by which all taxes paid or accrued to foreign countries or possessions of the United States for any taxable year for which the taxpayer chooses to have the benefits of this subpart exceed the limitation under subsection (a) shall be deemed taxes paid or accrued to foreign countries or possessions of the United States in the first preceding taxable year and in any of the first 10 succeeding taxable years, in that order and to the extent not deemed taxes paid or accrued in a prior taxable year, in the amount by which the limitation under subsection (a) for such preceding or succeeding taxable year exceeds the sum of the taxes paid or accrued to foreign countries or possessions of the United States for such preceding or succeeding taxable year and the amount of the taxes for any taxable year earlier than the current taxable year which shall be deemed to have been paid or accrued in such preceding or subsequent taxable year (whether or not the taxpayer chooses to have the benefits of this subpart with respect to such earlier taxable year). Such amount deemed paid or accrued in any year may be availed of only as a tax credit and not as a deduction and only if the taxpayer for such year chooses to have the benefits of this subpart as to taxes paid or accrued for that year to foreign countries or possessions of the United States. This subsection shall not apply to taxes paid or accrued with respect to amounts described in subsection (d)(1)(A).

(d) Separate application of section with respect to certain categories of income The provisions of subsections (a), (b), and (c) and sections 902, 1 907, and 960 shall be applied separately with respect to— any amount includible in gross income under section 951A (other than passive category income), foreign branch income, passive category income, and general category income. For purposes of this subsection— The term “passive category income” means passive income and specified passive category income. The term “general category income” means income other than income described in paragraph (1)(A), foreign branch income, and passive category income. Except as otherwise provided in this subparagraph, the term “passive income” means any income received or accrued by any person which is of a kind which would be foreign personal holding company income (as defined in section 954(c)). Except as provided in clause (iii), subparagraph (E)(ii), or paragraph (3)(H), the term “passive income” includes any amount includible in gross income under section 1293 (relating to certain passive foreign investment companies). The term “passive income” shall not include— any export financing interest, and any high-taxed income. In determining whether any income is of a kind which would be foreign personal holding company income, the rules of section 864(d)(6) shall apply only in the case of income of a controlled foreign corporation. The term “specified passive category income” means— dividends from a DISC or former DISC (as defined in section 992(a)) to the extent such dividends are treated as income from sources without the United States, and distributions from a former FSC (as defined in section 922) out of earnings and profits attributable to foreign trade income (within the meaning of section 923(b)) or interest or carrying charges (as defined in section 927(d)(1)) derived from a transaction which results in foreign trade income (as defined in section 923(b)). Any reference in subclause (II) to section 922, 923, or 927 shall be treated as a reference to such section as in effect before its repeal by the FSC Repeal and Extraterritorial Income Exclusion Act of 2000. Financial services income shall be treated as general category income in the case of— a member of a financial services group, and any other person if such person is predominantly engaged in the active conduct of a banking, insurance, financing, or similar business. The term “financial services group” means any affiliated group (as defined in section 1504(a) without regard to paragraphs (2) and (3) of section 1504(b)) which is predominantly engaged in the active conduct of a banking, insurance, financing, or similar business. In determining whether such a group is so engaged, there shall be taken into account only the income of members of the group that are— United States corporations, or controlled foreign corporations in which such United States corporations own, directly or indirectly, at least 80 percent of the total voting power and value of the stock. The Secretary shall by regulation specify for purposes of this subparagraph the treatment of financial services income received or accrued by partnerships and by other pass-thru entities which are not members of a financial services group. Except as otherwise provided in this subparagraph, the term “financial services income” means any income which is received or accrued by any person predominantly engaged in the active conduct of a banking, insurance, financing, or similar business, and which is— described in clause (ii), or passive income (determined without regard to subparagraph (B)(iii)(II)). Income is described in this clause if such income is— derived in the active conduct of a banking, financing, or similar business, derived from the investment by an insurance company of its unearned premiums or reserves ordinary and necessary for the proper conduct of its insurance business, or of a kind which would be insurance income as defined in section 953(a) determined without regard to those provisions of paragraph (1)(A) of such section which limit insurance income to income from countries other than the country in which the corporation was created or organized. The term “noncontrolled 10-percent owned foreign corporation” means any foreign corporation which is— a specified 10-percent owned foreign corporation (as defined in section 245A(b)), or a passive foreign investment company (as defined in section 1297(a)) with respect to which the taxpayer meets the stock ownership requirements of section 902(a) (or, for purposes of applying paragraphs (3) and (4), the requirements of section 902(b)). A controlled foreign corporation shall not be treated as a noncontrolled 10-percent owned foreign corporation with respect to any distribution out of its earnings and profits for periods during which it was a controlled foreign corporation. Any reference to section 902 in this clause shall be treated as a reference to such section as in effect before its repeal. If any foreign corporation is a noncontrolled 10-percent owned foreign corporation with respect to the taxpayer, any inclusion under section 1293 with respect to such corporation shall be treated as a dividend from such corporation. The term “high-taxed income” means any income which (but for this subparagraph) would be passive income if the sum of— the foreign income taxes paid or accrued by the taxpayer with respect to such income, and the foreign income taxes deemed paid by the taxpayer with respect to such income under section 902 1 or 960, exceeds the highest rate of tax specified in section 1 or 11 (whichever applies) multiplied by the amount of such income (determined with regard to section 78). For purposes of the preceding sentence, the term “foreign income taxes” means any income, war profits, or excess profits tax imposed by any foreign country or possession of the United States. For purposes of this paragraph, the term “export financing interest” means any interest derived from financing the sale (or other disposition) for use or consumption outside the United States of any property— which is manufactured, produced, grown, or extracted in the United States by the taxpayer or a related person, and not more than 50 percent of the fair market value of which is attributable to products imported into the United States. For purposes of clause (ii), the fair market value of any property imported into the United States shall be its appraised value, as determined by the Secretary under section 402 of the Tariff Act of 1930 ( 19 U.S.C. 1401a ) in connection with its importation. In the case of taxable years beginning after December 31, 2006 , tax imposed under the law of a foreign country or possession of the United States on an amount which does not constitute income under United States tax principles shall be treated as imposed on income described in paragraph (1)(D). In the case of taxes paid or accrued in taxable years beginning after December 31, 2004 , and before January 1, 2007 , a taxpayer may elect to treat tax imposed under the law of a foreign country or possession of the United States on an amount which does not constitute income under United States tax principles as tax imposed on income described in subparagraph (C) or (I) of paragraph (1). Any such election shall apply to the taxable year for which made and all subsequent taxable years described in subclause (I) unless revoked with the consent of the Secretary. For purposes of this paragraph, the term “related person” has the meaning given such term by section 954(d)(3), except that such section shall be applied by substituting “the person with respect to whom the determination is being made” for “controlled foreign corporation” each place it appears. The term “foreign branch income” means the business profits of such United States person which are attributable to 1 or more qualified business units (as defined in section 989(a)) in 1 or more foreign countries. For purposes of the preceding sentence, the amount of business profits attributable to a qualified business unit shall be determined under rules established by the Secretary. Such term shall not include any income which is passive category income. For purposes of paragraph (1)— taxes carried from any taxable year beginning before January 1, 2007 , to any taxable year beginning on or after such date, with respect to any item of income, shall be treated as described in the subparagraph of paragraph (1) in which such income would be described were such taxes paid or accrued in a taxable year beginning on or after such date, and the Secretary may by regulations provide for the allocation of any carryback of taxes with respect to income from a taxable year beginning on or after January 1, 2007 , to a taxable year beginning before such date for purposes of allocating such income among the separate categories in effect for the taxable year to which carried. Except as otherwise provided in this paragraph, dividends, interest, rents, and royalties received or accrued by the taxpayer from a controlled foreign corporation in which the taxpayer is a United States shareholder shall not be treated as passive category income. Any amount included in gross income under section 951(a)(1)(A) shall be treated as passive category income to the extent the amount so included is attributable to passive category income. Any interest, rent, or royalty which is received or accrued from a controlled foreign corporation in which the taxpayer is a United States shareholder shall be treated as passive category income to the extent it is properly allocable (under regulations prescribed by the Secretary) to passive category income of the controlled foreign corporation. Any dividend paid out of the earnings and profits of any controlled foreign corporation in which the taxpayer is a United States shareholder shall be treated as passive category income in proportion to the ratio of— the portion of the earnings and profits attributable to passive category income, to the total amount of earnings and profits. If a controlled foreign corporation meets the requirements of section 954(b)(3)(A) (relating to de minimis rule) for any taxable year, for purposes of this paragraph, none of its foreign base company income (as defined in section 954(a) without regard to section 954(b)(5)) and none of its gross insurance income (as defined in section 954(b)(3)(C)) for such taxable year shall be treated as passive category income, except that this sentence shall not apply to any income which (without regard to this sentence) would be treated as financial services income. Solely for purposes of applying subparagraph (D), passive income of a controlled foreign corporation shall not be treated as passive category income if the requirements of section 954(b)(4) are met with respect to such income. In determining whether any income of a controlled foreign corporation is passive category income, subclause (II) of paragraph (2)(B)(iii) shall not apply. Any income of the taxpayer which is treated as passive category income under this paragraph shall be so treated notwithstanding any provision of paragraph (2); except that the determination of whether any amount is high-taxed income shall be made after the application of this paragraph. For purposes of this paragraph, the term “dividend” includes any amount included in gross income in section 951(a)(1)(B). Any amount included in gross income under section 78 to the extent attributable to amounts included in gross income in section 951(a)(1)(A) shall not be treated as a dividend but shall be treated as included in gross income under section 951(a)(1)(A). If— a passive foreign investment company is a controlled foreign corporation, and the taxpayer is a United States shareholder in such controlled foreign corporation, any amount included in gross income under section 1293 shall be treated as income in a separate category to the extent such amount is attributable to income in such category. For purposes of this subsection, any dividend from a noncontrolled 10-percent owned foreign corporation with respect to the taxpayer shall be treated as income described in a subparagraph of paragraph (1) in proportion to the ratio of— the portion of earnings and profits attributable to income described in such subparagraph, to the total amount of earnings and profits. In the case of any distribution from a controlled foreign corporation to a United States shareholder, rules similar to the rules of subparagraph (A) shall apply in determining the extent to which earnings and profits of the controlled foreign corporation which are attributable to dividends received from a noncontrolled 10-percent owned foreign corporation may be treated as income in a separate category. For purposes of this paragraph— The rules of section 316 shall apply. The Secretary may prescribe regulations regarding the treatment of distributions out of earnings and profits for periods before the taxpayer’s acquisition of the stock to which the distributions relate. If the Secretary determines that the proper subparagraph of paragraph (1) in which a dividend is described has not been substantiated, such dividend shall be treated as income described in paragraph (1)(C). Rules similar to the rules of paragraph (3)(F) shall apply for purposes of this paragraph. Rules similar to subparagraph (A) also shall apply to any carryforward under subsection (c) from a taxable year beginning before January 1, 2003 , of tax allocable to a dividend from a noncontrolled 10-percent owned foreign corporation with respect to the taxpayer. The Secretary may by regulations provide for the allocation of any carryback of tax allocable to a dividend from a noncontrolled 10-percent owned foreign corporation from a taxable year beginning on or after January 1, 2003 , to a taxable year beginning before such date for purposes of allocating such dividend among the separate categories in effect for the taxable year to which carried. For purposes of this subsection— The term “controlled foreign corporation” has the meaning given such term by section 957 (taking into account section 953(c)). The term “United States shareholder” has the meaning given such term by section 951(b) (taking into account section 953(c)). If— without regard to any treaty obligation of the United States, any item of income would be treated as derived from sources within the United States, under a treaty obligation of the United States, such item would be treated as arising from sources outside the United States, and the taxpayer chooses the benefits of such treaty obligation, subsections (a), (b), and (c) of this section and sections 907 and 960 shall be applied separately with respect to each such item. This paragraph shall not apply to any item of income to which subsection (h)(10) or section 865(h) applies. The Secretary may issue such regulations or other guidance as is necessary or appropriate to carry out the purposes of this paragraph, including regulations or other guidance which provides that related items of income may be aggregated for purposes of this paragraph. The Secretary shall prescribe such regulations as may be necessary or appropriate for the purposes of this subsection, including regulations— for the application of paragraph (3) and subsection (f)(5) in the case of income paid (or loans made) through 1 or more entities or between 2 or more chains of entities, preventing the manipulation of the character of income the effect of which is to avoid the purposes of this subsection, and providing that rules similar to the rules of paragraph (3)(C) shall apply to interest, rents, and royalties received or accrued from entities which would be controlled foreign corporations if they were foreign corporations.

([(e) Repealed. Pub. L. 101–508, title XI, § 11801(a)(31), Nov. 5, 1990, 104 Stat. 1388–521]

(f) Recapture of overall foreign loss For purposes of this subpart, in the case of any taxpayer who sustains an overall foreign loss for any taxable year, that portion of the taxpayer’s taxable income from sources without the United States for each succeeding taxable year which is equal to the lesser of— the amount of such loss (to the extent not used under this paragraph in prior taxable years), or 50 percent (or such larger percent as the taxpayer may choose) of the taxpayer’s taxable income from sources without the United States for such succeeding taxable year, shall be treated as income from sources within the United States (and not as income from sources without the United States). For purposes of this subsection, the term “overall foreign loss” means the amount by which the gross income for the taxable year from sources without the United States (whether or not the taxpayer chooses the benefits of this subpart for such taxable year) for such year is exceeded by the sum of the deductions properly apportioned or allocated thereto, except that there shall not be taken into account— any net operating loss deduction allowable for such year under section 172(a), and any— foreign expropriation loss for such year, as defined in section 172(h) (as in effect on the day before the date of the enactment of the Revenue Reconciliation Act of 1990), or loss for such year which arises from fire, storm, shipwreck, or other casualty, or from theft, to the extent such loss is not compensated for by insurance or otherwise. For purposes of this chapter, if property which has been used predominantly without the United States in a trade or business is disposed of during any taxable year— the taxpayer, notwithstanding any other provision of this chapter (other than paragraph (1)), shall be deemed to have received and recognized taxable income from sources without the United States in the taxable year of the disposition, by reason of such disposition, in an amount equal to the lesser of the excess of the fair market value of such property over the taxpayer’s adjusted basis in such property or the remaining amount of the overall foreign losses which were not used under paragraph (1) for such taxable year or any prior taxable year, and paragraph (1) shall be applied with respect to such income by substituting “100 percent” for “50 percent”. In determining for purposes of this subparagraph whether the predominant use of any property has been without the United States, there shall be taken into account use during the 3-year period ending on the date of the disposition (or, if shorter, the period during which the property has been used in the trade or business). For purposes of this subsection, the term “disposition” includes a sale, exchange, distribution, or gift of property whether or not gain or loss is recognized on the transfer. Any taxable income recognized solely by reason of subparagraph (A) shall have the same characterization it would have had if the taxpayer had sold or exchanged the property. The Secretary shall prescribe such regulations as he may deem necessary to provide for adjustments to the basis of property to reflect taxable income recognized solely by reason of subparagraph (A). Notwithstanding subparagraph (B), the term “disposition” does not include— a disposition of property which is not a material factor in the realization of income by the taxpayer, or a disposition of property to a domestic corporation in a distribution or transfer described in section 381(a). This paragraph shall apply to an applicable disposition in the same manner as if it were a disposition of property described in subparagraph (A), except that the exception contained in subparagraph (C)(i) shall not apply. For purposes of clause (i), the term “applicable disposition” means any disposition of any share of stock in a controlled foreign corporation in a transaction or series of transactions if, immediately before such transaction or series of transactions, the taxpayer owned more than 50 percent (by vote or value) of the stock of the controlled foreign corporation. Such term shall not include a disposition described in clause (iii) or (iv), except that clause (i) shall apply to any gain recognized on any such disposition. A disposition shall not be treated as an applicable disposition under clause (ii) if it is part of a transaction or series of transactions— to which section 351 or 721 applies, or under which the transferor receives stock in a foreign corporation in exchange for the stock in the controlled foreign corporation and the stock received is exchanged basis property (as defined in section 7701(a)(44)), and immediately after which, the transferor owns (by vote or value) at least the same percentage of stock in the controlled foreign corporation (or, if the controlled foreign corporation is not in existence after such transaction or series of transactions, in another foreign corporation stock in 2 which was received by the transferor in exchange for stock in the controlled foreign corporation) as the percentage of stock in the controlled foreign corporation which the taxpayer owned immediately before such transaction or series of transactions. A disposition shall not be treated as an applicable disposition under clause (ii) if it is part of a transaction or series of transactions in which the taxpayer (or any member of an affiliated group of corporations filing a consolidated return under section 1501 which includes the taxpayer) acquires the assets of a controlled foreign corporation in exchange for the shares of the controlled foreign corporation in a liquidation described in section 332 or a reorganization described in section 368(a)(1). For purposes of this subparagraph, the term “controlled foreign corporation” has the meaning given such term by section 957. For purposes of this subparagraph, ownership of stock shall be determined under the rules of subsections (a) and (b) of section 958. For purposes of this chapter, in the case of amounts of income from sources without the United States which are treated under section 666 (without regard to subsections (b) and (c) thereof if the taxpayer chose to take a deduction with respect to the amounts described in such subsections under section 667(d)(1)(B)) as having been distributed by a foreign trust in a preceding taxable year, that portion of such amounts equal to the amount of any overall foreign loss sustained by the beneficiary in a year prior to the taxable year of the beneficiary in which such distribution is received from the trust shall be treated as income from sources within the United States (and not income from sources without the United States) to the extent that such loss was not used under this subsection in prior taxable years, or in the current taxable year, against other income of the beneficiary. The amount of the separate limitation losses for any taxable year shall reduce income from sources within the United States for such taxable year only to the extent the aggregate amount of such losses exceeds the aggregate amount of the separate limitation incomes for such taxable year. The separate limitation losses for any taxable year (to the extent such losses do not exceed the separate limitation incomes for such year) shall be allocated among (and operate to reduce) such incomes on a proportionate basis. If— a separate limitation loss from any income category (hereinafter in this subparagraph referred to as “the loss category”) was allocated to income from any other category under subparagraph (B), and the loss category has income for a subsequent taxable year, such income (to the extent it does not exceed the aggregate separate limitation losses from the loss category not previously recharacterized under this subparagraph) shall be recharacterized as income from such other category in proportion to the prior reductions under subparagraph (B) in such other category not previously taken into account under this subparagraph. Nothing in the preceding sentence shall be construed as recharacterizing any tax. Any loss from sources in the United States for any taxable year (to the extent such loss does not exceed the separate limitation incomes from such year) shall be allocated among (and operate to reduce) such incomes on a proportionate basis. This subparagraph shall be applied after subparagraph (B). For purposes of this paragraph— The term “income category” means each separate category of income described in subsection (d)(1). The term “separate limitation income” means, with respect to any income category, the taxable income from sources outside the United States, separately computed for such category. The term “separate limitation loss” means, with respect to any income category, the loss from such category determined under the principles of section 907(c)(4)(B). If any separate limitation loss for any taxable year is allocated against any separate limitation income for such taxable year, except to the extent provided in regulations, rules similar to the rules of paragraph (3) shall apply to any disposition of property if gain from such disposition would be in the income category with respect to which there was such separate limitation loss.

(g) Recharacterization of overall domestic loss For purposes of this subpart and section 936, 1 in the case of any taxpayer who sustains an overall domestic loss for any taxable year beginning after December 31, 2006 , that portion of the taxpayer’s taxable income from sources within the United States for each succeeding taxable year which is equal to the lesser of— the amount of such loss (to the extent not used under this paragraph in prior taxable years), or 50 percent of the taxpayer’s taxable income from sources within the United States for such succeeding taxable year, shall be treated as income from sources without the United States (and not as income from sources within the United States). For purposes of this subsection— The term “overall domestic loss” means— with respect to any qualified taxable year, the domestic loss for such taxable year to the extent such loss offsets taxable income from sources without the United States for the taxable year or for any preceding qualified taxable year by reason of a carryback, and with respect to any other taxable year, the domestic loss for such taxable year to the extent such loss offsets taxable income from sources without the United States for any preceding qualified taxable year by reason of a carryback. For purposes of subparagraph (A), the term “domestic loss” means the amount by which the gross income for the taxable year from sources within the United States is exceeded by the sum of the deductions properly apportioned or allocated thereto (determined without regard to any carryback from a subsequent taxable year). For purposes of subparagraph (A), the term “qualified taxable year” means any taxable year for which the taxpayer chose the benefits of this subpart. Any income from sources within the United States that is treated as income from sources without the United States under paragraph (1) shall be allocated among and increase the income categories in proportion to the loss from sources within the United States previously allocated to those income categories. For purposes of this paragraph, the term “income category” has the meaning given such term by subsection (f)(5)(E)(i). The Secretary shall prescribe such regulations as may be necessary to coordinate the provisions of this subsection with the provisions of subsection (f). If any pre-2018 unused overall domestic loss is taken into account under paragraph (1) for any applicable taxable year, the taxpayer may elect to have such paragraph applied to such loss by substituting a percentage greater than 50 percent (but not greater than 100 percent) for 50 percent in subparagraph (B) thereof. For purposes of this paragraph, the term “pre-2018 unused overall domestic loss” means any overall domestic loss which— arises in a qualified taxable year beginning before January 1, 2018 , and has not been used under paragraph (1) for any taxable year beginning before such date. For purposes of this paragraph, the term “applicable taxable year” means any taxable year of the taxpayer beginning after December 31, 2017 , and before January 1, 2028 .

(h) Source rules in case of United States-owned foreign corporations The following amounts which are derived from a United States-owned foreign corporation and which would be treated as derived from sources outside the United States without regard to this subsection shall, for purposes of this section, be treated as derived from sources within the United States to the extent provided in this subsection: Any amount included in gross income under— section 951(a) (relating to amounts included in gross income of United States shareholders), or section 1293 (relating to current taxation of income from qualified funds). Interest. Dividends. Any amount described in subparagraph (A) of paragraph (1) shall be treated as derived from sources within the United States to the extent such amount is attributable to income of the United States-owned foreign corporation from sources within the United States. Any interest which— is paid or accrued by a United States-owned foreign corporation during any taxable year, is paid or accrued to a United States shareholder (as defined in section 951(b)) or a related person (within the meaning of section 267(b)) to such a shareholder, and is properly allocable (under regulations prescribed by the Secretary) to income of such foreign corporation for the taxable year from sources within the United States, shall be treated as derived from sources within the United States. The United States source ratio of any dividend paid or accrued by a United States-owned foreign corporation shall be treated as derived from sources within the United States. For purposes of subparagraph (A), the term “United States source ratio” means, with respect to any dividend paid out of the earnings and profits for any taxable year, a fraction— the numerator of which is the portion of the earnings and profits for such taxable year from sources within the United States, and the denominator of which is the total amount of earnings and profits for such taxable year. Paragraph (3) shall not apply to interest paid or accrued during any taxable year (and paragraph (4) shall not apply to any dividends paid out of the earnings and profits for such taxable year) if— the United States-owned foreign corporation has earnings and profits for such taxable year, and less than 10 percent of such earnings and profits is attributable to sources within the United States. For purposes of the preceding sentence, earnings and profits shall be determined without any reduction for interest described in paragraph (3) (determined without regard to subparagraph (C) thereof). For purposes of this subsection, the term “United States-owned foreign corporation” means any foreign corporation if 50 percent or more of— the total combined voting power of all classes of stock of such corporation entitled to vote, or the total value of the stock of such corporation, is held directly (or indirectly through applying paragraphs (2) and (3) of section 958(a) and paragraph (4) of section 318(a)) by United States persons (as defined in section 7701(a)(30)). For purposes of this subsection, the term “dividend” includes any gain treated as a dividend under section 1248. This subsection shall be applied before subsection (f). In the case of any dividend treated as not from sources within the United States under section 861(a)(2)(A), the corporation paying such dividend shall be treated for purposes of this subsection as a United States-owned foreign corporation. If— any amount derived from a United States-owned foreign corporation would be treated as derived from sources within the United States under this subsection by reason of an item of income of such United States-owned foreign corporation, under a treaty obligation of the United States (applied without regard to this subsection and by treating any amount included in gross income under section 951(a)(1) as a dividend), such amount would be treated as arising from sources outside the United States, and the taxpayer chooses the benefits of this paragraph, this subsection shall not apply to such amount to the extent attributable to such item of income (but subsections (a), (b), and (c) of this section and sections 907 and 960 shall be applied separately with respect to such amount to the extent so attributable). Amounts included in gross income under section 951(a)(1) shall be treated as a dividend under subparagraph (A)(ii) only if dividends paid by each corporation (the stock in which is taken into account in determining whether the shareholder is a United States shareholder in the United States-owned foreign corporation), if paid to the United States shareholder, would be treated under a treaty obligation of the United States as arising from sources outside the United States (applied without regard to this subsection). The Secretary shall prescribe such regulations as may be necessary or appropriate for purposes of this subsection, including— regulations for the application of this subsection in the case of interest or dividend payments through 1 or more entities, and regulations providing that this subsection shall apply to interest paid or accrued to any person (whether or not a United States shareholder).

(i) Limitation on use of deconsolidation to avoid foreign tax credit limitations If 2 or more domestic corporations would be members of the same affiliated group if— section 1504(b) were applied without regard to the exceptions contained therein, and the constructive ownership rules of section 1563(e) applied for purposes of section 1504(a), the Secretary may by regulations provide for resourcing the income of any of such corporations or for modifications to the consolidated return regulations to the extent that such resourcing or modifications are necessary to prevent the avoidance of the provisions of this subpart.

(j) Certain individuals exempt In the case of an individual to whom this subsection applies for any taxable year— the limitation of subsection (a) shall not apply, no taxes paid or accrued by the individual during such taxable year may be deemed paid or accrued under subsection (c) in any other taxable year, and no taxes paid or accrued by the individual during any other taxable year may be deemed paid or accrued under subsection (c) in such taxable year. This subsection shall apply to an individual for any taxable year if— the entire amount of such individual’s gross income for the taxable year from sources without the United States consists of qualified passive income, the amount of the creditable foreign taxes paid or accrued by the individual during the taxable year does not exceed $300 ($ 600 in the case of a joint return), and such individual elects to have this subsection apply for the taxable year. For purposes of this subsection— The term “qualified passive income” means any item of gross income if— such item of income is passive income (as defined in subsection (d)(2)(B) without regard to clause (iii) thereof), and such item of income is shown on a payee statement furnished to the individual. The term “creditable foreign taxes” means any taxes for which a credit is allowable under section 901; except that such term shall not include any tax unless such tax is shown on a payee statement furnished to such individual. The term “payee statement” has the meaning given to such term by section 6724(d)(2). This subsection shall not apply to any estate or trust.

(k) Cross references For increase of limitation under subsection (a) for taxes paid with respect to amounts received which were included in the gross income of the taxpayer for a prior taxable year as a United States shareholder with respect to a controlled foreign corporation, see section 960(c).

§ 905 Applicable rules

(a) Year in which credit taken The credits provided in this subpart may, at the option of the taxpayer and irrespective of the method of accounting employed in keeping his books, be taken in the year in which the taxes of the foreign country or the possession of the United States accrued, subject, however, to the conditions prescribed in subsection (c). If the taxpayer elects to take such credits in the year in which the taxes of the foreign country or the possession of the United States accrued, the credits for all subsequent years shall be taken on the same basis, and no portion of any such taxes shall be allowed as a deduction in the same or any succeeding year.

(b) Proof of credits The credits provided in this subpart shall be allowed only if the taxpayer establishes to the satisfaction of the Secretary— the total amount of income derived from sources without the United States, determined as provided in part I, the amount of income derived from each country, the tax paid or accrued to which is claimed as a credit under this subpart, such amount to be determined under regulations prescribed by the Secretary, and all other information necessary for the verification and computation of such credits.

(c) Adjustments to accrued taxes If— accrued taxes when paid differ from the amounts claimed as credits by the taxpayer, accrued taxes are not paid before the date 2 years after the close of the taxable year to which such taxes relate, or any tax paid is refunded in whole or in part, the taxpayer shall notify the Secretary, who shall redetermine the amount of the tax for the year or years affected. Except as provided in subparagraph (B), in making the redetermination under paragraph (1), no credit shall be allowed for accrued taxes not paid before the date referred to in subparagraph (B) of paragraph (1). Any such taxes if subsequently paid— shall be taken into account for the taxable year to which such taxes relate, and shall be translated as provided in section 986(a)(2)(A). The amount of tax (if any) due on any redetermination under paragraph (1) shall be paid by the taxpayer on notice and demand by the Secretary, and the amount of tax overpaid (if any) shall be credited or refunded to the taxpayer in accordance with subchapter B of chapter 66 (section 6511 et seq.). In the case of any tax accrued but not paid, the Secretary, as a condition precedent to the allowance of the credit provided in this subpart, may require the taxpayer to give a bond, with sureties satisfactory to and approved by the Secretary, in such sum as the Secretary may require, conditioned on the payment by the taxpayer of any amount of tax found due on any such redetermination. Any such bond shall contain such further conditions as the Secretary may require. In any redetermination under paragraph (1) by the Secretary of the amount of tax due from the taxpayer for the year or years affected by a refund, the amount of the taxes refunded for which credit has been allowed under this section shall be reduced by the amount of any tax described in section 901 imposed by the foreign country or possession of the United States with respect to such refund; but no credit under this subpart, or deduction under section 164, shall be allowed for any taxable year with respect to any such tax imposed on the refund. No interest shall be assessed or collected on any amount of tax due on any redetermination by the Secretary, resulting from a refund to the taxpayer, for any period before the receipt of such refund, except to the extent interest was paid by the foreign country or possession of the United States on such refund for such period.

§ 906 Nonresident alien individuals and foreign corporations

(a) Allowance of credit A nonresident alien individual or a foreign corporation engaged in trade or business within the United States during the taxable year shall be allowed a credit under section 901 for the amount of any income, war profits, and excess profits taxes paid or accrued during the taxable year to any foreign country or possession of the United States with respect to income effectively connected with the conduct of a trade or business within the United States.

(b) Special rules For purposes of subsection (a) and for purposes of determining the deductions allowable under sections 873(a) and 882(c), in determining the amount of any tax paid or accrued to any foreign country or possession there shall not be taken into account any amount of tax to the extent the tax so paid or accrued is imposed with respect to income from sources within the United States which would not be taxed by such foreign country or possession but for the fact that— in the case of a nonresident alien individual, such individual is a citizen or resident of such foreign country or possession, or in the case of a foreign corporation, such corporation was created or organized under the law of such foreign country or possession or is domiciled for tax purposes in such country or possession. For purposes of subsection (a), in applying section 904 the taxpayer’s taxable income shall be treated as consisting only of the taxable income effectively connected with the taxpayer’s conduct of a trade or business within the United States. The credit allowed pursuant to subsection (a) shall not be allowed against any tax imposed by section 871(a) (relating to income of nonresident alien individual not connected with United States business) or 881 (relating to income of foreign corporations not connected with United States business). , (5) Repealed. Pub. L. 115–97, title I, § 14301(c)(23) , Dec. 22, 2017 , 131 Stat. 2223 .] No credit shall be allowed under this section against the tax imposed by section 884.

§ 907 Special rules in case of foreign oil and gas income

(a) Reduction in amount allowed as foreign tax under section 901 In applying section 901, the amount of any foreign oil and gas taxes paid or accrued (or deemed to have been paid) during the taxable year which would (but for this subsection) be taken into account for purposes of section 901 shall be reduced by the amount (if any) by which the amount of such taxes exceeds the product of— the amount of the combined foreign oil and gas income for the taxable year, multiplied by— in the case of a corporation, the percentage which is equal to the highest rate of tax specified under section 11(b), or in the case of an individual, a fraction the numerator of which is the tax against which the credit under section 901(a) is taken and the denominator of which is the taxpayer’s entire taxable income.

(b) Combined foreign oil and gas income; foreign oil and gas taxes For purposes of this section— The term “combined foreign oil and gas income” means, with respect to any taxable year, the sum of— foreign oil and gas extraction income, and foreign oil related income. The term “foreign oil and gas taxes” means, with respect to any taxable year, the sum of— oil and gas extraction taxes, and any income, war profits, and excess profits taxes paid or accrued (or deemed to have been paid or accrued under section 960) during the taxable year with respect to foreign oil related income (determined without regard to subsection (c)(4)) or loss which would be taken into account for purposes of section 901 without regard to this section.

(c) Foreign income definitions and special rules For purposes of this section— The term “foreign oil and gas extraction income” means the taxable income derived from sources without the United States and its possessions from— the extraction (by the taxpayer or any other person) of minerals from oil or gas wells, or the sale or exchange of assets used by the taxpayer in the trade or business described in subparagraph (A). Such term does not include any dividend or interest income which is passive income (as defined in section 904(d)(2)(A)). The term “foreign oil related income” means the taxable income derived from sources outside the United States and its possessions from— the processing of minerals extracted (by the taxpayer or by any other person) from oil or gas wells into their primary products, the transportation of such minerals or primary products, the distribution or sale of such minerals or primary products, the disposition of assets used by the taxpayer in the trade or business described in subparagraph (A), (B), or (C), or the performance of any other related service. Such term does not include any dividend or interest income which is passive income (as defined in section 904(d)(2)(A)). The term “foreign oil and gas extraction income” and the term “foreign oil related income” include— interest, to the extent the category of income of such interest is determined under section 904(d)(3), amounts with respect to which taxes are deemed paid under section 960, and the taxpayer’s distributive share of the income of partnerships, to the extent such dividends, interest, amounts, or distributive share is attributable to foreign oil and gas extraction income, or to foreign oil related income, as the case may be; except that interest described in subparagraph (A) shall not be taken into account in computing foreign oil and gas extraction income but shall be taken into account in computing foreign oil-related income. The combined foreign oil and gas income of a taxpayer for a taxable year (determined without regard to this paragraph) shall be reduced— first by the amount determined under subparagraph (B), and then by the amount determined under subparagraph (C). The aggregate amount of such reductions shall be treated as income (from sources without the United States) which is not combined foreign oil and gas income. The reduction under this paragraph shall be equal to the lesser of— the foreign oil and gas extraction income of the taxpayer for the taxable year (determined without regard to this paragraph), or the excess of— the aggregate amount of foreign oil extraction losses for preceding taxable years beginning after December 31, 1982 , and before January 1, 2009 , over so much of such aggregate amount as was recharacterized under this paragraph (as in effect before and after the date of the enactment of the Energy Improvement and Extension Act of 2008) for preceding taxable years beginning after December 31, 1982 . The reduction under this paragraph shall be equal to the lesser of— the combined foreign oil and gas income of the taxpayer for the taxable year (determined without regard to this paragraph), reduced by an amount equal to the reduction under subparagraph (A) for the taxable year, or the excess of— the aggregate amount of foreign oil and gas losses for preceding taxable years beginning after December 31, 2008 , over so much of such aggregate amount as was recharacterized under this paragraph for preceding taxable years beginning after December 31, 2008 . For purposes of this paragraph, the term “foreign oil and gas loss” means the amount by which— the gross income for the taxable year from sources without the United States and its possessions (whether or not the taxpayer chooses the benefits of this subpart for such taxable year) taken into account in determining the combined foreign oil and gas income for such year, is exceeded by the sum of the deductions properly apportioned or allocated thereto. For purposes of clause (i), the net operating loss deduction allowable for the taxable year under section 172(a) shall not be taken into account. For purposes of clause (i), there shall not be taken into account— any foreign expropriation loss (as defined in section 172(h) (as in effect on the day before the date of the enactment of the Revenue Reconciliation Act of 1990)) for the taxable year, or any loss for the taxable year which arises from fire, storm, shipwreck, or other casualty, or from theft, to the extent such loss is not compensated for by insurance or otherwise. For purposes of subparagraph (B)(ii)(I), foreign oil extraction losses shall be determined under this paragraph as in effect on the day before the date of the enactment of the Energy Improvement and Extension Act of 2008. The term “oil and gas extraction taxes” means any income, war profits, and excess profits tax paid or accrued (or deemed to have been paid under section 960) during the taxable year with respect to foreign oil and gas extraction income (determined without regard to paragraph (4)) or loss which would be taken into account for purposes of section 901 without regard to this section.

(d) Disregard of certain posted prices, etc. For purposes of this chapter, in determining the amount of taxable income in the case of foreign oil and gas extraction income, if the oil or gas is disposed of, or is acquired other than from the government of a foreign country, at a posted price (or other pricing arrangement) which differs from the fair market value for such oil or gas, such fair market value shall be used in lieu of such posted price (or other pricing arrangement).

([(e) Repealed. Pub. L. 101–508, title XI, § 11801(a)(32), Nov. 5, 1990, 104 Stat. 1388–521]

(f) Carryback and carryover of disallowed credits If the amount of the foreign oil and gas taxes paid or accrued during any taxable year exceeds the limitation provided by subsection (a) for such taxable year (hereinafter in this subsection referred to as the “unused credit year”), such excess shall be deemed to be foreign oil and gas taxes paid or accrued in the first preceding taxable year and in any of the first 10 succeeding taxable years, in that order and to the extent not deemed tax paid or accrued in a prior taxable year by reason of the limitation imposed by paragraph (2). Such amount deemed paid or accrued in any taxable year may be availed of only as a tax credit and not as a deduction and only if the taxpayer for such year chooses to have the benefits of this subpart as to taxes paid or accrued for that year to foreign countries or possessions. The amount of the unused foreign oil and gas taxes which under paragraph (1) may be deemed paid or accrued in any preceding or succeeding taxable year shall not exceed the lesser of— the amount by which the limitation provided by subsection (a) for such taxable year exceeds the sum of— the foreign oil and gas taxes paid or accrued during such taxable year, plus the amounts of the foreign oil and gas taxes which by reason of this subsection are deemed paid or accrued in such taxable year and are attributable to taxable years preceding the unused credit year; or the amount by which the limitation provided by section 904 for such taxable year exceeds the sum of— the taxes paid or accrued (or deemed to have been paid under section 960) to all foreign countries and possessions of the United States during such taxable year, the amount of such taxes which were deemed paid or accrued in such taxable year under section 904(c) and which are attributable to taxable years preceding the unused credit year, plus the amount of the foreign oil and gas taxes which by reason of this subsection are deemed paid or accrued in such taxable year and are attributable to taxable years preceding the unused credit year. In the case of any taxable year which is an unused credit year under this subsection and which is an unused credit year under section 904(c), the provisions of this subsection shall be applied before section 904(c). For purposes of determining the amount of taxes paid or accrued in any taxable year which may be deemed paid or accrued in a preceding or succeeding taxable year under section 904(c), any tax deemed paid or accrued in such preceding or succeeding taxable year under this subsection shall be considered to be tax paid or accrued in such preceding or succeeding taxable year. In the case of any unused credit year beginning before January 1, 2009 , this subsection, as in effect on the day before the date of the enactment of the Energy Improvement and Extension Act of 2008, shall apply to unused oil and gas extraction taxes carried from such unused credit year to a taxable year beginning after December 31, 2008 . In the case of any unused credit year beginning in 2009, the amendments made to this subsection by the Energy Improvement and Extension Act of 2008 shall be treated as being in effect for any preceding year beginning before January 1, 2009 , solely for purposes of determining how much of the unused foreign oil and gas taxes for such unused credit year may be deemed paid or accrued in such preceding year.

§ 908 Reduction of credit for participation in or cooperation with an international boycott

(a) In general If a person, or a member of a controlled group (within the meaning of section 993(a)(3)) which includes such person, participates in or cooperates with an international boycott during the taxable year (within the meaning of section 999(b)), the amount of the credit allowable under section 901 to such person, or under section 960 to United States shareholders of such person, for foreign taxes paid during the taxable year shall be reduced by an amount equal to the product of— the amount of the credit which, but for this section, would be allowed under section 901 for the taxable year, multiplied by the international boycott factor (determined under section 999).

(b) Application with sections 275(a)(4) and 78 Section 275(a)(4) and section 78 shall not apply to any amount of taxes denied credit under subsection (a).

(a) In general If there is a foreign tax credit splitting event with respect to a foreign income tax paid or accrued by the taxpayer, such tax shall not be taken into account for purposes of this title before the taxable year in which the related income is taken into account under this chapter by the taxpayer.

(b) Special rules with respect to specified 10-percent owned foreign corporations If there is a foreign tax credit splitting event with respect to a foreign income tax paid or accrued by a specified 10-percent owned foreign corporation (as defined in section 245A(b) without regard to paragraph (2) thereof), such tax shall not be taken into account— for purposes of section 960, or for purposes of determining earnings and profits under section 964(a), before the taxable year in which the related income is taken into account under this chapter by such specified 10-percent owned foreign corporation or a domestic corporation which is a United States shareholder with respect to such specified 10-percent owned foreign corporation.

(c) Special rules For purposes of this section— In the case of a partnership, subsections (a) and (b) shall be applied at the partner level. Except as otherwise provided by the Secretary, a rule similar to the rule of the preceding sentence shall apply in the case of any S corporation or trust. In the case of any foreign income tax not taken into account by reason of subsection (a) or (b), except as otherwise provided by the Secretary, such tax shall be so taken into account in the taxable year referred to in such subsection (other than for purposes of section 986(a)) as a foreign income tax paid or accrued in such taxable year.

(d) Definitions For purposes of this section— There is a foreign tax credit splitting event with respect to a foreign income tax if the related income is (or will be) taken into account under this chapter by a covered person. The term “foreign income tax” means any income, war profits, or excess profits tax paid or accrued to any foreign country or to any possession of the United States. The term “related income” means, with respect to any portion of any foreign income tax, the income (or, as appropriate, earnings and profits) to which such portion of foreign income tax relates. The term “covered person” means, with respect to any person who pays or accrues a foreign income tax (hereafter in this paragraph referred to as the “payor”)— any entity in which the payor holds, directly or indirectly, at least a 10 percent ownership interest (determined by vote or value), any person which holds, directly or indirectly, at least a 10 percent ownership interest (determined by vote or value) in the payor, any person which bears a relationship to the payor described in section 267(b) or 707(b), and any other person specified by the Secretary for purposes of this paragraph.

(e) Regulations The Secretary may issue such regulations or other guidance as is necessary or appropriate to carry out the purposes of this section, including regulations or other guidance which provides— appropriate exceptions from the provisions of this section, and for the proper application of this section with respect to hybrid instruments.

“The amendments made by this section [enacting this section] shall apply to— foreign income taxes (as defined in section 909(d) of the Internal Revenue Code of 1986, as added by this section) paid or accrued in taxable years beginning after December 31, 2010 ; and foreign income taxes (as so defined) paid or accrued by a [former] section 902 corporation (as so defined) in taxable years beginning on or before such date (and not deemed paid under section 902(a) or 960 of such Code on or before such date), but only for purposes of applying sections 902 and 960 with respect to periods after such date. Section 909(b)(2) of the Internal Revenue Code of 1986, as added by this section, shall not apply to foreign income taxes described in paragraph (2).”

§ 911 Citizens or residents of the United States living abroad

(a) Exclusion from gross income At the election of a qualified individual (made separately with respect to paragraphs (1) and (2)), there shall be excluded from the gross income of such individual, and exempt from taxation under this subtitle, for any taxable year— the foreign earned income of such individual, and the housing cost amount of such individual.

(b) Foreign earned income For purposes of this section— The term “foreign earned income” with respect to any individual means the amount received by such individual from sources within a foreign country or countries which constitute earned income attributable to services performed by such individual during the period described in subparagraph (A) or (B) of subsection (d)(1), whichever is applicable. The foreign earned income for an individual shall not include amounts— received as a pension or annuity, paid by the United States or an agency thereof to an employee of the United States or an agency thereof, included in gross income by reason of section 402(b) (relating to taxability of beneficiary of nonexempt trust) or section 403(c) (relating to taxability of beneficiary under a nonqualified annuity), or received after the close of the taxable year following the taxable year in which the services to which the amounts are attributable are performed. The foreign earned income of an individual which may be excluded under subsection (a)(1) for any taxable year shall not exceed the amount of foreign earned income computed on a daily basis at an annual rate equal to the exclusion amount for the calendar year in which such taxable year begins. For purposes of applying subparagraph (A), amounts received shall be considered received in the taxable year in which the services to which the amounts are attributable are performed. In applying subparagraph (A) with respect to amounts received from services performed by a husband or wife which are community income under community property laws applicable to such income, the aggregate amount which may be excludable from the gross income of such husband and wife under subsection (a)(1) for any taxable year shall equal the amount which would be so excludable if such amounts did not constitute community income. The exclusion amount for any calendar year is $80, 000. I n t h ec a seo f an y t a x ab l eye a r b e g innin g ina c a l e n d a rye a r a f t er 2005, t h e$ 80,000 amount in clause (i) shall be increased by an amount equal to the product of— such dollar amount, and the cost-of-living adjustment determined under section 1(f)(3) for the calendar year in which the taxable year begins, determined by substituting “2004” for “2016” in subparagraph (A)(ii) thereof. If any increase determined under the preceding sentence is not a multiple of $100, s u c hin cre a ses ha ll b ero u n d e d t o t h e n e x tl o w es t m u lt i pl eo f$ 100.

(c) Housing cost amount For purposes of this section— The term “housing cost amount” means an amount equal to the excess of— the housing expenses of an individual for the taxable year to the extent such expenses do not exceed the amount determined under paragraph (2), over an amount equal to the product of— 16 percent of the amount (computed on a daily basis) in effect under subsection (b)(2)(D) for the calendar year in which such taxable year begins, multiplied by the number of days of such taxable year within the applicable period described in subparagraph (A) or (B) of subsection (d)(1). The amount determined under this paragraph is an amount equal to the product of— 30 percent (adjusted as may be provided under subparagraph (B)) of the amount (computed on a daily basis) in effect under subsection (b)(2)(D) for the calendar year in which the taxable year of the individual begins, multiplied by the number of days of such taxable year within the applicable period described in subparagraph (A) or (B) of subsection (d)(1). The Secretary may issue regulations or other guidance providing for the adjustment of the percentage under subparagraph (A)(i) on the basis of geographic differences in housing costs relative to housing costs in the United States. The term “housing expenses” means the reasonable expenses paid or incurred during the taxable year by or on behalf of an individual for housing for the individual (and, if they reside with him, for his spouse and dependents) in a foreign country. The term— includes expenses attributable to the housing (such as utilities and insurance), but does not include interest and taxes of the kind deductible under section 163 or 164 or any amount allowable as a deduction under section 216(a). Housing expenses shall not be treated as reasonable to the extent such expenses are lavish or extravagant under the circumstances. Except as provided in clause (ii), only housing expenses incurred with respect to that abode which bears the closest relationship to the tax home of the individual shall be taken into account under paragraph (1). If an individual maintains a separate abode outside the United States for his spouse and dependents and they do not reside with him because of living conditions which are dangerous, unhealthful, or otherwise adverse, then— the words “if they reside with him” in subparagraph (A) shall be disregarded, and the housing expenses incurred with respect to such abode shall be taken into account under paragraph (1). To the extent the housing cost amount of any individual for any taxable year is not attributable to employer provided amounts, such amount shall be treated as a deduction allowable in computing adjusted gross income to the extent of the limitation of subparagraph (B). For purposes of subparagraph (A), the limitation of this subparagraph is the excess of— the foreign earned income of the individual for the taxable year, over the amount of such income excluded from gross income under subsection (a) for the taxable year. The amount not allowable as a deduction for any taxable year under subparagraph (A) by reason of the limitation of subparagraph (B) shall be treated as a deduction allowable in computing adjusted gross income for the succeeding taxable year (and only for the succeeding taxable year) to the extent of the limitation of clause (ii) for such succeeding taxable year. For purposes of clause (i), the limitation of this clause for any taxable year is the excess of— the limitation of subparagraph (B) for such taxable year, over amounts treated as a deduction under subparagraph (A) for such taxable year. For purposes of this paragraph, the term “employer provided amounts” means any amount paid or incurred on behalf of the individual by the individual’s employer which is foreign earned income included in the individual’s gross income for the taxable year (without regard to this section). For purposes of this paragraph, an individual’s foreign earned income for any taxable year shall be determined without regard to the limitation of subparagraph (A) of subsection (b)(2).

(d) Definitions and special rules For purposes of this section— The term “qualified individual” means an individual whose tax home is in a foreign country and who is— a citizen of the United States and establishes to the satisfaction of the Secretary that he has been a bona fide resident of a foreign country or countries for an uninterrupted period which includes an entire taxable year, or a citizen or resident of the United States and who, during any period of 12 consecutive months, is present in a foreign country or countries during at least 330 full days in such period. The term “earned income” means wages, salaries, or professional fees, and other amounts received as compensation for personal services actually rendered, but does not include that part of the compensation derived by the taxpayer for personal services rendered by him to a corporation which represents a distribution of earnings or profits rather than a reasonable allowance as compensation for the personal services actually rendered. In the case of a taxpayer engaged in a trade or business in which both personal services and capital are material income-producing factors, under regulations prescribed by the Secretary, a reasonable allowance as compensation for the personal services rendered by the taxpayer, not in excess of 30 percent of his share of the net profits of such trade or business, shall be considered as earned income. The term “tax home” means, with respect to any individual, such individual’s home for purposes of section 162(a)(2) (relating to traveling expenses while away from home). An individual shall not be treated as having a tax home in a foreign country for any period for which his abode is within the United States, unless such individual is serving in an area designated by the President of the United States by Executive order as a combat zone for purposes of section 112 in support of the Armed Forces of the United States. Notwithstanding paragraph (1), an individual who— is a bona fide resident of, or is present in, a foreign country for any period, leaves such foreign country after August 31, 1978 — during any period during which the Secretary determines, after consultation with the Secretary of State or his delegate, that individuals were required to leave such foreign country because of war, civil unrest, or similar adverse conditions in such foreign country which precluded the normal conduct of business by such individuals, and before meeting the requirements of such paragraph (1), and establishes to the satisfaction of the Secretary that such individual could reasonably have been expected to have met such requirements but for the conditions referred to in clause (i) of subparagraph (B), shall be treated as a qualified individual with respect to the period described in subparagraph (A) during which he was a bona fide resident of, or was present in, the foreign country, and in applying subsections (b)(2)(A), (c)(1)(B)(ii), and (c)(2)(A)(ii) with respect to such individual, only the days within such period shall be taken into account. If— an individual who has earned income from sources within a foreign country submits a statement to the authorities of that country that he is not a resident of that country, and such individual is held not subject as a resident of that country to the income tax of that country by its authorities with respect to such earnings, then such individual shall not be considered a bona fide resident of that country for purposes of paragraph (1)(A). No deduction or exclusion from gross income under this subtitle or credit against the tax imposed by this chapter (including any credit or deduction for the amount of taxes paid or accrued to a foreign country or possession of the United States) shall be allowed to the extent such deduction, exclusion, or credit is properly allocable to or chargeable against amounts excluded from gross income under subsection (a). The sum of the amount excluded under subsection (a) and the amount deducted under subsection (c)(4)(A) for the taxable year shall not exceed the individual’s foreign earned income for such year. If travel (or any transaction in connection with such travel) with respect to any foreign country is subject to the regulations described in subparagraph (B) during any period— the term “foreign earned income” shall not include any income from sources within such country attributable to services performed during such period, the term “housing expenses” shall not include any expenses allocable to such period for housing in such country or for housing of the spouse or dependents of the taxpayer in another country while the taxpayer is present in such country, and an individual shall not be treated as a bona fide resident of, or as present in, a foreign country for any day during which such individual was present in such country during such period. For purposes of this paragraph, regulations are described in this subparagraph if such regulations— have been adopted pursuant to the Trading With the Enemy Act ( 50 U.S.C. 4301 et seq.) or the International Emergency Economic Powers Act ( 50 U.S.C. 1701 et seq.), and include provisions generally prohibiting citizens and residents of the United States from engaging in transactions related to travel to, from, or within a foreign country. Subparagraph (A) shall not apply to any individual during any period in which such individual’s activities are not in violation of the regulations described in subparagraph (B). The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section, including regulations providing rules— for cases where a husband and wife each have earned income from sources outside the United States, and for married individuals filing separate returns.

(e) Election An election under subsection (a) shall apply to the taxable year for which made and to all subsequent taxable years unless revoked under paragraph (2). A taxpayer may revoke an election made under paragraph (1) for any taxable year after the taxable year for which such election was made. Except with the consent of the Secretary, any taxpayer who makes such a revocation for any taxable year may not make another election under this section for any subsequent taxable year before the 6th taxable year after the taxable year for which such revocation was made.

(f) Determination of tax liability If, for any taxable year, any amount is excluded from gross income of a taxpayer under subsection (a), then, notwithstanding sections 1 and 55— if such taxpayer has taxable income for such taxable year, the tax imposed by section 1 for such taxable year shall be equal to the excess (if any) of— the tax which would be imposed by section 1 for such taxable year if the taxpayer’s taxable income were increased by the amount excluded under subsection (a) for such taxable year, over the tax which would be imposed by section 1 for such taxable year if the taxpayer’s taxable income were equal to the amount excluded under subsection (a) for such taxable year, and if such taxpayer has a taxable excess (as defined in section 55(b)(1)(B)) for such taxable year, the amount determined under the first sentence of section 55(b)(1)(A) for such taxable year shall be equal to the excess (if any) of— the amount which would be determined under such sentence for such taxable year (subject to the limitation of section 55(b)(3)) if the taxpayer’s taxable excess (as so defined) were increased by the amount excluded under subsection (a) for such taxable year, over the amount which would be determined under such sentence for such taxable year if the taxpayer’s taxable excess (as so defined) were equal to the amount excluded under subsection (a) for such taxable year. For purposes of this paragraph, the amount excluded under subsection (a) shall be reduced by the aggregate amount of any deductions or exclusions disallowed under subsection (d)(6) with respect to such excluded amount. In applying section 1(h) for purposes of determining the tax under paragraph (1)(A)(i) for any taxable year in which, without regard to this subsection, the taxpayer’s net capital gain exceeds taxable income (hereafter in this subparagraph referred to as the capital gain excess)— the taxpayer’s net capital gain (determined without regard to section 1(h)(11)) shall be reduced (but not below zero) by such capital gain excess, the taxpayer’s qualified dividend income shall be reduced by so much of such capital gain excess as exceeds the taxpayer’s net capital gain (determined without regard to section 1(h)(11) and the reduction under clause (i)), and adjusted net capital gain, unrecaptured section 1250 gain, and 28-percent rate gain shall each be determined after increasing the amount described in section 1(h)(4)(B) by such capital gain excess. In applying section 55(b)(3) for purposes of determining the tax under paragraph (1)(B)(i) for any taxable year in which, without regard to this subsection, the taxpayer’s net capital gain exceeds the taxable excess (as defined in section 55(b)(1)(B))— the rules of subparagraph (A) shall apply, except that such subparagraph shall be applied by substituting “the taxable excess (as defined in section 55(b)(1)(B))” for “taxable income”, and the reference in section 55(b)(3)(B) to the excess described in section 1(h)(1)(B), and the reference in section 55(b)(3)(C)(ii) to the excess described in section 1(h)(1)(C)(ii), shall each be treated as a reference to each such excess as determined under the rules of subparagraph (A) for purposes of determining the tax under paragraph (1)(A)(i). Terms used in this paragraph which are also used in section 1(h) shall have the respective meanings given such terms by section 1(h), except that in applying subparagraph (B) the adjustments under part VI of subchapter A shall be taken into account.

(g) Cross references For administrative and penal provisions relating to the exclusions provided for in this section, see sections 6001, 6011, 6012(c), and the other provisions of subtitle F.

“If for any taxable year beginning in 1977— an individual is entitled to the benefits of section 911 of the Internal Revenue Code of 1986 [formerly I.R.C. 1954], and such individual chooses to take to any extent the benefits of section 901 of such Code, then such individual shall be treated for such taxable year as an individual for whom an unused zero bracket amount computation is provided by section 63(e) of such Code.”

§ 912 Exemption for certain allowances

The following items shall not be included in gross income, and shall be exempt from taxation under this subtitle: In the case of civilian officers and employees of the Government of the United States, amounts received as allowances or otherwise (but not amounts received as post differentials) under— chapter 9 of title I of the Foreign Service Act of 1980, section 4 of the Central Intelligence Agency Act of 1949, as amended ( 50 U.S.C. 3505 ), title II of the Overseas Differentials and Allowances Act, or subsection (e) or (f) of the first section of the Administrative Expenses Act of 1946, as amended, or section 22 of such Act. In the case of civilian officers or employees of the Government of the United States stationed outside the continental United States (other than Alaska), amounts (other than amounts received under title II of the Overseas Differentials and Allowances Act) received as cost-of-living allowances in accordance with regulations approved by the President (or in the case of judicial officers or employees of the United States, in accordance with rules similar to such regulations). In the case of an individual who is a volunteer or volunteer leader within the meaning of the Peace Corps Act and members of his family, amounts received as allowances under section 5 or 6 of the Peace Corps Act other than amounts received as— termination payments under section 5(c) or section 6(1) of such Act, leave allowances, if such individual is a volunteer leader training in the United States, allowances to members of his family, and such portion of living allowances as the President may determine under the Peace Corps Act as constituting basic compensation. ( Aug. 16, 1954, ch. 736 , 68A Stat. 290 ; Pub. L. 86–707, title V, § 523(a) , Sept. 6, 1960 , 74 Stat. 802 ; Pub. L. 87–293, title II, § 201(a) , Sept. 22, 1961 , 75 Stat. 625 ; Pub. L. 96–465, title II, § 2206(e)(3) , Oct. 17, 1980 , 94 Stat. 2163 ; Pub. L. 100–647, title VI, § 6137(a) , Nov. 10, 1988 , 102 Stat. 3723 ; Pub. L. 115–141, div. U, title IV, § 401(a)(161) , Mar. 23, 2018 , 132 Stat. 1192 .)

[§ 913 Repealed. Pub. L. 97–34, title I, § 112(a), Aug. 13, 1981, 95 Stat. 194]

[§§ 921 to 927 Repealed. Pub. L. 106–519, § 2, Nov. 15, 2000, 114 Stat. 2423]

§ 931 Income from sources within Guam, American Samoa, or the Northern Mariana Islands

(a) General rule In the case of an individual who is a bona fide resident of a specified possession during the entire taxable year, gross income shall not include— income derived from sources within any specified possession, and income effectively connected with the conduct of a trade or business by such individual within any specified possession.

(b) Deductions, etc. allocable to excluded amounts not allowable An individual shall not be allowed— as a deduction from gross income any deductions (other than the deduction under section 151, relating to personal exemptions), or any credit, properly allocable or chargeable against amounts excluded from gross income under this section.

(c) Specified possession For purposes of this section, the term “specified possession” means Guam, American Samoa, and the Northern Mariana Islands.

(d) Employees of the United States Amounts paid for services performed as an employee of the United States (or any agency thereof) shall be treated as not described in paragraph (1) or (2) of subsection (a).

§ 932 Coordination of United States and Virgin Islands income taxes

(a) Treatment of United States residents This subsection shall apply to an individual for the taxable year if— such individual— is a citizen or resident of the United States (other than a bona fide resident of the Virgin Islands during the entire taxable year), and has income derived from sources within the Virgin Islands, or effectively connected with the conduct of a trade or business within such possession, for the taxable year, or such individual files a joint return for the taxable year with an individual described in subparagraph (A). Each individual to whom this subsection applies for the taxable year shall file his income tax return for the taxable year with both the United States and the Virgin Islands. In the case of an individual to whom this subsection applies in a taxable year for purposes of so much of this title (other than this section and section 7654) as relates to the taxes imposed by this chapter, the United States shall be treated as including the Virgin Islands.

(b) Portion of United States tax liability payable to the Virgin Islands Each individual to whom subsection (a) applies for the taxable year shall pay the applicable percentage of the taxes imposed by this chapter for such taxable year (determined without regard to paragraph (3)) to the Virgin Islands. For purposes of paragraph (1), the term “applicable percentage” means the percentage which Virgin Islands adjusted gross income bears to adjusted gross income. For purposes of subparagraph (A), the term “Virgin Islands adjusted gross income” means adjusted gross income determined by taking into account only income derived from sources within the Virgin Islands and deductions properly apportioned or allocable thereto. There shall be allowed as a credit against the tax imposed by this chapter for the taxable year an amount equal to the taxes required to be paid to the Virgin Islands under paragraph (1) which are so paid.

(c) Treatment of Virgin Islands residents This subsection shall apply to an individual for the taxable year if— such individual is a bona fide resident of the Virgin Islands during the entire taxable year, or such individual files a joint return for the taxable year with an individual described in subparagraph (A). Each individual to whom this subsection applies for the taxable year shall file an income tax return for the taxable year with the Virgin Islands. In the case of an individual to whom this subsection applies in a taxable year for purposes of so much of this title (other than this section and section 7654) as relates to the taxes imposed by this chapter, the Virgin Islands shall be treated as including the United States. In the case of an individual— who is a bona fide resident of the Virgin Islands during the entire taxable year, who, on his return of income tax to the Virgin Islands, reports income from all sources and identifies the source of each item shown on such return, and who fully pays his tax liability referred to in section 934(a) to the Virgin Islands with respect to such income, for purposes of calculating income tax liability to the United States, gross income shall not include any amount included in gross income on such return, and allocable deductions and credits shall not be taken into account.

(d) Special rule for joint returns In the case of a joint return, this section shall be applied on the basis of the residence of the spouse who has the greater adjusted gross income (determined without regard to community property laws) for the taxable year.

(e) Special rule for applying section to tax imposed in Virgin Islands In applying this section for purposes of determining income tax liability incurred to the Virgin Islands, the provisions of this section shall not be affected by the provisions of Federal law referred to in section 934(a).

§ 933 Income from sources within Puerto Rico

The following items shall not be included in gross income and shall be exempt from taxation under this subtitle: In the case of an individual who is a bona fide resident of Puerto Rico during the entire taxable year, income derived from sources within Puerto Rico (except amounts received for services performed as an employee of the United States or any agency thereof); but such individual shall not be allowed as a deduction from his gross income any deductions (other than the deduction under section 151, relating to personal exemptions), or any credit, properly allocable to or chargeable against amounts excluded from gross income under this paragraph. In the case of an individual citizen of the United States who has been a bona fide resident of Puerto Rico for a period of at least 2 years before the date on which he changes his residence from Puerto Rico, income derived from sources therein (except amounts received for services performed as an employee of the United States or any agency thereof) which is attributable to that part of such period of Puerto Rican residence before such date; but such individual shall not be allowed as a deduction from his gross income any deductions (other than the deduction for personal exemptions under section 151), or any credit, properly allocable to or chargeable against amounts excluded from gross income under this paragraph. ( Aug. 16, 1954, ch. 736 , 68A Stat. 293 ; Pub. L. 99–514, title XII, § 1272(d)(3) , Oct. 22, 1986 , 100 Stat. 2594 .)

§ 934 Limitation on reduction in income tax liability incurred to the Virgin Islands

(a) General rule Tax liability incurred to the Virgin Islands pursuant to this subtitle, as made applicable in the Virgin Islands by the Act entitled “An Act making appropriations for the naval service for the fiscal year ending June 30, 1922 , and for other purposes”, approved July 12, 1921 ( 48 U.S.C. 1397 ), or pursuant to section 28(a) of the Revised Organic Act of the Virgin Islands, approved July 22, 1954 ( 48 U.S.C. 1642 ), shall not be reduced or remitted in any way, directly or indirectly, whether by grant, subsidy, or other similar payment, by any law enacted in the Virgin Islands, except to the extent provided in subsection (b).

(b) Reductions permitted with respect to certain income Except as provided in paragraph (2), subsection (a) shall not apply with respect to so much of the tax liability referred to in subsection (a) as is attributable to income derived from sources within the Virgin Islands or income effectively connected with the conduct of a trade or business within the Virgin Islands. Paragraph (1) shall not apply to any liability payable to the Virgin Islands under section 932(b). In the case of a qualified foreign corporation, subsection (a) shall not apply with respect to so much of the tax liability referred to in subsection (a) as is attributable to income which is derived from sources outside the United States and which is not effectively connected with the conduct of a trade or business within the United States. For purposes of subparagraph (A), the term “qualified foreign corporation” means any foreign corporation if less than 10 percent of— the total voting power of the stock of such corporation, and the total value of the stock of such corporation, is owned or treated as owned (within the meaning of section 958) by 1 or more United States persons. The determination as to whether income is derived from sources within the United States or is effectively connected with the conduct of a trade or business within the United States shall be made under regulations prescribed by the Secretary.

[§ 934A Repealed. Pub. L. 99–514, title XII, § 1275(c)(3), Oct. 22, 1986, 100 Stat. 2599]

[§ 935 Repealed. Pub. L. 99–514, title XII, § 1272(d)(2), Oct. 22, 1986, 100 Stat. 2594]

[§ 936 Repealed. Pub. L. 115–141, div. U, title IV, § 401(d)(1)(C), Mar. 23, 2018, 132 Stat. 1206]

§ 937 Residence and source rules involving possessions

(a) Bona fide resident For purposes of this subpart, section 865(g)(3), section 876, section 881(b), paragraphs (2) and (3) of section 901(b), section 957(c), section 3401(a)(8)(C), and section 7654(a), except as provided in regulations, the term “bona fide resident” means a person— who is present for at least 183 days during the taxable year in Guam, American Samoa, the Northern Mariana Islands, Puerto Rico, or the Virgin Islands, as the case may be, and who does not have a tax home (determined under the principles of section 911(d)(3) without regard to the second sentence thereof) outside such specified possession during the taxable year and does not have a closer connection (determined under the principles of section 7701(b)(3)(B)(ii)) to the United States or a foreign country than to such specified possession. For purposes of paragraph (1), the determination as to whether a person is present for any day shall be made under the principles of section 7701(b).

(b) Source rules Except as provided in regulations, for purposes of this title— except as provided in paragraph (2), rules similar to the rules for determining whether income is income from sources within the United States or is effectively connected with the conduct of a trade or business within the United States shall apply for purposes of determining whether income is from sources within a possession specified in subsection (a)(1) or effectively connected with the conduct of a trade or business within any such possession, and any income treated as income from sources within the United States or as effectively connected with the conduct of a trade or business within the United States shall not be treated as income from sources within any such possession or as effectively connected with the conduct of a trade or business within any such possession.

(c) Reporting requirement If, for any taxable year, an individual takes the position for United States income tax reporting purposes that the individual became, or ceases to be, a bona fide resident of a possession specified in subsection (a)(1), such individual shall file with the Secretary, at such time and in such manner as the Secretary may prescribe, notice of such position. If, for any of an individual’s 3 taxable years ending before the individual’s first taxable year ending after the date of the enactment of this subsection, the individual took a position described in paragraph (1), the individual shall file with the Secretary, at such time and in such manner as the Secretary may prescribe, notice of such position.

[§§ 941 to 943 Repealed. Pub. L. 108–357, title I, § 101(b)(1), Oct. 22, 2004, 118 Stat. 1423]

§ 951 Amounts included in gross income of United States shareholders

(a) Amounts included If a foreign corporation is a controlled foreign corporation at any time during a taxable year of the foreign corporation (in this subsection referred to as the “CFC year”)— each United States shareholder which owns (within the meaning of section 958(a)) stock in such corporation on any day during the CFC year shall include in gross income such shareholder’s pro rata share (determined under paragraph (2)) of the corporation’s subpart F income for the CFC year, and each United States shareholder which owns (within the meaning of section 958(a)) stock in such corporation on the last day, in the CFC year, on which such corporation is a controlled foreign corporation shall include in gross income the amount determined under section 956 with respect to such shareholder for the CFC year (but only to the extent not excluded from gross income under section 959(a)(2)). A United States shareholder’s pro rata share of a controlled foreign corporation’s subpart F income for a CFC year shall be the portion of such income which is attributable to— the stock of such corporation owned (within the meaning of section 958(a)) by such shareholder, and any period of the CFC year during which— such shareholder owned (within the meaning of section 958(a)) such stock, such shareholder was a United States shareholder of such corporation, and such corporation was a controlled foreign corporation. Any amount required to be included in gross income by a United States shareholder under paragraph (1) with respect to a CFC year shall be included in gross income for the shareholder’s taxable year which includes the last day on which the shareholder owns (within the meaning of section 958(a)) stock in the controlled foreign corporation during such CFC year. The Secretary shall prescribe such regulations or other guidance as may be necessary or appropriate to carry out the purposes of this subsection, including regulations or other guidance allowing taxpayers to elect, or requiring taxpayers, to close the taxable year of a controlled foreign corporation upon a direct or indirect disposition of stock of such corporation.

(b) United States shareholder defined For purposes of this title, the term “United States shareholder” means, with respect to any foreign corporation, a United States person (as defined in section 957(c)) who owns (within the meaning of section 958(a)), or is considered as owning by applying the rules of ownership of section 958(b), 10 percent or more of the total combined voting power of all classes of stock entitled to vote of such foreign corporation, or 10 percent or more of the total value of shares of all classes of stock of such foreign corporation.

(c) Coordination with passive foreign investment company provisions If, but for this subsection, an amount would be included in the gross income of a United States shareholder for any taxable year both under subsection (a)(1)(A)(i) and under section 1293 (relating to current taxation of income from certain passive foreign investment companies), such amount shall be included in the gross income of such shareholder only under subsection (a)(1)(A).

§ 951A Net CFC tested income included in gross income of United States shareholders

(a) In general Each person who is a United States shareholder of any controlled foreign corporation for any taxable year of such United States shareholder shall include in gross income such shareholder’s net CFC tested income for such taxable year.

(b) Net CFC tested income For purposes of this section— The term “net CFC tested income” means, with respect to any United States shareholder for any taxable year of such United States shareholder, the excess (if any) of— the aggregate of such shareholder’s pro rata share of the tested income of each controlled foreign corporation with respect to which such shareholder is a United States shareholder for such taxable year of such United States shareholder, over the aggregate of such shareholder’s pro rata share of the tested loss of each controlled foreign corporation with respect to which such shareholder is a United States shareholder for such taxable year of such United States shareholder. For purposes of this section— The term “tested income” means, with respect to any controlled foreign corporation for any taxable year of such controlled foreign corporation, the excess (if any) of— the gross income of such corporation determined without regard to— any item of income described in section 952(b), any gross income taken into account in determining the subpart F income of such corporation, any gross income excluded from the foreign base company income (as defined in section 954) and the insurance income (as defined in section 953) of such corporation by reason of section 954(b)(4), any dividend received from a related person (as defined in section 954(d)(3)), and any foreign oil and gas extraction income (as defined in section 907(c)(1)) of such corporation, over the deductions (including taxes) properly allocable to such gross income under rules similar to the rules of section 954(b)(5) (or to which such deductions would be allocable if there were such gross income). The term “tested loss” means, with respect to any controlled foreign corporation for any taxable year of such controlled foreign corporation, the excess (if any) of the amount described in subparagraph (A)(ii) over the amount described in subparagraph (A)(i). Section 952(c)(1)(A) shall be applied by increasing the earnings and profits of the controlled foreign corporation by the tested loss of such corporation.

(c) Determination of pro rata share, etc. For purposes of this section— The pro rata shares referred to in subsections (b)(1)(A) and (b)(1)(B), respectively, shall be determined under the rules of section 951(a)(2) in the same manner as such section applies to subpart F income and shall be taken into account in the taxable year of the United States shareholder determined under section 951(a)(3). A person shall be treated as a United States shareholder of a controlled foreign corporation for any taxable year of such person only if such person owns (within the meaning of section 958(a)) stock in such foreign corporation on any day in such taxable year. A foreign corporation shall be treated as a controlled foreign corporation for any taxable year if such foreign corporation is a controlled foreign corporation at any time during such taxable year.

(d) Treatment as subpart F income for certain purposes Except as provided in subparagraph (B), any net CFC tested income included in gross income under subsection (a) shall be treated in the same manner as an amount included under section 951(a)(1)(A) for purposes of applying sections 168(h)(2)(B), 535(b)(10), 851(b), 904(h), 959, 961, 962, 993(a)(1)(E), 996(f)(1), 1248(b)(1), 1248(d)(1), 6501(e)(1)(C), 6654(d)(2)(D), and 6655(e)(4). The Secretary shall provide rules for the application of subparagraph (A) to other provisions of this title in any case in which the determination of subpart F income is required to be made at the level of the controlled foreign corporation. For purposes of the sections referred to in paragraph (1), with respect to any controlled foreign corporation any pro rata amount from which is taken into account in determining the net CFC tested income included in gross income of a United States shareholder under subsection (a), the portion of such net CFC tested income which is treated as being with respect to such controlled foreign corporation is— in the case of a controlled foreign corporation with no tested income, zero, and in the case of a controlled foreign corporation with tested income, the portion of such net CFC tested income which bears the same ratio to such net CFC tested income as— such United States shareholder’s pro rata amount of the tested income of such controlled foreign corporation, bears to the aggregate amount described in subsection (b)(1)(A) with respect to such United States shareholder.

§ 951B Amounts included in gross income of foreign controlled United States shareholders

(a) In general In the case of any foreign controlled United States shareholder of a foreign controlled foreign corporation— this subpart (other than sections 951A, 951(b), and 957) shall be applied with respect to such shareholder (separately from, and in addition to, the application of this subpart without regard to this section)— by substituting “foreign controlled United States shareholder” for “United States shareholder” each place it appears therein, and by substituting “foreign controlled foreign corporation” for “controlled foreign corporation” each place it appears therein, and section 951A (and such other provisions of this subpart as provided by the Secretary) shall be applied with respect to such shareholder— by treating each reference to “United States shareholder” in such section as including a reference to such shareholder, and by treating each reference to “controlled foreign corporation” in such section as including a reference to such foreign controlled foreign corporation.

(b) Foreign controlled United States shareholder For purposes of this section, the term “foreign controlled United States shareholder” means, with respect to any foreign corporation, any United States person which would be a United States shareholder with respect to such foreign corporation if— section 951(b) were applied by substituting “more than 50 percent” for “10 percent or more”, and section 958(b) were applied without regard to paragraph (4) thereof.

(c) Foreign controlled foreign corporation For purposes of this section, the term “foreign controlled foreign corporation” means a foreign corporation, other than a controlled foreign corporation, which would be a controlled foreign corporation if section 957(a) were applied— by substituting “foreign controlled United States shareholders” for “United States shareholders”, and by substituting “section 958(b) (other than paragraph (4) thereof)” for “section 958(b)”.

(d) Regulations The Secretary shall prescribe such regulations or other guidance as may be necessary or appropriate to carry out the purposes of this section, including regulations or other guidance— to treat a foreign controlled United States shareholder or a foreign controlled foreign corporation as a United States shareholder or as a controlled foreign corporation, respectively, for purposes of provisions of this title other than this subpart (including any reporting requirement), and with respect to the treatment of foreign controlled foreign corporations that are passive foreign investment companies (as defined in section 1297).

§ 952 Subpart F income defined

(a) In general For purposes of this subpart, the term “subpart F income” means, in the case of any controlled foreign corporation, the sum of— insurance income (as defined under section 953), the foreign base company income (as determined under section 954), an amount equal to the product of— the income of such corporation other than income which— is attributable to earnings and profits of the foreign corporation included in the gross income of a United States person under section 951 (other than by reason of this paragraph), or is described in subsection (b), multiplied by the international boycott factor (as determined under section 999), the sum of the amounts of any illegal bribes, kickbacks, or other payments (within the meaning of section 162(c)) paid by or on behalf of the corporation during the taxable year of the corporation directly or indirectly to an official, employee, or agent in fact of a government, and the income of such corporation derived from any foreign country during any period during which section 901(j) applies to such foreign country. The payments referred to in paragraph (4) are payments which would be unlawful under the Foreign Corrupt Practices Act of 1977 if the payor were a United States person. For purposes of paragraph (5), the income described therein shall be reduced, under regulations prescribed by the Secretary, so as to take into account deductions (including taxes) properly allocable to such income.

(b) Exclusion of United States income In the case of a controlled foreign corporation, subpart F income does not include any item of income from sources within the United States which is effectively connected with the conduct by such corporation of a trade or business within the United States unless such item is exempt from taxation (or is subject to a reduced rate of tax) pursuant to a treaty obligation of the United States. For purposes of this subsection, any exemption (or reduction) with respect to the tax imposed by section 884 shall not be taken into account.

(c) Limitation For purposes of subsection (a), the subpart F income of any controlled foreign corporation for any taxable year shall not exceed the earnings and profits of such corporation for such taxable year. The amount included in the gross income of any United States shareholder under section 951(a)(1)(A) for any taxable year and attributable to a qualified activity shall be reduced by the amount of such shareholder’s pro rata share of any qualified deficit. The term “qualified deficit” means any deficit in earnings and profits of the controlled foreign corporation for any prior taxable year which began after December 31, 1986 , and for which the controlled foreign corporation was a controlled foreign corporation; but only to the extent such deficit— is attributable to the same qualified activity as the activity giving rise to the income being offset, and has not previously been taken into account under this subparagraph. In determining the deficit attributable to qualified activities described in subclause (II) or (III) of clause (iii), 1 deficits in earnings and profits (to the extent not previously taken into account under this section) for taxable years beginning after 1962 and before 1987 also shall be taken into account. In the case of the qualified activity described in clause (iii)(I), 1 the rule of the preceding sentence shall apply, except that “1982” shall be substituted for “1962”. For purposes of this paragraph, the term “qualified activity” means any activity giving rise to— foreign base company sales income, foreign base company services income, in the case of a qualified insurance company, insurance income or foreign personal holding company income, or in the case of a qualified financial institution, foreign personal holding company income. For purposes of this paragraph, the shareholder’s pro rata share of any deficit for any prior taxable year shall be determined under rules similar to rules under section 951(a)(2) for whichever of the following yields the smaller share: the close of the taxable year, or the close of the taxable year in which the deficit arose. For purposes of this subparagraph, the term “qualified insurance company” means any controlled foreign corporation predominantly engaged in the active conduct of an insurance business in the taxable year and in the prior taxable years in which the deficit arose. For purposes of this paragraph, the term “qualified financial institution” means any controlled foreign corporation predominantly engaged in the active conduct of a banking, financing, or similar business in the taxable year and in the prior taxable year in which the deficit arose. An election may be made under this clause to have section 953(a) applied for purposes of this title without regard to the same country exception under paragraph (1)(A) thereof. Such election, once made, may be revoked only with the consent of the Secretary. In the case of an affiliated group of corporations (within the meaning of section 1504 but without regard to section 1504(b)(3) and by substituting “more than 50 percent” for “at least 80 percent” each place it appears), no election may be made under subclause (I) for any controlled foreign corporation unless such election is made for all other controlled foreign corporations who are members of such group and who were created or organized under the laws of the same country as such controlled foreign corporation. For purposes of clause (v), in determining whether any controlled corporation described in the preceding sentence is a qualified insurance company, all such corporations shall be treated as 1 corporation. A controlled foreign corporation may elect to reduce the amount of its subpart F income for any taxable year which is attributable to any qualified activity by the amount of any deficit in earnings and profits of a qualified chain member for a taxable year ending with (or within) the taxable year of such controlled foreign corporation to the extent such deficit is attributable to such activity. To the extent any deficit reduces subpart F income under the preceding sentence, such deficit shall not be taken into account under subparagraph (B). For purposes of this subparagraph, the term “qualified chain member” means, with respect to any controlled foreign corporation, any other corporation which is created or organized under the laws of the same foreign country as the controlled foreign corporation but only if— all the stock of such other corporation (other than directors’ qualifying shares) is owned at all times during the taxable year in which the deficit arose (directly or through 1 or more corporations other than the common parent) by such controlled foreign corporation, or all the stock of such controlled foreign corporation (other than directors’ qualifying shares) is owned at all times during the taxable year in which the deficit arose (directly or through 1 or more corporations other than the common parent) by such other corporation. This subparagraph shall be applied after subparagraphs (A) and (B). If the subpart F income of any controlled foreign corporation for any taxable year was reduced by reason of paragraph (1)(A), any excess of the earnings and profits of such corporation for any subsequent taxable year over the subpart F income of such foreign corporation for such taxable year shall be recharacterized as subpart F income under rules similar to the rules applicable under section 904(f)(5). For purposes of this subsection, earnings and profits of any controlled foreign corporation shall be determined without regard to paragraphs (4), (5), and (6) of section 312(n). Under regulations, the preceding sentence shall not apply to the extent it would increase earnings and profits by an amount which was previously distributed by the controlled foreign corporation.

(d) Income derived from foreign country The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of subsection (a)(5), including regulations which treat income paid through 1 or more entities as derived from a foreign country to which section 901(j) applies if such income was, without regard to such entities, derived from such country.

§ 953 Insurance income

(a) Insurance income For purposes of section 952(a)(1), the term “insurance income” means any income which— is attributable to the issuing (or reinsuring) of an insurance or annuity contract, and would (subject to the modifications provided by subsection (b)) be taxed under subchapter L of this chapter if such income were the income of a domestic insurance company. Such term shall not include any exempt insurance income (as defined in subsection (e)).

(b) Special rules For purposes of subsection (a)— The following provisions of subchapter L shall not apply: So much of section 805(a)(8) as relates to the deduction allowed under section 172. Section 832(c)(5) (relating to certain capital losses). The items referred to in— section 803(a)(1) (relating to gross amount of premiums and other considerations), section 803(a)(2) (relating to net decrease in reserves), section 805(a)(2) (relating to net increase in reserves), and section 832(b)(4) (relating to premiums earned on insurance contracts), shall be taken into account only to the extent they are in respect of any reinsurance or the issuing of any insurance or annuity contract described in subsection (a)(1). Reserves for any insurance or annuity contract shall be determined in the same manner as under section 954(i). All items of income, expenses, losses, and deductions shall be properly allocated or apportioned under regulations prescribed by the Secretary.

(c) Special rule for certain captive insurance companies For purposes only of taking into account related person insurance income— the term “United States shareholder” means, with respect to any foreign corporation, a United States person (as defined in section 957(c)) who owns (within the meaning of section 958(a)) any stock of the foreign corporation, the term “controlled foreign corporation” has the meaning given to such term by section 957(a) determined by substituting “25 percent or more” for “more than 50 percent”, and the pro rata share referred to in section 951(a)(1)(A) shall be determined under paragraph (5) of this subsection. For purposes of this subsection, the term “related person insurance income” means any insurance income (within the meaning of subsection (a)) attributable to a policy of insurance or reinsurance with respect to which the person (directly or indirectly) insured is a United States shareholder in the foreign corporation or a related person to such a shareholder. Paragraph (1) shall not apply to any foreign corporation if at all times during the taxable year of such foreign corporation— less than 20 percent of the total combined voting power of all classes of stock of such corporation entitled to vote, and less than 20 percent of the total value of such corporation, is owned (directly or indirectly under the principles of section 883(c)(4)) by persons who are (directly or indirectly) insured under any policy of insurance or reinsurance issued by such corporation or who are related persons to any such person. Paragraph (1) shall not apply to any foreign corporation for a taxable year of such corporation if the related person insurance income (determined on a gross basis) of such corporation for such taxable year is less than 20 percent of its insurance income (as so determined) for such taxable year determined without regard to those provisions of subsection (a)(1) which limit insurance income to income from countries other than the country in which the corporation was created or organized. Paragraph (1) shall not apply to any foreign corporation for any taxable year if— such corporation elects (at such time and in such manner as the Secretary may prescribe)— to treat its related person insurance income for such taxable year as income effectively connected with the conduct of a trade or business in the United States, and to waive all benefits (other than with respect to section 884) with respect to related person insurance income granted by the United States under any treaty between the United States and any foreign country, and such corporation meets such requirements as the Secretary shall prescribe to ensure that the tax imposed by this chapter on such income is paid. An election under this subparagraph made for any taxable year shall not be effective if the corporation (or any predecessor thereof) was a disqualified corporation for the taxable year for which the election was made or for any prior taxable year beginning after 1986. Except as provided in subclause (II), any election under subparagraph (C) shall apply to the taxable year for which made and all subsequent taxable years unless revoked with the consent of the Secretary. If a foreign corporation which made an election under subparagraph (C) for any taxable year is a disqualified corporation for any subsequent taxable year, such election shall not apply to any taxable year beginning after such subsequent taxable year. The tax imposed by section 4371 shall not apply with respect to any related person insurance income treated as effectively connected with the conduct of a trade or business within the United States under subparagraph (C). For purposes of this paragraph the term “disqualified corporation” means, with respect to any taxable year, any foreign corporation which is a controlled foreign corporation for an uninterrupted period of 30 days or more during such taxable year (determined without regard to this subsection) but only if a United States shareholder (determined without regard to this subsection) owns (within the meaning of section 958(a)) stock in such corporation at some time during such taxable year. In the case of a mutual insurance company— this subsection shall apply, policyholders of such company shall be treated as shareholders, and appropriate adjustments in the application of this subpart shall be made under regulations prescribed by the Secretary. The pro rata share determined under this paragraph for any United States shareholder is the lesser of— the amount which would be determined under paragraph (2) of section 951(a) if— only related person insurance income were taken into account, stock owned (within the meaning of section 958(a)) by United States shareholders on the last day of the taxable year were the only stock in the foreign corporation, and only distributions received by United States shareholders were taken into account under subparagraph (B) of such paragraph (2), or the amount which would be determined under paragraph (2) of section 951(a) if the entire earnings and profits of the foreign corporation for the taxable year were subpart F income. The Secretary shall prescribe regulations providing for such modifications to the provisions of this subpart as may be necessary or appropriate by reason of subparagraph (A). For purposes of this subsection— Except as provided in subparagraph (B), the term “related person” has the meaning given such term by section 954(d)(3). In the case of any policy of insurance covering liability arising from services performed as a director, officer, or employee of a corporation or as a partner or employee of a partnership, the person performing such services and the entity for which such services are performed shall be treated as related persons. For purposes of section 1248, if any person is (or would be but for paragraph (3)) treated under paragraph (1) as a United States shareholder with respect to any foreign corporation which would be taxed under subchapter L if it were a domestic corporation and which is (or would be but for paragraph (3)) treated under paragraph (1) as a controlled foreign corporation— such person shall be treated as meeting the stock ownership requirements of section 1248(a)(2) with respect to such foreign corporation, and such foreign corporation shall be treated as a controlled foreign corporation. The Secretary shall prescribe such regulations as may be necessary to carry out the purposes of this subsection, including— regulations preventing the avoidance of this subsection through cross insurance arrangements or otherwise, and regulations which may provide that a person will not be treated as a United States shareholder under paragraph (1) with respect to any foreign corporation if neither such person (nor any related person to such person) is (directly or indirectly) insured under any policy of insurance or reinsurance issued by such foreign corporation.

(d) Election by foreign insurance company to be treated as domestic corporation If— a foreign corporation is a controlled foreign corporation (as defined in section 957(a) by substituting “25 percent or more” for “more than 50 percent” and by using the definition of United States shareholder under 953(c)(1)(A)), such foreign corporation would qualify under part I or II of subchapter L for the taxable year if it were a domestic corporation, such foreign corporation meets such requirements as the Secretary shall prescribe to ensure that the taxes imposed by this chapter on such foreign corporation are paid, and such foreign corporation makes an election to have this paragraph apply and waives all benefits to such corporation granted by the United States under any treaty, for purposes of this title, such corporation shall be treated as a domestic corporation. Except as provided in subparagraph (B), an election under paragraph (1) shall apply to the taxable year for which made and all subsequent taxable years unless revoked with the consent of the Secretary. If a corporation which made an election under paragraph (1) for any taxable year fails to meet the requirements of subparagraphs (A), (B), and (C), of paragraph (1) for any subsequent taxable year, such election shall not apply to any taxable year beginning after such subsequent taxable year. If any corporation treated as a domestic corporation under this subsection is treated as a member of an affiliated group for purposes of chapter 6 (relating to consolidated returns), any loss of such corporation shall be treated as a dual consolidated loss for purposes of section 1503(d) without regard to paragraph (2)(B) thereof. For purposes of section 367, any foreign corporation making an election under paragraph (1) shall be treated as transferring (as of the 1st day of the 1st taxable year to which such election applies) all of its assets to a domestic corporation in connection with an exchange to which section 354 applies. Earnings and profits of the foreign corporation accumulated in taxable years beginning before January 1, 1988 , shall not be included in the gross income of the persons holding stock in such corporation by reason of subparagraph (A). For purposes of this title, any distribution made by a corporation to which an election under paragraph (1) applies out of earnings and profits accumulated in taxable years beginning before January 1, 1988 , shall be treated as a distribution made by a foreign corporation. The provisions specified in clause (iv) shall be applied without regard to paragraph (1), except that, in the case of a corporation to which an election under paragraph (1) applies, only earnings and profits accumulated in taxable years beginning before January 1, 1988 , shall be taken into account. The provisions specified in this clause are: Section 1248 (relating to gain from certain sales or exchanges of stock in certain foreign corporations). Subpart F of part III of subchapter N to the extent such subpart relates to earnings invested in United States property. Section 884 to the extent the foreign corporation reinvested 1987 earnings and profits in United States assets. For purposes of section 367, if— an election is made by a corporation under paragraph (1) for any taxable year, and such election ceases to apply for any subsequent taxable year, such corporation shall be treated as a domestic corporation transferring (as of the 1st day of such subsequent taxable year) all of its property to a foreign corporation in connection with an exchange to which section 354 applies. If a corporation makes an election under paragraph (1), the amount of tax imposed by this chapter for the 1st taxable year to which such election applies shall be increased by the amount determined under subparagraph (B). The amount of tax determined under this paragraph shall be equal to the lesser of— ¾ of 1 percent of the aggregate amount of capital and accumulated surplus of the corporation as of December 31, 1987 , or $1,500,000.

(e) Exempt insurance income For purposes of this section— The term “exempt insurance income” means income derived by a qualifying insurance company which— is attributable to the issuing (or reinsuring) of an exempt contract by such company or a qualifying insurance company branch of such company, and is treated as earned by such company or branch in its home country for purposes of such country’s tax laws. Such term shall not include income attributable to the issuing (or reinsuring) of an exempt contract as the result of any arrangement whereby another corporation receives a substantially equal amount of premiums or other consideration in respect of issuing (or reinsuring) a contract which is not an exempt contract. For purposes of this subsection and section 954(i), the exempt insurance income and exempt contracts of a qualifying insurance company or any qualifying insurance company branch of such company shall be determined separately for such company and each such branch by taking into account— in the case of the qualifying insurance company, only items of income, deduction, gain, or loss, and activities of such company not properly allocable or attributable to any qualifying insurance company branch of such company, and in the case of a qualifying insurance company branch, only items of income, deduction, gain, or loss and activities properly allocable or attributable to such branch. The term “exempt contract” means an insurance or annuity contract issued or reinsured by a qualifying insurance company or qualifying insurance company branch in connection with property in, liability arising out of activity in, or the lives or health of residents of, a country other than the United States. No contract of a qualifying insurance company or of a qualifying insurance company branch shall be treated as an exempt contract unless such company or branch derives more than 30 percent of its net written premiums from exempt contracts (determined without regard to this subparagraph)— which cover applicable home country risks, and with respect to which no policyholder, insured, annuitant, or beneficiary is a related person (as defined in section 954(d)(3)). The term “applicable home country risks” means risks in connection with property in, liability arising out of activity in, or the lives or health of residents of, the home country of the qualifying insurance company or qualifying insurance company branch, as the case may be, issuing or reinsuring the contract covering the risks. A contract issued by a qualifying insurance company or qualifying insurance company branch which covers risks other than applicable home country risks (as defined in subparagraph (B)(ii)) shall not be treated as an exempt contract unless such company or branch, as the case may be— conducts substantial activity with respect to an insurance business in its home country, and performs in its home country substantially all of the activities necessary to give rise to the income generated by such contract. The term “qualifying insurance company” means any controlled foreign corporation which— is subject to regulation as an insurance (or reinsurance) company by its home country, and is licensed, authorized, or regulated by the applicable insurance regulatory body for its home country to sell insurance, reinsurance, or annuity contracts to persons other than related persons (within the meaning of section 954(d)(3)) in such home country, derives more than 50 percent of its aggregate net written premiums from the issuance or reinsurance by such controlled foreign corporation and each of its qualifying insurance company branches of contracts— covering applicable home country risks (as defined in paragraph (2)) of such corporation or branch, as the case may be, and with respect to which no policyholder, insured, annuitant, or beneficiary is a related person (as defined in section 954(d)(3)), except that in the case of a branch, such premiums shall only be taken into account to the extent such premiums are treated as earned by such branch in its home country for purposes of such country’s tax laws, and is engaged in the insurance business and would be subject to tax under subchapter L if it were a domestic corporation. The term “qualifying insurance company branch” means a qualified business unit (within the meaning of section 989(a)) of a controlled foreign corporation if— such unit is licensed, authorized, or regulated by the applicable insurance regulatory body for its home country to sell insurance, reinsurance, or annuity contracts to persons other than related persons (within the meaning of section 954(d)(3)) in such home country, and such controlled foreign corporation is a qualifying insurance company, determined under paragraph (3) as if such unit were a qualifying insurance company branch. For purposes of this section and section 954, the determination of whether a contract issued by a controlled foreign corporation or a qualified business unit (within the meaning of section 989(a)) is a life insurance contract or an annuity contract shall be made without regard to sections 72(s), 101(f), 817(h), and 7702 if— such contract is regulated as a life insurance or annuity contract by the corporation’s or unit’s home country, and no policyholder, insured, annuitant, or beneficiary with respect to the contract is a United States person. For purposes of this subsection, except as provided in regulations— The term “home country” means, with respect to a controlled foreign corporation, the country in which such corporation is created or organized. The term “home country” means, with respect to a qualified business unit (as defined in section 989(a)), the country in which the principal office of such unit is located and in which such unit is licensed, authorized, or regulated by the applicable insurance regulatory body to sell insurance, reinsurance, or annuity contracts to persons other than related persons (as defined in section 954(d)(3)) in such country. For purposes of applying this subsection and section 954(i)— the rules of section 954(h)(7) (other than subparagraph (B) thereof) shall apply, there shall be disregarded any item of income, gain, loss, or deduction of, or derived from, an entity which is not engaged in regular and continuous transactions with persons which are not related persons, there shall be disregarded any change in the method of computing reserves a principal purpose of which is the acceleration or deferral of any item in order to claim the benefits of this subsection or section 954(i), a contract of insurance or reinsurance shall not be treated as an exempt contract (and premiums from such contract shall not be taken into account for purposes of paragraph (2)(B) or (3)) if— any policyholder, insured, annuitant, or beneficiary is a resident of the United States and such contract was marketed to such resident and was written to cover a risk outside the United States, or the contract covers risks located within and without the United States and the qualifying insurance company or qualifying insurance company branch does not maintain such contemporaneous records, and file such reports, with respect to such contract as the Secretary may require, the Secretary may prescribe rules for the allocation of contracts (and income from contracts) among 2 or more qualifying insurance company branches of a qualifying insurance company in order to clearly reflect the income of such branches, and premiums from a contract shall not be taken into account for purposes of paragraph (2)(B) or (3) if such contract reinsures a contract issued or reinsured by a related person (as defined in section 954(d)(3)). For purposes of subparagraph (D), the determination of where risks are located shall be made under the principles of section 953. In determining insurance income for purposes of subsection (c), exempt insurance income shall not include income derived from exempt contracts which cover risks other than applicable home country risks. The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this subsection and section 954(i). For income exempt from foreign personal holding company income, see section 954(i).

§ 954 Foreign base company income

(a) Foreign base company income For purposes of section 952(a)(2), the term “foreign base company income” means for any taxable year the sum of— the foreign personal holding company income for the taxable year (determined under subsection (c) and reduced as provided in subsection (b)(5)), the foreign base company sales income for the taxable year (determined under subsection (d) and reduced as provided in subsection (b)(5)), and the foreign base company services income for the taxable year (determined under subsection (e) and reduced as provided in subsection (b)(5)).

(b) Exclusion and special rules For purposes of subsection (a) and section 953— If the sum of foreign base company income (determined without regard to paragraph (5)) and the gross insurance income for the taxable year is less than the lesser of— 5 percent of gross income, or $1,000,000, no part of the gross income for the taxable year shall be treated as foreign base company income or insurance income. If the sum of the foreign base company income (determined without regard to paragraph (5)) and the gross insurance income for the taxable year exceeds 70 percent of gross income, the entire gross income for the taxable year shall, subject to the provisions of paragraphs (4) and (5), be treated as foreign base company income or insurance income (whichever is appropriate). For purposes of subparagraphs (A) and (B), the term “gross insurance income” means any item of gross income taken into account in determining insurance income under section 953. For purposes of subsection (a) and section 953, foreign base company income and insurance income shall not include any item of income received by a controlled foreign corporation if the taxpayer establishes to the satisfaction of the Secretary that such income was subject to an effective rate of income tax imposed by a foreign country greater than 90 percent of the maximum rate of tax specified in section 11. For purposes of subsection (a), the foreign personal holding company income, the foreign base company sales income, and the foreign base company services income shall be reduced, under regulations prescribed by the Secretary, so as to take into account deductions (including taxes) properly allocable to such income. Except to the extent provided in regulations prescribed by the Secretary, any interest which is paid or accrued by the controlled foreign corporation to any United States shareholder in such corporation (or any controlled foreign corporation related to such a shareholder) shall be allocated first to foreign personal holding company income which is passive income (within the meaning of section 904(d)(2)) of such corporation to the extent thereof. The Secretary may, by regulations, provide that the preceding sentence shall apply also to interest paid or accrued to other persons.

(c) Foreign personal holding company income For purposes of subsection (a)(1), the term “foreign personal holding company income” means the portion of the gross income which consists of: Dividends, interest, royalties, rents, and annuities. The excess of gains over losses from the sale or exchange of property— which gives rise to income described in subparagraph (A) (after application of paragraph (2)(A)) other than property which gives rise to income not treated as foreign personal holding company income by reason of subsection (h) or (i) for the taxable year, which is an interest in a trust, partnership, or REMIC, or which does not give rise to any income. Gains and losses from the sale or exchange of any property which, in the hands of the controlled foreign corporation, is property described in section 1221(a)(1) shall not be taken into account under this subparagraph. The excess of gains over losses from transactions (including futures, forward, and similar transactions) in any commodities. This subparagraph shall not apply to gains or losses which— arise out of commodity hedging transactions (as defined in paragraph (5)(A)), are active business gains or losses from the sale of commodities, but only if substantially all of the controlled foreign corporation’s commodities are property described in paragraph (1), (2), or (8) of section 1221(a), or are foreign currency gains or losses (as defined in section 988(b)) attributable to any section 988 transactions. The excess of foreign currency gains over foreign currency losses (as defined in section 988(b)) attributable to any section 988 transactions. This subparagraph shall not apply in the case of any transaction directly related to the business needs of the controlled foreign corporation. Any income equivalent to interest, including income from commitment fees (or similar amounts) for loans actually made. Net income from notional principal contracts. Any item of income, gain, deduction, or loss from a notional principal contract entered into for purposes of hedging any item described in any preceding subparagraph shall not be taken into account for purposes of this subparagraph but shall be taken into account under such other subparagraph. Payments in lieu of dividends which are made pursuant to an agreement to which section 1058 applies. Amounts received under a contract under which the corporation is to furnish personal services if— some person other than the corporation has the right to designate (by name or by description) the individual who is to perform the services, or the individual who is to perform the services is designated (by name or by description) in the contract, and amounts received from the sale or other disposition of such a contract. This subparagraph shall apply with respect to amounts received for services under a particular contract only if at some time during the taxable year 25 percent or more in value of the outstanding stock of the corporation is owned, directly or indirectly, by or for the individual who has performed, is to perform, or may be designated (by name or by description) as the one to perform, such services. Foreign personal holding company income shall not include rents and royalties which are derived in the active conduct of a trade or business and which are received from a person other than a related person (within the meaning of subsection (d)(3)). For purposes of the preceding sentence, rents derived from leasing an aircraft or vessel in foreign commerce shall not fail to be treated as derived in the active conduct of a trade or business if, as determined under regulations prescribed by the Secretary, the active leasing expenses are not less than 10 percent of the profit on the lease. Foreign personal holding company income shall not include any interest which is derived in the conduct of a banking business and which is export financing interest (as defined in section 904(d)(2)(G)). Except as provided by regulations, in the case of a regular dealer in property which is property described in paragraph (1)(B), forward contracts, option contracts, or similar financial instruments (including notional principal contracts and all instruments referenced to commodities), there shall not be taken into account in computing foreign personal holding company income— any item of income, gain, deduction, or loss (other than any item described in subparagraph (A), (E), or (G) of paragraph (1)) from any transaction (including hedging transactions and transactions involving physical settlement) entered into in the ordinary course of such dealer’s trade or business as such a dealer, and if such dealer is a dealer in securities (within the meaning of section 475), any interest or dividend or equivalent amount described in subparagraph (E) or (G) of paragraph (1) from any transaction (including any hedging transaction or transaction described in section 956(c)(2)(I)) entered into in the ordinary course of such dealer’s trade or business as such a dealer in securities, but only if the income from the transaction is attributable to activities of the dealer in the country under the laws of which the dealer is created or organized (or in the case of a qualified business unit described in section 989(a), is attributable to activities of the unit in the country in which the unit both maintains its principal office and conducts substantial business activity). Except as provided in subparagraph (B), the term “foreign personal holding company income” does not include— dividends and interest received from a related person which (I) is a corporation created or organized under the laws of the same foreign country under the laws of which the controlled foreign corporation is created or organized, and (II) has a substantial part of its assets used in its trade or business located in such same foreign country, and rents and royalties received from a corporation which is a related person for the use of, or the privilege of using, property within the country under the laws of which the controlled foreign corporation is created or organized. To the extent provided in regulations, payments made by a partnership with 1 or more corporate partners shall be treated as made by such corporate partners in proportion to their respective interests in the partnership. Subparagraph (A) shall not apply in the case of any interest, rent, or royalty to the extent such interest, rent, or royalty reduces the payor’s subpart F income or creates (or increases) a deficit which under section 952(c) may reduce the subpart F income of the payor or another controlled foreign corporation. Subparagraph (A)(i) shall not apply to any dividend with respect to any stock which is attributable to earnings and profits of the distributing corporation accumulated during any period during which the person receiving such dividend did not hold such stock either directly, or indirectly through a chain of one or more subsidiaries each of which meets the requirements of subparagraph (A)(i). In the case of any sale by a controlled foreign corporation of an interest in a partnership with respect to which such corporation is a 25-percent owner, such corporation shall be treated for purposes of this subsection as selling the proportionate share of the assets of the partnership attributable to such interest. The Secretary shall prescribe such regulations as may be appropriate to prevent abuse of the purposes of this paragraph, including regulations providing for coordination of this paragraph with the provisions of subchapter K. For purposes of this paragraph, the term “25-percent owner” means a controlled foreign corporation which owns directly 25 percent or more of the capital or profits interest in a partnership. For purposes of the preceding sentence, if a controlled foreign corporation is a shareholder or partner of a corporation or partnership, the controlled foreign corporation shall be treated as owning directly its proportionate share of any such capital or profits interest held directly or indirectly by such corporation or partnership. If a controlled foreign corporation is treated as owning a capital or profits interest in a partnership under constructive ownership rules similar to the rules of section 958(b), the controlled foreign corporation shall be treated as owning such interest directly for purposes of this subparagraph. For purposes of paragraph (1)(C)(i), the term “commodity hedging transaction” means any transaction with respect to a commodity if such transaction— is a hedging transaction as defined in section 1221(b)(2), determined— without regard to subparagraph (A)(ii) thereof, by applying subparagraph (A)(i) thereof by substituting “ordinary property or property described in section 1231(b)” for “ordinary property”, and by substituting “controlled foreign corporation” for “taxpayer” each place it appears, and is clearly identified as such in accordance with section 1221(a)(7). Commodities with respect to which gains and losses are not taken into account under paragraph (2)(C) in computing a controlled foreign corporation’s foreign personal holding company income shall not be taken into account in applying the substantially all test under paragraph (1)(C)(ii) to such corporation. The Secretary shall prescribe such regulations as are appropriate to carry out the purposes of paragraph (1)(C) in the case of transactions involving related parties. For purposes of this subsection, dividends, interest, rents, and royalties received or accrued from a controlled foreign corporation which is a related person shall not be treated as foreign personal holding company income to the extent attributable or properly allocable (determined under rules similar to the rules of subparagraphs (C) and (D) of section 904(d)(3)) to income of the related person which is neither subpart F income nor income treated as effectively connected with the conduct of a trade or business in the United States. For purposes of this subparagraph, interest shall include factoring income which is treated as income equivalent to interest for purposes of paragraph (1)(E). The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out this paragraph, including such regulations as may be necessary or appropriate to prevent the abuse of the purposes of this paragraph. Subparagraph (A) shall not apply in the case of any interest, rent, or royalty to the extent such interest, rent, or royalty creates (or increases) a deficit which under section 952(c) may reduce the subpart F income of the payor or another controlled foreign corporation. Subparagraph (A) shall apply to taxable years of foreign corporations beginning after December 31, 2005 , and to taxable years of United States shareholders with or within which such taxable years of foreign corporations end.

(d) Foreign base company sales income For purposes of subsection (a)(2), the term “foreign base company sales income” means income (whether in the form of profits, commissions, fees, or otherwise) derived in connection with the purchase of personal property from a related person and its sale to any person, the sale of personal property to any person on behalf of a related person, the purchase of personal property from any person and its sale to a related person, or the purchase of personal property from any person on behalf of a related person where— the property which is purchased (or in the case of property sold on behalf of a related person, the property which is sold) is manufactured, produced, grown, or extracted outside the country under the laws of which the controlled foreign corporation is created or organized, and the property is sold for use, consumption, or disposition outside such foreign country, or, in the case of property purchased on behalf of a related person, is purchased for use, consumption, or disposition outside such foreign country. For purposes of this subsection, personal property does not include agricultural commodities which are not grown in the United States in commercially marketable quantities. For purposes of determining foreign base company sales income in situations in which the carrying on of activities by a controlled foreign corporation through a branch or similar establishment outside the country of incorporation of the controlled foreign corporation has substantially the same effect as if such branch or similar establishment were a wholly owned subsidiary corporation deriving such income, under regulations prescribed by the Secretary the income attributable to the carrying on of such activities of such branch or similar establishment shall be treated as income derived by a wholly owned subsidiary of the controlled foreign corporation and shall constitute foreign base company sales income of the controlled foreign corporation. For purposes of this section, a person is a related person with respect to a controlled foreign corporation, if— such person is an individual, corporation, partnership, trust, or estate which controls, or is controlled by, the controlled foreign corporation, or such person is a corporation, partnership, trust, or estate which is controlled by the same person or persons which control the controlled foreign corporation. For purposes of the preceding sentence, control means, with respect to a corporation, the ownership, directly or indirectly, of stock possessing more than 50 percent of the total voting power of all classes of stock entitled to vote or of the total value of stock of such corporation. In the case of a partnership, trust, or estate, control means the ownership, directly or indirectly, of more than 50 percent (by value) of the beneficial interests in such partnership, trust, or estate. For purposes of this paragraph, rules similar to the rules of section 958 shall apply. For purposes of subsection (a)(2), the term “foreign base company sales income” includes any income (whether in the form of profits, commissions, fees, or otherwise) derived in connection with— the sale of any unprocessed timber referred to in section 865(b), or the milling of any such timber outside the United States. Subpart G shall not apply to any amount treated as subpart F income by reason of this paragraph.

(e) Foreign base company services income For purposes of subsection (a)(3), the term “foreign base company services income” means income (whether in the form of compensation, commissions, fees, or otherwise) derived in connection with the performance of technical, managerial, engineering, architectural, scientific, skilled, industrial, commercial, or like services which— are performed for or on behalf of any related person (within the meaning of subsection (d)(3)), and are performed outside the country under the laws of which the controlled foreign corporation is created or organized. Paragraph (1) shall not apply to income derived in connection with the performance of services which are directly related to— the sale or exchange by the controlled foreign corporation of property manufactured, produced, grown, or extracted by it and which are performed before the time of the sale or exchange, or an offer or effort to sell or exchange such property. Paragraph (1) shall also not apply to income which is exempt insurance income (as defined in section 953(e)) or which is not treated as foreign personal holding income by reason of subsection (c)(2)(C)(ii), (h), or (i).

([(f) Repealed. Pub. L. 108–357, title IV, § 415(a)(2), Oct. 22, 2004, 118 Stat. 1511]

([(g) Repealed. Pub. L. 115–97, title I, § 14211(b)(3), Dec. 22, 2017, 131 Stat. 2217]

(h) Special rule for income derived in the active conduct of banking, financing, or similar businesses For purposes of subsection (c)(1), foreign personal holding company income shall not include qualified banking or financing income of an eligible controlled foreign corporation. For purposes of this subsection— The term “eligible controlled foreign corporation” means a controlled foreign corporation which— is predominantly engaged in the active conduct of a banking, financing, or similar business, and conducts substantial activity with respect to such business. A controlled foreign corporation shall be treated as predominantly engaged in the active conduct of a banking, financing, or similar business if— more than 70 percent of the gross income of the controlled foreign corporation is derived directly from the active and regular conduct of a lending or finance business from transactions with customers which are not related persons, it is engaged in the active conduct of a banking business and is an institution licensed to do business as a bank in the United States (or is any other corporation not so licensed which is specified by the Secretary in regulations), or it is engaged in the active conduct of a securities business and is registered as a securities broker or dealer under section 15(a) of the Securities Exchange Act of 1934 or is registered as a Government securities broker or dealer under section 15C(a) of such Act (or is any other corporation not so registered which is specified by the Secretary in regulations). For purposes of this subsection— The term “qualified banking or financing income” means income of an eligible controlled foreign corporation which— is derived in the active conduct of a banking, financing, or similar business by— such eligible controlled foreign corporation, or a qualified business unit of such eligible controlled foreign corporation, is derived from one or more transactions— with customers located in a country other than the United States, and substantially all of the activities in connection with which are conducted directly by the corporation or unit in its home country, and is treated as earned by such corporation or unit in its home country for purposes of such country’s tax laws. No income of an eligible controlled foreign corporation not described in clause (ii) or (iii) of paragraph (2)(B) (or of a qualified business unit of such corporation) shall be treated as qualified banking or financing income unless more than 30 percent of such corporation’s or unit’s gross income is derived directly from the active and regular conduct of a lending or finance business from transactions with customers which are not related persons and which are located within such corporation’s or unit’s home country. The term “qualified banking or financing income” shall not include income derived from 1 or more transactions with customers located in a country other than the home country of the eligible controlled foreign corporation or a qualified business unit of such corporation unless such corporation or unit conducts substantial activity with respect to a banking, financing, or similar business in its home country. For purposes of this paragraph, the qualified banking or financing income of an eligible controlled foreign corporation and each qualified business unit of such corporation shall be determined separately for such corporation and each such unit by taking into account— in the case of the eligible controlled foreign corporation, only items of income, deduction, gain, or loss and activities of such corporation not properly allocable or attributable to any qualified business unit of such corporation, and in the case of a qualified business unit, only items of income, deduction, gain, or loss and activities properly allocable or attributable to such unit. For purposes of subparagraph (A)(ii)(II), an activity shall be treated as conducted directly by an eligible controlled foreign corporation or qualified business unit in its home country if the activity is performed by employees of a related person and— the related person is an eligible controlled foreign corporation the home country of which is the same as the home country of the corporation or unit to which subparagraph (A)(ii)(II) is being applied, the activity is performed in the home country of the related person, and the related person is compensated on an arm’s-length basis for the performance of the activity by its employees and such compensation is treated as earned by such person in its home country for purposes of the home country’s tax laws. For purposes of this subsection, the term “lending or finance business” means the business of— making loans, purchasing or discounting accounts receivable, notes, or installment obligations, engaging in leasing (including entering into leases and purchasing, servicing, and disposing of leases and leased assets), issuing letters of credit or providing guarantees, providing charge and credit card services, or rendering services or making facilities available in connection with activities described in subparagraphs (A) through (E) carried on by— the corporation (or qualified business unit) rendering services or making facilities available, or another corporation (or qualified business unit of a corporation) which is a member of the same affiliated group (as defined in section 1504, but determined without regard to section 1504(b)(3)). For purposes of this subsection— The term “customer” means, with respect to any controlled foreign corporation or qualified business unit, any person which has a customer relationship with such corporation or unit and which is acting in its capacity as such. Except as provided in regulations— The term “home country” means, with respect to any controlled foreign corporation, the country under the laws of which the corporation was created or organized. The term “home country” means, with respect to any qualified business unit, the country in which such unit maintains its principal office. The determination of where a customer is located shall be made under rules prescribed by the Secretary. The term “qualified business unit” has the meaning given such term by section 989(a). The term “related person” has the meaning given such term by subsection (d)(3). Paragraph (1) shall not apply to income described in subsection (c)(2)(C)(ii) of a dealer in securities (within the meaning of section 475) which is an eligible controlled foreign corporation described in paragraph (2)(B)(iii). For purposes of applying this subsection and subsection (c)(2)(C)(ii)— there shall be disregarded any item of income, gain, loss, or deduction with respect to any transaction or series of transactions one of the principal purposes of which is qualifying income or gain for the exclusion under this section, including any transaction or series of transactions a principal purpose of which is the acceleration or deferral of any item in order to claim the benefits of such exclusion through the application of this subsection, there shall be disregarded any item of income, gain, loss, or deduction of an entity which is not engaged in regular and continuous transactions with customers which are not related persons, there shall be disregarded any item of income, gain, loss, or deduction with respect to any transaction or series of transactions utilizing, or doing business with— one or more entities in order to satisfy any home country requirement under this subsection, or a special purpose entity or arrangement, including a securitization, financing, or similar entity or arrangement, if one of the principal purposes of such transaction or series of transactions is qualifying income or gain for the exclusion under this subsection, and a related person, an officer, a director, or an employee with respect to any controlled foreign corporation (or qualified business unit) which would otherwise be treated as a customer of such corporation or unit with respect to any transaction shall not be so treated if a principal purpose of such transaction is to satisfy any requirement of this subsection. The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this subsection, subsection (c)(1)(B)(i), subsection (c)(2)(C)(ii), and the last sentence of subsection (e)(2).

(i) Special rule for income derived in the active conduct of insurance business For purposes of subsection (c)(1), foreign personal holding company income shall not include qualified insurance income of a qualifying insurance company. The term “qualified insurance income” means income of a qualifying insurance company which is— received from a person other than a related person (within the meaning of subsection (d)(3)) and derived from the investments made by a qualifying insurance company or a qualifying insurance company branch of its reserves allocable to exempt contracts or of 80 percent of its unearned premiums from exempt contracts (as both are determined in the manner prescribed under paragraph (4)), or received from a person other than a related person (within the meaning of subsection (d)(3)) and derived from investments made by a qualifying insurance company or a qualifying insurance company branch of an amount of its assets allocable to exempt contracts equal to— in the case of property, casualty, or health insurance contracts, one-third of its premiums earned on such insurance contracts during the taxable year (as defined in section 832(b)(4)), and in the case of life insurance or annuity contracts, 10 percent of the reserves described in subparagraph (A) for such contracts. Except as provided by the Secretary, for purposes of subparagraphs (A) and (B) of paragraph (2)— in the case of any contract which is a separate account-type contract (including any variable contract not meeting the requirements of section 817), income credited under such contract shall be allocable only to such contract, and income not allocable under subparagraph (A) shall be allocated ratably among contracts not described in subparagraph (A). For purposes of paragraph (2)(A)— The unearned premiums and reserves of a qualifying insurance company or a qualifying insurance company branch with respect to property, casualty, or health insurance contracts shall be determined using the same methods and interest rates which would be used if such company or branch were subject to tax under subchapter L, except that— the interest rate determined for the functional currency of the company or branch, and which, except as provided by the Secretary, is calculated in the same manner as the Federal mid-term rate under section 1274(d), shall be substituted for the applicable Federal interest rate, and such company or branch shall use the appropriate foreign loss payment pattern. Except as provided in clause (ii), the amount of the reserve of a qualifying insurance company or qualifying insurance company branch for any life insurance or annuity contract shall be equal to the greater of— the net surrender value of such contract (as defined in section 807(e)(1)(A)), or the reserve determined under paragraph (5). The amount of the reserve under clause (i) shall be the foreign statement reserve for the contract (less any catastrophe, deficiency, equalization, or similar reserves), if, pursuant to a ruling request submitted by the taxpayer or as provided in published guidance, the Secretary determines that the factors taken into account in determining the foreign statement reserve provide an appropriate means of measuring income. In no event shall the reserve determined under this paragraph for any contract as of any time exceed the amount which would be taken into account with respect to such contract as of such time in determining foreign statement reserves (less any catastrophe, deficiency, equalization, or similar reserves). The amount of the reserve determined under this paragraph with respect to any contract shall be determined in the same manner as it would be determined if the qualifying insurance company or qualifying insurance company branch were subject to tax under subchapter L, except that in applying such subchapter— the interest rate determined for the functional currency of the company or branch, and which, except as provided by the Secretary, is calculated in the same manner as the Federal mid-term rate under section 1274(d), shall be substituted for the applicable Federal interest rate, the highest assumed interest rate permitted to be used in determining foreign statement reserves shall apply, and tables for mortality and morbidity which reasonably reflect the current mortality and morbidity risks in the company’s or branch’s home country shall be substituted for the mortality and morbidity tables otherwise used for such subchapter. The Secretary may provide that the interest rate and mortality and morbidity tables of a qualifying insurance company may be used for 1 or more of its qualifying insurance company branches when appropriate. For purposes of this subsection, any term used in this subsection which is also used in section 953(e) shall have the meaning given such term by section 953.

[§ 955 Repealed. Pub. L. 115–97, title I, § 14212(a), Dec. 22, 2017, 131 Stat. 2217]

§ 956 Investment of earnings in United States property

(a) General rule In the case of any controlled foreign corporation, the amount determined under this section with respect to any United States shareholder for any taxable year is the lesser of— the excess (if any) of— such shareholder’s pro rata share of the average of the amounts of United States property held (directly or indirectly) by the controlled foreign corporation as of the close of each quarter of such taxable year, over the amount of earnings and profits described in section 959(c)(1)(A) with respect to such shareholder, or such shareholder’s pro rata share of the applicable earnings of such controlled foreign corporation. The amount taken into account under paragraph (1) with respect to any property shall be its adjusted basis as determined for purposes of computing earnings and profits, reduced by any liability to which the property is subject.

(b) Special rules For purposes of this section, the term “applicable earnings” means, with respect to any controlled foreign corporation, the sum of— the amount (not including a deficit) referred to in section 316(a)(1) to the extent such amount was accumulated in prior taxable years, and the amount referred to in section 316(a)(2), but reduced by distributions made during the taxable year and by earnings and profits described in section 959(c)(1). In applying subsection (a) to any taxable year, there shall be disregarded any item of United States property which was acquired by the controlled foreign corporation before the first day on which such corporation was treated as a controlled foreign corporation. The aggregate amount of property disregarded under the preceding sentence shall not exceed the portion of the applicable earnings of such controlled foreign corporation which were accumulated during periods before such first day. If any foreign corporation ceases to be a controlled foreign corporation during any taxable year— the determination of any United States shareholder’s pro rata share shall be made on the basis of stock owned (within the meaning of section 958(a)) by such shareholder on the last day during the taxable year on which the foreign corporation is a controlled foreign corporation, the average referred to in subsection (a)(1)(A) for such taxable year shall be determined by only taking into account quarters ending on or before such last day, and in determining applicable earnings, the amount taken into account by reason of being described in paragraph (2) of section 316(a) shall be the portion of the amount so described which is allocable (on a pro rata basis) to the part of such year during which the corporation is a controlled foreign corporation.

(c) United States property defined For purposes of subsection (a), the term “United States property” means any property acquired after December 31, 1962 , which is— tangible property located in the United States; stock of a domestic corporation; an obligation of a United States person; or any right to the use in the United States of— a patent or copyright, an invention, model, or design (whether or not patented), a secret formula or process, or any other similar right, which is acquired or developed by the controlled foreign corporation for use in the United States. For purposes of subsection (a), the term “United States property” does not include— obligations of the United States, money, or deposits with— any bank (as defined by section 2(c) of the Bank Holding Company Act of 1956 ( 12 U.S.C. 1841(c) ), without regard to subparagraphs (C) and (G) of paragraph (2) of such section), or any corporation not described in clause (i) with respect to which a bank holding company (as defined by section 2(a) of such Act) or financial holding company (as defined by section 2(p) of such Act) owns directly or indirectly more than 80 percent by vote or value of the stock of such corporation; property located in the United States which is purchased in the United States for export to, or use in, foreign countries; any obligation of a United States person arising in connection with the sale or processing of property if the amount of such obligation outstanding at no time during the taxable year exceeds the amount which would be ordinary and necessary to carry on the trade or business of both the other party to the sale or processing transaction and the United States person had the sale or processing transaction been made between unrelated persons; any aircraft, railroad rolling stock, vessel, motor vehicle, or container used in the transportation of persons or property in foreign commerce and used predominantly outside the United States; an amount of assets of an insurance company equivalent to the unearned premiums or reserves ordinary and necessary for the proper conduct of its insurance business attributable to contracts which are contracts described in section 953(e)(2); the stock or obligations of a domestic corporation which is neither a United States shareholder (as defined in section 951(b)) of the controlled foreign corporation, nor a domestic corporation, 25 percent or more of the total combined voting power of which, immediately after the acquisition of any stock in such domestic corporation by the controlled foreign corporation, is owned, or is considered as being owned, by such United States shareholders in the aggregate; any movable property (other than a vessel or aircraft) which is used for the purpose of exploring for, developing, removing, or transporting resources from ocean waters or under such waters when used on the Continental Shelf of the United States; an amount of assets of the controlled foreign corporation equal to the earnings and profits accumulated after December 31, 1962 , and excluded from subpart F income under section 952(b); deposits of cash or securities made or received on commercial terms in the ordinary course of a United States or foreign person’s business as a dealer in securities or in commodities, but only to the extent such deposits are made or received as collateral or margin for (i) a securities loan, notional principal contract, options contract, forward contract, or futures contract, or (ii) any other financial transaction in which the Secretary determines that it is customary to post collateral or margin; an obligation of a United States person to the extent the principal amount of the obligation does not exceed the fair market value of readily marketable securities sold or purchased pursuant to a sale and repurchase agreement or otherwise posted or received as collateral for the obligation in the ordinary course of its business by a United States or foreign person which is a dealer in securities or commodities; securities acquired and held by a controlled foreign corporation in the ordinary course of its business as a dealer in securities if— the dealer accounts for the securities as securities held primarily for sale to customers in the ordinary course of business, and the dealer disposes of the securities (or such securities mature while held by the dealer) within a period consistent with the holding of securities for sale to customers in the ordinary course of business; and an obligation of a United States person which— is not a domestic corporation, and is not— a United States shareholder (as defined in section 951(b)) of the controlled foreign corporation, or a partnership, estate, or trust in which the controlled foreign corporation, or any related person (as defined in section 954(d)(3)), is a partner, beneficiary, or trustee immediately after the acquisition of any obligation of such partnership, estate, or trust by the controlled foreign corporation. For purposes of subparagraphs (I), (J), and (K), the term “dealer in securities” has the meaning given such term by section 475(c)(1), and the term “dealer in commodities” has the meaning given such term by section 475(e), except that such term shall include a futures commission merchant. Notwithstanding paragraph (2) (other than subparagraph (H) thereof), the term “United States property” includes any trade or service receivable if— such trade or service receivable is acquired (directly or indirectly) from a related person who is a United States person, and the obligor under such receivable is a United States person. For purposes of this paragraph, the term “trade or service receivable” and “related person” have the respective meanings given to such terms by section 864(d).

(d) Pledges and guarantees For purposes of subsection (a), a controlled foreign corporation shall, under regulations prescribed by the Secretary, be considered as holding an obligation of a United States person if such controlled foreign corporation is a pledgor or guarantor of such obligations.

(e) Regulations The Secretary shall prescribe such regulations as may be necessary to carry out the purposes of this section, including regulations to prevent the avoidance of the provisions of this section through reorganizations or otherwise.

[§ 956A Repealed. Pub. L. 104–188, title I, § 1501(a)(2), Aug. 20, 1996, 110 Stat. 1825]

§ 957 Controlled foreign corporations; United States persons

(a) General rule For purposes of this title, the term “controlled foreign corporation” means any foreign corporation if more than 50 percent of— the total combined voting power of all classes of stock of such corporation entitled to vote, or the total value of the stock of such corporation, is owned (within the meaning of section 958(a)), or is considered as owned by applying the rules of ownership of section 958(b), by United States shareholders on any day during the taxable year of such foreign corporation.

(b) Special rule for insurance For purposes only of taking into account income described in section 953(a) (relating to insurance income), the term “controlled foreign corporation” includes not only a foreign corporation as defined by subsection (a) but also one of which more than 25 percent of the total combined voting power of all classes of stock (or more than 25 percent of the total value of stock) is owned (within the meaning of section 958(a)), or is considered as owned by applying the rules of ownership of section 958(b), by United States shareholders on any day during the taxable year of such corporation, if the gross amount of premiums or other consideration in respect of the reinsurance or the issuing of insurance or annuity contracts not described in section 953(e)(2) exceeds 75 percent of the gross amount of all premiums or other consideration in respect of all risks.

(c) United States person For purposes of this subpart, the term “United States person” has the meaning assigned to it by section 7701(a)(30) except that— with respect to a corporation organized under the laws of the Commonwealth of Puerto Rico, such term does not include an individual who is a bona fide resident of Puerto Rico, if a dividend received by such individual during the taxable year from such corporation would, for purposes of section 933(1), be treated as income derived from sources within Puerto Rico, and with respect to a corporation organized under the laws of Guam, American Samoa, or the Northern Mariana Islands— 80 percent or more of the gross income of which for the 3-year period ending at the close of the taxable year (or for such part of such period as such corporation or any predecessor has been in existence) was derived from sources within such a possession or was effectively connected with the conduct of a trade or business in such a possession, and 50 percent or more of the gross income of which for such period (or part) was derived from the active conduct of a trade or business within such a possession, such term does not include an individual who is a bona fide resident of Guam, American Samoa, or the Northern Mariana Islands. For purposes of subparagraphs (A) and (B) of paragraph (2), the determination as to whether income was derived from the active conduct of a trade or business within a possession shall be made under regulations prescribed by the Secretary.

§ 958 Rules for determining stock ownership

(a) Direct and indirect ownership For purposes of this subpart (other than section 960), stock owned means— stock owned directly, and stock owned with the application of paragraph (2). For purposes of subparagraph (B) of paragraph (1), stock owned, directly or indirectly, by or for a foreign corporation, foreign partnership, or foreign trust or foreign estate (within the meaning of section 7701(a)(31)) shall be considered as being owned proportionately by its shareholders, partners, or beneficiaries. Stock considered to be owned by a person by reason of the application of the preceding sentence shall, for purposes of applying such sentence, be treated as actually owned by such person. For purposes of applying paragraph (1) in the case of a foreign mutual insurance company, the term “stock” shall include any certificate entitling the holder to voting power in the corporation.

(b) Constructive ownership For purposes of sections 951(b), 954(d)(3), 956(c)(2), and 957, section 318(a) (relating to constructive ownership of stock) shall apply to the extent that the effect is to treat any United States person as a United States shareholder within the meaning of section 951(b), to treat a person as a related person within the meaning of section 954(d)(3), to treat the stock of a domestic corporation as owned by a United States shareholder of the controlled foreign corporation for purposes of section 956(c)(2), or to treat a foreign corporation as a controlled foreign corporation under section 957, except that— In applying paragraph (1)(A) of section 318(a), stock owned by a nonresident alien individual (other than a foreign trust or foreign estate) shall not be considered as owned by a citizen or by a resident alien individual. In applying subparagraphs (A), (B), and (C) of section 318(a)(2), if a partnership, estate, trust, or corporation owns, directly or indirectly, more than 50 percent of the total combined voting power of all classes of stock entitled to vote of a corporation, it shall be considered as owning all the stock entitled to vote. In applying subparagraph (C) of section 318(a)(2), the phrase “10 percent” shall be substituted for the phrase “50 percent” used in subparagraph (C). Subparagraphs (A), (B), and (C) of section 318(a)(3) shall not be applied so as to consider a United States person as owning stock which is owned by a person who is not a United States person. Paragraphs (1) and (4) shall not apply for purposes of section 956(c)(2) to treat stock of a domestic corporation as not owned by a United States shareholder.

§ 959 Exclusion from gross income of previously taxed earnings and profits

(a) Exclusion from gross income of United States persons For purposes of this chapter, the earnings and profits of a foreign corporation attributable to amounts which are, or have been, included in the gross income of a United States shareholder under section 951(a) shall not, when— such amounts are distributed to, or such amounts would, but for this subsection, be included under section 951(a)(1)(B) in the gross income of, such shareholder (or any other United States person who acquires from any person any portion of the interest of such United States shareholder in such foreign corporation, but only to the extent of such portion, and subject to such proof of the identity of such interest as the Secretary may by regulations prescribe) directly or indirectly through a chain of ownership described under section 958(a), be again included in the gross income of such United States shareholder (or of such other United States person). The rules of subsection (c) shall apply for purposes of paragraph (1) of this subsection and the rules of subsection (f) shall apply for purposes of paragraph (2) of this subsection.

(b) Exclusion from gross income of certain foreign subsidiaries For purposes of section 951(a), the earnings and profits of a controlled foreign corporation attributable to amounts which are, or have been, included in the gross income of a United States shareholder under section 951(a), shall not, when distributed through a chain of ownership described under section 958(a), be also included in the gross income of another controlled foreign corporation in such chain for purposes of the application of section 951(a) to such other controlled foreign corporation with respect to such United States shareholder (or to any other United States shareholder who acquires from any person any portion of the interest of such United States shareholder in the controlled foreign corporation, but only to the extent of such portion, and subject to such proof of identity of such interest as the Secretary may prescribe by regulations).

(c) Allocation of distributions For purposes of subsections (a) and (b), section 316(a) shall be applied by applying paragraph (2) thereof, and then paragraph (1) thereof— first to the aggregate of— earnings and profits attributable to amounts included in gross income under section 951(a)(1)(B) (or which would have been included except for subsection (a)(2) of this section), and earnings and profits attributable to amounts included in gross income under section 951(a)(1)(C) (or which would have been included except for subsection (a)(3) of this section), with any distribution being allocated between earnings and profits described in subparagraph (A) and earnings and profits described in subparagraph (B) proportionately on the basis of the respective amounts of such earnings and profits, then to earnings and profits attributable to amounts included in gross income under section 951(a)(1)(A) (but reduced by amounts not included under subparagraph (B) or (C) of section 951(a)(1) because of the exclusions in paragraphs (2) and (3) of subsection (a) of this section), and then to other earnings and profits. References in this subsection to section 951(a)(1)(C) and subsection (a)(3) shall be treated as references to such provisions as in effect on the day before the date of the enactment of the Small Business Job Protection Act of 1996.

(d) Distributions excluded from gross income not to be treated as dividends Any distribution excluded from gross income under subsection (a) shall be treated, for purposes of this chapter, as a distribution which is not a dividend; except that such distributions shall immediately reduce earnings and profits.

(e) Coordination with amounts previously taxed under section 1248 For purposes of this section and section 960(c), any amount included in the gross income of any person as a dividend by reason of subsection (a) or (f) of section 1248 shall be treated as an amount included in the gross income of such person (or, in any case to which section 1248(e) applies, of the domestic corporation referred to in section 1248(e)(2)) under section 951(a)(1)(A).

(f) Allocation rules for certain inclusions For purposes of this section, amounts that would be included under subparagraph (B) of section 951(a)(1) (determined without regard to this section) shall be treated as attributable first to earnings described in subsection (c)(2), and then to earnings described in subsection (c)(3). In applying this section, actual distributions shall be taken into account before amounts that would be included under section 951(a)(1)(B) (determined without regard to this section).

§ 960 Deemed paid credit for subpart F inclusions

(a) In general For purposes of subpart A of this part, if there is included in the gross income of a domestic corporation any item of income under section 951(a)(1) with respect to any controlled foreign corporation with respect to which such domestic corporation is a United States shareholder, such domestic corporation shall be deemed to have paid so much of such foreign corporation’s foreign income taxes as are properly attributable to such item of income.

(b) Special rules for distributions from previously taxed earnings and profits For purposes of subpart A of this part— If any portion of a distribution from a controlled foreign corporation to a domestic corporation which is a United States shareholder with respect to such controlled foreign corporation is excluded from gross income under section 959(a), such domestic corporation shall be deemed to have paid so much of such foreign corporation’s foreign income taxes as— are properly attributable to such portion, and have not been deemed to have to 1 been paid by such domestic corporation under this section for the taxable year or any prior taxable year. If section 959(b) applies to any portion of a distribution from a controlled foreign corporation to another controlled foreign corporation, such controlled foreign corporation shall be deemed to have paid so much of such other controlled foreign corporation’s foreign income taxes as— are properly attributable to such portion, and have not been deemed to have been paid by a domestic corporation under this section for the taxable year or any prior taxable year.

(c) Special rules for foreign tax credit in year of receipt of previously taxed earnings and profits In the case of any taxpayer who— either (i) chose to have the benefits of subpart A of this part for a taxable year beginning after September 30, 1993 , in which he was required under section 951(a) to include any amount in his gross income, or (ii) did not pay or accrue for such taxable year any income, war profits, or excess profits taxes to any foreign country or to any possession of the United States, chooses to have the benefits of subpart A of this part for any taxable year in which he receives 1 or more distributions or amounts which are excludable from gross income under section 959(a) and which are attributable to amounts included in his gross income for taxable years referred to in subparagraph (A), and for the taxable year in which such distributions or amounts are received, pays, or is deemed to have paid, or accrues income, war profits, or excess profits taxes to a foreign country or to any possession of the United States with respect to such distributions or amounts, the limitation under section 904 for the taxable year in which such distributions or amounts are received shall be increased by the lesser of the amount of such taxes paid, or deemed paid, or accrued with respect to such distributions or amounts or the amount in the excess limitation account as of the beginning of such taxable year. Each taxpayer meeting the requirements of paragraph (1)(A) shall establish an excess limitation account. The opening balance of such account shall be zero. For each taxable year beginning after September 30, 1993 , the taxpayer shall increase the amount in the excess limitation account by the excess (if any) of— the amount by which the limitation under section 904(a) for such taxable year was increased by reason of the total amount of the inclusions in gross income under section 951(a) for such taxable year, over the amount of any income, war profits, and excess profits taxes paid, or deemed paid, or accrued to any foreign country or possession of the United States which were allowable as a credit under section 901 for such taxable year and which would not have been allowable but for the inclusions in gross income described in clause (i). Proper reductions in the amount added to the account under the preceding sentence for any taxable year shall be made for any increase in the credit allowable under section 901 for such taxable year by reason of a carryback if such increase would not have been allowable but for the inclusions in gross income described in clause (i). For each taxable year beginning after September 30, 1993 , for which the limitation under section 904 was increased under paragraph (1), the taxpayer shall reduce the amount in the excess limitation account by the amount of such increase. If the taxpayer receives a distribution or amount in a taxable year beginning after September 30, 1993 , which is excluded from gross income under section 959(a) and is attributable to any amount included in gross income under section 951(a) for a taxable year beginning before October 1, 1993 , the limitation under section 904 for the taxable year in which such amount or distribution is received shall be increased by the amount determined under this subsection as in effect on the day before the date of the enactment of the Revenue Reconcilation 2 Act of 1993. In the case of any taxpayer who— chose to have the benefits of subpart A of this part for a taxable year in which he was required under section 951(a) to include in his gross income an amount in respect of a controlled foreign corporation, and does not choose to have the benefits of subpart A of this part for the taxable year in which he receives a distribution or amount which is excluded from gross income under section 959(a) and which is attributable to earnings and profits of the controlled foreign corporation which was included in his gross income for the taxable year referred to in subparagraph (A), no deduction shall be allowed under section 164 for the taxable year in which such distribution or amount is received for any income, war profits, or excess profits taxes paid or accrued to any foreign country or to any possession of the United States on or with respect to such distribution or amount. If an increase in the limitation under this subsection exceeds the tax imposed by this chapter for such year, the amount of such excess shall be deemed an overpayment of tax for such year.

(d) Deemed paid credit for taxes properly attributable to tested income For purposes of subpart A of this part, if any amount is includible in the gross income of a domestic corporation under section 951A, such domestic corporation shall be deemed to have paid foreign income taxes equal to 90 percent of the product of— such domestic corporation’s inclusion percentage, multiplied by the aggregate tested foreign income taxes paid or accrued by controlled foreign corporations. For purposes of paragraph (1), the term “inclusion percentage” means, with respect to any domestic corporation, the ratio (expressed as a percentage) of— such corporation’s net CFC tested income (as defined in section 951A(b)), divided by the aggregate amount described in section 951A(b)(1)(A) with respect to such corporation. For purposes of paragraph (1), the term “tested foreign income taxes” means, with respect to any domestic corporation which is a United States shareholder of a controlled foreign corporation, the foreign income taxes paid or accrued by such foreign corporation which are properly attributable to the tested income of such foreign corporation taken into account by such domestic corporation under section 951A. No credit shall be allowed under section 901 for 10 percent of any foreign income taxes paid or accrued (or deemed paid under subsection (b)(1)) with respect to any amount excluded from gross income under section 959(a) by reason of an inclusion in gross income under section 951A(a).

(e) Foreign income taxes The term “foreign income taxes” means any income, war profits, or excess profits taxes paid or accrued to any foreign country or possession of the United States.

(f) Regulations The Secretary shall prescribe such regulations or other guidance as may be necessary or appropriate to carry out the provisions of this section.

“The amendments made by this section [amending this section and sections 78, 535, 545, and 902 of this title] shall apply— in respect of any distribution received by a domestic corporation after December 31, 1977 , and in respect of any distribution received by a domestic corporation before January 1, 1978 , in a taxable year of such corporation beginning after December 31, 1975 , but only to the extent that such distribution is made out of the accumulated profits of a foreign corporation for a taxable year (of such foreign corporation) beginning after December 31, 1975 . For purposes of paragraph (2), a distribution made by a foreign corporation out of its profits which are attributable to a distribution received from a foreign corporation to which [former] section 902(b) of the Internal Revenue Code of 1986 [formerly I.R.C. 1954] applies shall be treated as made out of the accumulated profits of a foreign corporation for a taxable year beginning before January 1, 1976 , to the extent that such distribution was paid out of the accumulated profits of such foreign corporation for a taxable year beginning before January 1, 1976 .”

§ 961 Adjustments to basis of stock in controlled foreign corporations and of other property

(a) Increase in basis Under regulations prescribed by the Secretary, the basis of a United States shareholder’s stock in a controlled foreign corporation, and the basis of property of a United States shareholder by reason of which he is considered under section 958(a)(2) as owning stock of a controlled foreign corporation, shall be increased by the amount required to be included in his gross income under section 951(a) with respect to such stock or with respect to such property, as the case may be, but only to the extent to which such amount was included in the gross income of such United States shareholder. In the case of a United States shareholder who has made an election under section 962 for the taxable year, the increase in basis provided by this subsection shall not exceed an amount equal to the amount of tax paid under this chapter with respect to the amounts required to be included in his gross income under section 951(a).

(b) Reduction in basis Under regulations prescribed by the Secretary, the adjusted basis of stock or other property with respect to which a United States shareholder or a United States person receives an amount which is excluded from gross income under section 959(a) shall be reduced by the amount so excluded. In the case of a United States shareholder who has made an election under section 962 for any prior taxable year, the reduction in basis provided by this paragraph shall not exceed an amount equal to the amount received which is excluded from gross income under section 959(a) after the application of section 962(d). To the extent that an amount excluded from gross income under section 959(a) exceeds the adjusted basis of the stock or other property with respect to which it is received, the amount shall be treated as gain from the sale or exchange of property.

(c) Basis adjustments in stock held by foreign corporations Under regulations prescribed by the Secretary, if a United States shareholder is treated under section 958(a)(2) as owning stock in a controlled foreign corporation which is owned by another controlled foreign corporation, then adjustments similar to the adjustments provided by subsections (a) and (b) shall be made to— the basis of such stock, and the basis of stock in any other controlled foreign corporation by reason of which the United States shareholder is considered under section 958(a)(2) as owning the stock described in paragraph (1), but only for the purposes of determining the amount included under section 951 in the gross income of such United States shareholder (or any other United States shareholder who acquires from any person any portion of the interest of such United States shareholder by reason of which such shareholder was treated as owning such stock, but only to the extent of such portion, and subject to such proof of identity of such interest as the Secretary may prescribe by regulations). The preceding sentence shall not apply with respect to any stock to which a basis adjustment applies under subsection (a) or (b).

(d) Basis in specified 10-percent owned foreign corporation reduced by nontaxed portion of dividend for purposes of determining loss If a domestic corporation received a dividend from a specified 10-percent owned foreign corporation (as defined in section 245A) in any taxable year, solely for purposes of determining loss on any disposition of stock of such foreign corporation in such taxable year or any subsequent taxable year, the basis of such domestic corporation in such stock shall be reduced (but not below zero) by the amount of any deduction allowable to such domestic corporation under section 245A with respect to such stock except to the extent such basis was reduced under section 1059 by reason of a dividend for which such a deduction was allowable.

§ 962 Election by individuals to be subject to tax at corporate rates

(a) General rule Under regulations prescribed by the Secretary, in the case of a United States shareholder who is an individual and who elects to have the provisions of this section apply for the taxable year— the tax imposed under this chapter on amounts which are included in his gross income under section 951(a) shall (in lieu of the tax determined under sections 1 and 55) be an amount equal to the tax which would be imposed under section 11 if such amounts were received by a domestic corporation, and for purposes of applying the provisions of section 960 1 (relating to foreign tax credit) such amounts shall be treated as if they were received by a domestic corporation.

(b) Election An election to have the provisions of this section apply for any taxable year shall be made by a United States shareholder at such time and in such manner as the Secretary shall prescribe by regulations. An election made for any taxable year may not be revoked except with the consent of the Secretary.

(c) Pro ration of each section 11 bracket amount For purposes of applying subsection (a)(1), the amount in each taxable income bracket in the tax table in section 11(b) shall not exceed an amount which bears the same ratio to such bracket amount as the amount included in the gross income of the United States shareholder under section 951(a) for the taxable year bears to such shareholder’s pro rata share of the earnings and profits for the taxable year of all controlled foreign corporations with respect to which such shareholder includes any amount in gross income under section 951(a).

(d) Special rule for actual distributions The earnings and profits of a foreign corporation attributable to amounts which were included in the gross income of a United States shareholder under section 951(a) and with respect to which an election under this section applied shall, when such earnings and profits are distributed, notwithstanding the provisions of section 959(a)(1), be included in gross income to the extent that such earnings and profits so distributed exceed the amount of tax paid under this chapter on the amounts to which such election applied.

[§ 963 Repealed. Pub. L. 94–12, title VI, § 602(a)(1), Mar. 29, 1975, 89 Stat. 58]

§ 964 Miscellaneous provisions

(a) Earnings and profits Except as provided in section 312(k)(4), for purposes of this subpart, the earnings and profits of any foreign corporation, and the deficit in earnings and profits of any foreign corporation, for any taxable year shall be determined according to rules substantially similar to those applicable to domestic corporations, under regulations prescribed by the Secretary. In determining such earnings and profits, or the deficit in such earnings and profits, the amount of any illegal bribe, kickback, or other payment (within the meaning of section 162(c)) shall not be taken into account to decrease such earnings and profits or to increase such deficit. The payments referred to in the preceding sentence are payments which would be unlawful under the Foreign Corrupt Practices Act of 1977 if the payor were a United States person.

(b) Blocked foreign income Under regulations prescribed by the Secretary, no part of the earnings and profits of a controlled foreign corporation for any taxable year shall be included in earnings and profits for purposes of sections 952 and 956, if it is established to the satisfaction of the Secretary that such part could not have been distributed by the controlled foreign corporation to United States shareholders who own (within the meaning of section 958(a)) stock of such controlled foreign corporation because of currency or other restrictions or limitations imposed under the laws of any foreign country.

(c) Records and accounts of United States shareholders The Secretary may by regulations require each person who is, or has been, a United States shareholder of a controlled foreign corporation to maintain such records and accounts as may be prescribed by such regulations as necessary to carry out the provisions of this subpart and subpart G. Where, but for this paragraph, two or more United States persons would be required to maintain or furnish the same records and accounts as may by regulations be required under paragraph (1) with respect to the same controlled foreign corporation for the same period, the Secretary may by regulations provide that the maintenance or furnishing of such records and accounts by only one such person shall satisfy the requirements of paragraph (1) for such other persons.

(d) Treatment of certain branches For purposes of this chapter, section 6038, section 6046, and such other provisions as may be specified in regulations— a qualified insurance branch of a controlled foreign corporation shall be treated as a separate foreign corporation created under the laws of the foreign country with respect to which such branch qualifies under paragraph (2), and except as provided in regulations, any amount directly or indirectly transferred or credited from such branch to one or more other accounts of such controlled foreign corporation shall be treated as a dividend paid to such controlled foreign corporation. For purposes of paragraph (1), the term “qualified insurance branch” means any branch of a controlled foreign corporation which is licensed and predominantly engaged on a permanent basis in the active conduct of an insurance business in a foreign country if— separate books and accounts are maintained for such branch, the principal place of business of such branch is in such foreign country, such branch would be taxable under subchapter L if it were a separate domestic corporation, and an election under this paragraph applies to such branch. An election under this paragraph shall apply to the taxable year for which made and all subsequent taxable years unless revoked with the consent of the Secretary. The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this subsection.

(e) Gain on certain stock sales by controlled foreign corporations treated as dividends If a controlled foreign corporation sells or exchanges stock in any other foreign corporation, gain recognized on such sale or exchange shall be included in the gross income of such controlled foreign corporation as a dividend to the same extent that it would have been so included under section 1248(a) if such controlled foreign corporation were a United States person. For purposes of determining the amount which would have been so includible, the determination of whether such other foreign corporation was a controlled foreign corporation shall be made without regard to the preceding sentence. Clause (i) of section 954(c)(3)(A) shall not apply to any amount treated as a dividend by reason of paragraph (1). For purposes of this subsection, a controlled foreign corporation shall be treated as having sold or exchanged any stock if, under any provision of this subtitle, such controlled foreign corporation is treated as having gain from the sale or exchange of such stock. If, for any taxable year of a controlled foreign corporation beginning after December 31, 2017 , any amount is treated as a dividend under paragraph (1) by reason of a sale or exchange by the controlled foreign corporation of stock in another foreign corporation held for 1 year or more, then, notwithstanding any other provision of this title— the foreign-source portion of such dividend shall be treated for purposes of section 951(a)(1)(A) as subpart F income of the selling controlled foreign corporation for such taxable year, a United States shareholder with respect to the selling controlled foreign corporation shall include in gross income for the taxable year of the shareholder with or within which such taxable year of the controlled foreign corporation ends an amount equal to the shareholder’s pro rata share (determined in the same manner as under section 951(a)(2)) of the amount treated as subpart F income under clause (i), and the deduction under section 245A(a) shall be allowable to the United States shareholder with respect to the subpart F income included in gross income under clause (ii) in the same manner as if such subpart F income were a dividend received by the shareholder from the selling controlled foreign corporation. For purposes of this title, in the case of a sale or exchange by a controlled foreign corporation of stock in another foreign corporation in a taxable year of the selling controlled foreign corporation beginning after December 31, 2017 , rules similar to the rules of section 961(d) shall apply. For purposes of this paragraph, the foreign-source portion of any amount treated as a dividend under paragraph (1) shall be determined in the same manner as under section 245A(c).

§ 965 Treatment of deferred foreign income upon transition to participation exemption system of taxation

(a) Treatment of deferred foreign income as subpart F income In the case of the last taxable year of a deferred foreign income corporation which begins before January 1, 2018 , the subpart F income of such foreign corporation (as otherwise determined for such taxable year under section 952) shall be increased by the greater of— the accumulated post-1986 deferred foreign income of such corporation determined as of November 2, 2017 , or the accumulated post-1986 deferred foreign income of such corporation determined as of December 31, 2017 .

(b) Reduction in amounts included in gross income of United States shareholders of specified foreign corporations with deficits in earnings and profits In the case of a taxpayer which is a United States shareholder with respect to at least one deferred foreign income corporation and at least one E&P deficit foreign corporation, the amount which would (but for this subsection) be taken into account under section 951(a)(1) by reason of subsection (a) as such United States shareholder’s pro rata share of the subpart F income of each deferred foreign income corporation shall be reduced by the amount of such United States shareholder’s aggregate foreign E&P deficit which is allocated under paragraph (2) to such deferred foreign income corporation. The aggregate foreign E&P deficit of any United States shareholder shall be allocated among the deferred foreign income corporations of such United States shareholder in an amount which bears the same proportion to such aggregate as— such United States shareholder’s pro rata share of the accumulated post-1986 deferred foreign income of each such deferred foreign income corporation, bears to the aggregate of such United States shareholder’s pro rata share of the accumulated post-1986 deferred foreign income of all deferred foreign income corporations of such United States shareholder. For purposes of this subsection— The term “aggregate foreign E&P deficit” means, with respect to any United States shareholder, the lesser of— the aggregate of such shareholder’s pro rata shares of the specified E&P deficits of the E&P deficit foreign corporations of such shareholder, or the amount determined under paragraph (2)(B). If the amount described in clause (i)(II) is less than the amount described in clause (i)(I), then the shareholder shall designate, in such form and manner as the Secretary determines— the amount of the specified E&P deficit which is to be taken into account for each E&P deficit corporation with respect to the taxpayer, and in the case of an E&P deficit corporation which has a qualified deficit (as defined in section 952), the portion (if any) of the deficit taken into account under subclause (I) which is attributable to a qualified deficit, including the qualified activities to which such portion is attributable. The term “E&P deficit foreign corporation” means, with respect to any taxpayer, any specified foreign corporation with respect to which such taxpayer is a United States shareholder, if, as of November 2, 2017 — such specified foreign corporation has a deficit in post-1986 earnings and profits, such corporation was a specified foreign corporation, and such taxpayer was a United States shareholder of such corporation. The term “specified E&P deficit” means, with respect to any E&P deficit foreign corporation, the amount of the deficit referred to in subparagraph (B). For purposes of applying section 959 in any taxable year beginning with the taxable year described in subsection (a), with respect to any United States shareholder of a deferred foreign income corporation, an amount equal to such shareholder’s reduction under paragraph (1) which is allocated to such deferred foreign income corporation under this subsection shall be treated as an amount which was included in the gross income of such United States shareholder under section 951(a). For purposes of this title, with respect to any taxable year beginning with the taxable year described in subsection (a), a United States shareholder’s pro rata share of the earnings and profits of any E&P deficit foreign corporation under this subsection shall be increased by the amount of the specified E&P deficit of such corporation taken into account by such shareholder under paragraph (1), and, for purposes of section 952, such increase shall be attributable to the same activity to which the deficit so taken into account was attributable. In the case of any affiliated group which includes at least one E&P net surplus shareholder and one E&P net deficit shareholder, the amount which would (but for this paragraph) be taken into account under section 951(a)(1) by reason of subsection (a) by each such E&P net surplus shareholder shall be reduced (but not below zero) by such shareholder’s applicable share of the affiliated group’s aggregate unused E&P deficit. For purposes of this paragraph, the term “E&P net surplus shareholder” means any United States shareholder which would (determined without regard to this paragraph) take into account an amount greater than zero under section 951(a)(1) by reason of subsection (a). For purposes of this paragraph, the term “E&P net deficit shareholder” means any United States shareholder if— the aggregate foreign E&P deficit with respect to such shareholder (as defined in paragraph (3)(A) without regard to clause (i)(II) thereof), exceeds the amount which would (but for this subsection) be taken into account by such shareholder under section 951(a)(1) by reason of subsection (a). For purposes of this paragraph— The term “aggregate unused E&P deficit” means, with respect to any affiliated group, the lesser of— the sum of the excesses described in subparagraph (C), determined with respect to each E&P net deficit shareholder in such group, or the amount determined under subparagraph (E)(ii). If the group ownership percentage of any E&P net deficit shareholder is less than 100 percent, the amount of the excess described in subparagraph (C) which is taken into account under clause (i)(I) with respect to such E&P net deficit shareholder shall be such group ownership percentage of such amount. For purposes of this paragraph, the term “applicable share” means, with respect to any E&P net surplus shareholder in any affiliated group, the amount which bears the same proportion to such group’s aggregate unused E&P deficit as— the product of— such shareholder’s group ownership percentage, multiplied by the amount which would (but for this paragraph) be taken into account under section 951(a)(1) by reason of subsection (a) by such shareholder, bears to the aggregate amount determined under clause (i) with respect to all E&P net surplus shareholders in such group. For purposes of this paragraph, the term “group ownership percentage” means, with respect to any United States shareholder in any affiliated group, the percentage of the value of the stock of such United States shareholder which is held by other includible corporations in such affiliated group. Notwithstanding the preceding sentence, the group ownership percentage of the common parent of the affiliated group is 100 percent. Any term used in this subparagraph which is also used in section 1504 shall have the same meaning as when used in such section.

(c) Application of participation exemption to included income In the case of a United States shareholder of a deferred foreign income corporation, there shall be allowed as a deduction for the taxable year in which an amount is included in the gross income of such United States shareholder under section 951(a)(1) by reason of this section an amount equal to the sum of— the United States shareholder’s 8 percent rate equivalent percentage of the excess (if any) of— the amount so included as gross income, over the amount of such United States shareholder’s aggregate foreign cash position, plus the United States shareholder’s 15.5 percent rate equivalent percentage of so much of the amount described in subparagraph (A)(ii) as does not exceed the amount described in subparagraph (A)(i). For purposes of this subsection— The term “8 percent rate equivalent percentage” means, with respect to any United States shareholder for any taxable year, the percentage which would result in the amount to which such percentage applies being subject to a 8 percent rate of tax determined by only taking into account a deduction equal to such percentage of such amount and the highest rate of tax specified in section 11 for such taxable year. In the case of any taxable year of a United States shareholder to which section 15 applies, the highest rate of tax under section 11 before the effective date of the change in rates and the highest rate of tax under section 11 after the effective date of such change shall each be taken into account under the preceding sentence in the same proportions as the portion of such taxable year which is before and after such effective date, respectively. The term “15.5 percent rate equivalent percentage” means, with respect to any United States shareholder for any taxable year, the percentage determined under subparagraph (A) applied by substituting “15.5 percent rate of tax” for “8 percent rate of tax”. For purposes of this subsection— The term “aggregate foreign cash position” means, with respect to any United States shareholder, the greater of— the aggregate of such United States shareholder’s pro rata share of the cash position of each specified foreign corporation of such United States shareholder determined as of the close of the last taxable year of such specified foreign corporation which begins before January 1, 2018 , or one half of the sum of— the aggregate described in clause (i) determined as of the close of the last taxable year of each such specified foreign corporation which ends before November 2, 2017 , plus the aggregate described in clause (i) determined as of the close of the taxable year of each such specified foreign corporation which precedes the taxable year referred to in subclause (I). For purposes of this paragraph, the cash position of any specified foreign corporation is the sum of— cash held by such foreign corporation, the net accounts receivable of such foreign corporation, plus the fair market value of the following assets held by such corporation: Personal property which is of a type that is actively traded and for which there is an established financial market. Commercial paper, certificates of deposit, the securities of the Federal government and of any State or foreign government. Any foreign currency. Any obligation with a term of less than one year. Any asset which the Secretary identifies as being economically equivalent to any asset described in this subparagraph. For purposes of this paragraph, the term “net accounts receivable” means, with respect to any specified foreign corporation, the excess (if any) of— such corporation’s accounts receivable, over such corporation’s accounts payable (determined consistent with the rules of section 461). Cash positions of a specified foreign corporation described in clause (ii), (iii)(I), or (iii)(IV) of subparagraph (B) shall not be taken into account by a United States shareholder under subparagraph (A) to the extent that such United States shareholder demonstrates to the satisfaction of the Secretary that such amount is so taken into account by such United States shareholder with respect to another specified foreign corporation. An entity (other than a corporation) shall be treated as a specified foreign corporation of a United States shareholder for purposes of determining such United States shareholder’s aggregate foreign cash position if any interest in such entity is held by a specified foreign corporation of such United States shareholder (determined after application of this subparagraph) and such entity would be a specified foreign corporation of such United States shareholder if such entity were a foreign corporation. If the Secretary determines that a principal purpose of any transaction was to reduce the aggregate foreign cash position taken into account under this subsection, such transaction shall be disregarded for purposes of this subsection.

(d) Deferred foreign income corporation; accumulated post-1986 deferred foreign income For purposes of this section— The term “deferred foreign income corporation” means, with respect to any United States shareholder, any specified foreign corporation of such United States shareholder which has accumulated post-1986 deferred foreign income (as of the date referred to in paragraph (1) or (2) of subsection (a)) greater than zero. The term “accumulated post-1986 deferred foreign income” means the post-1986 earnings and profits except to the extent such earnings— are attributable to income of the specified foreign corporation which is effectively connected with the conduct of a trade or business within the United States and subject to tax under this chapter, or in the case of a controlled foreign corporation, if distributed, would be excluded from the gross income of a United States shareholder under section 959. To the extent provided in regulations or other guidance prescribed by the Secretary, in the case of any controlled foreign corporation which has shareholders which are not United States shareholders, accumulated post-1986 deferred foreign income shall be appropriately reduced by amounts which would be described in subparagraph (B) if such shareholders were United States shareholders. The term “post-1986 earnings and profits” means the earnings and profits of the foreign corporation (computed in accordance with sections 964(a) and 986, and by only taking into account periods when the foreign corporation was a specified foreign corporation) accumulated in taxable years beginning after December 31, 1986 , and determined— as of the date referred to in paragraph (1) or (2) of subsection (a), whichever is applicable with respect to such foreign corporation, and without diminution by reason of dividends distributed during the taxable year described in subsection (a) other than dividends distributed to another specified foreign corporation.

(e) Specified foreign corporation For purposes of this section, the term “specified foreign corporation” means— any controlled foreign corporation, and any foreign corporation with respect to which one or more domestic corporations is a United States shareholder. For purposes of sections 951 and 961, a foreign corporation described in paragraph (1)(B) shall be treated as a controlled foreign corporation solely for purposes of taking into account the subpart F income of such corporation under subsection (a) (and for purposes of applying subsection (f)). Such term shall not include any corporation which is a passive foreign investment company (as defined in section 1297) with respect to the shareholder and which is not a controlled foreign corporation.

(f) Determinations of pro rata share For purposes of this section, the determination of any United States shareholder’s pro rata share of any amount with respect to any specified foreign corporation shall be determined under rules similar to the rules of section 951(a)(2) by treating such amount in the same manner as subpart F income (and by treating such specified foreign corporation as a controlled foreign corporation). The portion which is included in the income of a United States shareholder under section 951(a)(1) by reason of subsection (a) which is equal to the deduction allowed under subsection (c) by reason of such inclusion— shall be treated as income exempt from tax for purposes of sections 705(a)(1)(B) and 1367(a)(1)(A), and shall not be treated as income exempt from tax for purposes of determining whether an adjustment shall be made to an accumulated adjustment account under section 1368(e)(1)(A).

(g) Disallowance of foreign tax credit, etc. No credit shall be allowed under section 901 for the applicable percentage of any taxes paid or accrued (or treated as paid or accrued) with respect to any amount for which a deduction is allowed under this section. For purposes of this subsection, the term “applicable percentage” means the amount (expressed as a percentage) equal to the sum of— 0.771 multiplied by the ratio of— the excess to which subsection (c)(1)(A) applies, divided by the sum of such excess plus the amount to which subsection (c)(1)(B) applies, plus 0.557 multiplied by the ratio of— the amount to which subsection (c)(1)(B) applies, divided by the sum described in subparagraph (A)(ii). No deduction shall be allowed under this chapter for any tax for which credit is not allowable under section 901 by reason of paragraph (1) (determined by treating the taxpayer as having elected the benefits of subpart A of part III of subchapter N). With respect to the taxes treated as paid or accrued by a domestic corporation with respect to amounts which are includible in gross income of such domestic corporation by reason of this section, section 78 shall apply only to so much of such taxes as bears the same proportion to the amount of such taxes as— the excess of— the amounts which are includible in gross income of such domestic corporation by reason of this section, over the deduction allowable under subsection (c) with respect to such amounts, bears to such amounts.

(h) Election to pay liability in installments In the case of a United States shareholder of a deferred foreign income corporation, such United States shareholder may elect to pay the net tax liability under this section in 8 installments of the following amounts: 8 percent of the net tax liability in the case of each of the first 5 of such installments, 15 percent of the net tax liability in the case of the 6th such installment, 20 percent of the net tax liability in the case of the 7th such installment, and 25 percent of the net tax liability in the case of the 8th such installment. If an election is made under paragraph (1), the first installment shall be paid on the due date (determined without regard to any extension of time for filing the return) for the return of tax for the taxable year described in subsection (a) and each succeeding installment shall be paid on the due date (as so determined) for the return of tax for the taxable year following the taxable year with respect to which the preceding installment was made. If there is an addition to tax for failure to timely pay any installment required under this subsection, a liquidation or sale of substantially all the assets of the taxpayer (including in a title 11 or similar case), a cessation of business by the taxpayer, or any similar circumstance, then the unpaid portion of all remaining installments shall be due on the date of such event (or in the case of a title 11 or similar case, the day before the petition is filed). The preceding sentence shall not apply to the sale of substantially all the assets of a taxpayer to a buyer if such buyer enters into an agreement with the Secretary under which such buyer is liable for the remaining installments due under this subsection in the same manner as if such buyer were the taxpayer. If an election is made under paragraph (1) to pay the net tax liability under this section in installments and a deficiency has been assessed with respect to such net tax liability, the deficiency shall be prorated to the installments payable under paragraph (1). The part of the deficiency so prorated to any installment the date for payment of which has not arrived shall be collected at the same time as, and as a part of, such installment. The part of the deficiency so prorated to any installment the date for payment of which has arrived shall be paid upon notice and demand from the Secretary. This subsection shall not apply if the deficiency is due to negligence, to intentional disregard of rules and regulations, or to fraud with intent to evade tax. Any election under paragraph (1) shall be made not later than the due date for the return of tax for the taxable year described in subsection (a) and shall be made in such manner as the Secretary shall provide. For purposes of this subsection— The net tax liability under this section with respect to any United States shareholder is the excess (if any) of— such taxpayer’s net income tax for the taxable year in which an amount is included in the gross income of such United States shareholder under section 951(a)(1) by reason of this section, over such taxpayer’s net income tax for such taxable year determined— without regard to this section, and without regard to any income or deduction properly attributable to a dividend received by such United States shareholder from any deferred foreign income corporation. The term “net income tax” means the regular tax liability reduced by the credits allowed under subparts A, B, and D of part IV of subchapter A.

(i) Special rules for S corporation shareholders In the case of any S corporation which is a United States shareholder of a deferred foreign income corporation, each shareholder of such S corporation may elect to defer payment of such shareholder’s net tax liability under this section with respect to such S corporation until the shareholder’s taxable year which includes the triggering event with respect to such liability. Any net tax liability payment of which is deferred under the preceding sentence shall be assessed on the return of tax as an addition to tax in the shareholder’s taxable year which includes such triggering event. In the case of any shareholder’s net tax liability under this section with respect to any S corporation, the triggering event with respect to such liability is whichever of the following occurs first: Such corporation ceases to be an S corporation (determined as of the first day of the first taxable year that such corporation is not an S corporation). A liquidation or sale of substantially all the assets of such S corporation (including in a title 11 or similar case), a cessation of business by such S corporation, such S corporation ceases to exist, or any similar circumstance. A transfer of any share of stock in such S corporation by the taxpayer (including by reason of death, or otherwise). In the case of a transfer of less than all of the taxpayer’s shares of stock in the S corporation, such transfer shall only be a triggering event with respect to so much of the taxpayer’s net tax liability under this section with respect to such S corporation as is properly allocable to such stock. A transfer described in clause (iii) of subparagraph (A) shall not be treated as a triggering event if the transferee enters into an agreement with the Secretary under which such transferee is liable for net tax liability with respect to such stock in the same manner as if such transferee were the taxpayer. A shareholder’s net tax liability under this section with respect to any S corporation is the net tax liability under this section which would be determined under subsection (h)(6) if the only subpart F income taken into account by such shareholder by reason of this section were allocations from such S corporation. In the case of a taxpayer which elects to defer payment under paragraph (1)— subsection (h) shall be applied separately with respect to the liability to which such election applies, an election under subsection (h) with respect to such liability shall be treated as timely made if made not later than the due date for the return of tax for the taxable year in which the triggering event with respect to such liability occurs, the first installment under subsection (h) with respect to such liability shall be paid not later than such due date (but determined without regard to any extension of time for filing the return), and if the triggering event with respect to any net tax liability is described in paragraph (2)(A)(ii), an election under subsection (h) with respect to such liability may be made only with the consent of the Secretary. If any shareholder of an S corporation elects to defer payment under paragraph (1), such S corporation shall be jointly and severally liable for such payment and any penalty, addition to tax, or additional amount attributable thereto. Any limitation on the time period for the collection of a liability deferred under this subsection shall not be treated as beginning before the date of the triggering event with respect to such liability. Any shareholder of an S corporation which makes an election under paragraph (1) shall report the amount of such shareholder’s deferred net tax liability on such shareholder’s return of tax for the taxable year for which such election is made and on the return of tax for each taxable year thereafter until such amount has been fully assessed on such returns. For purposes of this paragraph, the term “deferred net tax liability” means, with respect to any taxable year, the amount of net tax liability payment of which has been deferred under paragraph (1) and which has not been assessed on a return of tax for any prior taxable year. In the case of any failure to report any amount required to be reported under subparagraph (A) with respect to any taxable year before the due date for the return of tax for such taxable year, there shall be assessed on such return as an addition to tax 5 percent of such amount. Any election under paragraph (1)— shall be made by the shareholder of the S corporation not later than the due date for such shareholder’s return of tax for the taxable year which includes the close of the taxable year of such S corporation in which the amount described in subsection (a) is taken into account, and shall be made in such manner as the Secretary shall provide.

(j) Reporting by S corporation Each S corporation which is a United States shareholder of a specified foreign corporation shall report in its return of tax under section 6037(a) the amount includible in its gross income for such taxable year by reason of this section and the amount of the deduction allowable by subsection (c). Any copy provided to a shareholder under section 6037(b) shall include a statement of such shareholder’s pro rata share of such amounts.

(k) Extension of limitation on assessment Notwithstanding section 6501, the limitation on the time period for the assessment of the net tax liability under this section (as defined in subsection (h)(6)) shall not expire before the date that is 6 years after the return for the taxable year described in such subsection was filed.

(l) Recapture for expatriated entities If a deduction is allowed under subsection (c) to a United States shareholder and such shareholder first becomes an expatriated entity at any time during the 10-year period beginning on the date of the enactment of the Tax Cuts and Jobs Act 1 (with respect to a surrogate foreign corporation which first becomes a surrogate foreign corporation during such period), then— the tax imposed by this chapter shall be increased for the first taxable year in which such taxpayer becomes an expatriated entity by an amount equal to 35 percent of the amount of the deduction allowed under subsection (c), and no credits shall be allowed against the increase in tax under subparagraph (A). For purposes of this subsection, the term “expatriated entity” has the same meaning given such term under section 7874(a)(2), except that such term shall not include an entity if the surrogate foreign corporation with respect to the entity is treated as a domestic corporation under section 7874(b). For purposes of this subsection, the term “surrogate foreign corporation” has the meaning given such term in section 7874(a)(2)(B).

(m) Special rules for United States shareholders which are real estate investment trusts If a real estate investment trust is a United States shareholder in 1 or more deferred foreign income corporations— any amount required to be taken into account under section 951(a)(1) by reason of this section shall not be taken into account as gross income of the real estate investment trust for purposes of applying paragraphs (2) and (3) of section 856(c) to any taxable year for which such amount is taken into account under section 951(a)(1), and if the real estate investment trust elects the application of this subparagraph, notwithstanding subsection (a), any amount required to be taken into account under section 951(a)(1) by reason of this section shall, in lieu of the taxable year in which it would otherwise be included in gross income (for purposes of the computation of real estate investment trust taxable income under section 857(b)), be included in gross income as follows: 8 percent of such amount in the case of each of the taxable years in the 5-taxable year period beginning with the taxable year in which such amount would otherwise be included. 15 percent of such amount in the case of the 1st taxable year following such period. 20 percent of such amount in the case of the 2nd taxable year following such period. 25 percent of such amount in the case of the 3rd taxable year following such period. Any election under paragraph (1)(B) shall be made not later than the due date for the first taxable year in the 5-taxable year period described in clause (i) of paragraph (1)(B) and shall be made in such manner as the Secretary shall provide. If an election under paragraph (1)(B) is in effect with respect to any real estate investment trust, the following rules shall apply: For purposes of subsection (c)(1)— the aggregate amount to which subparagraph (A) or (B) of subsection (c)(1) applies shall be determined without regard to the election, each such aggregate amount shall be allocated to each taxable year described in paragraph (1)(B) in the same proportion as the amount included in the gross income of such United States shareholder under section 951(a)(1) by reason of this section is allocated to each such taxable year. The real estate investment trust may not make an election under subsection (g) for any taxable year described in paragraph (1)(B). If there is a liquidation or sale of substantially all the assets of the real estate investment trust (including in a title 11 or similar case), a cessation of business by such trust, or any similar circumstance, then any amount not yet included in gross income under paragraph (1)(B) shall be included in gross income as of the day before the date of the event and the unpaid portion of any tax liability with respect to such inclusion shall be due on the date of such event (or in the case of a title 11 or similar case, the day before the petition is filed).

(n) Election not to apply net operating loss deduction If a United States shareholder of a deferred foreign income corporation elects the application of this subsection for the taxable year described in subsection (a), then the amount described in paragraph (2) shall not be taken into account— in determining the amount of the net operating loss deduction under section 172 of such shareholder for such taxable year, or in determining the amount of taxable income for such taxable year which may be reduced by net operating loss carryovers or carrybacks to such taxable year under section 172. The amount described in this paragraph is the sum of— the amount required to be taken into account under section 951(a)(1) by reason of this section (determined after the application of subsection (c)), plus in the case of a domestic corporation which chooses to have the benefits of subpart A of part III of subchapter N for the taxable year, the taxes deemed to be paid by such corporation under subsections (a) and (b) of section 960 for such taxable year with respect to the amount described in subparagraph (A) which are treated as a dividends 2 under section 78. Any election under this subsection shall be made not later than the due date (including extensions) for filing the return of tax for the taxable year and shall be made in such manner as the Secretary shall prescribe.

(o) Regulations The Secretary shall prescribe such regulations or other guidance as may be necessary or appropriate to carry out the provisions of this section, including— regulations or other guidance to provide appropriate basis adjustments, and regulations or other guidance to prevent the avoidance of the purposes of this section, including through a reduction in earnings and profits, through changes in entity classification or accounting methods, or otherwise.

§ 970 Reduction of subpart F income of export trade corporations

(a) Export trade income constituting foreign base company income In the case of a controlled foreign corporation (as defined in section 957) which for the taxable year is an export trade corporation, the subpart F income (determined without regard to this subpart) of such corporation for such year shall be reduced by an amount equal to so much of the export trade income (as defined in section 971(b)) of such corporation for such year as constitutes foreign base company income (as defined in section 954), but only to the extent that such amount does not exceed whichever of the following amounts is the lesser: an amount equal to 1½ times so much of the export promotion expenses (as defined in section 971(d)) of such corporation for such year as is properly allocable to the export trade income which constitutes foreign base company income of such corporation for such year, or an amount equal to 10 percent of so much of the gross receipts for such year (or, in the case of gross receipts arising from commissions, fees, or other compensation for its services, so much of the gross amount upon the basis of which such commissions, fees, or other compensation is computed) accruing to such export trade corporation from the sale, installation, operation, maintenance, or use of property in respect of which such corporation derives export trade income as is properly allocable to the export trade income which constitutes foreign base company income of such corporation for such year. The allocations with respect to export trade income which constitutes foreign base company income under subparagraphs (A) and (B) shall be made under regulations prescribed by the Secretary. The reduction under paragraph (1) for any taxable year shall not exceed an amount which bears the same ratio to the increase in the investments in export trade assets (as defined in section 971(c)) of such corporation for such year as the export trade income which constitutes foreign base company income of such corporation for such year bears to the entire export trade income of such corporation for such year.

([(b) Repealed. Pub. L. 115–97, title I, § 14212(b)(5), Dec. 22, 2017, 131 Stat. 2217]

(c) Investments in export trade assets For purposes of this section, the amount taken into account with respect to any export trade asset shall be its adjusted basis, reduced by any liability to which the asset is subject. For purposes of subsection (a), the amount of increase in investments in export trade assets of any controlled foreign corporation for any taxable year is the amount by which— the amount of such investments at the close of the taxable year, exceeds the amount of such investments at the close of the preceding taxable year. For purposes of subsection (b), the amount of decrease in investments in export trade assets of any controlled foreign corporation for any taxable year is the amount by which— the amount of such investments at the close of the preceding taxable year (reduced by an amount equal to the amount of net loss sustained during the taxable year with respect to export trade assets), exceeds the amount of such investments at the close of the taxable year. A United States shareholder of an export trade corporation may, under regulations prescribed by the Secretary, make the determinations under paragraphs (2) and (3) as of the close of the 75th day after the close of the years referred to in such paragraphs in lieu of on the last day of such years. A United States shareholder of an export trade corporation may, under regulations prescribed by the Secretary, make the determinations under paragraphs (2) and (3) with respect to export trade assets described in section 971(c)(3) as of the close of the years following the years referred to in such paragraphs, or as of the close of such longer period of time as such regulations may permit, in lieu of on the last day of such years and in lieu of on the day prescribed in the preceding sentence. Any election under this paragraph made with respect to any taxable year shall apply to such year and to all succeeding taxable years unless the Secretary consents to the revocation of such election.

§ 971 Definitions

(a) Export trade corporations For purposes of this subpart, the term “export trade corporation” means— A controlled foreign corporation (as defined in section 957) which satisfies the following conditions: 90 percent or more of the gross income of such corporation for the 3–year period immediately preceding the close of the taxable year (or such part of such period subsequent to the effective date of this subpart during which the corporation was in existence) was derived from sources without the United States, and 75 percent or more of the gross income of such corporation for such period constituted gross income in respect of which such corporation derived export trade income. If 50 percent or more of the gross income of a controlled foreign corporation in the period specified in subsection (a)(1)(A) is gross income in respect of which such corporation derived export trade income in respect of agricultural products grown in the United States, it may qualify as an export trade corporation although it does not meet the requirements of subsection (a)(1)(B). No controlled foreign corporation may qualify as an export trade corporation for any taxable year beginning after October 31, 1971 , unless it qualified as an export trade corporation for any taxable year beginning before such date. If a corporation fails to qualify as an export trade corporation for a period of any 3 consecutive taxable years beginning after such date, it may not qualify as an export trade corporation for any taxable year beginning after such period.

(b) Export trade income For the purposes of this subpart, the term “export trade income” means net income from— the sale to an unrelated person for use, consumption, or disposition outside the United States of export property (as defined in subsection (e)), or from commissions, fees, compensation, or other income from the performance of commercial, industrial, financial, technical, scientific, managerial, engineering, architectural, skilled, or other services in respect to such sales or in respect of the installation or maintenance of such export property; commissions, fees, compensation, or other income from commercial, industrial, financial, technical, scientific, managerial, engineering, architectural, skilled, or other services performed in connection with the use by an unrelated person outside the United States of patents, copyrights, secret processes and formulas, goodwill, trademarks, trade brands, franchises, and other like property acquired or developed and owned by the manufacturer, producer, grower, or extractor of export property in respect of which the export trade corporation earns export trade income under paragraph (1); commissions, fees, rentals, or other compensation or income attributable to the use of export property by an unrelated person or attributable to the use of export property in the rendition of technical, scientific, or engineering services to an unrelated person; and interest from export trade assets described in subsection (c)(4). For purposes of paragraph (3), if a controlled foreign corporation receives income from an unrelated person attributable to the use of export property in the rendition of services to such unrelated person together with income attributable to the rendition of other services to such unrelated person, including personal services, the amount of such aggregate income which shall be considered to be attributable to the use of the export property shall (if such amount cannot be established by reference to transactions between unrelated persons) be that part of such aggregate income which the cost of the export property consumed in the rendition of such services (including a reasonable allowance for depreciation) bears to the total costs and expenses attributable to such aggregate income.

(c) Export trade assets For purposes of this subpart, the term “export trade assets” means— working capital reasonably necessary for the production of export trade income, inventory of export property held for use, consumption, or disposition outside the United States, facilities located outside the United States for the storage, handling, transportation, packaging, or servicing of export property, and evidences of indebtedness executed by persons, other than related persons, in connection with payment for purchases of export property for use, consumption, or disposition outside the United States, or in connection with the payment for services described in subsections (b)(2) and (3).

(d) Export promotion expenses For purposes of this subpart, the term “export promotion expenses” means the following expenses paid or incurred in the receipt or production of export trade income— a reasonable allowance for salaries or other compensation for personal services actually rendered for such purpose, rentals or other payments for the use of property actually used for such purpose, a reasonable allowance for the exhaustion, wear and tear, or obsolescence of property actually used for such purpose, and any other ordinary and necessary expenses of the corporation to the extent reasonably allocable to the receipt or production of export trade income. No expense incurred within the United States shall be treated as an export promotion expense within the meaning of the preceding sentence, unless at least 90 percent of each category of expenses described in such sentence is incurred outside the United States.

(e) Export property For purposes of this subpart, the term “export property” means any property or any interest in property manufactured, produced, grown, or extracted in the United States.

(f) Unrelated person For purposes of this subpart, the term “unrelated person” means a person other than a related person as defined in section 954(d)(3).

“If— a corporation which is not an export trading corporation for its most recent taxable year ending before the date of the enactment of the Tax Reform Act of 1984 [ July 18, 1984 ] but was an export trading corporation for any prior taxable year, and such corporation may not qualify as an export trade corporation for any taxable year beginning after December 31, 1984 , by reason of section 971(a)(3) of the Internal Revenue Code of 1954 [now 1986], or (B) such corporation makes an election, before the date 6 months after the date of the enactment of this Act [ Oct. 22, 1986 ], not to be treated as an export trade corporation with respect to taxable years beginning after December 31, 1984 , rules similar to the rules of paragraphs (2) and (4) of section 805(b) of the Tax Reform Act of 1984 [set out as a note under section 991 of this title ] shall apply to such corporation. For purposes of the preceding sentence, the term ‘export trade corporation’ has the meaning given such term by section 971 of such Code.”

[§ 972 Repealed. Pub. L. 94–455, title XIX, § 1901(a)(120), Oct. 4, 1976, 90 Stat. 1784]

[§ 981 Repealed. Pub. L. 94–455, title X, § 1012(b)(2), Oct. 4, 1976, 90 Stat. 1614]

§ 982 Admissibility of documentation maintained in foreign countries

(a) General rule If the taxpayer fails to substantially comply with any formal document request arising out of the examination of the tax treatment of any item (hereinafter in this section referred to as the “examined item”) before the 90th day after the date of the mailing of such request on motion by the Secretary, any court having jurisdiction of a civil proceeding in which the tax treatment of the examined item is an issue shall prohibit the introduction by the taxpayer of any foreign-based documentation covered by such request.

(b) Reasonable cause exception Subsection (a) shall not apply with respect to any documentation if the taxpayer establishes that the failure to provide the documentation as requested by the Secretary is due to reasonable cause. For purposes of paragraph (1), the fact that a foreign jurisdiction would impose a civil or criminal penalty on the taxpayer (or any other person) for disclosing the requested documentation is not reasonable cause.

(c) Formal document request For purposes of this section— The term “formal document request” means any request (made after the normal request procedures have failed to produce the requested documentation) for the production of foreign-based documentation which is mailed by registered or certified mail to the taxpayer at his last known address and which sets forth— the time and place for the production of the documentation, a statement of the reason the documentation previously produced (if any) is not sufficient, a description of the documentation being sought, and the consequences to the taxpayer of the failure to produce the documentation described in subparagraph (C). Notwithstanding any other law or rule of law, any person to whom a formal document request is mailed shall have the right to begin a proceeding to quash such request not later than the 90th day after the day such request was mailed. In any such proceeding, the Secretary may seek to compel compliance with such request. The United States district court for the district in which the person (to whom the formal document request is mailed) resides or is found shall have jurisdiction to hear any proceeding brought under subparagraph (A). An order denying the petition shall be deemed a final order which may be appealed. The running of the 90-day period referred to in subsection (a) shall be suspended during any period during which a proceeding brought under subparagraph (A) is pending.

(d) Definitions and special rules For purposes of this section— The term “foreign-based documentation” means any documentation which is outside the United States and which may be relevant or material to the tax treatment of the examined item. The term “documentation” includes books and records. The Secretary, and any court having jurisdiction over a proceeding under subsection (c)(2), may extend the 90-day period referred to in subsection (a).

(e) Suspension of statute of limitations If any person takes any action as provided in subsection (c)(2), the running of any period of limitations under section 6501 (relating to the assessment and collection of tax) or under section 6531 (relating to criminal prosecutions) with respect to such person shall be suspended for the period during which the proceeding under such subsection, and appeals therein, are pending.

§ 985 Functional currency

(a) In general Unless otherwise provided in regulations, all determinations under this subtitle shall be made in the taxpayer’s functional currency.

(b) Functional currency For purposes of this subtitle, the term “functional currency” means— except as provided in subparagraph (B), the dollar, or in the case of a qualified business unit, the currency of the economic environment in which a significant part of such unit’s activities are conducted and which is used by such unit in keeping its books and records. The functional currency of any qualified business unit shall be the dollar if activities of such unit are primarily conducted in dollars. To the extent provided in regulations, the taxpayer may elect to use the dollar as the functional currency for any qualified business unit if— such unit keeps its books and records in dollars, or the taxpayer uses a method of accounting that approximates a separate transactions method. Any such election shall apply to the taxable year for which made and all subsequent taxable years unless revoked with the consent of the Secretary. Any change in the functional currency shall be treated as a change in the taxpayer’s method of accounting for purposes of section 481 under procedures to be established by the Secretary.

§ 986 Determination of foreign taxes and foreign corporation’s earnings and profits

(a) Foreign income taxes For purposes of determining the amount of the foreign tax credit, in the case of a taxpayer who takes foreign income taxes into account when accrued, the amount of any foreign income taxes (and any adjustment thereto) shall be translated into dollars by using the average exchange rate for the taxable year to which such taxes relate. Subparagraph (A) shall not apply to any foreign income taxes— paid after the date 2 years after the close of the taxable year to which such taxes relate, or paid before the beginning of the taxable year to which such taxes relate. Subparagraph (A) shall not apply to any foreign income taxes the liability for which is denominated in any inflationary currency (as determined under regulations). At the election of the taxpayer, subparagraph (A) shall not apply to any foreign income taxes the liability for which is denominated in any currency other than in the taxpayer’s functional currency. An election under this subparagraph may apply to foreign income taxes attributable to a qualified business unit in accordance with regulations prescribed by the Secretary. Any such election shall apply to the taxable year for which made and all subsequent taxable years unless revoked with the consent of the Secretary. In the case of a regulated investment company which takes into account income on an accrual basis, subparagraphs (A) through (D) shall not apply and foreign income taxes paid or accrued with respect to such income shall be translated into dollars using the exchange rate as of the date the income accrues. For adjustments where tax is not paid within 2 years, see section 905(c). For purposes of determining the amount of the foreign tax credit, in the case of any foreign income taxes to which subparagraph (A) or (E) of paragraph (1) does not apply— such taxes shall be translated into dollars using the exchange rates as of the time such taxes were paid to the foreign country or possession of the United States, and any adjustment to the amount of such taxes shall be translated into dollars using— except as provided in clause (ii), the exchange rate as of the time when such adjustment is paid to the foreign country or possession, or in the case of any refund or credit of foreign income taxes, using the exchange rate as of the time of the original payment of such foreign income taxes. To the extent prescribed in regulations, the average exchange rate for the period (specified in such regulations) during which the taxes or adjustment is paid may be used instead of the exchange rate as of the time of such payment. For purposes of this subsection, the term “foreign income taxes” means any income, war profits, or excess profits taxes paid or accrued to any foreign country or to any possession of the United States.

(b) Earnings and profits and distributions For purposes of determining the tax under this subtitle— of any shareholder of any foreign corporation, the earnings and profits of such corporation shall be determined in the corporation’s functional currency, and in the case of any United States person, the earnings and profits determined under paragraph (1) (when distributed, deemed distributed, or otherwise taken into account under this subtitle) shall (if necessary) be translated into dollars using the appropriate exchange rate.

(c) Previously taxed earnings and profits Foreign currency gain or loss with respect to distributions of previously taxed earnings and profits (as described in section 959 or 1293(c)) attributable to movements in exchange rates between the times of deemed and actual distribution shall be recognized and treated as ordinary income or loss from the same source as the associated income inclusion. The Secretary shall prescribe regulations with respect to the treatment of distributions of previously taxed earnings and profits through tiers of foreign corporations.

§ 987 Branch transactions

In the case of any taxpayer having 1 or more qualified business units with a functional currency other than the dollar, taxable income of such taxpayer shall be determined— by computing the taxable income or loss separately for each such unit in its functional currency, by translating the income or loss separately computed under paragraph (1) at the appropriate exchange rate, and by making proper adjustments (as prescribed by the Secretary) for transfers of property between qualified business units of the taxpayer having different functional currencies, including— treating post-1986 remittances from each such unit as made on a pro rata basis out of post-1986 accumulated earnings, and treating gain or loss determined under this paragraph as ordinary income or loss, respectively, and sourcing such gain or loss by reference to the source of the income giving rise to post-1986 accumulated earnings. (Added Pub. L. 99–514, title XII, § 1261(a) , Oct. 22, 1986 , 100 Stat. 2586 ; amended Pub. L. 100–647, title I, § 1012(v)(1)(B) , Nov. 10, 1988 , 102 Stat. 3528 .)

§ 988 Treatment of certain foreign currency transactions

(a) General rule Notwithstanding any other provision of this chapter— Except as otherwise provided in this section, any foreign currency gain or loss attributable to a section 988 transaction shall be computed separately and treated as ordinary income or loss (as the case may be). Except as provided in regulations, a taxpayer may elect to treat any foreign currency gain or loss attributable to a forward contract, a futures contract, or option described in subsection (c)(1)(B)(iii) which is a capital asset in the hands of the taxpayer and which is not a part of a straddle (within the meaning of section 1092(c), without regard to paragraph (4) thereof) as capital gain or loss (as the case may be) if the taxpayer makes such election and identifies such transaction before the close of the day on which such transaction is entered into (or such earlier time as the Secretary may prescribe). To the extent provided in regulations, any amount treated as ordinary income or loss under paragraph (1) shall be treated as interest income or expense (as the case may be). Except as otherwise provided in regulations, in the case of any amount treated as ordinary income or loss under paragraph (1) (without regard to paragraph (1)(B)), the source of such amount shall be determined by reference to the residence of the taxpayer or the qualified business unit of the taxpayer on whose books the asset, liability, or item of income or expense is properly reflected. For purposes of this subpart— The residence of any person shall be— in the case of an individual, the country in which such individual’s tax home (as defined in section 911(d)(3)) is located, in the case of any corporation, partnership, trust, or estate which is a United States person (as defined in section 7701(a)(30)), the United States, and in the case of any corporation, partnership, trust, or estate which is not a United States person, a country other than the United States. If an individual does not have a tax home (as so defined), the residence of such individual shall be the United States if such individual is a United States citizen or a resident alien and shall be a country other than the United States if such individual is not a United States citizen or a resident alien. In the case of a qualified business unit of any taxpayer (including an individual), the residence of such unit shall be the country in which the principal place of business of such qualified business unit is located. To the extent provided in regulations, in the case of a partnership, the determination of residence shall be made at the partner level. Except to the extent provided in regulations, in the case of a loan by a United States person or a related person to a 10-percent owned foreign corporation which is denominated in a currency other than the dollar and bears interest at a rate at least 10 percentage points higher than the Federal mid-term rate (determined under section 1274(d)) at the time such loan is entered into, the following rules shall apply: For purposes of section 904 only, such loan shall be marked to market on an annual basis. Any interest income earned with respect to such loan for the taxable year shall be treated as income from sources within the United States to the extent of any loss attributable to clause (i). For purposes of this subparagraph, the term “related person” has the meaning given such term by section 954(d)(3), except that such section shall be applied by substituting “United States person” for “controlled foreign corporation” each place such term appears. The term “10-percent owned foreign corporation” means any foreign corporation in which the United States person owns directly or indirectly at least 10 percent of the voting stock.

(b) Foreign currency gain or loss For purposes of this section— The term “foreign currency gain” means any gain from a section 988 transaction to the extent such gain does not exceed gain realized by reason of changes in exchange rates on or after the booking date and before the payment date. The term “foreign currency loss” means any loss from a section 988 transaction to the extent such loss does not exceed the loss realized by reason of changes in exchange rates on or after the booking date and before the payment date. In the case of any section 988 transaction described in subsection (c)(1)(B)(iii), any gain or loss from such transaction shall be treated as foreign currency gain or loss (as the case may be).

(c) Other definitions For purposes of this section— The term “section 988 transaction” means any transaction described in subparagraph (B) if the amount which the taxpayer is entitled to receive (or is required to pay) by reason of such transaction— is denominated in terms of a nonfunctional currency, or is determined by reference to the value of 1 or more nonfunctional currencies. For purposes of subparagraph (A), the following transactions are described in this subparagraph: The acquisition of a debt instrument or becoming the obligor under a debt instrument. Accruing (or otherwise taking into account) for purposes of this subtitle any item of expense or gross income or receipts which is to be paid or received after the date on which so accrued or taken into account. Entering into or acquiring any forward contract, futures contract, option, or similar financial instrument. The Secretary may prescribe regulations excluding from the application of clause (ii) any class of items the taking into account of which is not necessary to carry out the purposes of this section by reason of the small amounts or short periods involved, or otherwise. In the case of any disposition of any nonfunctional currency— such disposition shall be treated as a section 988 transaction, and any gain or loss from such transaction shall be treated as foreign currency gain or loss (as the case may be). For purposes of this section, the term “nonfunctional currency” includes coin or currency, and nonfunctional currency denominated demand or time deposits or similar instruments issued by a bank or other financial institution. Clause (iii) of subparagraph (B) shall not apply to any regulated futures contract or nonequity option which would be marked to market under section 1256 if held on the last day of the taxable year. The taxpayer may elect to have clause (i) not apply to such taxpayer. Such an election shall apply to contracts held at any time during the taxable year for which such election is made or any succeeding taxable year unless such election is revoked with the consent of the Secretary. Except as provided in regulations, an election under subclause (I) for any taxable year shall be made on or before the 1st day of such taxable year (or, if later, on or before the 1st day during such year on which the taxpayer holds a contract described in clause (i)). In the case of a partnership, an election under subclause (I) shall be made by each partner separately. A similar rule shall apply in the case of an S corporation. This subparagraph shall not apply to any income or loss of a partnership for any taxable year if such partnership made an election under subparagraph (E)(iii)(V) for such year or any preceding year. In the case of a qualified fund, clause (iii) of subparagraph (B) shall not apply to any instrument which would be marked to market under section 1256 if held on the last day of the taxable year (determined after the application of clause (iv)). If any partnership made an election under clause (iii)(V) for any taxable year and such partnership has a net loss for such year or any succeeding year from instruments referred to in clause (i), the rules of clauses (i) and (iv) shall apply to any such loss year whether or not such partnership is a qualified fund for such year. For purposes of this subparagraph, the term “qualified fund” means any partnership if— at all times during the taxable year (and during each preceding taxable year to which an election under subclause (V) applied), such partnership has at least 20 partners and no single partner owns more than 20 percent of the interests in the capital or profits of the partnership, the principal activity of such partnership for such taxable year (and each such preceding taxable year) consists of buying and selling options, futures, or forwards with respect to commodities, at least 90 percent of the gross income of the partnership for the taxable year (and for each such preceding taxable year) consisted of income or gains described in subparagraph (A), (B), or (G) of section 7704(d)(1) or gain from the sale or disposition of capital assets held for the production of interest or dividends, no more than a de minimis amount of the gross income of the partnership for the taxable year (and each such preceding taxable year) was derived from buying and selling commodities, and an election under this subclause applies to the taxable year. An election under subclause (V) for any taxable year shall be made on or before the 1st day of such taxable year (or, if later, on or before the 1st day during such year on which the partnership holds an instrument referred to in clause (i)). Any such election shall apply to the taxable year for which made and all succeeding taxable years unless revoked with the consent of the Secretary. Except as provided in regulations, in the case of a qualified fund, any bank forward contract, any foreign currency futures contract traded on a foreign exchange, or to the extent provided in regulations any similar instrument, which is not otherwise a section 1256 contract shall be treated as a section 1256 contract for purposes of section 1256. In the case of any instrument treated as a section 1256 contract under subclause (I), subparagraph (A) of section 1256(a)(3) shall be applied by substituting “100 percent” for “40 percent” (and subparagraph (B) of such section shall not apply). The interest of a general partner in the partnership shall not be treated as failing to meet the 20-percent ownership requirements of clause (iii)(I) for any taxable year of the partnership if, for the taxable year of the partner in which such partnership taxable year ends, such partner (and each corporation filing a consolidated return with such partner) had no ordinary income or loss from a section 988 transaction which is foreign currency gain or loss (as the case may be). For purposes of clause (iii)(I), any income allocable to a general partner as incentive compensation based on profits rather than capital shall not be taken into account in determining such partner’s interest in the profits of the partnership. Except as provided in regulations, the interest of a partner in the partnership shall not be treated as failing to meet the 20-percent ownership requirements of clause (iii)(I) if none of the income of such partner from such partnership is subject to tax under this chapter (whether directly or through 1 or more pass-thru entities). In determining whether the requirements of clause (iii)(I) are met with respect to any partnership, except to the extent provided in regulations, any interest in such partnership held by another partnership shall be treated as held proportionately by the partners in such other partnership. For purposes of this subparagraph— Interests in the partnership held by persons related to each other (within the meaning of sections 267(b) and 707(b)) shall be treated as held by 1 person. References to any partnership shall include a reference to any predecessor thereof. Rules similar to the rules of section 7704(e) shall apply. For purposes of clause (iii)(IV), any debt instrument which is a section 988 transaction shall be treated as a commodity. The term “booking date” means— in the case of a transaction described in paragraph (1)(B)(i), the date of acquisition or on which the taxpayer becomes the obligor, or in the case of a transaction described in paragraph (1)(B)(ii), the date on which accrued or otherwise taken into account. The term “payment date” means the date on which the payment is made or received. The term “debt instrument” means a bond, debenture, note, or certificate or other evidence of indebtedness. To the extent provided in regulations, such term shall include preferred stock. If the taxpayer takes or makes delivery in connection with any section 988 transaction described in paragraph (1)(B)(iii), any gain or loss (determined as if the taxpayer sold the contract, option, or instrument on the date on which he took or made delivery for its fair market value on such date) shall be recognized in the same manner as if such contract, option, or instrument were so sold.

(d) Treatment of 988 hedging transactions To the extent provided in regulations, if any section 988 transaction is part of a 988 hedging transaction, all transactions which are part of such 988 hedging transaction shall be integrated and treated as a single transaction or otherwise treated consistently for purposes of this subtitle. For purposes of the preceding sentence, the determination of whether any transaction is a section 988 transaction shall be determined without regard to whether such transaction would otherwise be marked-to-market under section 475 or 1256 and such term shall not include any transaction with respect to which an election is made under subsection (a)(1)(B). Sections 475, 1092, and 1256 shall not apply to a transaction covered by this subsection. For purposes of paragraph (1), the term “988 hedging transaction” means any transaction— entered into by the taxpayer primarily— to manage risk of currency fluctuations with respect to property which is held or to be held by the taxpayer, or to manage risk of currency fluctuations with respect to borrowings made or to be made, or obligations incurred or to be incurred, by the taxpayer, and identified by the Secretary or the taxpayer as being a 988 hedging transaction.

(e) Application to individuals The preceding provisions of this section shall not apply to any section 988 transaction entered into by an individual which is a personal transaction. If— nonfunctional currency is disposed of by an individual in any transaction, and such transaction is a personal transaction, no gain shall be recognized for purposes of this subtitle by reason of changes in exchange rates after such currency was acquired by such individual and before such disposition. The preceding sentence shall not apply if the gain which would otherwise be recognized on the transaction exceeds $200. For purposes of this subsection, the term “personal transaction” means any transaction entered into by an individual, except that such term shall not include any transaction to the extent that expenses properly allocable to such transaction meet the requirements of— section 162 (other than traveling expenses described in subsection (a)(2) thereof), or section 212 (other than that part of section 212 dealing with expenses incurred in connection with taxes).

§ 989 Other definitions and special rules

(a) Qualified business unit For purposes of this subpart, the term “qualified business unit” means any separate and clearly identified unit of a trade or business of a taxpayer which maintains separate books and records.

(b) Appropriate exchange rate Except as provided in regulations, for purposes of this subpart, the term “appropriate exchange rate” means— in the case of an actual distribution of earnings and profits, the spot rate on the date such distribution is included in income, in the case of an actual or deemed sale or exchange of stock in a foreign corporation treated as a dividend under section 1248, the spot rate on the date the deemed dividend is included in income, in the case of any amounts included in income under section 951(a)(1)(A) or 1293(a), the average exchange rate for the taxable year of the foreign corporation, or in the case of any other qualified business unit of a taxpayer, the average exchange rate for the taxable year of such qualified business unit. For purposes of the preceding sentence, any amount included in income under section 951(a)(1)(B) shall be treated as an actual distribution made on the last day of the taxable year for which such amount was so included.

(c) Regulations The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this subpart, including regulations— setting forth procedures to be followed by taxpayers with qualified business units using a net worth method of accounting before the enactment of this subpart, limiting the recognition of foreign currency loss on certain remittances from qualified business units, providing for the recharacterization of interest and principal payments with respect to obligations denominated in certain hyperinflationary currencies, providing for alternative adjustments to the application of section 905(c), providing for the appropriate treatment of related party transactions (including transactions between qualified business units of the same taxpayer), and setting forth procedures for determining the average exchange rate for any period.

§ 991 Taxation of a domestic international sales corporation

For purposes of the taxes imposed by this subtitle upon a DISC (as defined in section 992(a)), a DISC shall not be subject to the taxes imposed by this subtitle. (Added Pub. L. 92–178, title V, § 501 , Dec. 10, 1971 , 85 Stat. 535 ; amended Pub. L. 105–206, title VI, § 6011(e)(1) , July 22, 1998 , 112 Stat. 818 .)

§ 992 Requirements of a domestic international sales corporation

(a) Definition of “DISC” and “former DISC” For purposes of this title, the term “DISC” means, with respect to any taxable year, a corporation which is incorporated under the laws of any State and satisfies the following conditions for the taxable year: 95 percent or more of the gross receipts (as defined in section 993(f)) of such corporation consist of qualified export receipts (as defined in section 993(a)), the adjusted basis of the qualified export assets (as defined in section 993(b)) of the corporation at the close of the taxable year equals or exceeds 95 percent of the sum of the adjusted basis of all assets of the corporation at the close of the taxable year, such corporation does not have more than one class of stock and the par or stated value of its outstanding stock is at least $2,500 on each day of the taxable year, and the corporation has made an election pursuant to subsection (b) to be treated as a DISC and such election is in effect for the taxable year. The Secretary shall prescribe regulations setting forth the conditions under and the extent to which a corporation which has filed a return as a DISC for a taxable year shall be treated as a DISC for such taxable year for all purposes of this title, notwithstanding the fact that the corporation has failed to satisfy the conditions of paragraph (1). For purposes of this title, the term “former DISC” means, with respect to any taxable year, a corporation which is not a DISC for such year but was a DISC in a preceding taxable year and at the beginning of the taxable year has undistributed previously taxed income or accumulated DISC income.

(b) Election An election by a corporation to be treated as a DISC shall be made by such corporation for a taxable year at any time during the 90–day period immediately preceding the beginning of the taxable year, except that the Secretary may give his consent to the making of an election at such other times as he may designate. Such election shall be made in such manner as the Secretary shall prescribe and shall be valid only if all persons who are shareholders in such corporation on the first day of the first taxable year for which such election is effective consent to such election. If a corporation makes an election under paragraph (1), then the provisions of this part shall apply to such corporation for the taxable year of the corporation for which made and for all succeeding taxable years and shall apply to each person who at any time is a shareholder of such corporation for all periods on or after the first day of the first taxable year of the corporation for which the election is effective. An election under this subsection made by any corporation may be terminated by revocation of such election for any taxable year of the corporation after the first taxable year of the corporation for which the election is effective. A termination under this paragraph shall be effective with respect to such election— for the taxable year in which made, if made at any time during the first 90 days of such taxable year, or for the taxable year following the taxable year in which made, if made after the close of such 90 days, and for all succeeding taxable years of the corporation. Such termination shall be made in such manner as the Secretary shall prescribe by regulations. If a corporation is not a DISC for each of any 5 consecutive taxable years of the corporation for which an election under this subsection is effective, the election shall be terminated and not be in effect for any taxable year of the corporation after such 5th year.

(c) Distributions to meet qualification requirements Subject to the conditions provided by paragraph (2), a corporation which for a taxable year does not satisfy a condition specified in paragraph (1)(A) (relating to gross receipts) or (1)(B) (relating to assets) of subsection (a) shall nevertheless be deemed to satisfy such condition for such year if it makes a pro rata distribution of property after the close of the taxable year to its shareholders (designated at the time of such distribution as a distribution to meet qualification requirements) with respect to their stock in an amount which is equal to— if the condition of subsection (a)(1)(A) is not satisfied, the portion of such corporation’s taxable income attributable to its gross receipts which are not qualified export receipts for such year, if the condition of subsection (a)(1)(B) is not satisfied, the fair market value of those assets which are not qualified export assets on the last day of such taxable year, or if neither of such conditions is satisfied, the sum of the amounts required by subparagraphs (A) and (B). The conditions under paragraph (1) shall be deemed satisfied in the case of a distribution made under such paragraph— if the failure to meet the requirements of subsection (a)(1)(A) or (B), and the failure to make such distribution prior to the date on which made, are due to reasonable cause; and the corporation pays, within the 30–day period beginning with the day on which such distribution is made, to the Secretary, if such corporation makes such distribution after the 15th day of the 9th month after the close of the taxable year, an amount determined by multiplying (i) the amount equal to 4½ percent of such distribution, by (ii) the number of its taxable years which begin after the taxable year with respect to which such distribution is made and before such distribution is made. For purposes of this title, any payment made pursuant to this paragraph shall be treated as interest. A distribution made on or before the 15th day of the 9th month after the close of the taxable year shall be deemed for reasonable cause for purposes of paragraph (2)(A) if— at least 70 percent of the gross receipts of such corporation for such taxable year consist of qualified export receipts, and the adjusted basis of the qualified export assets held by the corporation on the last day of each month of the taxable year equals or exceeds 70 percent of the sum of the adjusted basis of all assets held by the corporation on such day.

(d) Ineligible corporations The following corporations shall not be eligible to be treated as a DISC— a corporation exempt from tax by reason of section 501, a personal holding company (as defined in section 542), a financial institution to which section 581 applies, an insurance company subject to the tax imposed by subchapter L, a regulated investment company (as defined in section 851(a)), or an S corporation.

(e) Coordination with personal holding company provisions in case of certain produced film rents If— a corporation (hereinafter in this subsection referred to as “subsidiary”) was established to take advantage of the provisions of this part, and a second corporation (hereinafter in this subsection referred to as “parent”) throughout the taxable year owns directly at least 80 percent of the stock of the subsidiary, then, for purposes of applying subsection (d)(2) and section 541 (relating to personal holding company tax) to the subsidiary for the taxable year, there shall be taken into account under section 543(a)(5) (relating to produced film rents) any interest in a film acquired by the parent and transferred to the subsidiary as if such interest were acquired by the subsidiary at the time it was acquired by the parent.

§ 993 Definitions and special rules

(a) Qualified export receipts For purposes of this part, except as provided by regulations under paragraph (2), the qualified export receipts of a corporation are— gross receipts from the sale, exchange, or other disposition of export property, gross receipts from the lease or rental of export property, which is used by the lessee of such property outside the United States, gross receipts for services which are related and subsidiary to any qualified sale, exchange, lease, rental, or other disposition of export property by such corporation, gross receipts from the sale, exchange, or other disposition of qualified export assets (other than export property), dividends (or amounts includible in gross income under section 951) with respect to stock of a related foreign export corporation (as defined in subsection (e)), interest on any obligation which is a qualified export asset, gross receipts for engineering or architectural services for construction projects located (or proposed for location) outside the United States, and gross receipts for the performance of managerial services in furtherance of the production of other qualified export receipts of a DISC. The Secretary may under regulations designate receipts from the sale, exchange, lease, rental, or other disposition of export property, and from services, as not being receipts described in paragraph (1) if he determines that such sale, exchange, lease, rental, or other disposition, or furnishing of services— is for ultimate use in the United States; is accomplished by a subsidy granted by the United States or any instrumentality thereof; is for use by the United States or any instrumentality thereof where the use of such export property or services is required by law or regulation. For purposes of this part, the term “qualified export receipts” does not include receipts from a corporation which is a DISC for its taxable year in which the receipts arise and which is a member of a controlled group (as defined in paragraph (3)) which includes the recipient corporation. For purposes of this part, the term “controlled group” has the meaning assigned to the term “controlled group of corporations” by section 1563(a), except that the phrase “more than 50 percent” shall be substituted for the phrase “at least 80 percent” each place it appears therein, and section 1563(b) shall not apply.

(b) Qualified export assets For purposes of this part, the qualified export assets of a corporation are— export property (as defined in subsection (c)); assets used primarily in connection with the sale, lease, rental, storage, handling, transportation, packaging, assembly, or servicing of export property, or the performance of engineering or architectural services described in subparagraph (G) of subsection (a)(1) or managerial services in furtherance of the production of qualified export receipts described in subparagraphs (A), (B), (C), and (G) of subsection (a)(1); accounts receivable and evidences of indebtedness which arise by reason of transactions of such corporation or of another corporation which is a DISC and which is a member of a controlled group which includes such corporation described in subparagraph (A), (B), (C), (D), (G), or (H), of subsection (a)(1); money, bank deposits, and other similar temporary investments, which are reasonably necessary to meet the working capital requirements of such corporation; obligations arising in connection with a producer’s loan (as defined in subsection (d)); stock or securities of a related foreign export corporation (as defined in subsection (e)); obligations issued, guaranteed, or insured, in whole or in part, by the Export-Import Bank of the United States or the Foreign Credit Insurance Association in those cases where such obligations are acquired from such Bank or Association or from the seller or purchaser of the goods or services with respect to which such obligations arose; obligations issued by a domestic corporation organized solely for the purpose of financing sales of export property pursuant to an agreement with the Export-Import Bank of the United States under which such corporation makes export loans guaranteed by such bank; and amounts (other than reasonable working capital) on deposit in the United States that are utilized during the period provided for in, and otherwise in accordance with, regulations prescribed by the Secretary to acquire other qualified export assets.

(c) Export property For purposes of this part, the term “export property” means property— manufactured, produced, grown, or extracted in the United States by a person other than a DISC, held primarily for sale, lease, or rental, in the ordinary course of trade or business, by, or to, a DISC, for direct use, consumption, or disposition outside the United States, and not more than 50 percent of the fair market value of which is attributable to articles imported into the United States. In applying subparagraph (C), the fair market value of any article imported into the United States shall be its appraised value, as determined by the Secretary under section 402 of the Tariff Act of 1930 ( 19 U.S.C. 1401a ) in connection with its importation. For purposes of this part, the term “export property” does not include— property leased or rented by a DISC for use by any member of a controlled group (as defined in subsection (a)(3)) which includes the DISC, patents, inventions, models, designs, formulas, or processes, whether or not patented, copyrights (other than films, tapes, records, or similar reproductions, for commercial or home use), goodwill, trademarks, trade brands, franchises, or other like property, products of a character with respect to which a deduction for depletion is allowable (including oil, gas, coal, or uranium products) under section 613 or 613A, products the export of which is prohibited or curtailed under section 7(a) 1 of the Export Administration Act of 1979 to effectuate the policy set forth in paragraph (2)(C) of section 3 1 of such Act (relating to the protection of the domestic economy), or any unprocessed timber which is a softwood. Subparagraph (C) shall not apply to any commodity or product at least 50 percent of the fair market value of which is attributable to manufacturing or processing, except that subparagraph (C) shall apply to any primary product from oil, gas, coal, or uranium. For purposes of the preceding sentence, the term “processing” does not include extracting or handling, packing, packaging, grading, storing, or transporting. For purposes of subparagraph (E), the term “unprocessed timber” means any log, cant, or similar form of timber. If the President determines that the supply of any property described in paragraph (1) is insufficient to meet the requirements of the domestic economy, he may by Executive order designate the property as in short supply. Any property so designated shall be treated as property not described in paragraph (1) during the period beginning with the date specified in the Executive order and ending with the date specified in an Executive order setting forth the President’s determination that the property is no longer in short supply.

(d) Producer’s loans An obligation, subject to the rules provided in paragraphs (2) and (3), shall be treated as arising out of a producer’s loan if— the loan, when added to the unpaid balance of all other producer’s loans made by the DISC, does not exceed the accumulated DISC income at the beginning of the month in which the loan is made; the obligation is evidenced by a note (or other evidence of indebtedness) with a stated maturity date not more than 5 years from the date of the loan; the loan is made to a person engaged in the United States in the manufacturing, production, growing, or extraction of export property determined without regard to subparagraph (C) or (D) of subsection (c)(2), (referred to hereinafter as the “borrower”); and at the time of such loan it is designated as a producer’s loan. An obligation shall be treated as arising out of a producer’s loan only to the extent that such loan, when added to the unpaid balance of all other producer’s loans to the borrower outstanding at the time such loan is made, does not exceed an amount determined by multiplying the sum of— the amount of the borrower’s adjusted basis determined at the beginning of the borrower’s taxable year in which the loan is made, in plant, machinery, and equipment, and supporting production facilities in the United States; the amount of the borrower’s property held primarily for sale, lease, or rental, to customers in the ordinary course of trade or business, at the beginning of such taxable year; and the aggregate amount of the borrower’s research and experimental expenditures (within the meaning of section 174) in the United States during all preceding taxable years beginning after December 31, 1971 , by the percentage which the borrower’s receipts, during the 3 taxable years immediately preceding the taxable year (but not including any taxable year commencing prior to 1972) in which the loan is made, from the sale, lease, or rental outside the United States of property which would be export property (determined without regard to subparagraph (C) or (D) of subsection (c)(2)) if held by a DISC is of the gross receipts during such 3 taxable years from the sale, lease, or rental of property held by such borrower primarily for sale, lease, or rental to customers in the ordinary course of the trade or business of such borrower. An obligation shall be treated as arising out of a producer’s loan in a taxable year only to the extent that such loan, when added to the unpaid balance of all other producer’s loans to the borrower made during such taxable year, does not exceed an amount equal to— the amount by which the sum of the adjusted basis of assets described in paragraph (2)(A) and (B) on the last day of the taxable year in which the loan is made exceeds the sum of the adjusted basis of such assets on the first day of such taxable year; plus the aggregate amount of the borrower’s research and experimental expenditures (within the meaning of section 174) in the United States during such taxable year. In the case of a borrower who is a domestic film maker and who incurs an obligation to a DISC for the making of a film, and such DISC is engaged in the trade or business of selling, leasing, or renting films which are export property, the limitation described in paragraph (2) may be determined (to the extent provided under regulations prescribed by the Secretary) on the basis of— the sum of the amounts described in subparagraphs (A), (B), and (C) thereof plus reasonable estimates of all such amounts to be incurred at any time by the borrower with respect to films which are commenced within the taxable year in which the loan is made, and the percentage which, based on the experience of producers of similar films, the annual receipts of such producers from the sale, lease, or rental of such films outside the United States is of the annual gross receipts of such producers from the sale, lease, or rental of such films. For purposes of this paragraph, a borrower is a domestic film maker with respect to a film if— such borrower is a United States person within the meaning of section 7701(a)(30), except that with respect to a partnership, all of the partners must be United States persons, and with respect to a corporation, all of its officers and at least a majority of its directors must be United States persons; such borrower is engaged in the trade or business of making the film with respect to which the loan is made; the studio, if any, used or to be used for the taking of photographs and the recording of sound incorporated into such film is located in the United States; the aggregate playing time of portions of such film photographed outside the United States does not or will not exceed 20 percent of the playing time of such film; and not less than 80 percent of the total amount paid or to be paid for services performed in the making of such film is paid or to be paid to persons who are United States persons at the time such services are performed or consists of amounts which are fully taxable by the United States. For purposes of clause (v) of subparagraph (B)— there shall not be taken into account any amount which is contingent upon receipts or profits of the film and which is fully taxable by the United States (within the meaning of clause (ii)); and any amount paid or to be paid to a United States person, to a non-resident alien individual, or to a corporation which furnishes the services of an officer or employee to the borrower with respect to the making of a film, shall be treated as fully taxable by the United States only if the total amount received by such person, individual, officer, or employee for services performed in the making of such film is fully included in gross income for purposes of this chapter.

(e) Related foreign export corporation In determining whether a corporation (hereinafter in this subsection referred to as “the domestic corporation”) is a DISC— A foreign corporation is a related foreign export corporation if— stock possessing more than 50 percent of the total combined voting power of all classes of stock entitled to vote is owned directly by the domestic corporation, 95 percent or more of such foreign corporation’s gross receipts for its taxable year ending with or within the taxable year of the domestic corporation consists of qualified export receipts described in subparagraphs (A), (B), (C), and (D) of subsection (a)(1) and interest on any obligation described in paragraphs (3) and (4) of subsection (b), and the adjusted basis of the qualified export assets (described in paragraphs (1), (2), (3), and (4) of subsection (b)) held by such foreign corporation at the close of such taxable year equals or exceeds 95 percent of the sum of the adjusted basis of all assets held by it at the close of such taxable year. A foreign corporation is a related foreign export corporation if— stock possessing more than 50 percent of the total combined voting power of all classes of stock entitled to vote is owned directly by the domestic corporation, and its exclusive function is to hold real property for the exclusive use (under a lease or otherwise) of the domestic corporation. A foreign corporation is a related foreign export corporation if— less than 10 percent of the total combined voting power of all classes of stock entitled to vote of such foreign corporation is owned (within the meaning of section 1563 (d) and (e)) by the domestic corporation or by a controlled group of corporations (within the meaning of section 1563) of which the domestic corporation is a member, and the ownership of stock or securities in such foreign corporation by the domestic corporation is determined (under regulations prescribed by the Secretary) to be reasonably in furtherance of a transaction or transactions giving rise to qualified export receipts of the domestic corporation.

(f) Gross receipts For purposes of this part, the term “gross receipts” means the total receipts from the sale, lease, or rental of property held primarily for sale, lease, or rental in the ordinary course of trade or business, and gross income from all other sources. In the case of commissions on the sale, lease, or rental of property, the amount taken into account for purposes of this part as gross receipts shall be the gross receipts on the sale, lease, or rental of the property on which such commissions arose.

(g) United States defined For purposes of this part, the term “United States” includes the Commonwealth of Puerto Rico and the possessions of the United States.

§ 994 Inter-company pricing rules

(a) In general In the case of a sale of export property to a DISC by a person described in section 482, the taxable income of such DISC and such person shall be based upon a transfer price which would allow such DISC to derive taxable income attributable to such sale (regardless of the sales price actually charged) in an amount which does not exceed the greatest of— 4 percent of the qualified export receipts on the sale of such property by the DISC plus 10 percent of the export promotion expenses of such DISC attributable to such receipts, 50 percent of the combined taxable income of such DISC and such person which is attributable to the qualified export receipts on such property derived as the result of a sale by the DISC plus 10 percent of the export promotion expenses of such DISC attributable to such receipts, or taxable income based upon the sale price actually charged (but subject to the rules provided in section 482).

(b) Rules for commissions, rentals, and marginal costing The Secretary shall prescribe regulations setting forth— rules which are consistent with the rules set forth in subsection (a) for the application of this section in the case of commissions, rentals, and other income, and rules for the allocation of expenditures in computing combined taxable income under subsection (a)(2) in those cases where a DISC is seeking to establish or maintain a market for export property.

(c) Export promotion expenses For purposes of this section, the term “export promotion expenses” means those expenses incurred to advance the distribution or sale of export property for use, consumption, or distribution outside of the United States, but does not include income taxes. Such expenses shall also include freight expenses to the extent of 50 percent of the cost of shipping export property aboard airplanes owned and operated by United States persons or ships documented under the laws of the United States in those cases where law or regulations does not require that such property be shipped aboard such airplanes or ships.

§ 995 Taxation of DISC income to shareholders

(a) General rule A shareholder of a DISC or former DISC shall be subject to taxation on the earnings and profits of a DISC as provided in this chapter, but subject to the modifications of this subpart.

(b) Deemed distributions A shareholder of a DISC shall be treated as having received a distribution taxable as a dividend with respect to his stock in an amount which is equal to his pro rata share of the sum (or, if smaller, the earnings and profits for the taxable year) of— the gross interest derived during the taxable year from producer’s loans, the gain recognized by the DISC during the taxable year on the sale or exchange of property, other than property which in the hands of the DISC is a qualified export asset, previously transferred to it in a transaction in which gain was not recognized in whole or in part, but only to the extent that the transferor’s gain on the previous transfer was not recognized, the gain (other than the gain described in subparagraph (B)) recognized by the DISC during the taxable year on the sale or exchange of property (other than property which in the hands of the DISC is stock in trade or other property described in section 1221(a)(1)) previously transferred to it in a transaction in which gain was not recognized in whole or in part, but only to the extent that the transferor’s gain on the previous transfer was not recognized and would have been treated as ordinary income if the property had been sold or exchanged rather than transferred to the DISC, 50 percent of the taxable income of the DISC for the taxable year attributable to military property, the taxable income of the DISC attributable to qualified export receipts of the DISC for the taxable year which exceed $10,000,000, the sum of— in the case of a shareholder which is a C corporation, one-seventeenth of the excess of the taxable income of the DISC for the taxable year, before reduction for any distributions during the year, over the sum of the amounts deemed distributed for the taxable year under subparagraphs (A), (B), (C), (D), and (E), an amount equal to 16 ⁄ 17 of the excess referred to in clause (i), multiplied by the international boycott factor determined under section 999, and any illegal bribe, kickback, or other payment (within the meaning of section 162(c)) paid by or on behalf of the DISC directly or indirectly to an official, employee, or agent in fact of a government, and the amount of foreign investment attributable to producer’s loans (as defined in subsection (d)) of a DISC for the taxable year. Distributions described in this paragraph shall be deemed to be received on the last day of the taxable year of the DISC in which the income was derived. In the case of a distribution described in subparagraph (G), earnings and profits for the taxable year shall include accumulated earnings and profits. A shareholder of a corporation which revoked its election to be treated as a DISC or failed to satisfy the conditions of section 992(a)(1) for a taxable year shall be deemed to have received (at the time specified in subparagraph (B)) a distribution taxable as a dividend equal to his pro rata share of the DISC income of such corporation accumulated during the immediately preceding consecutive taxable years for which the corporation was a DISC. Distributions described in subparagraph (A) shall be deemed to be received in equal installments on the last day of each of the 10 taxable years of the corporation following the year of the termination or disqualification described in subparagraph (A) (but in no case over more than twice the number of immediately preceding consecutive taxable years during which the corporation was a DISC). For purposes of paragraph (1)(D), taxable income of a DISC for the taxable year attributable to military property shall be determined by only taking into account— the gross income of the DISC for the taxable year which is attributable to military property, and the deductions which are properly apportioned or allocated to such income. For purposes of subparagraph (A), the term “military property” means any property which is an arm, ammunition, or implement of war designated in the munitions list published pursuant to section 38 of the Arms Export Control Act ( 22 U.S.C. 2778 ). For purposes of applying paragraph (1)(E), all DISC’s which are members of the same controlled group shall be treated as a single corporation. The dollar amount under paragraph (1)(E) shall be allocated among the DISC’s which are members of the same controlled group in a manner provided in regulations prescribed by the Secretary.

(c) Gain on disposition of stock in a DISC If— a shareholder disposes of stock in a DISC or former DISC any gain recognized on such disposition shall be included in gross income as a dividend to the extent provided in paragraph (2), or stock of a DISC or former DISC is disposed of in a transaction in which the separate corporate existence of the DISC or former DISC is terminated other than by a mere change in place of organization, however effected, any gain realized on the disposition of such stock in the transaction shall be recognized notwithstanding any other provision of this title to the extent provided in paragraph (2) and to the extent so recognized shall be included in gross income as a dividend. The amounts described in paragraph (1) shall be included in gross income as a dividend to the extent of the accumulated DISC income of the DISC or former DISC which is attributable to the stock disposed of and which was accumulated in taxable years of such corporation during the period or periods the stock disposed of was held by the shareholder which disposed of such stock.

(d) Foreign investment attributable to DISC earnings For the purposes of this part— The amount of foreign investment attributable to producer’s loans of a DISC for a taxable year shall be the smallest of— the net increase in foreign assets by members of the controlled group (as defined in section 993(a)(3)) which includes the DISC, the actual foreign investment by domestic members of such group, or the amount of outstanding producer’s loans by such DISC to members of such controlled group. The term “net increase in foreign assets” of a controlled group means the excess of— the amount incurred by such group to acquire assets (described in section 1231(b)) located outside the United States over, the sum of— the depreciation with respect to assets of such group located outside the United States; the outstanding amount of stock or debt obligations of such group issued after December 31, 1971 , to persons other than the United States persons or any member of such group; one-half the earnings and profits of foreign members of such group and foreign branches of domestic members of such group; one-half the royalties and fees paid by foreign members of such group to domestic members of such group; and the uncommitted transitional funds of the group as determined under paragraph (4). For purposes of this paragraph, assets which are qualified export assets of a DISC (or would be qualified export assets if owned by a DISC) shall not be taken into account. Amounts described in this paragraph (other than in subparagraphs (B)(ii) and (v)) shall be taken into account only to the extent they are attributable to taxable years beginning after December 31, 1971 . The term “actual foreign investment” by domestic members of a controlled group means the sum of— contributions to capital of foreign members of the group by domestic members of the group after December 31, 1971 , the outstanding amount of stock or debt obligations of foreign members of such group (other than normal trade indebtedness) issued after December 31, 1971 , to domestic members of such group, amounts transferred by domestic members of the group after December 31, 1971 , to foreign branches of such members, and one-half the earnings and profits of foreign members of such group and foreign branches of domestic members of such group for taxable years beginning after December 31, 1971 . As used in this subsection, the term “domestic member” means a domestic corporation which is a member of a controlled group (as defined in section 993(a)(3)), and the term “foreign member” means a foreign corporation which is a member of such a controlled group. The uncommitted transitional funds of the group shall be an amount equal to the sum of— the excess of— the amount of stock or debt obligations of domestic members of such group outstanding on December 31, 1971 , and issued on or after January 1, 1968 , to persons other than United States persons or any members of such group, but only to the extent the taxpayer establishes that such amount constitutes a long-term borrowing for purposes of the foreign direct investment program, over the net amount of actual foreign investment by domestic members of such group during the period that such stock or debt obligations have been outstanding; and the amount of liquid assets to the extent not included in subparagraph (A) held by foreign members of such group and foreign branches of domestic members of such group on October 31, 1971 , in excess of their reasonable working capital needs on such date. For purposes of this paragraph, the term “liquid assets” means money, bank deposits (not including time deposits), and indebtedness of 2 years or less to maturity on the date of acquisition; and the actual foreign investment shall be determined under paragraph (3) without regard to the date in subparagraph (A) of such paragraph and without regard to subparagraph (D) of such paragraph. Under regulations prescribed by the Secretary the determinations under this subsection shall be made on a cumulative basis with proper adjustments for amounts previously taken into account.

(e) Certain transfers of DISC assets If— a corporation owns, directly or indirectly, all of the stock of a subsidiary and a DISC, the subsidiary has been engaged in the active conduct of a trade or business (within the meaning of section 355(b)) throughout the 5–year period ending on the date of the transfer and continues to be so engaged thereafter, and during the taxable year of the subsidiary in which its stock is transferred and its preceding taxable year, such trade or business gives rise to qualified export receipts of the subsidiary and the DISC, then, under such terms and conditions as the Secretary by regulations shall prescribe, transfers of assets, stock, or both, will be deemed to be a reorganization within the meaning of section 368, a transaction to which section 355 applies, an exchange of stock to which section 351 applies, or a combination thereof. The preceding sentence shall apply only to the extent that the transfer or transfers involved are for the purpose of preventing the separation of the ownership of the stock in the DISC from the ownership of the trade or business which (during the base period) produced the export gross receipts of the DISC.

(f) Interest on DISC-related deferred tax liability A shareholder of a DISC shall pay for each taxable year interest in an amount equal to the product of— the shareholder’s DISC-related deferred tax liability for such year, and the base period T-bill rate. For purposes of this subsection— The term “shareholder’s DISC-related deferred tax liability” means, with respect to any taxable year of a shareholder of a DISC, the excess of— the amount which would be the tax liability of the shareholder for the taxable year if the deferred DISC income of such shareholder for such taxable year were included in gross income as ordinary income, over the actual amount of the tax liability of such shareholder for such taxable year. Determinations under the preceding sentence shall be made without regard to carrybacks to such taxable year. The Secretary shall prescribe regulations which provide such adjustments— to the accounts of the DISC, and to the amount of any carryover or carryback of the shareholder, as may be necessary or appropriate in the case of net operating losses, credits, and carryovers, and carrybacks of losses and credits. The term “tax liability” means the amount of the tax imposed by this chapter for the taxable year reduced by credits allowable against such tax (other than credits allowable under sections 31, 32, and 34). For purposes of this subsection— The term “deferred DISC income” means, with respect to any taxable year of a shareholder, the excess of— the shareholder’s pro rata share of accumulated DISC income (for periods after 1984) of the DISC as of the close of the computation year, over the amount of the distributions-in-excess-of-income for the taxable year of the DISC following the computation year. For purposes of applying subparagraph (A) with respect to any taxable year of a shareholder, the computation year is the taxable year of the DISC which ends with (or within) the taxable year of the shareholder which precedes the taxable year of the shareholder for which the amount of deferred DISC income is being determined. For purposes of subparagraph (A), the term “distributions-in-excess-of-income” means, with respect to any taxable year of a DISC, the excess (if any) of— the amount of actual distributions to the shareholder out of accumulated DISC income, over the shareholder’s pro rata share of the DISC income for such taxable year. For purposes of this subsection, the term “base period T-bill rate” means the annual rate of interest determined by the Secretary to be equivalent to the average of the 1-year constant maturity Treasury yields, as published by the Board of Governors of the Federal Reserve System, for the 1-year period ending on September 30 of the calendar year ending with (or of the most recent calendar year ending before) the close of the taxable year of the shareholder. The Secretary shall prescribe such regulations as may be necessary for the application of this subsection to short years of the DISC, the shareholder, or both. The interest accrued during any taxable year which a shareholder is required to pay under paragraph (1) shall be treated, for purposes of this title, as interest payable under section 6601 and shall be paid by the shareholder at the time the tax imposed by this chapter for such taxable year is required to be paid. For purposes of this subsection, the term “DISC” includes a former DISC.

(g) Treatment of tax-exempt shareholders If any organization described in subsection (a)(2) or (b)(2) of section 511 (or any other person otherwise subject to tax under section 511) is a shareholder in a DISC— any amount deemed distributed to such shareholder under subsection (b), any actual distribution to such shareholder which under section 996 is treated as out of accumulated DISC income, and any gain which is treated as a dividend under subsection (c), shall be treated as derived from the conduct of an unrelated trade or business (and the modifications of section 512(b) shall not apply). The rules of the preceding sentence shall apply also for purposes of determining any such shareholder’s DISC-related deferred tax liability under subsection (f).

§ 996 Rules for allocation in the case of distributions and losses

(a) Rules for actual distributions and certain deemed distributions Any actual distribution (other than a distribution described in paragraph (2) or to which section 995(c) applies) to a shareholder by a DISC (or former DISC) which is made out of earnings and profits shall be treated as made— first, out of previously taxed income, to the extent thereof, second, out of accumulated DISC income, to the extent thereof, and finally, out of other earnings and profits. Any actual distribution made pursuant to section 992(c) (relating to distributions to meet qualification requirements), and any deemed distribution pursuant to section 995(b)(1)(G) (relating to foreign investment attributable to producer’s loans), shall be treated as made— first, out of accumulated DISC income, to the extent thereof, second, out of the earnings and profits described in paragraph (1)(C), to the extent thereof, and finally, out of previously taxed income. In the case of any amount of any actual distribution to a C corporation made pursuant to section 992(c) which is required to satisfy the condition of section 992(a)(1)(A), the preceding sentence shall apply to 16/17ths of such amount and paragraph (1) shall apply to the remaining 1/17th of such amount. Amounts distributed out of previously taxed income shall be excluded by the distributee from gross income except for gains described in subsection (e)(2), and shall reduce the amount of the previously taxed income.

(b) Ordering rules for losses If for any taxable year a DISC, or a former DISC, incurs a deficit in earnings and profits, such deficit shall be chargeable— first, to earnings and profits described in subsection (a)(1)(C), to the extent thereof, second, to accumulated DISC income, to the extent thereof, and finally, to previously taxed income, except that a deficit in earnings and profits shall not be applied against accumulated DISC income which has been determined is to be deemed distributed to the shareholders (pursuant to section 995(b)(2)(A)) as a result of a revocation of election or other disqualification.

(c) Priority of distributions Any actual distribution made during a taxable year shall be treated as being made subsequent to any deemed distribution made during such year. Any actual distribution made pursuant to section 992(c) (relating to distributions to meet qualification requirements) shall be treated as being made before any other actual distributions during the taxable year.

(d) Subsequent effect of previous disposition of DISC stock If— gain with respect to a share of stock of a DISC or former DISC is treated under section 995(c) as a dividend or as ordinary income, and any person subsequently receives an actual distribution made out of accumulated DISC income, or a deemed distribution made pursuant to section 995(b)(2), with respect to such share, such person shall treat such distribution in the same manner as a distribution from previously taxed income to the extent that (i) the gain referred to in subparagraph (A), exceeds (ii) any other amounts with respect to such share which were treated under this paragraph as made from previously taxed income. In applying this paragraph with respect to a share of stock in a DISC or former DISC, gain on the acquisition of such share by the DISC or former DISC or gain on a transaction prior to such acquisition shall not be considered gain referred to in subparagraph (A). If section 995(c) applies to a redemption of stock in a DISC or former DISC, the accumulated DISC income shall be reduced by an amount equal to the gain described in section 995(c) with respect to such stock which is (or has been) treated as ordinary income, except to the extent distributions with respect to such stock have been treated under paragraph (1).

(e) Adjustment to basis Amounts representing deemed distributions as provided in section 995(b) shall increase the basis of the stock with respect to which the distribution is made. The portion of an actual distribution made out of previously taxed income shall reduce the basis of the stock with respect to which it is made, and to the extent that it exceeds the adjusted basis of such stock, shall be treated as gain from the sale or exchange of property. In the case of stock includible in the gross estate of a decedent for which an election is made under section 2032 (relating to alternate valuation), this paragraph shall not apply to any distribution made after the date of the decedent’s death and before the alternate valuation date provided by section 2032.

(f) Definition of divisions of earnings and profits For purposes of this part: The earnings and profits derived by a corporation during a taxable year in which such corporation is a DISC, before reduction for any distributions during the year, but reduced by amounts deemed distributed under section 995(b)(1), shall constitute the DISC income for such year. The earnings and profits of a DISC for a taxable year include any amounts includible in such DISC’s gross income pursuant to section 951(a) for such year. Accumulated DISC income shall be reduced by deemed distributions under section 995(b)(2). Earnings and profits deemed distributed under section 995(b) for a taxable year shall constitute previously taxed income for such year. The earnings and profits for a taxable year which are described in neither paragraph (1) nor (2) shall constitute the other earnings and profits for such year.

(g) Effectively connected income In the case of a shareholder who is a nonresident alien individual or a foreign corporation, trust, or estate, gains referred to in section 995(c) and all distributions out of accumulated DISC income including deemed distributions shall be treated as gains and distributions which are effectively connected with the conduct of a trade or business conducted through a permanent establishment of such shareholder within the United States and which are derived from sources within the United States.

§ 997 Special subchapter C rules

For purposes of applying the provisions of subchapter C of chapter 1, any distribution in property to a corporation by a DISC or former DISC which is made out of previously taxed income or accumulated DISC income shall— be treated as a distribution in the same amount as if such distribution of property were made to an individual, and have a basis, in the hands of the recipient corporation, equal to the amount determined under paragraph (1). (Added Pub. L. 92–178, title V, § 501 , Dec. 10, 1971 , 85 Stat. 549 .)

§ 999 Reports by taxpayers; determinations

(a) International boycott reports by taxpayers If any person, or a member of a controlled group (within the meaning of section 993(a)(3)) which includes that person, has operations in, or related to— a country (or with the government, a company, or a national of a country) which is on the list maintained by the Secretary under paragraph (3), or any other country (or with the government, a company, or a national of that country) in which such person or such member had operations during the taxable year if such person (or, if such person is a foreign corporation, any United States shareholder of that corporation) knows or has reason to know that participation in or co-operation with an international boycott is required as a condition of doing business within such country or with such government, company, or national, that person or shareholder (within the meaning of section 951(b)) shall report such operations to the Secretary at such time and in such manner as the Secretary prescribes, except that in the case of a foreign corporation such report shall be required only of a United States shareholder (within the meaning of such section) of such corporation. A taxpayer shall report whether he, a foreign corporation of which he is a United States shareholder, or any member of a controlled group which includes the taxpayer or such foreign corporation has participated in or cooperated with an international boycott at any time during the taxable year, or has been requested to participate in or cooperate with such a boycott, and, if so, the nature of any operation in connection with which there was participation in or cooperation with such boycott (or there was a request to participate or cooperate). The Secretary shall maintain and publish not less frequently than quarterly a current list of countries which require or may require participation in or cooperation with an international boycott (within the meaning of subsection (b)(3)).

(b) Participation in or cooperation with an international boycott If the person or a member of a controlled group (within the meaning of section 993(a)(3)) which includes the person participates in or cooperates with an international boycott in the taxable year, all operations of the taxpayer or such group in that country and in any other country which requires participation in or cooperation with the boycott as a condition of doing business within that country, or with the government, a company, or a national of that country, shall be treated as operations in connection with which such participation or cooperation occurred, except to the extent that the person can clearly demonstrate that a particular operation is a clearly separate and identifiable operation in connection with which there was no participation in or cooperation with an international boycott. A clearly separate and identifiable operation of a person, or of a member of the controlled group (within the meaning of section 993(a)(3)) which includes that person, in or related to any country within the group of countries referred to in paragraph (1) shall not be treated as an operation in or related to a group of countries associated in carrying out an international boycott if the person can clearly demonstrate that he, or that such member, did not participate in or cooperate with the international boycott in connection with that operation. A taxpayer may show that different operations within the same country, or operations in different countries, are clearly separate and identifiable operations. For purposes of this section, a person participates in or cooperates with an international boycott if he agrees— as a condition of doing business directly or indirectly within a country or with the government, a company, or a national of a country— to refrain from doing business with or in a country which is the object of the boycott or with the government, companies, or nationals of that country; to refrain from doing business with any United States person engaged in trade in a country which is the object of the boycott or with the government, companies, or nationals of that country; to refrain from doing business with any company whose ownership or management is made up, all or in part, of individuals of a particular nationality, race, or religion, or to remove (or refrain from selecting) corporate directors who are individuals of a particular nationality, race, or religion; or to refrain from employing individuals of a particular nationality, race, or religion; or as a condition of the sale of a product to the government, a company, or a national of a country, to refrain from shipping or insuring that product on a carrier owned, leased, or operated by a person who does not participate in or cooperate with an international boycott (within the meaning of subparagraph (A)). This section shall not apply to any agreement by a person (or such member)— to meet requirements imposed by a foreign country with respect to an international boycott if United States law or regulations, or an Executive Order, sanctions participation in, or cooperation with, that international boycott, to comply with a prohibition on the importation of goods produced in whole or in part in any country which is the object of an international boycott, or to comply with a prohibition imposed by a country on the exportation of products obtained in such country to any country which is the object of an international boycott.

(c) International boycott factor For purposes of sections 908(a), 952(a)(3), and 995(b)(1)(F)(ii), the international boycott factor is a fraction, determined under regulations prescribed by the Secretary, the numerator of which reflects the world-wide operations of a person (or, in the case of a controlled group (within the meaning of section 993(a)(3)) which includes that person, of the group) which are operations in or related to a group of countries associated in carrying out an international boycott in or with which that person or a member of that controlled group has participated or cooperated in the taxable year, and the denominator of which reflects the world-wide operations of that person or group. If the taxpayer clearly demonstrates that the foreign taxes paid and income earned for the taxable year are attributable to specific operations, then, in lieu of applying the international boycott factor for such taxable year, the amount of the credit disallowed under section 908(a), the addition to subpart F income under section 952(a)(3), and the amount of deemed distribution under section 995(b)(1)(F)(ii) for the taxable year, if any, shall be the amount specifically attributable to the operations in which there was participation in or cooperation with an international boycott under section 999(b)(1). For purposes of this subsection, the term “world-wide operations” means operations in or related to countries other than the United States.

(d) Determination with respect to particular operations Upon a request made by the taxpayer, the Secretary shall issue a determination with respect to whether a particular operation of a person, or of a member of a controlled group which includes that person, constitutes participation in or cooperation with an international boycott. The Secretary may issue such a determination in advance of such operation in cases which are of such a nature that an advance determination is possible and appropriate under the circumstances. If the request is made before the operation is commenced, or before the end of a taxable year in which the operation is carried out, the Secretary may decline to issue such a determination before close of the taxable year.

(e) Participation or cooperation by related persons If a person controls (within the meaning of section 304(c)) a corporation— participation in or cooperation with an international boycott by such corporation shall be presumed to be such participation or cooperation by such person, and participation in or cooperation with such a boycott by such person shall be presumed to be such participation or cooperation by such corporation.

(f) Willful failure to report Any person (within the meaning of section 6671(b)) required to report under this section who willfully fails to make such report shall, in addition to other penalties provided by law, be fined not more than $25,000, imprisoned for not more than one year, or both.

[§ 1000 Reserved]

§ 1001 Determination of amount of and recognition of gain or loss

(a) Computation of gain or loss The gain from the sale or other disposition of property shall be the excess of the amount realized therefrom over the adjusted basis provided in section 1011 for determining gain, and the loss shall be the excess of the adjusted basis provided in such section for determining loss over the amount realized.

(b) Amount realized The amount realized from the sale or other disposition of property shall be the sum of any money received plus the fair market value of the property (other than money) received. In determining the amount realized— there shall not be taken into account any amount received as reimbursement for real property taxes which are treated under section 164(d) as imposed on the purchaser, and there shall be taken into account amounts representing real property taxes which are treated under section 164(d) as imposed on the taxpayer if such taxes are to be paid by the purchaser.

(c) Recognition of gain or loss Except as otherwise provided in this subtitle, the entire amount of the gain or loss, determined under this section, on the sale or exchange of property shall be recognized.

(d) Installment sales Nothing in this section shall be construed to prevent (in the case of property sold under contract providing for payment in installments) the taxation of that portion of any installment payment representing gain or profit in the year in which such payment is received.

(e) Certain term interests In determining gain or loss from the sale or other disposition of a term interest in property, that portion of the adjusted basis of such interest which is determined pursuant to section 1014, 1015, or 1041 (to the extent that such adjusted basis is a portion of the entire adjusted basis of the property) shall be disregarded. For purposes of paragraph (1), the term “term interest in property” means— a life interest in property, an interest in property for a term of years, or an income interest in a trust. Paragraph (1) shall not apply to a sale or other disposition which is a part of a transaction in which the entire interest in property is transferred to any person or persons.

[§ 1002 Repealed. Pub. L. 94–455, title XIX, § 1901(b)(28)(B)(i), Oct. 4, 1976, 90 Stat. 1799]

§ 1011 Adjusted basis for determining gain or loss

(a) General rule The adjusted basis for determining the gain or loss from the sale or other disposition of property, whenever acquired, shall be the basis (determined under section 1012 or other applicable sections of this subchapter and subchapters C (relating to corporate distributions and adjustments), K (relating to partners and partnerships), and P (relating to capital gains and losses)), adjusted as provided in section 1016.

(b) Bargain sale to a charitable organization If a deduction is allowable under section 170 (relating to charitable contributions) by reason of a sale, then the adjusted basis for determining the gain from such sale shall be that portion of the adjusted basis which bears the same ratio to the adjusted basis as the amount realized bears to the fair market value of the property.

§ 1012 Basis of property—cost

(a) In general The basis of property shall be the cost of such property, except as otherwise provided in this subchapter and subchapters C (relating to corporate distributions and adjustments), K (relating to partners and partnerships), and P (relating to capital gains and losses).

(b) Special rule for apportioned real estate taxes The cost of real property shall not include any amount in respect of real property taxes which are treated under section 164(d) as imposed on the taxpayer.

(c) Determinations by account In the case of the sale, exchange, or other disposition of a specified security on or after the applicable date, the conventions prescribed by regulations under this section shall be applied on an account by account basis. Except as provided in subparagraph (B), any stock for which an average basis method is permissible under this section which is acquired before January 1, 2012 , shall be treated as a separate account from any such stock acquired on or after such date. If a regulated investment company described in subparagraph (A) elects to have this subparagraph apply with respect to one or more of its stockholders— subparagraph (A) shall not apply with respect to any stock in such regulated investment company held by such stockholders, and all stock in such regulated investment company which is held by such stockholders shall be treated as covered securities described in section 6045(g)(3) without regard to the date of the acquisition of such stock. A rule similar to the rule of the preceding sentence shall apply with respect to a broker holding such stock as a nominee. For purposes of this section, the terms “specified security” and “applicable date” shall have the meaning given such terms in section 6045(g).

(d) Average basis for stock acquired pursuant to a dividend reinvestment plan In the case of any stock acquired after December 31, 2011 , in connection with a dividend reinvestment plan, the basis of such stock while held as part of such plan shall be determined using one of the methods which may be used for determining the basis of stock in a regulated investment company. In the case of the transfer to another account of stock to which paragraph (1) applies, such stock shall have a cost basis in such other account equal to its basis in the dividend reinvestment plan immediately before such transfer (properly adjusted for any fees or other charges taken into account in connection with such transfer). Rules similar to the rules of subsection (c)(2) shall apply for purposes of this subsection. Notwithstanding paragraph (1), in the case of an election under rules similar to the rules of subsection (c)(2)(B) with respect to stock held in connection with a dividend reinvestment plan, the average basis method is permissible with respect to all such stock without regard to the date of the acquisition of such stock. For purposes of this subsection— The term “dividend reinvestment plan” means any arrangement under which dividends on any stock are reinvested in stock identical to the stock with respect to which the dividends are paid. Stock shall be treated as acquired in connection with a dividend reinvestment plan if such stock is acquired pursuant to such plan or if the dividends paid on such stock are subject to such plan.

§ 1013 Basis of property included in inventory

If the property should have been included in the last inventory, the basis shall be the last inventory value thereof. ( Aug. 16, 1954, ch. 736 , 68A Stat. 296 .)

§ 1014 Basis of property acquired from a decedent

(a) In general Except as otherwise provided in this section, the basis of property in the hands of a person acquiring the property from a decedent or to whom the property passed from a decedent shall, if not sold, exchanged, or otherwise disposed of before the decedent’s death by such person, be— the fair market value of the property at the date of the decedent’s death, in the case of an election under section 2032, its value at the applicable valuation date prescribed by such section, in the case of an election under section 2032A, its value determined under such section, or to the extent of the applicability of the exclusion described in section 2031(c), the basis in the hands of the decedent.

(b) Property acquired from the decedent For purposes of subsection (a), the following property shall be considered to have been acquired from or to have passed from the decedent: Property acquired by bequest, devise, or inheritance, or by the decedent’s estate from the decedent; Property transferred by the decedent during his lifetime in trust to pay the income for life to or on the order or direction of the decedent, with the right reserved to the decedent at all times before his death to revoke the trust; In the case of decedents dying after December 31, 1951 , property transferred by the decedent during his lifetime in trust to pay the income for life to or on the order or direction of the decedent with the right reserved to the decedent at all times before his death to make any change in the enjoyment thereof through the exercise of a power to alter, amend, or terminate the trust; Property passing without full and adequate consideration under a general power of appointment exercised by the decedent by will; In the case of decedents dying after August 26, 1937 , and before January 1, 2005 , property acquired by bequest, devise, or inheritance or by the decedent’s estate from the decedent, if the property consists of stock or securities of a foreign corporation, which with respect to its taxable year next preceding the date of the decedent’s death was, under the law applicable to such year, a foreign personal holding company. In such case, the basis shall be the fair market value of such property at the date of the decedent’s death or the basis in the hands of the decedent, whichever is lower; In the case of decedents dying after December 31, 1947 , property which represents the surviving spouse’s one-half share of community property held by the decedent and the surviving spouse under the community property laws of any State, or possession of the United States or any foreign country, if at least one-half of the whole of the community interest in such property was includible in determining the value of the decedent’s gross estate under chapter 11 of subtitle B (section 2001 and following, relating to estate tax) or section 811 of the Internal Revenue Code of 1939; , (8) Repealed. Pub. L. 113–295, div. A, title II, § 221(a)(74)(B) , Dec. 19, 2014 , 128 Stat. 4049 ] In the case of decedents dying after December 31, 1953 , property acquired from the decedent by reason of death, form of ownership, or other conditions (including property acquired through the exercise or non-exercise of a power of appointment), if by reason thereof the property is required to be included in determining the value of the decedent’s gross estate under chapter 11 of subtitle B or under the Internal Revenue Code of 1939. In such case, if the property is acquired before the death of the decedent, the basis shall be the amount determined under subsection (a) reduced by the amount allowed to the taxpayer as deductions in computing taxable income under this subtitle or prior income tax laws for exhaustion, wear and tear, obsolescence, amortization, and depletion on such property before the death of the decedent. Such basis shall be applicable to the property commencing on the death of the decedent. This paragraph shall not apply to— annuities described in section 72; property to which paragraph (5) would apply if the property had been acquired by bequest; and property described in any other paragraph of this subsection. Property includible in the gross estate of the decedent under section 2044 (relating to certain property for which marital deduction was previously allowed). In any such case, the last 3 sentences of paragraph (9) shall apply as if such property were described in the first sentence of paragraph (9).

(c) Property representing income in respect of a decedent This section shall not apply to property which constitutes a right to receive an item of income in respect of a decedent under section 691.

(d) Special rule with respect to DISC stock If stock owned by a decedent in a DISC or former DISC (as defined in section 992(a)) acquires a new basis under subsection (a), such basis (determined before the application of this subsection) shall be reduced by the amount (if any) which would have been included in gross income under section 995(c) as a dividend if the decedent had lived and sold the stock at its fair market value on the estate tax valuation date. In computing the gain the decedent would have had if he had lived and sold the stock, his basis shall be determined without regard to the last sentence of section 996(e)(2) (relating to reductions of basis of DISC stock). For purposes of this subsection, the estate tax valuation date is the date of the decedent’s death or, in the case of an election under section 2032, the applicable valuation date prescribed by that section.

(e) Appreciated property acquired by decedent by gift within 1 year of death In the case of a decedent dying after December 31, 1981 , if— appreciated property was acquired by the decedent by gift during the 1-year period ending on the date of the decedent’s death, and such property is acquired from the decedent by (or passes from the decedent to) the donor of such property (or the spouse of such donor), the basis of such property in the hands of such donor (or spouse) shall be the adjusted basis of such property in the hands of the decedent immediately before the death of the decedent. For purposes of paragraph (1)— The term “appreciated property” means any property if the fair market value of such property on the day it was transferred to the decedent by gift exceeds its adjusted basis. In the case of any appreciated property described in subparagraph (A) of paragraph (1) sold by the estate of the decedent or by a trust of which the decedent was the grantor, rules similar to the rules of paragraph (1) shall apply to the extent the donor of such property (or the spouse of such donor) is entitled to the proceeds from such sale.

(f) Basis must be consistent with estate tax return For purposes of this section— The basis of any property to which subsection (a) applies shall not exceed— in the case of property the final value of which has been determined for purposes of the tax imposed by chapter 11 on the estate of such decedent, such value, and in the case of property not described in subparagraph (A) and with respect to which a statement has been furnished under section 6035(a) identifying the value of such property, such value. Paragraph (1) shall only apply to any property whose inclusion in the decedent’s estate increased the liability for the tax imposed by chapter 11 (reduced by credits allowable against such tax) on such estate. For purposes of paragraph (1), the basis of property has been determined for purposes of the tax imposed by chapter 11 if— the value of such property is shown on a return under section 6018 and such value is not contested by the Secretary before the expiration of the time for assessing a tax under chapter 11, in a case not described in subparagraph (A), the value is specified by the Secretary and such value is not timely contested by the executor of the estate, or the value is determined by a court or pursuant to a settlement agreement with the Secretary. The Secretary may by regulations provide exceptions to the application of this subsection.

§ 1015 Basis of property acquired by gifts and transfers in trust

(a) Gifts after December 31, 1920 If the property was acquired by gift after December 31, 1920 , the basis shall be the same as it would be in the hands of the donor or the last preceding owner by whom it was not acquired by gift, except that if such basis (adjusted for the period before the date of the gift as provided in section 1016) is greater than the fair market value of the property at the time of the gift, then for the purpose of determining loss the basis shall be such fair market value. If the facts necessary to determine the basis in the hands of the donor or the last preceding owner are unknown to the donee, the Secretary shall, if possible, obtain such facts from such donor or last preceding owner, or any other person cognizant thereof. If the Secretary finds it impossible to obtain such facts, the basis in the hands of such donor or last preceding owner shall be the fair market value of such property as found by the Secretary as of the date or approximate date at which, according to the best information that the Secretary is able to obtain, such property was acquired by such donor or last preceding owner.

(b) Transfer in trust after December 31, 1920 If the property was acquired after December 31, 1920 , by a transfer in trust (other than by a transfer in trust by a gift, bequest, or devise), the basis shall be the same as it would be in the hands of the grantor increased in the amount of gain or decreased in the amount of loss recognized to the grantor on such transfer under the law applicable to the year in which the transfer was made.

(c) Gift or transfer in trust before January 1, 1921 If the property was acquired by gift or transfer in trust on or before December 31, 1920 , the basis shall be the fair market value of such property at the time of such acquisition.

(d) Increased basis for gift tax paid If— the property is acquired by gift on or after September 2, 1958 , the basis shall be the basis determined under subsection (a), increased (but not above the fair market value of the property at the time of the gift) by the amount of gift tax paid with respect to such gift, or the property was acquired by gift before September 2, 1958 , and has not been sold, exchanged, or otherwise disposed of before such date, the basis of the property shall be increased on such date by the amount of gift tax paid with respect to such gift, but such increase shall not exceed an amount equal to the amount by which the fair market value of the property at the time of the gift exceeded the basis of the property in the hands of the donor at the time of the gift. For purposes of paragraph (1), the amount of gift tax paid with respect to any gift is an amount which bears the same ratio to the amount of gift tax paid under chapter 12 with respect to all gifts made by the donor for the calendar year (or preceding calendar period) in which such gift is made as the amount of such gift bears to the taxable gifts (as defined in section 2503(a) but computed without the deduction allowed by section 2521) made by the donor during such calendar year or period. For purposes of the preceding sentence, the amount of any gift shall be the amount included with respect to such gift in determining (for the purposes of section 2503(a)) the total amount of gifts made during the calendar year or period, reduced by the amount of any deduction allowed with respect to such gift under section 2522 (relating to charitable deduction) or under section 2523 (relating to marital deduction). For purposes of paragraph (1), where the donor and his spouse elected, under section 2513 to have the gift considered as made one-half by each, the amount of gift tax paid with respect to such gift under chapter 12 shall be the sum of the amounts of tax paid with respect to each half of such gift (computed in the manner provided in paragraph (2)). For purposes of section 1016(b), an increase in basis under paragraph (1) shall be treated as an adjustment under section 1016(a). With respect to any property acquired by gift before 1955, references in this subsection to any provision of this title shall be deemed to refer to the corresponding provision of the Internal Revenue Code of 1939 or prior revenue laws which was effective for the year in which such gift was made. In the case of any gift made after December 31, 1976 , the increase in basis provided by this subsection with respect to any gift for the gift tax paid under chapter 12 shall be an amount (not in excess of the amount of tax so paid) which bears the same ratio to the amount of tax so paid as— the net appreciation in value of the gift, bears to the amount of the gift. For purposes of paragraph (1), the net appreciation in value of any gift is the amount by which the fair market value of the gift exceeds the donor’s adjusted basis immediately before the gift.

(e) Gifts between spouses In the case of any property acquired by gift in a transfer described in section 1041(a), the basis of such property in the hands of the transferee shall be determined under section 1041(b)(2) and not this section.

§ 1016 Adjustments to basis

(a) General rule Proper adjustment in respect of the property shall in all cases be made— for expenditures, receipts, losses, or other items, properly chargeable to capital account, but no such adjustment shall be made— for— taxes or other carrying charges described in section 266; or expenditures described in section 173 (relating to circulation expenditures), for which deductions have been taken by the taxpayer in determining taxable income for the taxable year or prior taxable years; or for mortality, expense, or other reasonable charges incurred under an annuity or life insurance contract; in respect of any period since February 28, 1913 , for exhaustion, wear and tear, obsolescence, amortization, and depletion, to the extent of the amount— allowed as deductions in computing taxable income under this subtitle or prior income tax laws, and resulting (by reason of the deductions so allowed) in a reduction for any taxable year of the taxpayer’s taxes under this subtitle (other than chapter 2, relating to tax on self-employment income), or prior income, war-profits, or excess-profits tax laws, but not less than the amount allowable under this subtitle or prior income tax laws. Where no method has been adopted under section 167 (relating to depreciation deduction), the amount allowable shall be determined under the straight line method. Subparagraph (B) of this paragraph shall not apply in respect of any period since February 28, 1913 , and before January 1, 1952 , unless an election has been made under section 1020 (as in effect before the date of the enactment of the Tax Reform Act of 1976). Where for any taxable year before the taxable year 1932 the depletion allowance was based on discovery value or a percentage of income, then the adjustment for depletion for such year shall be based on the depletion which would have been allowable for such year if computed without reference to discovery value or a percentage of income; in respect of any period— before March 1, 1913 , since February 28, 1913 , during which such property was held by a person or an organization not subject to income taxation under this chapter or prior income tax laws, since February 28, 1913 , and before January 1, 1958 , during which such property was held by a person subject to tax under part I of subchapter L (or the corresponding provisions of prior income tax laws), to the extent that paragraph (2) does not apply, and since February 28, 1913 , during which such property was held by a person subject to tax under part II of subchapter L as in effect prior to its repeal by the Tax Reform Act of 1986 (or the corresponding provisions of prior income tax laws), to the extent that paragraph (2) does not apply, for exhaustion, wear and tear, obsolescence, amortization, and depletion, to the extent sustained; in the case of stock (to the extent not provided for in the foregoing paragraphs) for the amount of distributions previously made which, under the law applicable to the year in which the distribution was made, either were tax-free or were applicable in reduction of basis (not including distributions made by a corporation which was classified as a personal service corporation under the provisions of the Revenue Act of 1918 ( 40 Stat. 1057 ), or the Revenue Act of 1921 ( 42 Stat. 227 ), out of its earnings or profits which were taxable in accordance with the provisions of section 218 of the Revenue Act of 1918 or 1921); in the case of any bond (as defined in section 171(d)) the interest on which is wholly exempt from the tax imposed by this subtitle, to the extent of the amortizable bond premium disallowable as a deduction pursuant to section 171(a)(2), and in the case of any other bond (as defined in section 171(d)) to the extent of the deductions allowable pursuant to section 171(a)(1) (or the amount applied to reduce interest payments under section 171(e)(2)) with respect thereto; in the case of any municipal bond (as defined in section 75(b)), to the extent provided in section 75(a)(2); in the case of a residence the acquisition of which resulted, under section 1034 (as in effect on the day before the date of the enactment of the Taxpayer Relief Act of 1997), in the nonrecognition of any part of the gain realized on the sale, exchange, or involuntary conversion of another residence, to the extent provided in section 1034(e) (as so in effect); in the case of property pledged to the Commodity Credit Corporation, to the extent of the amount received as a loan from the Commodity Credit Corporation and treated by the taxpayer as income for the year in which received pursuant to section 77, and to the extent of any deficiency on such loan with respect to which the taxpayer has been relieved from liability; for amounts allowed as deductions as deferred expenses under section 616(b) (relating to certain expenditures in the development of mines) and resulting in a reduction of the taxpayer’s taxes under this subtitle, but not less than the amounts allowable under such section for the taxable year and prior years; Repealed. Pub. L. 94–455, title XIX, § 1901(b)(21)(G) , Oct. 4, 1976 , 90 Stat. 1798 ] for deductions to the extent disallowed under section 268 (relating to sale of land with unharvested crops), notwithstanding the provisions of any other paragraph of this subsection; Repealed. Pub. L. 113–295, div. A, title II, § 221(a)(75) , Dec. 19, 2014 , 128 Stat. 4049 ] Repealed. Pub. L. 108–357, title IV, § 413(c)(19) , Oct. 22, 2004 , 118 Stat. 1509 ] for amounts allowed as deductions under section 174 or 174A(c) and resulting in a reduction of the taxpayers’ taxes under this subtitle, but not less than the amounts allowable under such section for the taxable year and prior years; for deductions to the extent disallowed under section 272 (relating to disposal of coal or domestic iron ore), notwithstanding the provisions of any other paragraph of this subsection; in the case of any evidence of indebtedness referred to in section 811(b) (relating to amortization of premium and accrual of discount in the case of life insurance companies), to the extent of the adjustments required under section 811(b) (or the corresponding provisions of prior income tax laws) for the taxable year and all prior taxable years; to the extent provided in section 1367 in the case of stock of, and indebtedness owed to, shareholders of an S corporation; to the extent provided in section 961 in the case of stock in controlled foreign corporations (or foreign corporations which were controlled foreign corporations) and of property by reason of which a person is considered as owning such stock; to the extent provided in section 50(c), in the case of expenditures with respect to which a credit has been allowed under section 38; for amounts allowed as deductions under section 59(e) (relating to optional 10-year writeoff of certain tax preferences); to the extent provided in section 1059 (relating to reduction in basis for extraordinary dividends); in the case of qualified replacement property the acquisition of which resulted under section 1042 in the nonrecognition of any part of the gain realized on the sale or exchange of any property, to the extent provided in section 1042(d), 1 in the case of property the acquisition of which resulted under section 1043, 1045, or 1397B in the nonrecognition of any part of the gain realized on the sale of other property, to the extent provided in section 1043(c), 1045(b)(3), or 1397B(b)(4), as the case may be, 1 Repealed. Pub. L. 113–295, div. A, title II, § 221(a)(34)(G) , Dec. 19, 2014 , 128 Stat. 4042 ] Repealed. Pub. L. 113–295, div. A, title II, § 221(a)(2)(D) , Dec. 19, 2014 , 128 Stat. 4037 ] to the extent provided in sections 23(g) and 137(e), 1 Repealed. Pub. L. 115–141, div. U, title IV, § 401(d)(4)(B)(iv) , Mar. 23, 2018 , 132 Stat. 1209 ] in the case of a facility with respect to which a credit was allowed under section 45F, to the extent provided in section 45F(f)(1), 1 in the case of railroad track with respect to which a credit was allowed under section 45G, to the extent provided in section 45G(e)(3), 1 to the extent provided in section 179B(c), 1 to the extent provided in section 179D(e), 1 to the extent provided in section 45L(e), in the case of amounts with respect to which a credit has been allowed under section 45L, 1 to the extent provided in section 25C(g), in the case of amounts with respect to which a credit has been allowed under section 25C, 1 to the extent provided in section 25D(f), in the case of amounts with respect to which a credit has been allowed under section 25D, 1 to the extent provided in section 30B(h)(4), 1 to the extent provided in section 30C(e)(1), 1 to the extent provided in section 30D(f)(1), 1 and to the extent provided in subsections (b)(2) and (c) of section 1400Z–2.

(b) Substituted basis Whenever it appears that the basis of property in the hands of the taxpayer is a substituted basis, then the adjustments provided in subsection (a) shall be made after first making in respect of such substituted basis proper adjustments of a similar nature in respect of the period during which the property was held by the transferor, donor, or grantor, or during which the other property was held by the person for whom the basis is to be determined. A similar rule shall be applied in the case of a series of substituted bases.

(c) Increase in basis of property on which additional estate tax is imposed If an additional estate tax is imposed under section 2032A(c)(1) with respect to any interest in property and the qualified heir makes an election under this subsection with respect to the imposition of such tax, the adjusted basis of such interest shall be increased by an amount equal to the excess of— the fair market value of such interest on the date of the decedent’s death (or the alternate valuation date under section 2032, if the executor of the decedent’s estate elected the application of such section), over the value of such interest determined under section 2032A(a). In the case of any partial disposition for which an election under this subsection is made, the increase in basis under paragraph (1) shall be an amount— which bears the same ratio to the increase which would be determined under paragraph (1) (without regard to this paragraph) with respect to the entire interest, as the amount of the tax imposed under section 2032A(c)(1) with respect to such disposition bears to the adjusted tax difference attributable to the entire interest (as determined under section 2032A(c)(2)(B)). For purposes of subparagraph (A), the term “partial disposition” means any disposition or cessation to which subsection (c)(2)(D), (h)(1)(B), or (i)(1)(B) of section 2032A applies. Any increase in basis under this subsection shall be deemed to have occurred immediately before the disposition or cessation resulting in the imposition of the tax under section 2032A(c)(1). If the tax under section 2032A(c)(1) is imposed with respect to qualified replacement property (as defined in section 2032A(h)(3)(B)) or qualified exchange property (as defined in section 2032A(i)(3)), the increase in basis under paragraph (1) shall be made by reference to the property involuntarily converted or exchanged (as the case may be). An election under this subsection shall be made at such time and in such manner as the Secretary shall by regulations prescribe. Such an election, once made, shall be irrevocable. If an election is made under this subsection with respect to any additional estate tax imposed under section 2032A(c)(1), for purposes of section 6601 (relating to interest on underpayments), the last date prescribed for payment of such tax shall be deemed to be the last date prescribed for payment of the tax imposed by section 2001 with respect to the estate of the decedent (as determined for purposes of section 6601).

(d) Reduction in basis of automobile on which gas guzzler tax was imposed If— the taxpayer acquires any automobile with respect to which a tax was imposed by section 4064, and the use of such automobile by the taxpayer begins not more than 1 year after the date of the first sale for ultimate use of such automobile, the basis of such automobile shall be reduced by the amount of the tax imposed by section 4064 with respect to such automobile. In the case of importation, if the date of entry or withdrawal from warehouse for consumption is later than the date of the first sale for ultimate use, such later date shall be substituted for the date of such first sale in the preceding sentence.

(e) Cross reference For treatment of separate mineral interests as one property, see section 614.

§ 1017 Discharge of indebtedness

(a) General rule If— an amount is excluded from gross income under subsection (a) of section 108 (relating to discharge of indebtedness), and under subsection (b)(2)(E), (b)(5), or (c)(1) of section 108, any portion of such amount is to be applied to reduce basis, then such portion shall be applied in reduction of the basis of any property held by the taxpayer at the beginning of the taxable year following the taxable year in which the discharge occurs.

(b) Amount and properties determined under regulations The amount of reduction to be applied under subsection (a) (not in excess of the portion referred to in subsection (a)), and the particular properties the bases of which are to be reduced, shall be determined under regulations prescribed by the Secretary. In the case of a discharge to which subparagraph (A) or (B) of section 108(a)(1) applies, the reduction in basis under subsection (a) of this section shall not exceed the excess of— the aggregate of the bases of the property held by the taxpayer immediately after the discharge, over the aggregate of the liabilities of the taxpayer immediately after the discharge. The preceding sentence shall not apply to any reduction in basis by reason of an election under section 108(b)(5). Any amount which under subsection (b)(5) or (c)(1) of section 108 is to be applied to reduce basis shall be applied only to reduce the basis of depreciable property held by the taxpayer. For purposes of this section, the term “depreciable property” means any property of a character subject to the allowance for depreciation, but only if a basis reduction under subsection (a) will reduce the amount of depreciation or amortization which otherwise would be allowable for the period immediately following such reduction. For purposes of this section, any interest of a partner in a partnership shall be treated as depreciable property to the extent of such partner’s proportionate interest in the depreciable property held by such partnership. The preceding sentence shall apply only if there is a corresponding reduction in the partnership’s basis in depreciable property with respect to such partner. For purposes of this section, if— a corporation holds stock in another corporation (hereinafter in this subparagraph referred to as the “subsidiary”), and such corporations are members of the same affiliated group which file a consolidated return under section 1501 for the taxable year in which the discharge occurs, then such stock shall be treated as depreciable property to the extent that such subsidiary consents to a corresponding reduction in the basis of its depreciable property. At the election of the taxpayer, for purposes of this section, the term “depreciable property” includes any real property which is described in section 1221(a)(1). An election under clause (i) shall be made on the taxpayer’s return for the taxable year in which the discharge occurs or at such other time as may be permitted in regulations prescribed by the Secretary. Such an election, once made, may be revoked only with the consent of the Secretary. In the case of any amount which under section 108(c)(1) is to be applied to reduce basis— depreciable property shall only include depreciable real property for purposes of subparagraphs (A) and (C), subparagraph (E) shall not apply, and in the case of property taken into account under section 108(c)(2)(B), the reduction with respect to such property shall be made as of the time immediately before disposition if earlier than the time under subsection (a). Any amount which under subsection (b)(2)(E) of section 108 is to be applied to reduce basis and which is attributable to an amount excluded under subsection (a)(1)(C) of section 108— shall be applied only to reduce the basis of qualified property held by the taxpayer, and shall be applied to reduce the basis of qualified property in the following order: First the basis of qualified property which is depreciable property. Second the basis of qualified property which is land used or held for use in the trade or business of farming. Then the basis of other qualified property. For purposes of this paragraph, the term “qualified property” has the meaning given to such term by section 108(g)(3)(C). Rules similar to the rules of subparagraphs (C), (D), and (E) of paragraph (3) shall apply for purposes of this paragraph and section 108(g).

(c) Special rules In the case of an amount excluded from gross income under section 108(a)(1)(A), no reduction in basis shall be made under this section in the basis of property which the debtor treats as exempt property under section 522 of title 11 of the United States Code. For purposes of this title, a reduction in basis under this section shall not be treated as a disposition.

(d) Recapture of reductions For purposes of sections 1245 and 1250— any property the basis of which is reduced under this section and which is neither section 1245 property nor section 1250 property shall be treated as section 1245 property, and any reduction under this section shall be treated as a deduction allowed for depreciation. For purposes of section 1250(b), the determination of what would have been the depreciation adjustments under the straight line method shall be made as if there had been no reduction under this section.

[§ 1018 Repealed. Pub. L. 96–589, § 6(h)(1), Dec. 24, 1980, 94 Stat. 3410]

§ 1019 Property on which lessee has made improvements

Neither the basis nor the adjusted basis of any portion of real property shall, in the case of the lessor of such property, be increased or diminished on account of income derived by the lessor in respect of such property and excludable from gross income under section 109 (relating to improvements by lessee on lessor’s property). ( Aug. 16, 1954, ch. 736 , 68A Stat. 301 ; Pub. L. 113–295, div. A, title II, § 221(a)(76) , Dec. 19, 2014 , 128 Stat. 4049 .)

[§ 1020 Repealed. Pub. L. 94–455, title XIX, § 1901(a)(125), Oct. 4, 1976, 90 Stat. 1784]

§ 1021 Sale of annuities

In case of the sale of an annuity contract, the adjusted basis shall in no case be less than zero. ( Aug. 16, 1954, ch. 736 , 68A Stat. 302 .)

[§ 1022 Repealed. Pub. L. 111–312, title III, § 301(a), Dec. 17, 2010, 124 Stat. 3300]

§ 1023 Cross references

For certain distributions by a corporation which are applied in reduction of basis of stock, see section 301(c)(2). For basis in case of construction of new vessels, see chapter 533 of title 46, United States Code. ( Aug. 16, 1954, ch. 736 , 68A Stat. 302 , § 1022; renumbered § 1023, Pub. L. 88–272, title II, § 225(j)(1) , Feb. 26, 1964 , 78 Stat. 92 ; renumbered § 1024 and amended Pub. L. 94–455, title XIX, § 1901(a)(127) , title XX, § 2005(a)(2), Oct. 4, 1976 , 90 Stat. 1784 , 1872; renumbered § 1023, Pub. L. 96–223, title IV, § 401(a) , Apr. 2, 1980 , 94 Stat. 299 ; Pub. L. 96–589, § 6(i)(4) , Dec. 24, 1980 , 94 Stat. 3410 ; Pub. L. 109–304, § 17(e)(4) , Oct. 6, 2006 , 120 Stat. 1708 .)

[§ 1024 Renumbered § 1023]

§ 1031 Exchange of real property held for productive use or investment

(a) Nonrecognition of gain or loss from exchanges solely in kind No gain or loss shall be recognized on the exchange of real property held for productive use in a trade or business or for investment if such real property is exchanged solely for real property of like kind which is to be held either for productive use in a trade or business or for investment. This subsection shall not apply to any exchange of real property held primarily for sale. For purposes of this subsection, any property received by the taxpayer shall be treated as property which is not like-kind property if— such property is not identified as property to be received in the exchange on or before the day which is 45 days after the date on which the taxpayer transfers the property relinquished in the exchange, or such property is received after the earlier of— the day which is 180 days after the date on which the taxpayer transfers the property relinquished in the exchange, or the due date (determined with regard to extension) for the transferor’s return of the tax imposed by this chapter for the taxable year in which the transfer of the relinquished property occurs.

(b) Gain from exchanges not solely in kind If an exchange would be within the provisions of subsection (a), of section 1035(a), of section 1036(a), or of section 1037(a), if it were not for the fact that the property received in exchange consists not only of property permitted by such provisions to be received without the recognition of gain, but also of other property or money, then the gain, if any, to the recipient shall be recognized, but in an amount not in excess of the sum of such money and the fair market value of such other property.

(c) Loss from exchanges not solely in kind If an exchange would be within the provisions of subsection (a), of section 1035(a), of section 1036(a), or of section 1037(a), if it were not for the fact that the property received in exchange consists not only of property permitted by such provisions to be received without the recognition of gain or loss, but also of other property or money, then no loss from the exchange shall be recognized.

(d) Basis If property was acquired on an exchange described in this section, section 1035(a), section 1036(a), or section 1037(a), then the basis shall be the same as that of the property exchanged, decreased in the amount of any money received by the taxpayer and increased in the amount of gain or decreased in the amount of loss to the taxpayer that was recognized on such exchange. If the property so acquired consisted in part of the type of property permitted by this section, section 1035(a), section 1036(a), or section 1037(a), to be received without the recognition of gain or loss, and in part of other property, the basis provided in this subsection shall be allocated between the properties (other than money) received, and for the purpose of the allocation there shall be assigned to such other property an amount equivalent to its fair market value at the date of the exchange. For purposes of this section, section 1035(a), and section 1036(a), where as part of the consideration to the taxpayer another party to the exchange assumed (as determined under section 357(d)) a liability of the taxpayer, such assumption shall be considered as money received by the taxpayer on the exchange.

(e) Application to certain partnerships For purposes of this section, an interest in a partnership which has in effect a valid election under section 761(a) to be excluded from the application of all of subchapter K shall be treated as an interest in each of the assets of such partnership and not as an interest in a partnership.

(f) Special rules for exchanges between related persons If— a taxpayer exchanges property with a related person, there is nonrecognition of gain or loss to the taxpayer under this section with respect to the exchange of such property (determined without regard to this subsection), and before the date 2 years after the date of the last transfer which was part of such exchange— the related person disposes of such property, or the taxpayer disposes of the property received in the exchange from the related person which was of like kind to the property transferred by the taxpayer, there shall be no nonrecognition of gain or loss under this section to the taxpayer with respect to such exchange; except that any gain or loss recognized by the taxpayer by reason of this subsection shall be taken into account as of the date on which the disposition referred to in subparagraph (C) occurs. For purposes of paragraph (1)(C), there shall not be taken into account any disposition— after the earlier of the death of the taxpayer or the death of the related person, in a compulsory or involuntary conversion (within the meaning of section 1033) if the exchange occurred before the threat or imminence of such conversion, or with respect to which it is established to the satisfaction of the Secretary that neither the exchange nor such disposition had as one of its principal purposes the avoidance of Federal income tax. For purposes of this subsection, the term “related person” means any person bearing a relationship to the taxpayer described in section 267(b) or 707(b)(1). This section shall not apply to any exchange which is part of a transaction (or series of transactions) structured to avoid the purposes of this subsection.

(g) Special rule where substantial diminution of risk If paragraph (2) applies to any property for any period, the running of the period set forth in subsection (f)(1)(C) with respect to such property shall be suspended during such period. This paragraph shall apply to any property for any period during which the holder’s risk of loss with respect to the property is substantially diminished by— the holding of a put with respect to such property, the holding by another person of a right to acquire such property, or a short sale or any other transaction.

(h) Special rules for foreign real property Real property located in the United States and real property located outside the United States are not property of a like kind.

§ 1032 Exchange of stock for property

(a) Nonrecognition of gain or loss No gain or loss shall be recognized to a corporation on the receipt of money or other property in exchange for stock (including treasury stock) of such corporation. No gain or loss shall be recognized by a corporation with respect to any lapse or acquisition of an option, or with respect to a securities futures contract (as defined in section 1234B), to buy or sell its stock (including treasury stock).

(b) Basis For basis of property acquired by a corporation in certain exchanges for its stock, see section 362.

§ 1033 Involuntary conversions

(a) General rule If property (as a result of its destruction in whole or in part, theft, seizure, or requisition or condemnation or threat or imminence thereof) is compulsorily or involuntarily converted— Into property similar or related in service or use to the property so converted, no gain shall be recognized. Into money or into property not similar or related in service or use to the converted property, the gain (if any) shall be recognized except to the extent hereinafter provided in this paragraph: If the taxpayer during the period specified in subparagraph (B), for the purpose of replacing the property so converted, purchases other property similar or related in service or use to the property so converted, or purchases stock in the acquisition of control of a corporation owning such other property, at the election of the taxpayer the gain shall be recognized only to the extent that the amount realized upon such conversion (regardless of whether such amount is received in one or more taxable years) exceeds the cost of such other property or such stock. Such election shall be made at such time and in such manner as the Secretary may by regulations prescribe. For purposes of this paragraph— no property or stock acquired before the disposition of the converted property shall be considered to have been acquired for the purpose of replacing such converted property unless held by the taxpayer on the date of such disposition; and the taxpayer shall be considered to have purchased property or stock only if, but for the provisions of subsection (b) of this section, the unadjusted basis of such property or stock would be its cost within the meaning of section 1012. The period referred to in subparagraph (A) shall be the period beginning with the date of the disposition of the converted property, or the earliest date of the threat or imminence of requisition or condemnation of the converted property, whichever is the earlier, and ending— 2 years after the close of the first taxable year in which any part of the gain upon the conversion is realized, or subject to such terms and conditions as may be specified by the Secretary, at the close of such later date as the Secretary may designate on application by the taxpayer. Such application shall be made at such time and in such manner as the Secretary may by regulations prescribe. If a taxpayer has made the election provided in subparagraph (A), then— the statutory period for the assessment of any deficiency, for any taxable year in which any part of the gain on such conversion is realized, attributable to such gain shall not expire prior to the expiration of 3 years from the date the Secretary is notified by the taxpayer (in such manner as the Secretary may by regulations prescribe) of the replacement of the converted property or of an intention not to replace, and such deficiency may be assessed before the expiration of such 3–year period notwithstanding the provisions of section 6212(c) or the provisions of any other law or rule of law which would otherwise prevent such assessment. If the election provided in subparagraph (A) is made by the taxpayer and such other property or such stock was purchased before the beginning of the last taxable year in which any part of the gain upon such conversion is realized, any deficiency, to the extent resulting from such election, for any taxable year ending before such last taxable year may be assessed (notwithstanding the provisions of section 6212(c) or 6501 or the provisions of any other law or rule of law which would otherwise prevent such assessment) at any time before the expiration of the period within which a deficiency for such last taxable year may be assessed. For purposes of this paragraph— The term “control” means the ownership of stock possessing at least 80 percent of the total combined voting power of all classes of stock entitled to vote and at least 80 percent of the total number of shares of all other classes of stock of the corporation. The term “disposition of the converted property” means the destruction, theft, seizure, requisition, or condemnation of the converted property, or the sale or exchange of such property under threat or imminence of requisition or condemnation.

(b) Basis of property acquired through involuntary conversion If the property was acquired as the result of a compulsory or involuntary conversion described in subsection (a)(1), the basis shall be the same as in the case of the property so converted— decreased in the amount of any money received by the taxpayer which was not expended in accordance with the provisions of law (applicable to the year in which such conversion was made) determining the taxable status of the gain or loss upon such conversion, and increased in the amount of gain or decreased in the amount of loss to the taxpayer recognized upon such conversion under the law applicable to the year in which such conversion was made. In the case of property purchased by the taxpayer in a transaction described in subsection (a)(2) which resulted in the nonrecognition of any part of the gain realized as the result of a compulsory or involuntary conversion, the basis shall be the cost of such property decreased in the amount of the gain not so recognized; and if the property purchased consists of more than 1 piece of property, the basis determined under this sentence shall be allocated to the purchased properties in proportion to their respective costs. If the basis of stock in a corporation is decreased under paragraph (2), an amount equal to such decrease shall also be applied to reduce the basis of property held by the corporation at the time the taxpayer acquired control (as defined in subsection (a)(2)(E)) of such corporation. Subparagraph (A) shall not apply to the extent that it would (but for this subparagraph) require a reduction in the aggregate adjusted bases of the property of the corporation below the taxpayer’s adjusted basis of the stock in the corporation (determined immediately after such basis is decreased under paragraph (2)). The decrease required under subparagraph (A) shall be allocated— first to property which is similar or related in service or use to the converted property, second to depreciable property (as defined in section 1017(b)(3)(B)) not described in clause (i), and then to other property. No reduction in the basis of any property under this paragraph shall exceed the adjusted basis of such property (determined without regard to such reduction). If more than 1 property is described in a clause of subparagraph (C), the reduction under this paragraph shall be allocated among such property in proportion to the adjusted bases of such property (as so determined).

(c) Property sold pursuant to reclamation laws For purposes of this subtitle, if property lying within an irrigation project is sold or otherwise disposed of in order to conform to the acreage limitation provisions of Federal reclamation laws, such sale or disposition shall be treated as an involuntary conversion to which this section applies.

(d) Livestock destroyed by disease For purposes of this subtitle, if livestock are destroyed by or on account of disease, or are sold or exchanged because of disease, such destruction or such sale or exchange shall be treated as an involuntary conversion to which this section applies.

(e) Livestock sold on account of drought, flood, or other weather-related conditions For purposes of this subtitle, the sale or exchange of livestock (other than poultry) held by a taxpayer for draft, breeding, or dairy purposes in excess of the number the taxpayer would sell if he followed his usual business practices shall be treated as an involuntary conversion to which this section applies if such livestock are sold or exchanged by the taxpayer solely on account of drought, flood, or other weather-related conditions. In the case of drought, flood, or other weather-related conditions described in paragraph (1) which result in the area being designated as eligible for assistance by the Federal Government, subsection (a)(2)(B) shall be applied with respect to any converted property by substituting “4 years” for “2 years”. The Secretary may extend on a regional basis the period for replacement under this section (after the application of subparagraph (A)) for such additional time as the Secretary determines appropriate if the weather-related conditions which resulted in such application continue for more than 3 years.

(f) Replacement of livestock with other farm property in certain cases For purposes of subsection (a), if, because of drought, flood, or other weather-related conditions, or soil contamination or other environmental contamination, it is not feasible for the taxpayer to reinvest the proceeds from compulsorily or involuntarily converted livestock in property similar or related in use to the livestock so converted, other property (including real property in the case of soil contamination or other environmental contamination) used for farming purposes shall be treated as property similar or related in service or use to the livestock so converted.

(g) Condemnation of real property held for productive use in trade or business or for investment For purposes of subsection (a), if real property (not including stock in trade or other property held primarily for sale) held for productive use in trade or business or for investment is (as the result of its seizure, requisition, or condemnation, or threat or imminence thereof) compulsorily or involuntarily converted, property of a like kind to be held either for productive use in trade or business or for investment shall be treated as property similar or related in service or use to the property so converted. Paragraph (1) shall not apply to the purchase of stock in the acquisition of control of a corporation described in subsection (a)(2)(A). A taxpayer may elect, at such time and in such manner as the Secretary may prescribe, to treat property which constitutes an outdoor advertising display as real property for purposes of this chapter. The election provided by this subparagraph may not be made with respect to any property with respect to which an election under section 179(a) (relating to election to expense certain depreciable business assets) is in effect. An election made under subparagraph (A) may not be revoked without the consent of the Secretary. For purposes of this paragraph, the term “outdoor advertising display” means a rigidly assembled sign, display, or device permanently affixed to the ground or permanently attached to a building or other inherently permanent structure constituting, or used for the display of, a commercial or other advertisement to the public. For purposes of this subsection, an interest in real property purchased as replacement property for a compulsorily or involuntarily converted outdoor advertising display defined in subparagraph (C) (and treated by the taxpayer as real property) shall be considered property of a like kind as the property converted without regard to whether the taxpayer’s interest in the replacement property is the same kind of interest the taxpayer held in the converted property. In the case of a compulsory or involuntary conversion described in paragraph (1), subsection (a)(2)(B)(i) shall be applied by substituting “3 years” for “2 years”.

(h) Special rules for property damaged by federally declared disasters If the taxpayer’s principal residence or any of its contents is located in a disaster area and is compulsorily or involuntarily converted as a result of a federally declared disaster— No gain shall be recognized by reason of the receipt of any insurance proceeds for personal property which was part of such contents and which was not scheduled property for purposes of such insurance. In the case of any insurance proceeds (not described in clause (i)) for such residence or contents— such proceeds shall be treated as received for the conversion of a single item of property, and any property which is similar or related in service or use to the residence so converted (or contents thereof) shall be treated for purposes of subsection (a)(2) as property similar or related in service or use to such single item of property. Subsection (a)(2)(B) shall be applied with respect to any property so converted by substituting “4 years” for “2 years”. If a taxpayer’s property held for productive use in a trade or business or for investment is located in a disaster area and is compulsorily or involuntarily converted as a result of a federally declared disaster, tangible property of a type held for productive use in a trade or business shall be treated for purposes of subsection (a) as property similar or related in service or use to the property so converted. The terms “federally declared disaster” and “disaster area” shall have the respective meaning given such terms by section 165(i)(5). For purposes of this subsection, the term “principal residence” has the same meaning as when used in section 121, except that such term shall include a residence not treated as a principal residence solely because the taxpayer does not own the residence.

(i) Replacement property must be acquired from unrelated person in certain cases If the property which is involuntarily converted is held by a taxpayer to which this subsection applies, subsection (a) shall not apply if the replacement property or stock is acquired from a related person. The preceding sentence shall not apply to the extent that the related person acquired the replacement property or stock from an unrelated person during the period applicable under subsection (a)(2)(B). This subsection shall apply to— a C corporation, a partnership in which 1 or more C corporations own, directly or indirectly (determined in accordance with section 707(b)(3)), more than 50 percent of the capital interest, or profits interest, in such partnership at the time of the involuntary conversion, and any other taxpayer if, with respect to property which is involuntarily converted during the taxable year, the aggregate of the amount of realized gain on such property on which there is realized gain exceeds $100,000. In the case of a partnership, subparagraph (C) shall apply with respect to the partnership and with respect to each partner. A similar rule shall apply in the case of an S corporation and its shareholders. For purposes of this subsection, a person is related to another person if the person bears a relationship to the other person described in section 267(b) or 707(b)(1).

(j) Sales or exchanges under certain hazard mitigation programs For purposes of this subtitle, if property is sold or otherwise transferred to the Federal Government, a State or local government, or an Indian tribal government to implement hazard mitigation under the Robert T. Stafford Disaster Relief and Emergency Assistance Act (as in effect on the date of the enactment of this subsection) or the National Flood Insurance Act (as in effect on such date), such sale or transfer shall be treated as an involuntary conversion to which this section applies.

(k) Cross references For determination of the period for which the taxpayer has held property involuntarily converted, see section 1223. For treatment of gains from involuntary conversions as capital gains in certain cases, see section 1231(a). For exclusion from gross income of gain from involuntary conversion of principal residence, see section 121.

[§ 1034 Repealed. Pub. L. 105–34, title III, § 312(b), Aug. 5, 1997, 111 Stat. 839]

§ 1035 Certain exchanges of insurance policies

(a) General rules No gain or loss shall be recognized on the exchange of— a contract of life insurance for another contract of life insurance or for an endowment or annuity contract or for a qualified long-term care insurance contract; a contract of endowment insurance (A) for another contract of endowment insurance which provides for regular payments beginning at a date not later than the date payments would have begun under the contract exchanged, or (B) for an annuity contract, or (C) for a qualified long-term care insurance contract; an annuity contract for an annuity contract or for a qualified long-term care insurance contract; or a qualified long-term care insurance contract for a qualified long-term care insurance contract.

(b) Definitions For the purpose of this section— A contract of endowment insurance is a contract with an insurance company which depends in part on the life expectancy of the insured, but which may be payable in full in a single payment during his life. An annuity contract is a contract to which paragraph (1) applies but which may be payable during the life of the annuitant only in installments. For purposes of the preceding sentence, a contract shall not fail to be treated as an annuity contract solely because a qualified long-term care insurance contract is a part of or a rider on such contract. A contract of life insurance is a contract to which paragraph (1) applies but which is not ordinarily payable in full during the life of the insured. For purposes of the preceding sentence, a contract shall not fail to be treated as a life insurance contract solely because a qualified long-term care insurance contract is a part of or a rider on such contract.

(c) Exchanges involving foreign persons To the extent provided in regulations, subsection (a) shall not apply to any exchange having the effect of transferring property to any person other than a United States person.

(d) Cross references For rules relating to recognition of gain or loss where an exchange is not solely in kind, see subsections (b) and (c) of section 1031. For rules relating to the basis of property acquired in an exchange described in subsection (a), see subsection (d) of section 1031.

§ 1036 Stock for stock of same corporation

(a) General rule No gain or loss shall be recognized if common stock in a corporation is exchanged solely for common stock in the same corporation, or if preferred stock in a corporation is exchanged solely for preferred stock in the same corporation.

(b) Nonqualified preferred stock not treated as stock For purposes of this section, nonqualified preferred stock (as defined in section 351(g)(2)) shall be treated as property other than stock.

(c) Cross references For rules relating to recognition of gain or loss where an exchange is not solely in kind, see subsections (b) and (c) of section 1031. For rules relating to the basis of property acquired in an exchange described in subsection (a), see subsection (d) of section 1031.

§ 1037 Certain exchanges of United States obligations

(a) General rule When so provided by regulations promulgated by the Secretary in connection with the issue of obligations of the United States, no gain or loss shall be recognized on the surrender to the United States of obligations of the United States issued under chapter 31 of title 31 in exchange solely for other obligations issued under such chapter.

(b) Application of original issue discount rules In any case in which gain has been realized but not recognized because of the provisions of subsection (a) (or so much of section 1031(b) as relates to subsection (a) of this section), to the extent such gain is later recognized by reason of a disposition or redemption of an obligation received in an exchange subject to such provisions, the first sentence of section 1271(c)(2) 1 shall apply to such gain as though the obligation disposed of or redeemed were the obligation surrendered to the Government in the exchange rather than the obligation actually disposed of or redeemed. For purposes of this paragraph and subpart A of part V of subchapter P, if the obligation surrendered in the exchange is a nontransferable obligation described in subsection (a) or (c) of section 454— the aggregate amount considered, with respect to the obligation surrendered, as ordinary income shall not exceed the difference between the issue price and the stated redemption price which applies at the time of the exchange, and the issue price of the obligation received in the exchange shall be considered to be the stated redemption price of the obligation surrendered in the exchange, increased by the amount of other consideration (if any) paid to the United States as a part of the exchange. In any case in which subsection (a) (or so much of section 1031(b) or (c) as relates to subsection (a) of this section) has applied to the exchange of a transferable obligation which was issued at not less than par for another transferable obligation, the issue price of the obligation received from the Government in the exchange shall be considered for purposes of applying subpart A of part V of subchapter P to be the same as the issue price of the obligation surrendered to the Government in the exchange, increased by the amount of other consideration (if any) paid to the United States as a part of the exchange.

(c) Cross references For rules relating to the recognition of gain or loss in a case where subsection (a) would apply except for the fact that the exchange was not made solely for other obligations of the United States, see subsections (b) and (c) of section 1031. For rules relating to the basis of obligations of the United States acquired in an exchange for other obligations described in subsection (a), see subsection (d) of section 1031.

§ 1038 Certain reacquisitions of real property

(a) General rule If— a sale of real property gives rise to indebtedness to the seller which is secured by the real property sold, and the seller of such property reacquires such property in partial or full satisfaction of such indebtedness, then, except as provided in subsections (b) and (d), no gain or loss shall result to the seller from such reacquisition, and no debt shall become worthless or partially worthless as a result of such reacquisition.

(b) Amount of gain resulting In the case of a reacquisition of real property to which subsection (a) applies, gain shall result from such reacquisition to the extent that— the amount of money and the fair market value of other property (other than obligations of the purchaser) received, prior to such reacquisition, with respect to the sale of such property, exceeds the amount of the gain on the sale of such property returned as income for periods prior to such reacquisition. The amount of gain determined under paragraph (1) resulting from a reacquisition during any taxable year beginning after the date of the enactment of this section shall not exceed the amount by which the price at which the real property was sold exceeded its adjusted basis, reduced by the sum of— the amount of the gain on the sale of such property returned as income for periods prior to the reacquisition of such property, and the amount of money and the fair market value of other property (other than obligations of the purchaser received with respect to the sale of such property) paid or transferred by the seller in connection with the reacquisition of such property. For purposes of this paragraph, the price at which real property is sold is the gross sales price reduced by the selling commissions, legal fees, and other expenses incident to the sale of such property which are properly taken into account in determining gain or loss on such sale. Except as provided in this section, the gain determined under this subsection resulting from a reacquisition to which subsection (a) applies shall be recognized, notwithstanding any other provision of this subtitle.

(c) Basis of reacquired real property If subsection (a) applies to the reacquisition of any real property, the basis of such property upon such reacquisition shall be the adjusted basis of the indebtedness to the seller secured by such property (determined as of the date of reacquisition), increased by the sum of— the amount of the gain determined under subsection (b) resulting from such reacquisition, and the amount described in subsection (b)(2)(B). If any indebtedness to the seller secured by such property is not discharged upon the reacquisition of such property, the basis of such indebtedness shall be zero.

(d) Indebtedness treated as worthless prior to reacquisition If, prior to a reacquisition of real property to which subsection (a) applies, the seller has treated indebtedness secured by such property as having become worthless or partially worthless— such seller shall be considered as receiving, upon the reacquisition of such property, an amount equal to the amount of such indebtedness treated by him as having become worthless, and the adjusted basis of such indebtedness shall be increased (as of the date of reacquisition) by an amount equal to the amount so considered as received by such seller.

(e) Principal residences If— subsection (a) applies to a reacquisition of real property with respect to the sale of which gain was not recognized under section 121 (relating to gain on sale of principal residence); and within 1 year after the date of the reacquisition of such property by the seller, such property is resold by him, then, under regulations prescribed by the Secretary, subsections (b), (c), and (d) of this section shall not apply to the reacquisition of such property and, for purposes of applying section 121, the resale of such property shall be treated as a part of the transaction constituting the original sale of such property.

([(f) Repealed. Pub. L. 104–188, title I, § 1616(b)(12), Aug. 20, 1996, 110 Stat. 1857]

(g) Acquisition by estate, etc., of seller Under regulations prescribed by the Secretary, if an installment obligation is indebtedness to the seller which is described in subsection (a), and if such obligation is, in the hands of the taxpayer, an obligation with respect to which section 691(a)(4)(B) applies, then— for purposes of subsection (a), acquisition of real property by the taxpayer shall be treated as reacquisition by the seller, and the basis of the real property acquired by the taxpayer shall be increased by an amount equal to the deduction under section 691(c) which would (but for this subsection) have been allowable to the taxpayer with respect to the gain on the exchange of the obligation for the real property.

[§ 1039 Repealed. Pub. L. 101–508, title XI, § 11801(a)(33), Nov. 5, 1990, 104 Stat. 1388–521]

§ 1040 Transfer of certain farm, etc., real property

(a) General rule If the executor of the estate of any decedent transfers to a qualified heir (within the meaning of section 2032A(e)(1)) any property with respect to which an election was made under section 2032A, then gain on such transfer shall be recognized to the estate only to the extent that, on the date of such transfer, the fair market value of such property exceeds the value of such property for purposes of chapter 11 (determined without regard to section 2032A).

(b) Similar rule for certain trusts To the extent provided in regulations prescribed by the Secretary, a rule similar to the rule provided in subsection (a) shall apply where the trustee of a trust (any portion of which is included in the gross estate of the decedent) transfers property with respect to which an election was made under section 2032A.

(c) Basis of property acquired in transfer described in subsection (a) or (b) The basis of property acquired in a transfer with respect to which gain realized is not recognized by reason of subsection (a) or (b) shall be the basis of such property immediately before the transfer increased by the amount of the gain recognized to the estate or trust on the transfer.

§ 1041 Transfers of property between spouses or incident to divorce

(a) General rule No gain or loss shall be recognized on a transfer of property from an individual to (or in trust for the benefit of)— a spouse, or a former spouse, but only if the transfer is incident to the divorce.

(b) Transfer treated as gift; transferee has transferor’s basis In the case of any transfer of property described in subsection (a)— for purposes of this subtitle, the property shall be treated as acquired by the transferee by gift, and the basis of the transferee in the property shall be the adjusted basis of the transferor.

(c) Incident to divorce For purposes of subsection (a)(2), a transfer of property is incident to the divorce if such transfer— occurs within 1 year after the date on which the marriage ceases, or is related to the cessation of the marriage.

(d) Special rule where spouse is nonresident alien Subsection (a) shall not apply if the spouse (or former spouse) of the individual making the transfer is a nonresident alien.

(e) Transfers in trust where liability exceeds basis Subsection (a) shall not apply to the transfer of property in trust to the extent that— the sum of the amount of the liabilities assumed, plus the amount of the liabilities to which the property is subject, exceeds the total of the adjusted basis of the property transferred. Proper adjustment shall be made under subsection (b) in the basis of the transferee in such property to take into account gain recognized by reason of the preceding sentence.

§ 1042 Sales of stock to employee stock ownership plans or certain cooperatives

(a) Nonrecognition of gain If— the taxpayer or executor elects in such form as the Secretary may prescribe the application of this section with respect to any sale of qualified securities, the taxpayer purchases qualified replacement property within the replacement period, and the requirements of subsection (b) are met with respect to such sale, then the gain (if any) on such sale which would be recognized as long-term capital gain shall be recognized only to the extent that the amount realized on such sale exceeds the cost to the taxpayer of such qualified replacement property.

(b) Requirements to qualify for nonrecognition A sale of qualified securities meets the requirements of this subsection if— The qualified securities are sold to— an employee stock ownership plan (as defined in section 4975(e)(7)), or an eligible worker-owned cooperative. The plan or cooperative referred to in paragraph (1) owns (after application of section 318(a)(4)), immediately after the sale, at least 30 percent of— each class of outstanding stock of the corporation (other than stock described in section 1504(a)(4)) which issued the qualified securities, or the total value of all outstanding stock of the corporation (other than stock described in section 1504(a)(4)). The taxpayer files with the Secretary the written statement described in subparagraph (B). A statement is described in this subparagraph if it is a verified written statement of— the employer whose employees are covered by the plan described in paragraph (1), or any authorized officer of the cooperative described in paragraph ( l ), 1 consenting to the application of sections 4978 and 4979A with respect to such employer or cooperative. The taxpayer’s holding period with respect to the qualified securities is at least 3 years (determined as of the time of the sale).

(c) Definitions; special rules For purposes of this section— The term “qualified securities” means employer securities (as defined in section 409( l )) which— are issued by a domestic C corporation that has no stock outstanding that is readily tradable on an established securities market, and were not received by the taxpayer in— a distribution from a plan described in section 401(a), or a transfer pursuant to an option or other right to acquire stock to which section 83, 422, or 423 applied (or to which section 422 or 424 (as in effect on the day before the date of the enactment of the Revenue Reconciliation Act of 1990) applied). The term “eligible worker-owned cooperative” means any organization— to which part I of subchapter T applies, a majority of the membership of which is composed of employees of such organization, a majority of the voting stock of which is owned by members, a majority of the board of directors of which is elected by the members on the basis of 1 person 1 vote, and a majority of the allocated earnings and losses of which are allocated to members on the basis of— patronage, capital contributions, or some combination of clauses (i) and (ii). The term “replacement period” means the period which begins 3 months before the date on which the sale of qualified securities occurs and which ends 12 months after the date of such sale. The term “qualified replacement property” means any security issued by a domestic operating corporation which— did not, for the taxable year preceding the taxable year in which such security was purchased, have passive investment income (as defined in section 1362(d)(3)(C)) in excess of 25 percent of the gross receipts of such corporation for such preceding taxable year, and is not the corporation which issued the qualified securities which such security is replacing or a member of the same controlled group of corporations (within the meaning of section 1563(a)(1)) as such corporation. For purposes of clause (i), income which is described in section 954(c)(3) (as in effect immediately before the Tax Reform Act of 1986) shall not be treated as passive investment income. For purposes of this paragraph— The term “operating corporation” means a corporation more than 50 percent of the assets of which were, at the time the security was purchased or before the close of the replacement period, used in the active conduct of the trade or business. The term “operating corporation” shall include— any financial institution described in section 581, and an insurance company subject to tax under subchapter L. For purposes of applying this paragraph, if— the corporation issuing the security owns stock representing control of 1 or more other corporations, 1 or more other corporations own stock representing control of the corporation issuing the security, or both, then all such corporations shall be treated as 1 corporation. For purposes of clause (i), the term “control” has the meaning given such term by section 304(c). In determining control, there shall be disregarded any qualified replacement property of the taxpayer with respect to the section 1042 sale being tested. For purposes of this paragraph, the term “security” has the meaning given such term by section 165(g)(2), except that such term shall not include any security issued by a government or political subdivision thereof. No sale of securities by an underwriter to an employee stock ownership plan or eligible worker-owned cooperative in the ordinary course of his trade or business as an underwriter, whether or not guaranteed, shall be treated as a sale for purposes of subsection (a). An election under subsection (a) shall be filed not later than the last day prescribed by law (including extensions thereof) for filing the return of tax imposed by this chapter for the taxable year in which the sale occurs. Subsection (a) shall not apply to any gain on the sale of any qualified securities which is includible in the gross income of any C corporation.

(d) Basis of qualified replacement property The basis of the taxpayer in qualified replacement property purchased by the taxpayer during the replacement period shall be reduced by the amount of gain not recognized by reason of such purchase and the application of subsection (a). If more than one item of qualified replacement property is purchased, the basis of each of such items shall be reduced by an amount determined by multiplying the total gain not recognized by reason of such purchase and the application of subsection (a) by a fraction— the numerator of which is the cost of such item of property, and the denominator of which is the total cost of all such items of property. Any reduction in basis under this subsection shall not be taken into account for purposes of section 1278(a)(2)(A)(ii) (relating to definition of market discount).

(e) Recapture of gain on disposition of qualified replacement property If a taxpayer disposes of any qualified replacement property, then, notwithstanding any other provision of this title, gain (if any) shall be recognized to the extent of the gain which was not recognized under subsection (a) by reason of the acquisition by such taxpayer of such qualified replacement property. If— a corporation issuing qualified replacement property disposes of a substantial portion of its assets other than in the ordinary course of its trade or business, and any taxpayer owning stock representing control (within the meaning of section 304(c)) of such corporation at the time of such disposition holds any qualified replacement property of such corporation at such time, then the taxpayer shall be treated as having disposed of such qualified replacement property at such time. Paragraph (1) shall not apply to any transfer of qualified replacement property— in any reorganization (within the meaning of section 368) unless the person making the election under subsection (a)(1) owns stock representing control in the acquiring or acquired corporation and such property is substituted basis property in the hands of the transferee, by reason of the death of the person making such election, by gift, or in any transaction to which section 1042(a) applies.

(f) Statute of limitations If any gain is realized by the taxpayer on the sale or exchange of any qualified securities and there is in effect an election under subsection (a) with respect to such gain, then— the statutory period for the assessment of any deficiency with respect to such gain shall not expire before the expiration of 3 years from the date the Secretary is notified by the taxpayer (in such manner as the Secretary may by regulations prescribe) of— the taxpayer’s cost of purchasing qualified replacement property which the taxpayer claims results in nonrecognition of any part of such gain, the taxpayer’s intention not to purchase qualified replacement property within the replacement period, or a failure to make such purchase within the replacement period, and such deficiency may be assessed before the expiration of such 3-year period notwithstanding the provisions of any other law or rule of law which would otherwise prevent such assessment.

(g) Application of section to sales of stock in agricultural refiners and processors to eligible farm cooperatives This section shall apply to the sale of stock of a qualified refiner or processor to an eligible farmers’ cooperative. For purposes of this subsection, the term “qualified refiner or processor” means a domestic corporation— substantially all of the activities of which consist of the active conduct of the trade or business of refining or processing agricultural or horticultural products, and which, during the 1-year period ending on the date of the sale, purchases more than one-half of such products to be refined or processed from— farmers who make up the eligible farmers’ cooperative which is purchasing stock in the corporation in a transaction to which this subsection is to apply, or such cooperative. For purposes of this section, the term “eligible farmers’ cooperative” means an organization to which part I of subchapter T applies and which is engaged in the marketing of agricultural or horticultural products. In applying this section to a sale to which paragraph (1) applies— the eligible farmers’ cooperative shall be treated in the same manner as a cooperative described in subsection (b)(1)(B), subsection (b)(2) shall be applied by substituting “100 percent” for “30 percent” each place it appears, the determination as to whether any stock in the domestic corporation is a qualified security shall be made without regard to whether the stock is an employer security or to subsection (c)(1)(A), and paragraphs (2)(D) and (7) of subsection (c) shall not apply.

“If— before January 1, 1987 , the taxpayer acquired any security (as defined in section 165(g)(2) of the Internal Revenue Code of 1954 [now 1986]) issued by a domestic corporation or by any State or political subdivision thereof, the taxpayer treated such security as qualified replacement property for purposes of section 1042 of such Code, and such property does not meet the requirements of section 1042(c)(4) of such Code (as amended by subparagraph (A)), then, with respect to so much of any gain which the taxpayer treated as not recognized under section 1042(a) by reason of the acquisition of such property, the replacement period for purposes of such section shall not expire before January 1, 1987 .”

§ 1043 Sale of property to comply with conflict-of-interest requirements

(a) Nonrecognition of gain If an eligible person sells any property pursuant to a certificate of divestiture, at the election of the taxpayer, gain from such sale shall be recognized only to the extent that the amount realized on such sale exceeds the cost (to the extent not previously taken into account under this subsection) of any permitted property purchased by the taxpayer during the 60-day period beginning on the date of such sale.

(b) Definitions For purposes of this section— The term “eligible person” means— an officer or employee of the executive branch, or a judicial officer, of the Federal Government, but does not mean a special Government employee as defined in section 202 of title 18 , United States Code, and any spouse or minor or dependent child whose ownership of any property is attributable under any statute, regulation, rule, judicial canon, or executive order referred to in paragraph (2) to a person referred to in subparagraph (A). The term “certificate of divestiture” means any written determination— that states that divestiture of specific property is reasonably necessary to comply with any Federal conflict of interest statute, regulation, rule, judicial canon, or executive order (including section 208 of title 18 , United States Code), or requested by a congressional committee as a condition of confirmation, that has been issued by the President or the Director of the Office of Government Ethics, in the case of executive branch officers or employees, or by the Judicial Conference of the United States (or its designee), in the case of judicial officers, and that identifies the specific property to be divested. The term “permitted property” means any obligation of the United States or any diversified investment fund approved by regulations issued by the Office of Government Ethics. The taxpayer shall be considered to have purchased any permitted property if, but for subsection (c), the unadjusted basis of such property would be its cost within the meaning of section 1012. For purposes of this section, the trustee of a trust shall be treated as an eligible person with respect to property which is held in the trust if— any person referred to in paragraph (1)(A) has a beneficial interest in the principal or income of the trust, or any person referred to in paragraph (1)(B) has a beneficial interest in the principal or income of the trust and such interest is attributable under any statute, regulation, rule, judicial canon, or executive order referred to in paragraph (2) to a person referred to in paragraph (1)(A). The term “judicial officer” means the Chief Justice of the United States, the Associate Justices of the Supreme Court, and the judges of the United States courts of appeals, United States district courts, including the district courts in Guam, the Northern Mariana Islands, and the Virgin Islands, Court of Appeals for the Federal Circuit, Court of International Trade, Tax Court, Court of Federal Claims, Court of Appeals for Veterans Claims, United States Court of Appeals for the Armed Forces, and any court created by Act of Congress, the judges of which are entitled to hold office during good behavior.

(c) Basis adjustments If gain from the sale of any property is not recognized by reason of subsection (a), such gain shall be applied to reduce (in the order acquired) the basis for determining gain or loss of any permitted property which is purchased by the taxpayer during the 60-day period described in subsection (a).

[§ 1044 Repealed. Pub. L. 115–97, title I, § 13313(a), Dec. 22, 2017, 131 Stat. 2133]

§ 1045 Rollover of gain from qualified small business stock to another qualified small business stock

(a) Nonrecognition of gain In the case of any sale of qualified small business stock held by a taxpayer other than a corporation for more than 6 months and with respect to which such taxpayer elects the application of this section, gain from such sale shall be recognized only to the extent that the amount realized on such sale exceeds— the cost of any qualified small business stock purchased by the taxpayer during the 60-day period beginning on the date of such sale, reduced by any portion of such cost previously taken into account under this section. This section shall not apply to any gain which is treated as ordinary income for purposes of this title.

(b) Definitions and special rules For purposes of this section— The term “qualified small business stock” has the meaning given such term by section 1202(c). A taxpayer shall be treated as having purchased any property if, but for paragraph (3), the unadjusted basis of such property in the hands of the taxpayer would be its cost (within the meaning of section 1012). If gain from any sale is not recognized by reason of subsection (a), such gain shall be applied to reduce (in the order acquired) the basis for determining gain or loss of any qualified small business stock which is purchased by the taxpayer during the 60-day period described in subsection (a). For purposes of determining whether the nonrecognition of gain under subsection (a) applies to stock which is sold— the taxpayer’s holding period for such stock and the stock referred to in subsection (a)(1) shall be determined without regard to section 1223, and only the first 6 months of the taxpayer’s holding period for the stock referred to in subsection (a)(1) shall be taken into account for purposes of applying section 1202(c)(2). Rules similar to the rules of subsections (f), (g), (h), (i), (j), and (k) of section 1202 shall apply.

[§ 1051 Repealed. Pub. L. 113–295, div. A, title II, § 221(a)(78), Dec. 19, 2014, 128 Stat. 4049]

§ 1052 Basis established by the Revenue Act of 1932 or 1934 or by the Internal Revenue Code of 1939

(a) Revenue Act of 1932 If the property was acquired, after February 28, 1913 , in any taxable year beginning before January 1, 1934 , and the basis thereof, for purposes of the Revenue Act of 1932 was prescribed by section 113(a)(6), (7), or (9) of such Act ( 47 Stat. 199 ), then for purposes of this subtitle the basis shall be the same as the basis therein prescribed in the Revenue Act of 1932.

(b) Revenue Act of 1934 If the property was acquired, after February 28, 1913 , in any taxable year beginning before January 1, 1936 , and the basis thereof, for purposes of the Revenue Act of 1934, was prescribed by section 113(a)(6), (7), or (8) of such Act ( 48 Stat. 706 ), then for purposes of this subtitle the basis shall be the same as the basis therein prescribed in the Revenue Act of 1934.

(c) Internal Revenue Code of 1939 If the property was acquired, after February 28, 1913 , in a transaction to which the Internal Revenue Code of 1939 applied, and the basis thereof, for purposes of the Internal Revenue Code of 1939, was prescribed by section 113(a)(6), (7), (8), (13), (15), (18), (19), or (23) of such code, then for purposes of this subtitle the basis shall be the same as the basis therein prescribed in the Internal Revenue Code of 1939.

§ 1053 Property acquired before March 1, 1913

In the case of property acquired before March 1, 1913 , if the basis otherwise determined under this subtitle, adjusted (for the period before March 1, 1913 ) as provided in section 1016, is less than the fair market value of the property as of March 1, 1913 , then the basis for determining gain shall be such fair market value. In determining the fair market value of stock in a corporation as of March 1, 1913 , due regard shall be given to the fair market value of the assets of the corporation as of that date. ( Aug. 16, 1954, ch. 736 , 68A Stat. 311 ; Pub. L. 85–866, title I, § 47 , Sept. 2, 1958 , 72 Stat. 1642 .)

§ 1054 Certain stock of Federal National Mortgage Association

In the case of a share of stock issued pursuant to section 303(c) of the Federal National Mortgage Association Charter Act (12 U.S.C., sec. 1718), the basis of such share in the hands of the initial holder shall be an amount equal to the capital contributions evidenced by such share reduced by the amount (if any) required by section 162(d) to be treated (with respect to such share) as ordinary and necessary expenses paid or incurred in carrying on a trade or business. (Added Pub. L. 86–779, § 8(b) , Sept. 14, 1960 , 74 Stat. 1003 .)

§ 1055 Redeemable ground rents

(a) Character For purposes of this subtitle— a redeemable ground rent shall be treated as being in the nature of a mortgage, and real property held subject to liabilities under a redeemable ground rent shall be treated as held subject to liabilities under a mortgage.

(b) Application of subsection (a) Subsection (a) shall take effect on the day after the date of the enactment of this section and shall apply with respect to taxable years ending after such date of enactment. In determining the basis of real property held subject to liabilities under a redeemable ground rent, subsection (a) shall apply whether such real property was acquired before or after the enactment of this section. In the case of a redeemable ground rent reserved or created on or before the date of the enactment of this section in connection with a transfer of the right to hold real property subject to liabilities under such ground rent, the basis of such ground rent after such date in the hands of the person who reserved or created the ground rent shall be the amount taken into account in respect of such ground rent for Federal income tax purposes as consideration for the disposition of such real property. If no such amount was taken into account, such basis shall be determined as if this section had not been enacted.

(c) Redeemable ground rent defined For purposes of this subtitle, the term “redeemable ground rent” means only a ground rent with respect to which— there is a lease of land which is assignable by the lessee without the consent of the lessor and which (together with periods for which the lease may be renewed at the option of the lessee) is for a term in excess of 15 years, the leaseholder has a present or future right to terminate, and to acquire the entire interest of the lessor in the land, by payment of a determined or determinable amount, which right exists by virtue of State or local law and not because of any private agreement or privately created condition, and the lessor’s interest in the land is primarily a security interest to protect the rental payments to which the lessor is entitled under the lease.

(d) Cross reference For treatment of rentals under redeemable ground rents as interest, see section 163(c).

[§ 1056 Repealed. Pub. L. 108–357, title VIII, § 886(b)(1)(A), Oct. 22, 2004, 118 Stat. 1641]

[§ 1057 Repealed. Pub. L. 105–34, title XI, § 1131(c)(2), Aug. 5, 1997, 111 Stat. 980]

§ 1058 Transfers of securities under certain agreements

(a) General rule In the case of a taxpayer who transfers securities (as defined in section 1236(c)) pursuant to an agreement which meets the requirements of subsection (b), no gain or loss shall be recognized on the exchange of such securities by the taxpayer for an obligation under such agreement, or on the exchange of rights under such agreement by that taxpayer for securities identical to the securities transferred by that taxpayer.

(b) Agreement requirements In order to meet the requirements of this subsection, an agreement shall— provide for the return to the transferor of securities identical to the securities transferred; require that payments shall be made to the transferor of amounts equivalent to all interest, dividends, and other distributions which the owner of the securities is entitled to receive during the period beginning with the transfer of the securities by the transferor and ending with the transfer of identical securities back to the transferor; not reduce the risk of loss or opportunity for gain of the transferor of the securities in the securities transferred; and meet such other requirements as the Secretary may by regulation prescribe.

(c) Basis Property acquired by a taxpayer described in subsection (a), in a transaction described in that subsection, shall have the same basis as the property transferred by that taxpayer.

§ 1059 Corporate shareholder’s basis in stock reduced by nontaxed portion of extraordinary dividends

(a) General rule If any corporation receives any extraordinary dividend with respect to any share of stock and such corporation has not held such stock for more than 2 years before the dividend announcement date— The basis of such corporation in such stock shall be reduced (but not below zero) by the nontaxed portion of such dividends. If the nontaxed portion of such dividends exceeds such basis, such excess shall be treated as gain from the sale or exchange of such stock for the taxable year in which the extraordinary dividend is received.

(b) Nontaxed portion For purposes of this section— The nontaxed portion of any dividend is the excess (if any) of— the amount of such dividend, over the taxable portion of such dividend. The taxable portion of any dividend is— the portion of such dividend includible in gross income, reduced by the amount of any deduction allowable with respect to such dividend under section 243 1 245, or 245A.

(c) Extraordinary dividend defined For purposes of this section— The term “extraordinary dividend” means any dividend with respect to a share of stock if the amount of such dividend equals or exceeds the threshold percentage of the taxpayer’s adjusted basis in such share of stock. The term “threshold percentage” means— 5 percent in the case of stock which is preferred as to dividends, and 10 percent in the case of any other stock. All dividends— which are received by the taxpayer (or a person described in subparagraph (C)) with respect to any share of stock, and which have ex-dividend dates within the same period of 85 consecutive days, shall be treated as 1 dividend. All dividends— which are received by the taxpayer (or a person described in subparagraph (C)) with respect to any share of stock, and which have ex-dividend dates during the same period of 365 consecutive days, shall be treated as extraordinary dividends if the aggregate of such dividends exceeds 20 percent of the taxpayer’s adjusted basis in such stock (determined without regard to this section). In the case of any stock, a person is described in this subparagraph if— the basis of such stock in the hands of such person is determined in whole or in part by reference to the basis of such stock in the hands of the taxpayer, or the basis of such stock in the hands of the taxpayer is determined in whole or in part by reference to the basis of such stock in the hands of such person. If the taxpayer establishes to the satisfaction of the Secretary the fair market value of any share of stock as of the day before the ex-dividend date, the taxpayer may elect to apply paragraphs (1) and (3) by substituting such value for the taxpayer’s adjusted basis.

(d) Special rules For purposes of this section— Any reduction in basis under subsection (a)(1) shall be treated as occurring at the beginning of the ex-dividend date of the extraordinary dividend to which the reduction relates. To the extent any dividend consists of property other than cash, the amount of such dividend shall be treated as the fair market value of such property (as of the date of the distribution) reduced as provided in section 301(b)(2). For purposes of determining the holding period of stock under subsection (a), rules similar to the rules of paragraphs (3) and (4) of section 246(c) shall apply and there shall not be taken into account any day which is more than 2 years after the date on which such share becomes ex-dividend. The term “ex-dividend date” means the date on which the share of stock becomes ex-dividend. The term “dividend announcement date” means, with respect to any dividend, the date on which the corporation declares, announces, or agrees to the amount or payment of such dividend, whichever is the earliest. Subsection (a) shall not apply to any extraordinary dividend with respect to any share of stock of a corporation if— such stock was held by the taxpayer during the entire period such corporation was in existence, and except as provided in regulations, no earnings and profits of such corporation were attributable to transfers of property from (or earnings and profits of) a corporation which is not a qualified corporation. For purposes of subparagraph (A), the term “qualified corporation” means any corporation (including a predecessor corporation)— with respect to which the taxpayer holds directly or indirectly during the entire period of such corporation’s existence at least the same ownership interest as the taxpayer holds in the corporation distributing the extraordinary dividend, and which has no earnings and profits— which were earned by, or which are attributable to gain on property which accrued during a period the corporation holding the property was, a corporation not described in clause (i). This paragraph shall not apply to any extraordinary dividend to the extent such application is inconsistent with the purposes of this section.

(e) Special rules for certain distributions Except as otherwise provided in regulations— In the case of any redemption of stock— which is part of a partial liquidation (within the meaning of section 302(e)) of the redeeming corporation, which is not pro rata as to all shareholders, or which would not have been treated (in whole or in part) as a dividend if— any options had not been taken into account under section 318(a)(4), or section 304(a) had not applied, any amount treated as a dividend with respect to such redemption shall be treated as an extraordinary dividend to which paragraphs (1) and (2) of subsection (a) apply without regard to the period the taxpayer held such stock. In the case of a redemption described in clause (iii), only the basis in the stock redeemed shall be taken into account under subsection (a). An exchange described in section 356 which is treated as a dividend shall be treated as a redemption of stock for purposes of applying subparagraph (A). Except as provided in regulations, the term “extraordinary dividend” does not include any qualifying dividend (within the meaning of section 243). Subparagraph (A) shall not apply to any portion of a dividend which is attributable to earnings and profits which— were earned by a corporation during a period it was not a member of the affiliated group, or are attributable to gain on property which accrued during a period the corporation holding the property was not a member of the affiliated group. In the case of 1 or more qualified preferred dividends with respect to any share of stock— this section shall not apply to such dividends if the taxpayer holds such stock for more than 5 years, and if the taxpayer disposes of such stock before it has been held for more than 5 years, the aggregate reduction under subsection (a)(1) with respect to such dividends shall not be greater than the excess (if any) of— the qualified preferred dividends paid with respect to such stock during the period the taxpayer held such stock, over the qualified preferred dividends which would have been paid during such period on the basis of the stated rate of return. For purposes of this paragraph— The actual rate of return shall be the rate of return for the period for which the taxpayer held the stock, determined— by only taking into account dividends during such period, and by using the lesser of the adjusted basis of the taxpayer in such stock or the liquidation preference of such stock. The stated rate of return shall be the annual rate of the qualified preferred dividend payable with respect to any share of stock (expressed as a percentage of the amount described in clause (i)(II)). For purposes of this paragraph— The term “qualified preferred dividend” means any fixed dividend payable with respect to any share of stock which— provides for fixed preferred dividends payable not less frequently than annually, and is not in arrears as to dividends at the time the taxpayer acquires the stock. Such term shall not include any dividend payable with respect to any share of stock if the actual rate of return on such stock exceeds 15 percent. In determining the holding period for purposes of subparagraph (A)(ii), subsection (d)(3) shall be applied by substituting “5 years” for “2 years”.

(f) Treatment of dividends on certain preferred stock Any dividend with respect to disqualified preferred stock shall be treated as an extraordinary dividend to which paragraphs (1) and (2) of subsection (a) apply without regard to the period the taxpayer held the stock. For purposes of this subsection, the term “disqualified preferred stock” means any stock which is preferred as to dividends if— when issued, such stock has a dividend rate which declines (or can reasonably be expected to decline) in the future, the issue price of such stock exceeds its liquidation rights or its stated redemption price, or such stock is otherwise structured— to avoid the other provisions of this section, and to enable corporate shareholders to reduce tax through a combination of dividend received deductions and loss on the disposition of the stock.

(g) Regulations The Secretary shall prescribe such regulations as may be appropriate to carry out the purposes of this section, including regulations— providing for the application of this section in the case of stock dividends, stock splits, reorganizations, and other similar transactions, in the case of stock held by pass-thru entities, and in the case of consolidated groups, and providing that the rules of subsection (f) shall apply in the case of stock which is not preferred as to dividends in cases where stock is structured to avoid the purposes of this section.

(a) In general If any property is imported into the United States in a transaction (directly or indirectly) between related persons (within the meaning of section 482), the amount of any costs— which are taken into account in computing the basis or inventory cost of such property by the purchaser, and which are also taken into account in computing the customs value of such property, shall not, for purposes of computing such basis or inventory cost for purposes of this chapter, be greater than the amount of such costs taken into account in computing such customs value.

(b) Customs value; import For purposes of this section— The term “customs value” means the value taken into account for purposes of determining the amount of any customs duties or any other duties which may be imposed on the importation of any property. Except as provided in regulations, the term “import” means the entering, or withdrawal from warehouse, for consumption.

§ 1060 Special allocation rules for certain asset acquisitions

(a) General rule In the case of any applicable asset acquisition, for purposes of determining both— the transferee’s basis in such assets, and the gain or loss of the transferor with respect to such acquisition, the consideration received for such assets shall be allocated among such assets acquired in such acquisition in the same manner as amounts are allocated to assets under section 338(b)(5). If in connection with an applicable asset acquisition, the transferee and transferor agree in writing as to the allocation of any consideration, or as to the fair market value of any of the assets, such agreement shall be binding on both the transferee and transferor unless the Secretary determines that such allocation (or fair market value) is not appropriate.

(b) Information required to be furnished to Secretary Under regulations, the transferor and transferee in an applicable asset acquisition shall, at such times and in such manner as may be provided in such regulations, furnish to the Secretary the following information: The amount of the consideration received for the assets which is allocated to section 197 intangibles. Any modification of the amount described in paragraph (1). Any other information with respect to other assets transferred in such acquisition as the Secretary deems necessary to carry out the provisions of this section.

(c) Applicable asset acquisition For purposes of this section, the term “applicable asset acquisition” means any transfer (whether directly or indirectly)— of assets which constitute a trade or business, and with respect to which the transferee’s basis in such assets is determined wholly by reference to the consideration paid for such assets. A transfer shall not be treated as failing to be an applicable asset acquisition merely because section 1031 applies to a portion of the assets transferred.

(d) Treatment of certain partnership transactions In the case of a distribution of partnership property or a transfer of an interest in a partnership— the rules of subsection (a) shall apply but only for purposes of determining the value of section 197 intangibles for purposes of applying section 755, and if section 755 applies, such distribution or transfer (as the case may be) shall be treated as an applicable asset acquisition for purposes of subsection (b).

(e) Information required in case of certain transfers of interests in entities If— a person who is a 10-percent owner with respect to any entity transfers an interest in such entity, and in connection with such transfer, such owner (or a related person) enters into an employment contract, covenant not to compete, royalty or lease agreement, or other agreement with the transferee, such owner and the transferee shall, at such time and in such manner as the Secretary may prescribe, furnish such information as the Secretary may require. For purposes of this subsection— The term “10-percent owner” means, with respect to any entity, any person who holds 10 percent or more (by value) of the interests in such entity immediately before the transfer. Section 318 shall apply in determining ownership of stock in a corporation. Similar principles shall apply in determining the ownership of interests in any other entity. For purposes of this subsection, the term “related person” means any person who is related (within the meaning of section 267(b) or 707(b)(1)) to the 10-percent owner.

(f) Cross reference For provisions relating to penalties for failure to file a return required by this section, see section 6721.

§ 1061 Partnership interests held in connection with performance of services

(a) In general If one or more applicable partnership interests are held by a taxpayer at any time during the taxable year, the excess (if any) of— the taxpayer’s net long-term capital gain with respect to such interests for such taxable year, over the taxpayer’s net long-term capital gain with respect to such interests for such taxable year computed by applying paragraphs (3) and (4) of sections 1 1222 by substituting “3 years” for “1 year”, shall be treated as short-term capital gain, notwithstanding section 83 or any election in effect under section 83(b).

(b) Special rule To the extent provided by the Secretary, subsection (a) shall not apply to income or gain attributable to any asset not held for portfolio investment on behalf of third party investors.

(c) Applicable partnership interest For purposes of this section— Except as provided in this paragraph or paragraph (4), the term “applicable partnership interest” means any interest in a partnership which, directly or indirectly, is transferred to (or is held by) the taxpayer in connection with the performance of substantial services by the taxpayer, or any other related person, in any applicable trade or business. The previous sentence shall not apply to an interest held by a person who is employed by another entity that is conducting a trade or business (other than an applicable trade or business) and only provides services to such other entity. The term “applicable trade or business” means any activity conducted on a regular, continuous, and substantial basis which, regardless of whether the activity is conducted in one or more entities, consists, in whole or in part, of— raising or returning capital, and either— investing in (or disposing of) specified assets (or identifying specified assets for such investing or disposition), or developing specified assets. The term “specified asset” means securities (as defined in section 475(c)(2) without regard to the last sentence thereof), commodities (as defined in section 475(e)(2)), real estate held for rental or investment, cash or cash equivalents, options or derivative contracts with respect to any of the foregoing, and an interest in a partnership to the extent of the partnership’s proportionate interest in any of the foregoing. The term “applicable partnership interest” shall not include— any interest in a partnership directly or indirectly held by a corporation, or any capital interest in the partnership which provides the taxpayer with a right to share in partnership capital commensurate with— the amount of capital contributed (determined at the time of receipt of such partnership interest), or the value of such interest subject to tax under section 83 upon the receipt or vesting of such interest. The term “third party investor” means a person who— holds an interest in the partnership which does not constitute property held in connection with an applicable trade or business; and is not (and has not been) actively engaged, and is (and was) not related to a person so engaged, in (directly or indirectly) providing substantial services described in paragraph (1) for such partnership or any applicable trade or business.

(d) Transfer of applicable partnership interest to related person If a taxpayer transfers any applicable partnership interest, directly or indirectly, to a person related to the taxpayer, the taxpayer shall include in gross income (as short term capital gain) the excess (if any) of— so much of the taxpayer’s long-term capital gains with respect to such interest for such taxable year attributable to the sale or exchange of any asset held for not more than 3 years as is allocable to such interest, over any amount treated as short term capital gain under subsection (a) with respect to the transfer of such interest. For purposes of this paragraph, a person is related to the taxpayer if— the person is a member of the taxpayer’s family within the meaning of section 318(a)(1), or the person performed a service within the current calendar year or the preceding three calendar years in any applicable trade or business in which or for which the taxpayer performed a service.

(e) Reporting The Secretary shall require such reporting (at the time and in the manner prescribed by the Secretary) as is necessary to carry out the purposes of this section.

(f) Regulations The Secretary shall issue such regulations or other guidance as is necessary or appropriate to carry out the purposes of this section 2

§ 1062 Gain from the sale or exchange of qualified farmland property to qualified farmers

(a) Election to pay tax in installments In the case of gain from the sale or exchange of qualified farmland property to a qualified farmer, at the election of the taxpayer, the portion of the net income tax of such taxpayer for the taxable year of the sale or exchange which is equal to the applicable net tax liability shall be paid in 4 equal installments.

(b) Rules relating to installment payments If an election is made under subsection (a), the first installment shall be paid on the due date (determined without regard to any extension of time for filing the return) for the return of tax for the taxable year in which the sale or exchange occurs and each succeeding installment shall be paid on the due date (as so determined) for the return of tax for the taxable year following the taxable year with respect to which the preceding installment was made. If there is an addition to tax for failure to timely pay any installment required under this section, then the unpaid portion of all remaining installments shall be due on the date of such failure. In the case of an individual, if the individual dies, then the unpaid portion of all remaining installment shall be paid on the due date for the return of tax for the taxable year in which the taxpayer dies. In the case of a taxpayer which is a C corporation, trust, or estate, if there is a liquidation or sale of substantially all the assets of the taxpayer (including in a title 11 or similar case), a cessation of business by the taxpayer (in the case of a C corporation), or any similar circumstance, then the unpaid portion of all remaining installments shall be due on the date of such event (or in the case of a title 11 or similar case, the day before the petition is filed). The preceding sentence shall not apply to the sale of substantially all the assets of a taxpayer to a buyer if such buyer enters into an agreement with the Secretary under which such buyer is liable for the remaining installments due under this subsection in the same manner as if such buyer were the taxpayer. If an election is made under subsection (a) to pay the applicable net tax liability in installments and a deficiency has been assessed with respect to such applicable net tax liability, the deficiency shall be prorated to the installments payable under subsection (a). The part of the deficiency so prorated to any installment the date for payment of which has not arrived shall be collected at the same time as, and as a part of, such installment. The part of the deficiency so prorated to any installment the date for payment of which has arrived shall be paid upon notice and demand from the Secretary. This section shall not apply if the deficiency is due to negligence, to intentional disregard of rules and regulations, or to fraud with intent to evade tax.

(c) Election Any election under subsection (a) shall be made not later than the due date for the return of tax for the taxable year described in subsection (a). In the case of a sale or exchange described in subsection (a) by a partnership or S corporation, the election under subsection (a) shall be made at the partner or shareholder level. The Secretary may prescribe such regulations or other guidance as necessary to carry out the purposes of this paragraph.

(d) Definitions For purposes of this section— The applicable net tax liability with respect to the sale or exchange of any property described in subsection (a) is the excess (if any) of— such taxpayer’s net income tax for the taxable year, over such taxpayer’s net income tax for such taxable year determined without regard to any gain recognized from the sale or exchange of such property. The term “net income tax” means the regular tax liability reduced by the credits allowed under subparts A, B, and D of part IV of subchapter A. The term “qualified farmland property” means real property located in the United States— which— has been used by the taxpayer as a farm for farming purposes, or leased by the taxpayer to a qualified farmer for farming purposes, during substantially all of the 10-year period ending on the date of the qualified sale or exchange, and which is subject to a covenant or other legally enforceable restriction which prohibits the use of such property other than as a farm for farming purposes for any period before the date that is 10 years after the date of the sale or exchange described in subsection (a). For purposes of clause (i), property which is used or leased by a partnership or S corporation in a manner described in such clause shall be treated as used or leased in such manner by each person who holds a direct or indirect interest in such partnership or S corporation. The terms “farm” and “farming purposes” have the respective meanings given such terms under section 2032A(e). The term “qualified farmer” means any individual who is actively engaged in farming (within the meaning of subsections (b) and (c) of section 1001 of the Food Security Act of 1986 1 ( 7 U.S.C. 1308–1(b) and (c))).

(e) Return requirement A taxpayer making an election under subsection (a) shall include with the return for the taxable year of the sale or exchange described in subsection (a) a copy of the covenant or other legally enforceable restriction described in subsection (d)(2)(A)(ii).

§ 1063 Cross references

For nonrecognition of gain in connection with the transfer of obsolete vessels to the Maritime Administration under chapter 573 of title 46, United States Code, see section 57307 of title 46 . For recognition of gain or loss in connection with the construction of new vessels, see chapter 533 of title 46, United States Code. ( Aug. 16, 1954, ch. 736 , 68A Stat. 311 , § 1054; renumbered § 1055, Pub. L. 86–779, § 8(b) , Sept. 14, 1960 , 74 Stat. 1003 ; renumbered § 1056, Pub. L. 88–9, § 1(b) , Apr. 10, 1963 , 77 Stat. 7 ; renumbered § 1057, Pub. L. 94–455, title II, § 212(a)(1) , Oct. 4, 1976 , 90 Stat. 1545 ; renumbered § 1058, Pub. L. 94–455, title X, § 1015(c) , Oct. 4, 1976 , 90 Stat. 1618 ; renumbered § 1059, Pub. L. 95–345, § 2(d)(1) , Aug. 15, 1978 , 92 Stat. 482 ; renumbered § 1060, Pub. L. 98–369, div. A, title I, § 53(a) , July 18, 1984 , 98 Stat. 565 ; renumbered § 1061 and amended, Pub. L. 99–514, title VI, § 641(a) , title XVIII, § 1899A(27), Oct. 22, 1986 , 100 Stat. 2282 , 2960; Pub. L. 109–304, § 17(e)(5) , Oct. 6, 2006 , 120 Stat. 1708 ; renumbered § 1062, Pub. L. 115–97, title I, § 13309(a)(1) , Dec. 22, 2017 , 131 Stat. 2130 ; renumbered § 1063, Pub. L. 119–21, title VII, § 70437(a) , July 4, 2025 , 139 Stat. 248 .)

[§ 1071 Repealed. Pub. L. 104–7, § 2(a), Apr. 11, 1995, 109 Stat. 93]

[§§ 1081 to 1083 Repealed. Pub. L. 109–135, title IV, § 402(a)(1), Dec. 21, 2005, 119 Stat. 2610]

§ 1091 Loss from wash sales of stock or securities

(a) Disallowance of loss deduction In the case of any loss claimed to have been sustained from any sale or other disposition of shares of stock or securities where it appears that, within a period beginning 30 days before the date of such sale or disposition and ending 30 days after such date, the taxpayer has acquired (by purchase or by an exchange on which the entire amount of gain or loss was recognized by law), or has entered into a contract or option so to acquire, substantially identical stock or securities, then no deduction shall be allowed under section 165 unless the taxpayer is a dealer in stock or securities and the loss is sustained in a transaction made in the ordinary course of such business. For purposes of this section, the term “stock or securities” shall, except as provided in regulations, include contracts or options to acquire or sell stock or securities.

(b) Stock acquired less than stock sold If the amount of stock or securities acquired (or covered by the contract or option to acquire) is less than the amount of stock or securities sold or otherwise disposed of, then the particular shares of stock or securities the loss from the sale or other disposition of which is not deductible shall be determined under regulations prescribed by the Secretary.

(c) Stock acquired not less than stock sold If the amount of stock or securities acquired (or covered by the contract or option to acquire) is not less than the amount of stock or securities sold or otherwise disposed of, then the particular shares of stock or securities the acquisition of which (or the contract or option to acquire which) resulted in the nondeductibility of the loss shall be determined under regulations prescribed by the Secretary.

(d) Unadjusted basis in case of wash sale of stock If the property consists of stock or securities the acquisition of which (or the contract or option to acquire which) resulted in the nondeductibility (under this section or corresponding provisions of prior internal revenue laws) of the loss from the sale or other disposition of substantially identical stock or securities, then the basis shall be the basis of the stock or securities so sold or disposed of, increased or decreased, as the case may be, by the difference, if any, between the price at which the property was acquired and the price at which such substantially identical stock or securities were sold or otherwise disposed of.

(e) Certain short sales of stock or securities and securities futures contracts to sell Rules similar to the rules of subsection (a) shall apply to any loss realized on the closing of a short sale of (or the sale, exchange, or termination of a securities futures contract to sell) stock or securities if, within a period beginning 30 days before the date of such closing and ending 30 days after such date— substantially identical stock or securities were sold, or another short sale of (or securities futures contracts to sell) substantially identical stock or securities was entered into. For purposes of this subsection, the term “securities futures contract” has the meaning provided by section 1234B(c).

(f) Cash settlement This section shall not fail to apply to a contract or option to acquire or sell stock or securities solely by reason of the fact that the contract or option settles in (or could be settled in) cash or property other than such stock or securities.

§ 1092 Straddles

(a) Recognition of loss in case of straddles, etc. Any loss with respect to 1 or more positions shall be taken into account for any taxable year only to the extent that the amount of such loss exceeds the unrecognized gain (if any) with respect to 1 or more positions which were offsetting positions with respect to 1 or more positions from which the loss arose. Any loss which may not be taken into account under subparagraph (A) for any taxable year shall, subject to the limitations under subparagraph (A), be treated as sustained in the succeeding taxable year. In the case of any straddle which is an identified straddle— paragraph (1) shall not apply with respect to positions comprising the identified straddle, if there is any loss with respect to any position of the identified straddle, the basis of each of the offsetting positions in the identified straddle shall be increased by an amount which bears the same ratio to the loss as the unrecognized gain with respect to such offsetting position bears to the aggregate unrecognized gain with respect to all such offsetting positions, if the application of clause (ii) does not result in an increase in the basis of any offsetting position in the identified straddle, the basis of each of the offsetting positions in the identified straddle shall be increased in a manner which— is reasonable, consistent with the purposes of this paragraph, and consistently applied by the taxpayer, and results in an aggregate increase in the basis of such offsetting positions which is equal to the loss described in clause (ii), and any loss described in clause (ii) shall not otherwise be taken into account for purposes of this title. The term “identified straddle” means any straddle— which is clearly identified on the taxpayer’s records as an identified straddle before the earlier of— the close of the day on which the straddle is acquired, or such time as the Secretary may prescribe by regulations. to the extent provided by regulations, the value of each position of which (in the hands of the taxpayer immediately before the creation of the straddle) is not less than the basis of such position in the hands of the taxpayer at the time the straddle is created, and which is not part of a larger straddle. A straddle shall be treated as clearly identified for purposes of clause (i) only if such identification includes an identification of the positions in the straddle which are offsetting with respect to other positions in the straddle. Except as otherwise provided by the Secretary, rules similar to the rules of clauses (ii) and (iii) of subparagraph (A) shall apply for purposes of this paragraph with respect to any position which is, or has been, a liability or obligation. The Secretary shall prescribe such regulations or other guidance as may be necessary or appropriate to carry out the purposes of this paragraph. Such regulations or other guidance may specify the proper methods for clearly identifying a straddle as an identified straddle (and for identifying the positions comprising such straddle), the rules for the application of this section to a taxpayer which fails to comply with those identification requirements, the rules for the application of this section to a position which is or has been a liability or obligation, methods of loss allocation which satisfy the requirements of subparagraph (A)(iii), and the ordering rules in cases where a taxpayer disposes (or otherwise ceases to be the holder) of any part of any position which is part of an identified straddle. For purposes of this subsection— The term “unrecognized gain” means— in the case of any position held by the taxpayer as of the close of the taxable year, the amount of gain which would be taken into account with respect to such position if such position were sold on the last business day of such taxable year at its fair market value, and in the case of any position with respect to which, as of the close of the taxable year, gain has been realized but not recognized, the amount of gain so realized. For purposes of paragraph (2)(A)(ii), the unrecognized gain with respect to any offsetting position shall be the excess of the fair market value of the position at the time of the determination over the fair market value of the position at the time the taxpayer identified the position as a position in an identified straddle. Each taxpayer shall disclose to the Secretary, at such time and in such manner and form as the Secretary may prescribe by regulations— each position (whether or not part of a straddle) with respect to which, as of the close of the taxable year, there is unrecognized gain, and the amount of such unrecognized gain. Clause (i) shall not apply— to any position which is part of an identified straddle, to any position which, with respect to the taxpayer, is property described in paragraph (1) or (2) of section 1221(a) or to any position which is part of a hedging transaction (as defined in section 1256(e)), or with respect to any taxable year if no loss on a position (including a regulated futures contract) has been sustained during such taxable year or if the only loss sustained on such position is a loss described in subclause (II).

(b) Regulations The Secretary shall prescribe such regulations with respect to gain or loss on positions which are a part of a straddle as may be appropriate to carry out the purposes of this section and section 263(g). To the extent consistent with such purposes, such regulations shall include rules applying the principles of subsections (a) and (d) of section 1091 and of subsections (b) and (d) of section 1233. The regulations prescribed under paragraph (1) shall provide that— the taxpayer may offset gains and losses from positions which are part of mixed straddles— by straddle-by-straddle identification, or by the establishment (with respect to any class of activities) of a mixed straddle account for which gains and losses would be recognized (and offset) on a periodic basis, such offsetting will occur before the application of section 1256, and section 1256(a)(3) will only apply to net gain or net loss attributable to section 1256 contracts, and the principles of section 1233(d) shall not apply with respect to any straddle identified under clause (i)(I) or part of an account established under clause (i)(II). In the case of any mixed straddle account referred to in subparagraph (A)(i)(II)— In no event shall more than 50 percent of the net gain from such account for any taxable year be treated as long-term capital gain. In no event shall more than 40 percent of the net loss from such account for any taxable year be treated as short-term capital loss. The regulations prescribed under paragraph (1) may treat as a mixed straddle positions not described in section 1256(d)(4). The regulations prescribed under paragraph (1) shall include regulations relating to the timing and character of gains and losses in case of straddles where at least 1 position is ordinary and at least 1 position is capital.

(c) Straddle defined For purposes of this section— The term “straddle” means offsetting positions with respect to personal property. A taxpayer holds offsetting positions with respect to personal property if there is a substantial diminution of the taxpayer’s risk of loss from holding any position with respect to personal property by reason of his holding 1 or more other positions with respect to personal property (whether or not of the same kind). In the case of any position which is not part of an identified straddle (within the meaning of subsection (a)(2)(B)), such position shall not be treated as offsetting with respect to any position which is part of an identified straddle. For purposes of paragraph (2), 2 or more positions shall be presumed to be offsetting if— the positions are in the same personal property (whether established in such property or a contract for such property), the positions are in the same personal property, even though such property may be in a substantially altered form, the positions are in debt instruments of a similar maturity or other debt instruments described in regulations prescribed by the Secretary, the positions are sold or marketed as offsetting positions (whether or not such positions are called a straddle, spread, butterfly, or any similar name), the aggregate margin requirement for such positions is lower than the sum of the margin requirements for each such position (if held separately), or there are such other factors (or satisfaction of subjective or objective tests) as the Secretary may by regulations prescribe as indicating that such positions are offsetting. For purposes of the preceding sentence, 2 or more positions shall be treated as described in clause (i), (ii), (iii), or (vi) only if the value of 1 or more of such positions ordinarily varies inversely with the value of 1 or more other such positions. Any presumption established pursuant to subparagraph (A) may be rebutted. If— all the offsetting positions making up any straddle consist of 1 or more qualified covered call options and the stock to be purchased from the taxpayer under such options, and such straddle is not part of a larger straddle, such straddle shall not be treated as a straddle for purposes of this section and section 263(g). For purposes of subparagraph (A), the term “qualified covered call option” means any option granted by the taxpayer to purchase stock held by the taxpayer (or stock acquired by the taxpayer in connection with the granting of the option) but only if— such option is traded on a national securities exchange which is registered with the Securities and Exchange Commission or other market which the Secretary determines has rules adequate to carry out the purposes of this paragraph, such option is granted more than 30 days before the day on which the option expires, such option is not a deep-in-the-money option, such option is not granted by an options dealer (within the meaning of section 1256(g)(8)) in connection with his activity of dealing in options, and gain or loss with respect to such option is not ordinary income or loss. For purposes of subparagraph (B), the term “deep-in-the-money option” means an option having a strike price lower than the lowest qualified bench mark. Except as otherwise provided in this subparagraph, for purposes of subparagraph (C), the term “lowest qualified bench mark” means the highest available strike price which is less than the applicable stock price. In the case of an option— which is granted more than 90 days before the date on which such option expires, and with respect to which the strike price is more than $50, t h e l o w es tq u a l i f i e d b e n c hma r ki s t h eseco n d hi g h es t a v ai l ab l es t r ik e p r i ce w hi c hi s l ess t han t h e a ppl i c ab l es t oc k p r i ce . I f — t h e a ppl i c ab l es t oc k p r i ce i s$ 25 or less, and but for this clause, the lowest qualified bench mark would be less than 85 percent of the applicable stock price, the lowest qualified bench mark shall be treated as equal to 85 percent of the applicable stock price. If— the applicable stock price is $150 or l ess, an d b u t f or t hi sc l a u se, t h e l o w es tq u a l i f i e d b e n c hma r k w o u l d b e l ess t han t h e a ppl i c ab l es t oc k p r i cere d u ce d b y$ 10, the lowest qualified bench mark shall be treated as equal to the applicable stock price reduced by $10. Subparagraph (A) shall not apply to any straddle for purposes of section 1092(a) if— the qualified covered call options referred to in such subparagraph are closed or the stock is disposed of at a loss during any taxable year, gain on disposition of the stock to be purchased from the taxpayer under such options or gains on such options are includible in gross income for a later taxable year, and such stock or option was not held by the taxpayer for 30 days or more after the closing of such options or the disposition of such stock. For purposes of the preceding sentence, the rules of paragraphs (3) and (4) of section 246(c) shall apply in determining the period for which the taxpayer holds the stock. For purposes of this paragraph, the term “strike price” means the price at which the option is exercisable. For purposes of subparagraph (D), the term “applicable stock price” means, with respect to any stock for which an option has been granted— the closing price of such stock on the most recent day on which such stock was traded before the date on which such option was granted, or the opening price of such stock on the day on which such option was granted, but only if such price is greater than 110 percent of the price determined under clause (i). The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this paragraph. Such regulations may include modifications to the provisions of this paragraph which are appropriate to take account of changes in the practices of option exchanges or to prevent the use of options for tax avoidance purposes.

(d) Definitions and special rules For purposes of this section— The term “personal property” means any personal property of a type which is actively traded. The term “position” means an interest (including a futures or forward contract or option) in personal property. For purposes of paragraph (1)— In the case of stock, the term “personal property” includes stock only if— such stock is of a type which is actively traded and at least 1 of the positions offsetting such stock is a position with respect to such stock or substantially similar or related property, or such stock is of a corporation formed or availed of to take positions in personal property which offset positions taken by any shareholder. For purposes of determining whether subsection (e) applies to any transaction with respect to stock described in subparagraph (A)(ii), all includible corporations of an affiliated group (within the meaning of section 1504(a)) shall be treated as 1 taxpayer. In determining whether 2 or more positions are offsetting, the taxpayer shall be treated as holding any position held by a related person. For purposes of subparagraph (A), a person is a related person to the taxpayer if with respect to any period during which a position is held by such person, such person— is the spouse of the taxpayer, or files a consolidated return (within the meaning of section 1501) with the taxpayer for any taxable year which includes a portion of such period. If part or all of the gain or loss with respect to a position held by a partnership, trust, or other entity would properly be taken into account for purposes of this chapter by a taxpayer, then, except to the extent otherwise provided in regulations, such position shall be treated as held by the taxpayer. In the case of a straddle at least 1 (but not all) of the positions of which are section 1256 contracts, the provisions of this section shall apply to any section 1256 contract and any other position making up such straddle. For purposes of subsection (a)(2) (relating to identified straddles), subparagraph (A) and section 1256(a)(4) shall not apply to a straddle all of the offsetting positions of which consist of section 1256 contracts. The term “section 1256 contract” has the meaning given such term by section 1256(b). For purposes of paragraph (2), an obligor’s interest in a nonfunctional currency denominated debt obligation is treated as a position in the nonfunctional currency. For purposes of paragraph (1), foreign currency for which there is an active interbank market is presumed to be actively traded. For purposes of subsection (a), if a taxpayer settles a position which is part of a straddle by delivering property to which the position relates (and such position, if terminated, would result in a realization of a loss), then such taxpayer shall be treated as if such taxpayer— terminated the position for its fair market value immediately before the settlement, and sold the property so delivered by the taxpayer at its fair market value.

(e) Exception for hedging transactions This section shall not apply in the case of any hedging transaction (as defined in section 1256(e)).

(f) Treatment of gain or loss and suspension of holding period where taxpayer grantor of qualified covered call option If a taxpayer holds any stock and grants a qualified covered call option to purchase such stock with a strike price less than the applicable stock price— Any loss with respect to such option shall be treated as long-term capital loss if, at the time such loss is realized, gain on the sale or exchange of such stock would be treated as long-term capital gain. The holding period of such stock shall not include any period during which the taxpayer is the grantor of such option.

(g) Cross reference For provision requiring capitalization of certain interest and carrying charges where there is a straddle, see section 263(g).

[§§ 1101 to 1103 Repealed. Pub. L. 101–508, title XI, § 11801(a)(34), Nov. 5, 1990, 104 Stat. 1388–521]

[§ 1111 Repealed. Pub. L. 94–455, title XIX, § 1901(a)(134), Oct. 4, 1976, 90 Stat. 1786]

[§ 1201 Repealed. Pub. L. 115–97, title I, § 13001(b)(2)(A), Dec. 22, 2017, 131 Stat. 2096]

§ 1202 Partial exclusion for gain from certain small business stock

(a) Exclusion In the case of a taxpayer other than a corporation, gross income shall not include— except as provided in paragraphs (3) and (4), 50 percent of any gain from the sale or exchange of qualified small business stock acquired on or before the applicable date and held for more than 5 years, and the applicable percentage of any gain from the sale or exchange of qualified small business stock acquired after the applicable date and held for at least 3 years. In the case of qualified small business stock acquired after the date of the enactment of this paragraph in a corporation which is a qualified business entity (as defined in section 1397C(b)) during substantially all of the taxpayer’s holding period for such stock, paragraph (1) shall be applied by substituting “60 percent” for “50 percent”. Rules similar to the rules of paragraphs (5) and (7) of section 1400B(b) (as in effect before its repeal) shall apply for purposes of this paragraph. Subparagraph (A) shall not apply to gain attributable to periods after December 31, 2018 . The District of Columbia Enterprise Zone shall not be treated as an empowerment zone for purposes of this paragraph. In the case of qualified small business stock acquired after the date of the enactment of this paragraph and on or before the date of the enactment of the Creating Small Business Jobs Act of 2010— paragraph (1)(A) shall be applied by substituting “75 percent” for “50 percent”, and paragraph (2) shall not apply. In the case of any stock which would be described in the preceding sentence (but for this sentence), the acquisition date for purposes of this subsection shall be the first day on which such stock was held by the taxpayer determined after the application of section 1223. In the case of qualified small business stock acquired after the date of the enactment of the Creating Small Business Jobs Act of 2010 and on or before the applicable date— paragraph (1)(A) shall be applied by substituting “100 percent” for “50 percent”, 1 paragraph (2) shall not apply. In the case of any stock which would be described in the preceding sentence (but for this sentence), the acquisition date for purposes of this subsection shall be the first day on which such stock was held by the taxpayer determined after the application of section 1223. The applicable percentage under paragraph (1) shall be determined under the following table: Years stock held: Applicable percentage: 3 years 50% 4 years 75% 5 years or more 100% For purposes of this section— The term “applicable date” means the date of the enactment of this paragraph. In the case of any stock which would (but for this paragraph) be treated as having been acquired before, on, or after the applicable date, whichever is applicable, the acquisition date for purposes of this section shall be the first day on which such stock was held by the taxpayer determined after the application of section 1223.

(b) Per-issuer limitation on taxpayer’s eligible gain If the taxpayer has eligible gain for the taxable year from 1 or more dispositions of stock issued by any corporation, the aggregate amount of such gain from dispositions of stock issued by such corporation which may be taken into account under subsection (a) for the taxable year shall not exceed the greater of— the applicable dollar limit for the taxable year, or 10 times the aggregate adjusted bases of qualified small business stock issued by such corporation and disposed of by the taxpayer during the taxable year. For purposes of subparagraph (B), the adjusted basis of any stock shall be determined without regard to any addition to basis after the date on which such stock was originally issued. For purposes of this subsection, the term “eligible gain” means any gain from the sale or exchange of qualified small business stock held for at least 3 years (more than 5 years in the case of stock acquired on or before the applicable date). In the case of a separate return by a married individual for any taxable year— paragraph (4)(A) shall be applied by substituting “ $5, 000, 000” f or “$ 10,000,000”, and paragraph (4)(B) shall be applied by substituting one-half of the dollar amount in effect under such paragraph for the taxable year for the amount so in effect. In the case of any joint return, the amount of gain taken into account under subsection (a) shall be allocated equally between the spouses for purposes of applying this subsection to subsequent taxable years. For purposes of this subsection, marital status shall be determined under section 7703. For purposes of paragraph (1)(A), the applicable dollar limit for any taxable year with respect to eligible gain from 1 or more dispositions by a taxpayer of qualified business stock of a corporation is— if such stock was acquired by the taxpayer on or before the applicable date, $10, 000, 000, re d u ce d b y t h e a gg re g a t e am o u n t o f e l i g ib l e g ain t ak e nin t o a cco u n t b y t h e t a x p a yer u n d ers u b sec t i o n (a) f or p r i or t a x ab l eye a rs an d a tt r ib u t ab l e t o d i s p os i t i o n so f s t oc ki ss u e d b ys u c h cor p or a t i o nan d a c q u i re d b y t h e t a x p a yer b e f ore, o n, or a f t er t h e a ppl i c ab l e d a t e, an d i f s u c h s t oc k w a s a c q u i re d b y t h e t a x p a yer a f t er t h e a ppl i c ab l e d a t e,$ 15,000,000, reduced by the sum of— the aggregate amount of eligible gain taken into account by the taxpayer under subsection (a) for prior taxable years and attributable to dispositions of stock issued by such corporation and acquired by the taxpayer before, on, or after the applicable date, plus the aggregate amount of eligible gain taken into account by the taxpayer under subsection (a) for the taxable year and attributable to dispositions of stock issued by such corporation and acquired by the taxpayer on or before the applicable date. In the case of any taxable year beginning after 2026, the $15, 000, 000 am o u n t in p a r a g r a p h (4) (B) s ha ll b e in cre a se d b y anam o u n t e q u a lt o — s u c h d o ll a r am o u n t, m u lt i pl i e d b y t h ecos t - o f - l i v in g a d j u s t m e n t d e t er min e d u n d ersec t i o n 1 (f) (3) f or t h ec a l e n d a rye a r in w hi c h t h e t a x ab l eye a r b e g in s, d e t er min e d b ys u b s t i t u t in g “ c a l e n d a rye a r 2025” f or “ c a l e n d a rye a r 2016” in s u b p a r a g r a p h (A) (ii) t h ereo f . I f an y in cre a se u n d er t hi ss u b p a r a g r a p hi s n o t am u lt i pl eo f$ 10,000, such increase shall be rounded to the nearest multiple of $10, 000. I f, f or an y t a x ab l eye a r, t h ee l i g ib l e g aina tt r ib u t ab l e t o d i s p os i t i o n so f s t oc ki ss u e d b y a cor p or a t i o nan d a c q u i re d b y t h e t a x p a yer a f t er t h e a ppl i c ab l e d a t ee x cee d s t h e a ppl i c ab l e d o ll a r l imi t, t h e nn o tw i t h s t an d in g an y in cre a se u n d ers u b p a r a g r a p h (A) f or an ys u b se q u e n tt a x ab l eye a r, t h e a ppl i c ab l e d o ll a r l imi t f ors u c h s u b se q u e n tt a x ab l eye a rs ha ll b ezero . I n t h ec a seo f an y t a x ab l eye a r b e g innin g a f t er 2026, t h e$ 75,000,000 amounts in paragraphs (1)(A) and (1)(B) shall each be increased by an amount equal to— such dollar amount, multiplied by the cost-of-living adjustment determined under section 1(f)(3) for the calendar year in which the taxable year begins, determined by substituting “calendar year 2025” for “calendar year 2016” in subparagraph (A)(ii) thereof. If any increase under this paragraph is not a multiple of $10, 000, s u c hin cre a ses ha ll b ero u n d e d t o t h e n e a res t m u lt i pl eo f$ 10,000.

(c) Qualified small business stock For purposes of this section— Except as otherwise provided in this section, the term “qualified small business stock” means any stock in a C corporation which is originally issued after the date of the enactment of the Revenue Reconciliation Act of 1993, if— as of the date of issuance, such corporation is a qualified small business, and except as provided in subsections (f) and (h), such stock is acquired by the taxpayer at its original issue (directly or through an underwriter)— in exchange for money or other property (not including stock), or as compensation for services provided to such corporation (other than services performed as an underwriter of such stock). Stock in a corporation shall not be treated as qualified small business stock unless, during substantially all of the taxpayer’s holding period for such stock, such corporation meets the active business requirements of subsection (e) and such corporation is a C corporation. Notwithstanding any provision of subsection (e), a corporation shall be treated as meeting the active business requirements of such subsection for any period during which such corporation qualifies as a specialized small business investment company. For purposes of clause (i), the term “specialized small business investment company” means any eligible corporation (as defined in subsection (e)(4)) which is licensed to operate under section 301(d) of the Small Business Investment Act of 1958 (as in effect on May 13, 1993 ). Stock acquired by the taxpayer shall not be treated as qualified small business stock if, at any time during the 4-year period beginning on the date 2 years before the issuance of such stock, the corporation issuing such stock purchased (directly or indirectly) any of its stock from the taxpayer or from a person related (within the meaning of section 267(b) or 707(b)) to the taxpayer. Stock issued by a corporation shall not be treated as qualified business stock if, during the 2-year period beginning on the date 1 year before the issuance of such stock, such corporation made 1 or more purchases of its stock with an aggregate value (as of the time of the respective purchases) exceeding 5 percent of the aggregate value of all of its stock as of the beginning of such 2-year period. If any transaction is treated under section 304(a) as a distribution in redemption of the stock of any corporation, for purposes of subparagraphs (A) and (B), such corporation shall be treated as purchasing an amount of its stock equal to the amount treated as such a distribution under section 304(a).

(d) Qualified small business For purposes of this section— The term “qualified small business” means any domestic corporation which is a C corporation if— the aggregate gross assets of such corporation (or any predecessor thereof) at all times on or after the date of the enactment of the Revenue Reconciliation Act of 1993 and before the issuance did not exceed $75, 000, 000, t h e a gg re g a t e g ross a sse t so f s u c h cor p or a t i o nimm e d ia t e l y a f t er t h e i ss u an ce (d e t er min e d b y t akin g in t o a cco u n t am o u n t srece i v e d in t h e i ss u an ce) d o n o t e x cee d$ 75,000,000, and such corporation agrees to submit such reports to the Secretary and to shareholders as the Secretary may require to carry out the purposes of this section. For purposes of paragraph (1), the term “aggregate gross assets” means the amount of cash and the aggregate adjusted bases of other property held by the corporation. For purposes of subparagraph (A), the adjusted basis of any property contributed to the corporation (or other property with a basis determined in whole or in part by reference to the adjusted basis of property so contributed) shall be determined as if the basis of the property contributed to the corporation (immediately after such contribution) were equal to its fair market value as of the time of such contribution. All corporations which are members of the same parent-subsidiary controlled group shall be treated as 1 corporation for purposes of this subsection. For purposes of subparagraph (A), the term “parent-subsidiary controlled group” means any controlled group of corporations as defined in section 1563(a)(1), except that— “more than 50 percent” shall be substituted for “at least 80 percent” each place it appears in section 1563(a)(1), and section 1563(a)(4) shall not apply.

(e) Active business requirement For purposes of subsection (c)(2), the requirements of this subsection are met by a corporation for any period if during such period— at least 80 percent (by value) of the assets of such corporation are used by such corporation in the active conduct of 1 or more qualified trades or businesses, and such corporation is an eligible corporation. For purposes of paragraph (1), if, in connection with any future qualified trade or business, a corporation is engaged in— start-up activities described in section 195(c)(1)(A), activities resulting in the payment or incurring of expenditures which are treated as foreign research or experimental expenditures under section 174 or domestic research or experimental expenditures under section 174A, or activities with respect to in-house research expenses described in section 41(b)(4), assets used in such activities shall be treated as used in the active conduct of a qualified trade or business. Any determination under this paragraph shall be made without regard to whether a corporation has any gross income from such activities at the time of the determination. For purposes of this subsection, the term “qualified trade or business” means any trade or business other than— any trade or business involving the performance of services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of 1 or more of its employees, any banking, insurance, financing, leasing, investing, or similar business, any farming business (including the business of raising or harvesting trees), any business involving the production or extraction of products of a character with respect to which a deduction is allowable under section 613 or 613A, and any business of operating a hotel, motel, restaurant, or similar business. For purposes of this subsection, the term “eligible corporation” means any domestic corporation; except that such term shall not include— a DISC or former DISC, a regulated investment company, real estate investment trust, or REMIC, and a cooperative. For purposes of this subsection, stock and debt in any subsidiary corporation shall be disregarded and the parent corporation shall be deemed to own its ratable share of the subsidiary’s assets, and to conduct its ratable share of the subsidiary’s activities. A corporation shall be treated as failing to meet the requirements of paragraph (1) for any period during which more than 10 percent of the value of its assets (in excess of liabilities) consists of stock or securities in other corporations which are not subsidiaries of such corporation (other than assets described in paragraph (6)). For purposes of this paragraph, a corporation shall be considered a subsidiary if the parent owns more than 50 percent of the combined voting power of all classes of stock entitled to vote, or more than 50 percent in value of all outstanding stock, of such corporation. For purposes of paragraph (1)(A), any assets which— are held as a part of the reasonably required working capital needs of a qualified trade or business of the corporation, or are held for investment and are reasonably expected to be used within 2 years to finance research and experimentation in a qualified trade or business or increases in working capital needs of a qualified trade or business, shall be treated as used in the active conduct of a qualified trade or business. For periods after the corporation has been in existence for at least 2 years, in no event may more than 50 percent of the assets of the corporation qualify as used in the active conduct of a qualified trade or business by reason of this paragraph. A corporation shall not be treated as meeting the requirements of paragraph (1) for any period during which more than 10 percent of the total value of its assets consists of real property which is not used in the active conduct of a qualified trade or business. For purposes of the preceding sentence, the ownership of, dealing in, or renting of real property shall not be treated as the active conduct of a qualified trade or business. For purposes of paragraph (1), rights to computer software which produces active business computer software royalties (within the meaning of section 543(d)(1)) shall be treated as an asset used in the active conduct of a trade or business.

(f) Stock acquired on conversion of other stock If any stock in a corporation is acquired solely through the conversion of other stock in such corporation which is qualified small business stock in the hands of the taxpayer— the stock so acquired shall be treated as qualified small business stock in the hands of the taxpayer, and the stock so acquired shall be treated as having been held during the period during which the converted stock was held.

(g) Treatment of pass-thru entities If any amount included in gross income by reason of holding an interest in a pass-thru entity meets the requirements of paragraph (2)— such amount shall be treated as gain described in subsection (a), and for purposes of applying subsection (b), such amount shall be treated as gain from a disposition of stock in the corporation issuing the stock disposed of by the pass-thru entity and the taxpayer’s proportionate share of the adjusted basis of the pass-thru entity in such stock shall be taken into account. An amount meets the requirements of this paragraph if— such amount is attributable to gain on the sale or exchange by the pass-thru entity of stock which is qualified small business stock in the hands of such entity (determined by treating such entity as an individual) and which was held by such entity for at least 3 years (more than 5 years in the case of stock acquired on or before the applicable date), and such amount is includible in the gross income of the taxpayer by reason of the holding of an interest in such entity which was held by the taxpayer on the date on which such pass-thru entity acquired such stock and at all times thereafter before the disposition of such stock by such pass-thru entity. Paragraph (1) shall not apply to any amount to the extent such amount exceeds the amount to which paragraph (1) would have applied if such amount were determined by reference to the interest the taxpayer held in the pass-thru entity on the date the qualified small business stock was acquired. For purposes of this subsection, the term “pass-thru entity” means— any partnership, any S corporation, any regulated investment company, and any common trust fund.

(h) Certain tax-free and other transfers For purposes of this section— In the case of a transfer described in paragraph (2), the transferee shall be treated as— having acquired such stock in the same manner as the transferor, and having held such stock during any continuous period immediately preceding the transfer during which it was held (or treated as held under this subsection) by the transferor. A transfer is described in this subsection if such transfer is— by gift, at death, or from a partnership to a partner of stock with respect to which requirements similar to the requirements of subsection (g) are met at the time of the transfer (without regard to the 5-year holding period requirement). Rules similar to the rules of section 1244(d)(2) shall apply for purposes of this section. In the case of a transaction described in section 351 or a reorganization described in section 368, if qualified small business stock is exchanged for other stock which would not qualify as qualified small business stock but for this subparagraph, such other stock shall be treated as qualified small business stock acquired on the date on which the exchanged stock was acquired. This section shall apply to gain from the sale or exchange of stock treated as qualified small business stock by reason of subparagraph (A) only to the extent of the gain which would have been recognized at the time of the transfer described in subparagraph (A) if section 351 or 368 had not applied at such time. The preceding sentence shall not apply if the stock which is treated as qualified small business stock by reason of subparagraph (A) is issued by a corporation which (as of the time of the transfer described in subparagraph (A)) is a qualified small business. For purposes of this paragraph, stock treated as qualified small business stock under subparagraph (A) shall be so treated for subsequent transactions or reorganizations, except that the limitation of subparagraph (B) shall be applied as of the time of the first transfer to which such limitation applied (determined after the application of the second sentence of subparagraph (B)). In the case of a transaction described in section 351, this paragraph shall apply only if, immediately after the transaction, the corporation issuing the stock owns directly or indirectly stock representing control (within the meaning of section 368(c)) of the corporation whose stock was exchanged.

(i) Basis rules For purposes of this section— In the case where the taxpayer transfers property (other than money or stock) to a corporation in exchange for stock in such corporation— such stock shall be treated as having been acquired by the taxpayer on the date of such exchange, and the basis of such stock in the hands of the taxpayer shall in no event be less than the fair market value of the property exchanged. If the adjusted basis of any qualified small business stock is adjusted by reason of any contribution to capital after the date on which such stock was originally issued, in determining the amount of the adjustment by reason of such contribution, the basis of the contributed property shall in no event be treated as less than its fair market value on the date of the contribution.

(j) Treatment of certain short positions If the taxpayer has an offsetting short position with respect to any qualified small business stock, subsection (a) shall not apply to any gain from the sale or exchange of such stock unless— such stock was held by the taxpayer for at least 3 years (more than 5 years in the case of stock acquired on or before the applicable date) as of the first day on which there was such a short position, and the taxpayer elects to recognize gain as if such stock were sold on such first day for its fair market value. For purposes of paragraph (1), the taxpayer shall be treated as having an offsetting short position with respect to any qualified small business stock if— the taxpayer has made a short sale of substantially identical property, the taxpayer has acquired an option to sell substantially identical property at a fixed price, or to the extent provided in regulations, the taxpayer has entered into any other transaction which substantially reduces the risk of loss from holding such qualified small business stock. For purposes of the preceding sentence, any reference to the taxpayer shall be treated as including a reference to any person who is related (within the meaning of section 267(b) or 707(b)) to the taxpayer.

(k) Regulations The Secretary shall prescribe such regulations as may be appropriate to carry out the purposes of this section, including regulations to prevent the avoidance of the purposes of this section through split-ups, shell corporations, partnerships, or otherwise.

§ 1211 Limitation on capital losses

(a) Corporations In the case of a corporation, losses from sales or exchanges of capital assets shall be allowed only to the extent of gains from such sales or exchanges.

(b) Other taxpayers In the case of a taxpayer other than a corporation, losses from sales or exchanges of capital assets shall be allowed only to the extent of the gains from such sales or exchanges, plus (if such losses exceed such gains) the lower of— $3, 000 ($ 1,500 in the case of a married individual filing a separate return), or the excess of such losses over such gains.

§ 1212 Capital loss carrybacks and carryovers

(a) Corporations If a corporation has a net capital loss for any taxable year (hereinafter in this paragraph referred to as the “loss year”), the amount thereof shall be— a capital loss carryback to each of the 3 taxable years preceding the loss year, but only to the extent— such loss is not attributable to a foreign expropriation capital loss, and the carryback of such loss does not increase or produce a net operating loss (as defined in section 172(c)) for the taxable year to which it is being carried back; except as provided in subparagraph (C), a capital loss carryover to each of the 5 taxable years succeeding the loss year; and a capital loss carryover to each of the 10 taxable years succeeding the loss year, but only to the extent such loss is attributable to a foreign expropriation loss, and shall be treated as a short-term capital loss in each such taxable year. The entire amount of the net capital loss for any taxable year shall be carried to the earliest of the taxable years to which such loss may be carried, and the portion of such loss which shall be carried to each of the other taxable years to which such loss may be carried shall be the excess, if any, of such loss over the total of the capital gain net income for each of the prior taxable years to which such loss may be carried. For purposes of the preceding sentence, the capital gain net income for any such prior taxable year shall be computed without regard to the net capital loss for the loss year or for any taxable year thereafter. In the case of any net capital loss which cannot be carried back in full to a preceding taxable year by reason of clause (ii) of subparagraph (A), the capital gain net income for such prior taxable year shall in no case be treated as greater than the amount of such loss which can be carried back to such preceding taxable year upon the application of such clause (ii). For purposes of this subsection, the term “foreign expropriation capital loss” means, for any taxable year, the sum of the losses taken into account in computing the net capital loss for such year which are— losses sustained directly by reason of the expropriation, intervention, seizure, or similar taking of property by the government of any foreign country, any political subdivision thereof, or any agency or instrumentality of the foregoing, or losses (treated under section 165(g)(1) as losses from the sale or exchange of capital assets) from securities which become worthless by reason of the expropriation, intervention, seizure, or similar taking of property by the government of any foreign country, any political subdivision thereof, or any agency or instrumentality of the foregoing. For purposes of paragraph (1), the portion of any net capital loss for any taxable year attributable to a foreign expropriation capital loss is the amount of the foreign expropriation capital loss for such year (but not in excess of the net capital loss for such year). For purposes of paragraph (1), if a portion of a net capital loss for any taxable year is attributable to a foreign expropriation capital loss, such portion shall be considered to be a separate net capital loss for such year to be applied after the other portion of such net capital loss. If a regulated investment company has a net capital loss for any taxable year— paragraph (1) shall not apply to such loss, the excess of the net short-term capital loss over the net long-term capital gain for such year shall be a short-term capital loss arising on the first day of the next taxable year, and the excess of the net long-term capital loss over the net short-term capital gain for such year shall be a long-term capital loss arising on the first day of the next taxable year. If a net capital loss to which paragraph (1) applies is carried over to a taxable year of a regulated investment company— Clauses (ii) and (iii) of subparagraph (A) shall be applied without regard to any amount treated as a short-term capital loss under paragraph (1). Paragraph (1) shall be applied by substituting “net capital loss for the loss year or any taxable year thereafter (other than a net capital loss to which paragraph (3)(A) applies)” for “net capital loss for the loss year or any taxable year thereafter”. A net capital loss of a corporation shall not be carried back under paragraph (1)(A) to a taxable year— for which it is a regulated investment company (as defined in section 851), or for which it is a real estate investment trust (as defined in section 856).

(b) Other taxpayers If a taxpayer other than a corporation has a net capital loss for any taxable year— the excess of the net short-term capital loss over the net long-term capital gain for such year shall be a short-term capital loss in the succeeding taxable year, and the excess of the net long-term capital loss over the net short-term capital gain for such year shall be a long-term capital loss in the succeeding taxable year. For purposes of determining the excess referred to in subparagraph (A) or (B) of paragraph (1), there shall be treated as a short-term capital gain in the taxable year an amount equal to the lesser of— the amount allowed for the taxable year under paragraph (1) or (2) of section 1211(b), or the adjusted taxable income for such taxable year. For purposes of subparagraph (A), the term “adjusted taxable income” means taxable income increased by the sum of— the amount allowed for the taxable year under paragraph (1) or (2) of section 1211(b), and the deduction allowed for such year under section 151 or any deduction in lieu thereof. For purposes of the preceding sentence, any excess of the deductions allowed for the taxable year over the gross income for such year shall be taken into account as negative taxable income.

(c) Carryback of losses from section 1256 contracts to offset prior gains from such contracts If a taxpayer (other than a corporation) has a net section 1256 contracts loss for the taxable year and elects to have this subsection apply to such taxable year, the amount of such net section 1256 contracts loss— shall be a carryback to each of the 3 taxable years preceding the loss year, and to the extent that, after the application of paragraphs (2) and (3), such loss is allowed as a carryback to any such preceding taxable year— 40 percent of the amount so allowed shall be treated as a short-term capital loss from section 1256 contracts, and 60 percent of the amount so allowed shall be treated as a long-term capital loss from section 1256 contracts. The entire amount of the net section 1256 contracts loss for any taxable year shall be carried to the earliest of the taxable years to which such loss may be carried back under paragraph (1). The portion of such loss which shall be carried to each of the 2 other taxable years to which such loss may be carried back shall be the excess (if any) of such loss over the portion of such loss which, after the application of paragraph (3), was allowed as a carryback for any prior taxable year. An amount shall be allowed as a carryback under paragraph (1) to any prior taxable year only to the extent— such amount does not exceed the net section 1256 contract gain for such year, and the allowance of such carryback does not increase or produce a net operating loss (as defined in section 172(c)) for such year. For purposes of paragraph (1), the term “net section 1256 contracts loss” means the lesser of— the net capital loss for the taxable year determined by taking into account only gains and losses from section 1256 contracts, or the sum of the amounts which, but for paragraph (6)(A), would be treated as capital losses in the succeeding taxable year under subparagraphs (A) and (B) of subsection (b)(1). For purposes of paragraph (1)— The term “net section 1256 contract gain” means the lesser of— the capital gain net income for the taxable year determined by taking into account only gains and losses from section 1256 contracts, or the capital gain net income for the taxable year. The net section 1256 contract gain for any taxable year before the loss year shall be computed without regard to the net section 1256 contracts loss for the loss year or for any taxable year thereafter. For purposes of applying subsection (b)(1), if any portion of the net section 1256 contracts loss for any taxable year is allowed as a carryback under paragraph (1) to any preceding taxable year— 40 percent of the amount allowed as a carryback shall be treated as a short-term capital gain for the loss year, and 60 percent of the amount allowed as a carryback shall be treated as a long-term capital gain for the loss year. Any amount carried forward as a short-term or long-term capital loss to any taxable year under subsection (b)(1) (after the application of subparagraph (A)) shall, to the extent attributable to losses from section 1256 contracts, be treated as loss from section 1256 contracts for such taxable year. For purposes of this subsection— The term “section 1256 contract” means any section 1256 contract (as defined in section 1256(b)) to which section 1256 applies. This subsection shall not apply to any estate or trust.

§ 1221 Capital asset defined

(a) In general For purposes of this subtitle, the term “capital asset” means property held by the taxpayer (whether or not connected with his trade or business), but does not include— stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business; property, used in his trade or business, of a character which is subject to the allowance for depreciation provided in section 167, or real property used in his trade or business; a patent, invention, model or design (whether or not patented), a secret formula or process, a copyright, a literary, musical, or artistic composition, a letter or memorandum, or similar property, held by— a taxpayer whose personal efforts created such property, in the case of a letter, memorandum, or similar property, a taxpayer for whom such property was prepared or produced, or a taxpayer in whose hands the basis of such property is determined, for purposes of determining gain from a sale or exchange, in whole or part by reference to the basis of such property in the hands of a taxpayer described in subparagraph (A) or (B); accounts or notes receivable acquired in the ordinary course of trade or business for services rendered or from the sale of property described in paragraph (1); a publication of the United States Government (including the Congressional Record) which is received from the United States Government or any agency thereof, other than by purchase at the price at which it is offered for sale to the public, and which is held by— a taxpayer who so received such publication, or a taxpayer in whose hands the basis of such publication is determined, for purposes of determining gain from a sale or exchange, in whole or in part by reference to the basis of such publication in the hands of a taxpayer described in subparagraph (A); any commodities derivative financial instrument held by a commodities derivatives dealer, unless— it is established to the satisfaction of the Secretary that such instrument has no connection to the activities of such dealer as a dealer, and such instrument is clearly identified in such dealer’s records as being described in subparagraph (A) before the close of the day on which it was acquired, originated, or entered into (or such other time as the Secretary may by regulations prescribe); any hedging transaction which is clearly identified as such before the close of the day on which it was acquired, originated, or entered into (or such other time as the Secretary may by regulations prescribe); or supplies of a type regularly used or consumed by the taxpayer in the ordinary course of a trade or business of the taxpayer.

(b) Definitions and special rules For purposes of subsection (a)(6)— The term “commodities derivatives dealer” means a person which 1 regularly offers to enter into, assume, offset, assign, or terminate positions in commodities derivative financial instruments with customers in the ordinary course of a trade or business. The term “commodities derivative financial instrument” means any contract or financial instrument with respect to commodities (other than a share of stock in a corporation, a beneficial interest in a partnership or trust, a note, bond, debenture, or other evidence of indebtedness, or a section 1256 contract (as defined in section 1256(b))), the value or settlement price of which is calculated by or determined by reference to a specified index. The term “specified index” means any one or more or any combination of— a fixed rate, price, or amount, or a variable rate, price, or amount, which is based on any current, objectively determinable financial or economic information with respect to commodities which is not within the control of any of the parties to the contract or instrument and is not unique to any of the parties’ circumstances. For purposes of this section, the term “hedging transaction” means any transaction entered into by the taxpayer in the normal course of the taxpayer’s trade or business primarily— to manage risk of price changes or currency fluctuations with respect to ordinary property which is held or to be held by the taxpayer, to manage risk of interest rate or price changes or currency fluctuations with respect to borrowings made or to be made, or ordinary obligations incurred or to be incurred, by the taxpayer, or to manage such other risks as the Secretary may prescribe in regulations. Notwithstanding subsection (a)(7), the Secretary shall prescribe regulations to properly characterize any income, gain, expense, or loss arising from a transaction— which is a hedging transaction but which was not identified as such in accordance with subsection (a)(7), or which was so identified but is not a hedging transaction. At the election of the taxpayer, paragraphs (1) and (3) of subsection (a) shall not apply to musical compositions or copyrights in musical works sold or exchanged by a taxpayer described in subsection (a)(3). The Secretary shall prescribe such regulations as are appropriate to carry out the purposes of paragraph (6) and (7) of subsection (a) in the case of transactions involving related parties.

§ 1222 Other terms relating to capital gains and losses

For purposes of this subtitle— The term “short-term capital gain” means gain from the sale or exchange of a capital asset held for not more than 1 year, if and to the extent such gain is taken into account in computing gross income. The term “short-term capital loss” means loss from the sale or exchange of a capital asset held for not more than 1 year, if and to the extent that such loss is taken into account in computing taxable income. The term “long-term capital gain” means gain from the sale or exchange of a capital asset held for more than 1 year, if and to the extent such gain is taken into account in computing gross income. The term “long-term capital loss” means loss from the sale or exchange of a capital asset held for more than 1 year, if and to the extent that such loss is taken into account in computing taxable income. The term “net short-term capital gain” means the excess of short-term capital gains for the taxable year over the short-term capital losses for such year. The term “net short-term capital loss” means the excess of short-term capital losses for the taxable year over the short-term capital gains for such year. The term “net long-term capital gain” means the excess of long-term capital gains for the taxable year over the long-term capital losses for such year. The term “net long-term capital loss” means the excess of long-term capital losses for the taxable year over the long-term capital gains for such year. The term “capital gain net income” means the excess of the gains from sales or exchanges of capital assets over the losses from such sales or exchanges. The term “net capital loss” means the excess of the losses from sales or exchanges of capital assets over the sum allowed under section 1211. In the case of a corporation, for the purpose of determining losses under this paragraph, amounts which are short-term capital losses under section 1212(a)(1) shall be excluded. The term “net capital gain” means the excess of the net long-term capital gain for the taxable year over the net short-term capital loss for such year. ( Aug. 16, 1954, ch. 736 , 68A Stat. 322 ; Pub. L. 88–272, title II, § 230(b) , Feb. 26, 1964 , 78 Stat. 100 ; Pub. L. 91–172, title V , §§ 511(a), 513(c), Dec. 30, 1969 , 83 Stat. 635 , 643; Pub. L. 94–455, title XIV, § 1402(a)(1) , (2), (d), title XIX, § 1901(a)(136), Oct. 4, 1976 , 90 Stat. 1731 , 1733, 1787; Pub. L. 98–369, div. A, title X, § 1001(a) , (e), July 18, 1984 , 98 Stat. 1011 , 1012; Pub. L. 111–325, title I, § 101(b)(2) , Dec. 22, 2010 , 124 Stat. 3538 ; Pub. L. 113–295, div. A, title II, § 221(a)(79) , Dec. 19, 2014 , 128 Stat. 4049 .)

§ 1223 Holding period of property

For purposes of this subtitle— In determining the period for which the taxpayer has held property received in an exchange, there shall be included the period for which he held the property exchanged if, under this chapter, the property has, for the purpose of determining gain or loss from a sale or exchange, the same basis in whole or in part in his hands as the property exchanged, and, in the case of such exchanges the property exchanged at the time of such exchange was a capital asset as defined in section 1221 or property described in section 1231. For purposes of this paragraph— an involuntary conversion described in section 1033 shall be considered an exchange of the property converted for the property acquired, and a distribution to which section 355 (or so much of section 356 as relates to section 355) applies shall be treated as an exchange. In determining the period for which the taxpayer has held property however acquired there shall be included the period for which such property was held by any other person, if under this chapter such property has, for the purpose of determining gain or loss from a sale or exchange, the same basis in whole or in part in his hands as it would have in the hands of such other person. In determining the period for which the taxpayer has held stock or securities the acquisition of which (or the contract or option to acquire which) resulted in the nondeductibility (under section 1091 relating to wash sales) of the loss from the sale or other disposition of substantially identical stock or securities, there shall be included the period for which he held the stock or securities the loss from the sale or other disposition of which was not deductible. In determining the period for which the taxpayer has held stock or rights to acquire stock received on a distribution, if the basis of such stock or rights is determined under section 307, there shall (under regulations prescribed by the Secretary) be included the period for which he held the stock in the distributing corporation before the receipt of such stock or rights upon such distribution. In determining the period for which the taxpayer has held stock or securities acquired from a corporation by the exercise of rights to acquire such stock or securities, there shall be included only the period beginning with the date on which the right to acquire was exercised. Repealed. Pub. L. 113–295, div. A, title II, § 221(a)(80)(C) , Dec. 19, 2014 , 128 Stat. 4049 .] In determining the period for which the taxpayer has held a commodity acquired in satisfaction of a commodity futures contract (other than a commodity futures contract to which section 1256 applies) there shall be included the period for which he held the commodity futures contract if such commodity futures contract was a capital asset in his hands. Repealed. Pub. L. 113–295, div. A, title II, § 221(a)(80)(C) , Dec. 19, 2014 , 128 Stat. 4049 .] In the case of a person acquiring property from a decedent or to whom property passed from a decedent (within the meaning of section 1014(b)), if— the basis of such property in the hands of such person is determined under section 1014, and such property is sold or otherwise disposed of by such person within 1 year after the decedent’s death, then such person shall be considered to have held such property for more than 1 year. If— property is acquired by any person in a transfer to which section 1040 applies, such property is sold or otherwise disposed of by such person within 1 year after the decedent’s death, and such sale or disposition is to a person who is a qualified heir (as defined in section 2032A(e)(1)) with respect to the decedent, then the person making such sale or other disposition shall be considered to have held such property for more than 1 year. In determining the period for which the taxpayer has held qualified replacement property (within the meaning of section 1042(b)) the acquisition of which resulted under section 1042 in the nonrecognition of any part of the gain realized on the sale of qualified securities (within the meaning of section 1042(b)), there shall be included the period for which such qualified securities had been held by the taxpayer. In determining the period for which the taxpayer has held property the acquisition of which resulted under section 1043 in the nonrecognition of any part of the gain realized on the sale of other property, there shall be included the period for which such other property had been held as of the date of such sale. Except for purposes of subsections (a)(2) and (c)(2)(A) of section 1202, in determining the period for which the taxpayer has held property the acquisition of which resulted under section 1045 or 1397B in the nonrecognition of any part of the gain realized on the sale of other property, there shall be included the period for which such other property has been held as of the date of such sale. If the security to which a securities futures contract (as defined in section 1234B) relates (other than a contract to which section 1256 applies) is acquired in satisfaction of such contract, in determining the period for which the taxpayer has held such security, there shall be included the period for which the taxpayer held such contract if such contract was a capital asset in the hands of the taxpayer. For special holding period provision relating to certain partnership distributions, see section 735(b). ( Aug. 16, 1954, ch. 736 , 68A Stat. 323 ; Pub. L. 87–834, § 14(b)(3) , Oct. 16, 1962 , 76 Stat. 1041 ; Pub. L. 91–614, title I, § 101(g) , Dec. 31, 1970 , 84 Stat. 1838 ; Pub. L. 94–455, title XIV, § 1402(b)(1)(Q) , (2), title XIX, § 1906(b) (13)(A), Oct. 4, 1976 , 90 Stat. 1732 , 1834; Pub. L. 95–600, title VII, § 702(c)(5) , Nov. 6, 1978 , 92 Stat. 2927 ; Pub. L. 96–223, title IV, § 401(a) , Apr. 2, 1980 , 94 Stat. 299 ; Pub. L. 97–448, title I , §§ 104(b)(3)(C), 105(c)(4), Jan. 12, 1983 , 96 Stat. 2382 , 2385; Pub. L. 98–369, div. A, title I, § 54(c) , title V, § 541(b)(1), title X, § 1001(b)(14), (e), July 18, 1984 , 98 Stat. 569 , 890, 1011, 1012; Pub. L. 100–647, title I, § 1006(e)(17) , Nov. 10, 1988 , 102 Stat. 3403 ; Pub. L. 101–194, title V, § 502(b)(1) , Nov. 30, 1989 , 103 Stat. 1754 ; Pub. L. 105–34, title III , §§ 312(d)(9), 313(b)(2), Aug. 5, 1997 , 111 Stat. 840 , 842; Pub. L. 105–206, title V, § 5001(a)(5) , title VI, § 6005(d)(4), July 22, 1998 , 112 Stat. 788 , 805; Pub. L. 106–554, § 1(a)(7) [title I, § 116(b)(2), title IV, § 401(h)(1)] , Dec. 21, 2000 , 114 Stat. 2763 , 2763A–603, 2763A–650; Pub. L. 108–357, title IV, § 413(c)(21) , Oct. 22, 2004 , 118 Stat. 1509 ; Pub. L. 109–135, title IV, § 402(a)(2) , Dec. 21, 2005 , 119 Stat. 2610 ; Pub. L. 113–295, div. A, title II, § 221(a)(80) , Dec. 19, 2014 , 128 Stat. 4049 ; Pub. L. 115–141, div. U, title IV, § 401(d)(4)(B)(vi) , Mar. 23, 2018 , 132 Stat. 1209 .)

§ 1231 Property used in the trade or business and involuntary conversions

(a) General rule If— the section 1231 gains for any taxable year, exceed the section 1231 losses for such taxable year, such gains and losses shall be treated as long-term capital gains or long-term capital losses, as the case may be. If— the section 1231 gains for any taxable year, do not exceed the section 1231 losses for such taxable year, such gains and losses shall not be treated as gains and losses from sales or exchanges of capital assets. For purposes of this subsection— The term “section 1231 gain” means— any recognized gain on the sale or exchange of property used in the trade or business, and any recognized gain from the compulsory or involuntary conversion (as a result of destruction in whole or in part, theft or seizure, or an exercise of the power of requisition or condemnation or the threat or imminence thereof) into other property or money of— property used in the trade or business, or any capital asset which is held for more than 1 year and is held in connection with a trade or business or a transaction entered into for profit. The term “section 1231 loss” means any recognized loss from a sale or exchange or conversion described in subparagraph (A). For purposes of this subsection— In determining under this subsection whether gains exceed losses— the section 1231 gains shall be included only if and to the extent taken into account in computing gross income, and the section 1231 losses shall be included only if and to the extent taken into account in computing taxable income, except that section 1211 shall not apply. Losses (including losses not compensated for by insurance or otherwise) on the destruction, in whole or in part, theft or seizure, or requisition or condemnation of— property used in the trade or business, or capital assets which are held for more than 1 year and are held in connection with a trade or business or a transaction entered into for profit, shall be treated as losses from a compulsory or involuntary conversion. In the case of any involuntary conversion (subject to the provisions of this subsection but for this sentence) arising from fire, storm, shipwreck, or other casualty, or from theft, of any— property used in the trade or business, or any capital asset which is held for more than 1 year and is held in connection with a trade or business or a transaction entered into for profit, this subsection shall not apply to such conversion (whether resulting in gain or loss) if during the taxable year the recognized losses from such conversions exceed the recognized gains from such conversions.

(b) Definition of property used in the trade or business For purposes of this section— The term “property used in the trade or business” means property used in the trade or business, of a character which is subject to the allowance for depreciation provided in section 167, held for more than 1 year, and real property used in the trade or business, held for more than 1 year, which is not— property of a kind which would properly be includible in the inventory of the taxpayer if on hand at the close of the taxable year, property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business, a patent, invention, model or design (whether or not patented), a secret formula or process, a copyright, a literary, musical, or artistic composition, a letter or memorandum, or similar property, held by a taxpayer described in paragraph (3) of section 1221(a), or a publication of the United States Government (including the Congressional Record) which is received from the United States Government, or any agency thereof, other than by purchase at the price at which it is offered for sale to the public, and which is held by a taxpayer described in paragraph (5) of section 1221(a). Such term includes timber, coal, and iron ore with respect to which section 631 applies. Such term includes— cattle and horses, regardless of age, held by the taxpayer for draft, breeding, dairy, or sporting purposes, and held by him for 24 months or more from the date of acquisition, and other livestock, regardless of age, held by the taxpayer for draft, breeding, dairy, or sporting purposes, and held by him for 12 months or more from the date of acquisition. Such term does not include poultry. In the case of an unharvested crop on land used in the trade or business and held for more than 1 year, if the crop and the land are sold or exchanged (or compulsorily or involuntarily converted) at the same time and to the same person, the crop shall be considered as “property used in the trade or business.”

(c) Recapture of net ordinary losses The net section 1231 gain for any taxable year shall be treated as ordinary income to the extent such gain does not exceed the non-recaptured net section 1231 losses. For purposes of this subsection, the term “non-recaptured net section 1231 losses” means the excess of— the aggregate amount of the net section 1231 losses for the 5 most recent preceding taxable years, over the portion of such losses taken into account under paragraph (1) for such preceding taxable years. For purposes of this subsection, the term “net section 1231 gain” means the excess of— the section 1231 gains, over the section 1231 losses. For purposes of this subsection, the term “net section 1231 loss” means the excess of— the section 1231 losses, over the section 1231 gains. For purposes of determining the amount of the net section 1231 gain or loss for any taxable year, the rules of paragraph (4) of subsection (a) shall apply.

[§§ 1232 to 1232B Repealed. Pub. L. 98–369, div. A, title I, § 42(a)(1), July 18, 1984, 98 Stat. 556]

§ 1233 Gains and losses from short sales

(a) Capital assets For purposes of this subtitle, gain or loss from the short sale of property shall be considered as gain or loss from the sale or exchange of a capital asset to the extent that the property, including a commodity future, used to close the short sale constitutes a capital asset in the hands of the taxpayer.

(b) Short-term gains and holding periods If gain or loss from a short sale is considered as gain or loss from the sale or exchange of a capital asset under subsection (a) and if on the date of such short sale substantially identical property has been held by the taxpayer for not more than 1 year (determined without regard to the effect, under paragraph (2) of this subsection, of such short sale on the holding period), or if substantially identical property is acquired by the taxpayer after such short sale and on or before the date of the closing thereof— any gain on the closing of such short sale shall be considered as a gain on the sale or exchange of a capital asset held for not more than 1 year (notwithstanding the period of time any property used to close such short sale has been held); and the holding period of such substantially identical property shall be considered to begin (notwithstanding section 1223, relating to the holding period of property) on the date of the closing of the short sale, or on the date of a sale, gift, or other disposition of such property, whichever date occurs first. This paragraph shall apply to such substantially identical property in the order of the dates of the acquisition of such property, but only to so much of such property as does not exceed the quantity sold short. For purposes of this subsection, the acquisition of an option to sell property at a fixed price shall be considered as a short sale, and the exercise or failure to exercise such option shall be considered as a closing of such short sale.

(c) Certain options to sell Subsection (b) shall not include an option to sell property at a fixed price acquired on the same day on which the property identified as intended to be used in exercising such option is acquired and which, if exercised, is exercised through the sale of the property so identified. If the option is not exercised, the cost of the option shall be added to the basis of the property with which the option is identified. This subsection shall apply only to options acquired after August 16, 1954 .

(d) Long-term losses If on the date of such short sale substantially identical property has been held by the taxpayer for more than 1 year, any loss on the closing of such short sale shall be considered as a loss on the sale or exchange of a capital asset held for more than 1 year (notwithstanding the period of time any property used to close such short sale has been held, and notwithstanding section 1234).

(e) Rules for application of section Subsection (b)(1) or (d) shall not apply to the gain or loss, respectively, on any quantity of property used to close such short sale which is in excess of the quantity of the substantially identical property referred to in the applicable subsection. For purposes of subsections (b) and (d)— the term “property” includes only stocks and securities (including stocks and securities dealt with on a “when issued” basis), and commodity futures, which are capital assets in the hands of the taxpayer, but does not include any position to which section 1092(b) applies; in the case of futures transactions in any commodity on or subject to the rules of a board of trade or commodity exchange, a commodity future requiring delivery in 1 calendar month shall not be considered as property substantially identical to another commodity future requiring delivery in a different calendar month; in the case of a short sale of property by an individual, the term “taxpayer”, in the application of this subsection and subsections (b) and (d), shall be read as “taxpayer or his spouse”; but an individual who is legally separated from the taxpayer under a decree of divorce or of separate maintenance shall not be considered as the spouse of the taxpayer; a securities futures contract (as defined in section 1234B) to acquire substantially identical property shall be treated as substantially identical property; and entering into a securities futures contract (as so defined) to sell shall be considered to be a short sale, and the settlement of such contract shall be considered to be the closing of such short sale. Where the taxpayer enters into 2 commodity futures transactions on the same day, one requiring delivery by him in one market and the other requiring delivery to him of the same (or substantially identical) commodity in the same calendar month in a different market, and the taxpayer subsequently closes both such transactions on the same day, subsections (b) and (d) shall have no application to so much of the commodity involved in either such transaction as does not exceed in quantity the commodity involved in the other. In the case of a taxpayer who is a dealer in securities (within the meaning of section 1236)— if, on the date of a short sale of stock, substantially identical property which is a capital asset in the hands of the taxpayer has been held for not more than 1 year, and if such short sale is closed more than 20 days after the date on which it was made, subsection (b)(2) shall apply in respect of the holding period of such substantially identical property. For purposes of subparagraph (A)— the last sentence of subsection (b) applies; and the term “stock” means any share or certificate of stock in a corporation, any bond or other evidence of indebtedness which is convertible into any such share or certificate, or any evidence of an interest in, or right to subscribe to or purchase, any of the foregoing.

(f) Arbitrage operations in securities In the case of a short sale which had been entered into as an arbitrage operation, to which sale the rule of subsection (b)(2) would apply except as otherwise provided in this subsection— subsection (b)(2) shall apply first to substantially identical assets acquired for arbitrage operations held at the close of business on the day such sale is made, and only to the extent that the quantity sold short exceeds the substantially identical assets acquired for arbitrage operations held at the close of business on the day such sale is made, shall the holding period of any other such identical assets held by the taxpayer be affected; in the event that assets acquired for arbitrage operations are disposed of in such manner as to create a net short position in assets acquired for arbitrage operations, such net short position shall be deemed to constitute a short sale made on that day; for the purpose of paragraphs (1) and (2) of this subsection the taxpayer will be deemed as of the close of any business day to hold property which he is or will be entitled to receive or acquire by virtue of any other asset acquired for arbitrage operations or by virtue of any contract he has entered into in an arbitrage operation; and for the purpose of this subsection arbitrage operations are transactions involving the purchase and sale of assets for the purpose of profiting from a current difference between the price of the asset purchased and the price of the asset sold, and in which the asset purchased, if not identical to the asset sold, is such that by virtue thereof the taxpayer is, or will be, entitled to acquire assets identical to the assets sold. Such operations must be clearly identified by the taxpayer in his records as arbitrage operations on the day of the transaction or as soon thereafter as may be practicable. Assets acquired for arbitrage operations will include stocks and securities and the right to acquire stocks and securities.

(g) Hedging transactions This section shall not apply in the case of a hedging transaction in commodity futures.

(h) Short sales of property which becomes substantially worthless If— the taxpayer enters into a short sale of property, and such property becomes substantially worthless, the taxpayer shall recognize gain in the same manner as if the short sale were closed when the property becomes substantially worthless. To the extent provided in regulations prescribed by the Secretary, the preceding sentence also shall apply with respect to any option with respect to property, any offsetting notional principal contract with respect to property, any futures or forward contract to deliver any property, and any other similar transaction. If property becomes substantially worthless during a taxable year and any short sale of such property remains open at the time such property becomes substantially worthless, then— the statutory period for the assessment of any deficiency attributable to any part of the gain on such transaction shall not expire before the earlier of— the date which is 3 years after the date the Secretary is notified by the taxpayer (in such manner as the Secretary may by regulations prescribe) of the substantial worthlessness of such property, or the date which is 6 years after the date the return for such taxable year is filed, and such deficiency may be assessed before the date applicable under subparagraph (A) notwithstanding the provisions of any other law or rule of law which would otherwise prevent such assessment.

§ 1234 Options to buy or sell

(a) Treatment of gain or loss in the case of the purchaser Gain or loss attributable to the sale or exchange of, or loss attributable to failure to exercise, an option to buy or sell property shall be considered gain or loss from the sale or exchange of property which has the same character as the property to which the option relates has in the hands of the taxpayer (or would have in the hands of the taxpayer if acquired by him). For purposes of paragraph (1), if loss is attributable to failure to exercise an option, the option shall be deemed to have been sold or exchanged on the day it expired. This subsection shall not apply to— an option which constitutes property described in paragraph (1) of section 1221(a); in the case of gain attributable to the sale or exchange of an option, any income derived in connection with such option which, without regard to this subsection, is treated as other than gain from the sale or exchange of a capital asset; and a loss attributable to failure to exercise an option described in section 1233(c).

(b) Treatment of grantor of option in the case of stock, securities, or commodities In the case of the grantor of the option, gain or loss from any closing transaction with respect to, and gain on lapse of, an option in property shall be treated as a gain or loss from the sale or exchange of a capital asset held not more than 1 year. For purposes of this subsection— The term “closing transaction” means any termination of the taxpayer’s obligation under an option in property other than through the exercise or lapse of the option. The term “property” means stocks and securities (including stocks and securities dealt with on a “when issued” basis), commodities, and commodity futures. This subsection shall not apply to any option granted in the ordinary course of the taxpayer’s trade or business of granting options.

(c) Treatment of options on section 1256 contracts and cash settlement options Gain or loss shall be recognized on the exercise of an option on a section 1256 contract (within the meaning of section 1256(b)). For purposes of subsections (a) and (b), a cash settlement option shall be treated as an option to buy or sell property. For purposes of subparagraph (A), the term “cash settlement option” means any option which on exercise settles in (or could be settled in) cash or property other than the underlying property.

§ 1234A Gains or losses from certain terminations

Gain or loss attributable to the cancellation, lapse, expiration, or other termination of— a right or obligation (other than a securities futures contract, as defined in section 1234B) with respect to property which is (or on acquisition would be) a capital asset in the hands of the taxpayer, or a section 1256 contract (as defined in section 1256) not described in paragraph (1) which is a capital asset in the hands of the taxpayer, shall be treated as gain or loss from the sale of a capital asset. The preceding sentence shall not apply to the retirement of any debt instrument (whether or not through a trust or other participation arrangement). (Added Pub. L. 97–34, title V, § 507(a) , Aug. 13, 1981 , 95 Stat. 333 ; amended Pub. L. 97–448, title I, § 105(e) , Jan. 12, 1983 , 96 Stat. 2387 ; Pub. L. 98–369, div. A, title I, § 102(e)(4) , (9), July 18, 1984 , 98 Stat. 624 , 625; Pub. L. 105–34, title X, § 1003(a)(1) , Aug. 5, 1997 , 111 Stat. 909 ; Pub. L. 106–554, § 1(a)(7) [title IV, § 401(b)] , Dec. 21, 2000 , 114 Stat. 2763 , 2763A–648; Pub. L. 107–147, title IV, § 412(d)(1)(A) , Mar. 9, 2002 , 116 Stat. 53 .)

§ 1234B Gains or losses from securities futures contracts

(a) Treatment of gain or loss Gain or loss attributable to the sale, exchange, or termination of a securities futures contract shall be considered gain or loss from the sale or exchange of property which has the same character as the property to which the contract relates has in the hands of the taxpayer (or would have in the hands of the taxpayer if acquired by the taxpayer). This subsection shall not apply to— a contract which constitutes property described in paragraph (1) or (7) of section 1221(a), and any income derived in connection with a contract which, without regard to this subsection, is treated as other than gain from the sale or exchange of a capital asset.

(b) Short-term gains and losses Except as provided in the regulations under section 1092(b) or this section, or in section 1233, if gain or loss on the sale, exchange, or termination of a securities futures contract to sell property is considered as gain or loss from the sale or exchange of a capital asset, such gain or loss shall be treated as short-term capital gain or loss.

(c) Securities futures contract For purposes of this section, the term “securities futures contract” means any security future (as defined in section 3(a)(55)(A) of the Securities Exchange Act of 1934, as in effect on the date of the enactment of this section). The Secretary may prescribe regulations regarding the status of contracts the values of which are determined directly or indirectly by reference to any index which becomes (or ceases to be) a narrow-based security index (as defined for purposes of section 1256(g)(6)).

(d) Contracts not treated as commodity futures contracts For purposes of this title, a securities futures contract shall not be treated as a commodity futures contract.

(e) Regulations The Secretary shall prescribe such regulations as may be appropriate to provide for the proper treatment of securities futures contracts under this title.

(f) Cross reference For special rules relating to dealer securities futures contracts, see section 1256.

§ 1235 Sale or exchange of patents

(a) General A transfer (other than by gift, inheritance, or devise) of property consisting of all substantial rights to a patent, or an undivided interest therein which includes a part of all such rights, by any holder shall be considered the sale or exchange of a capital asset held for more than 1 year, regardless of whether or not payments in consideration of such transfer are— payable periodically over a period generally coterminous with the transferee’s use of the patent, or contingent on the productivity, use, or disposition of the property transferred.

(b) “Holder” defined For purposes of this section, the term “holder” means— any individual whose efforts created such property, or any other individual who has acquired his interest in such property in exchange for consideration in money or money’s worth paid to such creator prior to actual reduction to practice of the invention covered by the patent, if such individual is neither— the employer of such creator, nor related to such creator (within the meaning of subsection (c)).

(c) Related persons Subsection (a) shall not apply to any transfer, directly or indirectly, between persons specified within any one of the paragraphs of section 267(b) or persons described in section 707(b); except that, in applying section 267(b) and (c) and section 707(b) for purposes of this section— the phrase “25 percent or more” shall be substituted for the phrase “more than 50 percent” each place it appears in section 267(b) or 707(b), and paragraph (4) of section 267(c) shall be treated as providing that the family of an individual shall include only his spouse, ancestors, and lineal descendants.

(d) Cross reference For special rule relating to nonresident aliens, see section 871(a).

§ 1236 Dealers in securities

(a) Capital gains Gain by a dealer in securities from the sale or exchange of any security shall in no event be considered as gain from the sale or exchange of a capital asset unless— the security was, before the close of the day on which it was acquired (or such earlier time as the Secretary may prescribe by regulations), clearly identified in the dealer’s records as a security held for investment; and the security was not, at any time after the close of such day (or such earlier time), held by such dealer primarily for sale to customers in the ordinary course of his trade or business.

(b) Ordinary losses Loss by a dealer in securities from the sale or exchange of any security shall, except as otherwise provided in section 582(c), (relating to bond, etc., losses of banks), in no event be considered as ordinary loss if at any time the security was clearly identified in the dealer’s records as a security held for investment.

(c) Definition of security For purposes of this section, the term “security” means any share of stock in any corporation, certificate of stock or interest in any corporation, note, bond, debenture, or evidence of indebtedness, or any evidence of an interest in or right to subscribe to or purchase any of the foregoing.

(d) Special rule for floor specialists In the case of a floor specialist (but only with respect to acquisitions, in connection with his duties on an exchange, of stock in which the specialist is registered with the exchange), subsection (a) shall be applied— by inserting “the 7th business day following” before “the day” the first place it appears in paragraph (1) and by inserting “7th business” before “day” in paragraph (2), and by striking the parenthetical phrase in paragraph (1). The term “floor specialist” means a person who is— a member of a national securities exchange, is registered as a specialist with the exchange, and meets the requirements for specialists established by the Securities and Exchange Commission.

(e) Special rule for options For purposes of subsection (a), any security acquired by a dealer pursuant to an option held by such dealer may be treated as held for investment only if the dealer, before the close of the day on which the option was acquired, clearly identified the option on his records as held for investment. For purposes of the preceding sentence, the term “option” includes the right to subscribe to or purchase any security.

§ 1237 Real property subdivided for sale

(a) General Any lot or parcel which is part of a tract of real property in the hands of a taxpayer other than a C corporation shall not be deemed to be held primarily for sale to customers in the ordinary course of trade or business at the time of sale solely because of the taxpayer having subdivided such tract for purposes of sale or because of any activity incident to such subdivision or sale, if— such tract, or any lot or parcel thereof, had not previously been held by such taxpayer primarily for sale to customers in the ordinary course of trade or business (unless such tract at such previous time would have been covered by this section) and, in the same taxable year in which the sale occurs, such taxpayer does not so hold any other real property; and no substantial improvement that substantially enhances the value of the lot or parcel sold is made by the taxpayer on such tract while held by the taxpayer or is made pursuant to a contract of sale entered into between the taxpayer and the buyer. For purposes of this paragraph, an improvement shall be deemed to be made by the taxpayer if such improvement was made by— the taxpayer or members of his family (as defined in section 267(c)(4)), by a corporation controlled by the taxpayer, an S corporation which included the taxpayer as a shareholder, or by a partnership which included the taxpayer as a partner; or a lessee, but only if the improvement constitutes income to the taxpayer; or Federal, State, or local government, or political subdivision thereof, but only if the improvement constitutes an addition to basis for the taxpayer; and such lot or parcel, except in the case of real property acquired by inheritance or devise, is held by the taxpayer for a period of 5 years.

(b) Special rules for application of section If more than 5 lots or parcels contained in the same tract of real property are sold or exchanged, gain from any sale or exchange (which occurs in or after the taxable year in which the sixth lot or parcel is sold or exchanged) of any lot or parcel which comes within the provisions of paragraphs (1), (2) and (3) of subsection (a) of this section shall be deemed to be gain from the sale of property held primarily for sale to customers in the ordinary course of the trade or business to the extent of 5 percent of the selling price. For the purpose of computing gain under paragraph (1) of this subsection, expenditures incurred in connection with the sale or exchange of any lot or parcel shall neither be allowed as a deduction in computing taxable income, nor treated as reducing the amount realized on such sale or exchange; but so much of such expenditures as does not exceed the portion of gain deemed under paragraph (1) of this subsection to be gain from the sale of property held primarily for sale to customers in the ordinary course of trade or business shall be so allowed as a deduction, and the remainder, if any, shall be treated as reducing the amount realized on such sale or exchange. No improvement shall be deemed a substantial improvement for purposes of subsection (a) if the lot or parcel is held by the taxpayer for a period of 10 years and if— such improvement is the building or installation of water, sewer, or drainage facilities or roads (if such improvement would except for this paragraph constitute a substantial improvement); it is shown to the satisfaction of the Secretary that the lot or parcel, the value of which was substantially enhanced by such improvement, would not have been marketable at the prevailing local price for similar building sites without such improvement; and the taxpayer elects, in accordance with regulations prescribed by the Secretary, to make no adjustment to basis of the lot or parcel, or of any other property owned by the taxpayer, on account of the expenditures for such improvements. Such election shall not make any item deductible which would not otherwise be deductible.

(c) Tract defined For purposes of this section, the term “tract of real property” means a single piece of real property, except that 2 or more pieces of real property shall be considered a tract if at any time they were contiguous in the hands of the taxpayer or if they would be contiguous except for the interposition of a road, street, railroad, stream, or similar property. If, following the sale or exchange of any lot or parcel from a tract of real property, no further sales or exchanges of any other lots or parcels from the remainder of such tract are made for a period of 5 years, such remainder shall be deemed a tract.

[§ 1238 Repealed. Pub. L. 101–508, title XI, § 11801(a)(35), Nov. 5, 1990, 104 Stat. 1388–521]

(a) Treatment of gain as ordinary income In the case of a sale or exchange of property, directly or indirectly, between related persons, any gain recognized to the transferor shall be treated as ordinary income if such property is, in the hands of the transferee, of a character which is subject to the allowance for depreciation provided in section 167.

(b) Related persons For purposes of subsection (a), the term “related persons” means— a person and all entities which are controlled entities with respect to such person, a taxpayer and any trust in which such taxpayer (or his spouse) is a beneficiary, unless such beneficiary’s interest in the trust is a remote contingent interest (within the meaning of section 318(a)(3)(B)(i)), and except in the case of a sale or exchange in satisfaction of a pecuniary bequest, an executor of an estate and a beneficiary of such estate.

(c) Controlled entity defined For purposes of this section, the term “controlled entity” means, with respect to any person— a corporation more than 50 percent of the value of the outstanding stock of which is owned (directly or indirectly) by or for such person, a partnership more than 50 percent of the capital interest or profits interest in which is owned (directly or indirectly) by or for such person, and any entity which is a related person to such person under paragraph (3), (10), (11), or (12) of section 267(b). For purposes of this section, ownership shall be determined in accordance with rules similar to the rules under section 267(c) (other than paragraph (3) thereof).

(d) Employer and related employee association For purposes of subsection (a), the term “related person” also includes— an employer and any person related to the employer (within the meaning of subsection (b)), and a welfare benefit fund (within the meaning of section 419(e)) which is controlled directly or indirectly by persons referred to in paragraph (1).

(e) Patent applications treated as depreciable property For purposes of this section, a patent application shall be treated as property which, in the hands of the transferee, is of a character which is subject to the allowance for depreciation provided in section 167.

[§ 1240 Repealed. Pub. L. 94–455, title XIX, § 1901(a)(139), Oct. 4, 1976, 90 Stat. 1787]

§ 1241 Cancellation of lease or distributor’s agreement

Amounts received by a lessee for the cancellation of a lease, or by a distributor of goods for the cancellation of a distributor’s agreement (if the distributor has a substantial capital investment in the distributorship), shall be considered as amounts received in exchange for such lease or agreement. ( Aug. 16, 1954, ch. 736 , 68A Stat. 333 .)

§ 1242 Losses on small business investment company stock

If— a loss is on stock in a small business investment company operating under the Small Business Investment Act of 1958, and such loss would (but for this section) be a loss from the sale or exchange of a capital asset, then such loss shall be treated as an ordinary loss. For purposes of section 172 (relating to the net operating loss deduction) any amount of loss treated by reason of this section as an ordinary loss shall be treated as attributable to a trade or business of the taxpayer. (Added Pub. L. 85–866, title I, § 57(a) , Sept. 2, 1958 , 72 Stat. 1645 ; amended Pub. L. 94–455, title XIX, § 1901(b)(3)(F) , Oct. 4, 1976 , 90 Stat. 1793 .)

§ 1243 Loss of small business investment company

In the case of a small business investment company operating under the Small Business Investment Act of 1958, if— a loss is on stock received pursuant to the conversion privilege of convertible debentures acquired pursuant to section 304 of the Small Business Investment Act of 1958, and such loss would (but for this section) be a loss from the sale or exchange of a capital asset, then such loss shall be treated as an ordinary loss. (Added Pub. L. 85–866, title I, § 57(a) , Sept. 2, 1958 , 72 Stat. 1645 ; amended Pub. L. 91–172, title IV, § 433(b) , Dec. 30, 1969 , 83 Stat. 624 ; Pub. L. 94–455, title XIX, § 1901(b)(3)(F) , Oct. 4, 1976 , 90 Stat. 1793 .)

§ 1244 Losses on small business stock

(a) General rule In the case of an individual, a loss on section 1244 stock issued to such individual or to a partnership which would (but for this section) be treated as a loss from the sale or exchange of a capital asset shall, to the extent provided in this section, be treated as an ordinary loss.

(b) Maximum amount for any taxable year For any taxable year the aggregate amount treated by the taxpayer by reason of this section as an ordinary loss shall not exceed— $50, 000, or$ 100,000, in the case of a husband and wife filing a joint return for such year under section 6013.

(c) Section 1244 stock defined For purposes of this section, the term “section 1244 stock” means stock in a domestic corporation if— at the time such stock is issued, such corporation was a small business corporation, such stock was issued by such corporation for money or other property (other than stock and securities), and such corporation, during the period of its 5 most recent taxable years ending before the date the loss on such stock was sustained, derived more than 50 percent of its aggregate gross receipts from sources other than royalties, rents, dividends, interests, annuities, and sales or exchanges of stocks or securities. For purposes of paragraph (1)(C), if the corporation has not been in existence for 5 taxable years ending before the date the loss on the stock was sustained, there shall be substituted for such 5-year period— the period of the corporation’s taxable years ending before such date, or if the corporation has not been in existence for 1 taxable year ending before such date, the period such corporation has been in existence before such date. For purposes of paragraph (1)(C), gross receipts from the sales or exchanges of stock or securities shall be taken into account only to the extent of gains therefrom. Paragraph (1)(C) shall not apply with respect to any corporation if, for the period taken into account for purposes of paragraph (1)(C), the amount of the deductions allowed by this chapter (other than by sections 172, 243, and 245) exceeds the amount of gross income. For purposes of this section, a corporation shall be treated as a small business corporation if the aggregate amount of money and other property received by the corporation for stock, as a contribution to capital, and as paid-in surplus, does not exceed $1,000,000. The determination under the preceding sentence shall be made as of the time of the issuance of the stock in question but shall include amounts received for such stock and for all stock theretofore issued. For purposes of subparagraph (A), the amount taken into account with respect to any property other than money shall be the amount equal to the adjusted basis to the corporation of such property for determining gain, reduced by any liability to which the property was subject or which was assumed by the corporation. The determination under the preceding sentence shall be made as of the time the property was received by the corporation.

(d) Special rules If— section 1244 stock was issued in exchange for property, the basis of such stock in the hands of the taxpayer is determined by reference to the basis in his hands of such property, and the adjusted basis (for determining loss) of such property immediately before the exchange exceeded its fair market value at such time, then in computing the amount of the loss on such stock for purposes of this section the basis of such stock shall be reduced by an amount equal to the excess described in clause (iii). In computing the amount of the loss on stock for purposes of this section, any increase in the basis of such stock (through contributions to the capital of the corporation, or otherwise) shall be treated as allocable to stock which is not section 1244 stock. To the extent provided in regulations prescribed by the Secretary, stock in a corporation, the basis of which (in the hands of a taxpayer) is determined in whole or in part by reference to the basis in his hands of stock in such corporation which meets the requirements of subsection (c)(1) (other than subparagraph (C) thereof), or which is received in a reorganization described in section 368(a)(1)(F) in exchange for stock which meets such requirements, shall be treated as meeting such requirements. For purposes of paragraphs (1)(C) and (3)(A) of subsection (c), a successor corporation in a reorganization described in section 368(a)(1)(F) shall be treated as the same corporation as its predecessor. For purposes of section 172 (relating to the net operating loss deduction), any amount of loss treated by reason of this section as an ordinary loss shall be treated as attributable to a trade or business of the taxpayer. For purposes of this section, the term “individual” does not include a trust or estate.

(e) Regulations The Secretary shall prescribe such regulations as may be necessary to carry out the purposes of this section.

§ 1245 Gain from dispositions of certain depreciable property

(a) General rule Except as otherwise provided in this section, if section 1245 property is disposed of the amount by which the lower of— the recomputed basis of the property, or in the case of a sale, exchange, or involuntary conversion, the amount realized, or in the case of any other disposition, the fair market value of such property, exceeds the adjusted basis of such property shall be treated as ordinary income. Such gain shall be recognized notwithstanding any other provision of this subtitle. For purposes of this section— The term “recomputed basis” means, with respect to any property, its adjusted basis recomputed by adding thereto all adjustments reflected in such adjusted basis on account of deductions (whether in respect of the same or other property) allowed or allowable to the taxpayer or to any other person for depreciation or amortization. For purposes of subparagraph (A), if the taxpayer can establish by adequate records or other sufficient evidence that the amount allowed for depreciation or amortization for any period was less than the amount allowable, the amount added for such period shall be the amount allowed. Any deduction allowable under section 179, 179B, 179C, 179D, 179E, 181, 190, 193, or 194 shall be treated as if it were a deduction allowable for amortization. For purposes of this section, the term “section 1245 property” means any property which is or has been property of a character subject to the allowance for depreciation provided in section 167 and is either— personal property, other property (not including a building or its structural components) but only if such other property is tangible and has an adjusted basis in which there are reflected adjustments described in paragraph (2) for a period in which such property (or other property)— was used as an integral part of manufacturing, production, or extraction or of furnishing transportation, communications, electrical energy, gas, water, or sewage disposal services, constituted a research facility used in connection with any of the activities referred to in clause (i), or constituted a facility used in connection with any of the activities referred to in clause (i) for the bulk storage of fungible commodities (including commodities in a liquid or gaseous state), so much of any real property (other than any property described in subparagraph (B)) which has an adjusted basis in which there are reflected adjustments for amortization under section 169, 179, 179B, 179C, 179D, 179E, 188 (as in effect before its repeal by the Revenue Reconciliation Act of 1990), 190, 193, or 194 1 a single purpose agricultural or horticultural structure (as defined in section 168(i)(13)), a storage facility (not including a building or its structural components) used in connection with the distribution of petroleum or any primary product of petroleum, any railroad grading or tunnel bore (as defined in section 168(e)(4)), or any qualified production property (as defined in section 168(n)(2)).

(b) Exceptions and limitations Subsection (a) shall not apply to a disposition by gift. Except as provided in section 691 (relating to income in respect of a decedent), subsection (a) shall not apply to a transfer at death. If the basis of property in the hands of a transferee is determined by reference to its basis in the hands of the transferor by reason of the application of section 332, 351, 361, 721, or 731, then the amount of gain taken into account by the transferor under subsection (a)(1) shall not exceed the amount of gain recognized to the transferor on the transfer of such property (determined without regard to this section). Except as provided in paragraph (6), this paragraph shall not apply to a disposition to an organization (other than a cooperative described in section 521) which is exempt from the tax imposed by this chapter. If property is disposed of and gain (determined without regard to this section) is not recognized in whole or in part under section 1031 or 1033, then the amount of gain taken into account by the transferor under subsection (a)(1) shall not exceed the sum of— the amount of gain recognized on such disposition (determined without regard to this section), plus the fair market value of property acquired which is not section 1245 property and which is not taken into account under subparagraph (A). For purposes of this section, the basis of section 1245 property distributed by a partnership to a partner shall be deemed to be determined by reference to the adjusted basis of such property to the partnership. In the case of any property described in subparagraph (A), for purposes of computing the recomputed basis of such property the amount of the adjustments added back for periods before the distribution by the partnership shall be— the amount of the gain to which subsection (a) would have applied if such property had been sold by the partnership immediately before the distribution at its fair market value at such time, reduced by the amount of such gain to which section 751(b) applied. The second sentence of paragraph (3) shall not apply to a disposition of section 1245 property to an organization described in section 511(a)(2) or 511(b)(2) if, immediately after such disposition, such organization uses such property in an unrelated trade or business (as defined in section 513). If any property with respect to the disposition of which gain is not recognized by reason of subparagraph (A) ceases to be used in an unrelated trade or business of the organization acquiring such property, such organization shall be treated for purposes of this section as having disposed of such property on the date of such cessation. In determining, under subsection (a)(2), the recomputed basis of property with respect to which a deduction under section 194 was allowed for any taxable year, the taxpayer shall not take into account adjustments under section 194 to the extent such adjustments are attributable to the amortizable basis of the taxpayer acquired before the 10th taxable year preceding the taxable year in which gain with respect to the property is recognized. If a taxpayer disposes of more than 1 amortizable section 197 intangible (as defined in section 197(c)) in a transaction or a series of related transactions, all such amortizable 197 intangibles shall be treated as 1 section 1245 property for purposes of this section. Subparagraph (A) shall not apply to any amortizable section 197 intangible (as so defined) with respect to which the adjusted basis exceeds the fair market value.

(c) Adjustments to basis The Secretary shall prescribe such regulations as he may deem necessary to provide for adjustments to the basis of property to reflect gain recognized under subsection (a).

(d) Application of section This section shall apply notwithstanding any other provision of this subtitle.

[§§ 1246, 1247 Repealed. Pub. L. 108–357, title IV, § 413(a)(2), (3), Oct. 22, 2004, 118 Stat. 1506]

§ 1248 Gain from certain sales or exchanges of stock in certain foreign corporations

(a) General rule If— a United States person sells or exchanges stock in a foreign corporation, and such person owns, within the meaning of section 958(a), or is considered as owning by applying the rules of ownership of section 958(b), 10 percent or more of the total combined voting power of all classes of stock entitled to vote of such foreign corporation at any time during the 5-year period ending on the date of the sale or exchange when such foreign corporation was a controlled foreign corporation (as defined in section 957), then the gain recognized on the sale or exchange of such stock shall be included in the gross income of such person as a dividend, to the extent of the earnings and profits of the foreign corporation attributable (under regulations prescribed by the Secretary) to such stock which were accumulated in taxable years of such foreign corporation beginning after December 31, 1962 , and during the period or periods the stock sold or exchanged was held by such person while such foreign corporation was a controlled foreign corporation. For purposes of this section, a United States person shall be treated as having sold or exchanged any stock if, under any provision of this subtitle, such person is treated as realizing gain from the sale or exchange of such stock.

(b) Limitation on tax applicable to individuals In the case of an individual, if the stock sold or exchanged is a capital asset (within the meaning of section 1221) and has been held for more than 1 year, the tax attributable to an amount included in gross income as a dividend under subsection (a) shall not be greater than a tax equal to the sum of— a pro rata share of the excess of— the taxes that would have been paid by the foreign corporation with respect to its income had it been taxed under this chapter as a domestic corporation (but without allowance for deduction of, or credit for, taxes described in subparagraph (B)), for the period or periods the stock sold or exchanged was held by the United States person in taxable years beginning after December 31, 1962 , while the foreign corporation was a controlled foreign corporation, adjusted for distributions and amounts previously included in gross income of a United States shareholder under section 951, over the income, war profits, or excess profits taxes paid by the foreign corporation with respect to such income; and an amount equal to the tax that would result by including in gross income, as gain from the sale or exchange of a capital asset held for more than 1 year, an amount equal to the excess of (A) the amount included in gross income as a dividend under subsection (a), over (B) the amount determined under paragraph (1).

(c) Determination of earnings and profits Except as provided in section 312(k)(4), for purposes of this section, the earnings and profits of any foreign corporation for any taxable year shall be determined according to rules substantially similar to those applicable to domestic corporations, under regulations prescribed by the Secretary. If— subsection (a) or (f) applies to a sale, exchange, or distribution by a United States person of stock of a foreign corporation and, by reason of the ownership of the stock sold or exchanged, such person owned within the meaning of section 958(a)(2) stock of any other foreign corporation; and such person owned, within the meaning of section 958(a), or was considered as owning by applying the rules of ownership of section 958(b), 10 percent or more of the total combined voting power of all classes of stock entitled to vote of such other foreign corporation at any time during the 5-year period ending on the date of the sale or exchange when such other foreign corporation was a controlled foreign corporation (as defined in section 957), then, for purposes of this section, the earnings and profits of the foreign corporation the stock of which is sold or exchanged which are attributable to the stock sold or exchanged shall be deemed to include the earnings and profits of such other foreign corporation which— are attributable (under regulations prescribed by the Secretary) to the stock of such other foreign corporation which such person owned within the meaning of section 958(a)(2) (by reason of his ownership within the meaning of section 958(a)(1)(A) of the stock sold or exchanged) on the date of such sale or exchange (or on the date of any sale or exchange of the stock of such other foreign corporation occurring during the 5-year period ending on the date of the sale or exchange of the stock of such foreign corporation, to the extent not otherwise taken into account under this section but not in excess of the fair market value of the stock of such other foreign corporation sold or exchanged over the basis of such stock (for determining gain) in the hands of the transferor); and were accumulated in taxable years of such other corporation beginning after December 31, 1962 , and during the period or periods— such other corporation was a controlled foreign corporation, and such person owned within the meaning of section 958(a) the stock of such other foreign corporation.

(d) Exclusions from earnings and profits For purposes of this section, the following amounts shall be excluded, with respect to any United States person, from the earnings and profits of a foreign corporation: Earnings and profits of the foreign corporation attributable to any amount previously included in the gross income of such person under section 951, with respect to the stock sold or exchanged, but only to the extent the inclusion of such amount did not result in an exclusion of an amount from gross income under section 959. Earnings and profits of a foreign corporation which were accumulated during any taxable year beginning before January 1, 1976 , while such corporation was a less developed country corporation under section 902(d) as in effect before the enactment of the Tax Reduction Act of 1975. Any item includible in gross income of the foreign corporation under this chapter— for any taxable year beginning before January 1, 1967 , as income derived from sources within the United States of a foreign corporation engaged in trade or business within the United States, or for any taxable year beginning after December 31, 1966 , as income effectively connected with the conduct by such corporation of a trade or business within the United States. This paragraph shall not apply with respect to any item which is exempt from taxation (or is subject to a reduced rate of tax) pursuant to a treaty obligation of the United States. Earnings and profits of the foreign corporation attributable to foreign trade income of a FSC (as defined in section 922) other than foreign trade income which— is section 923(a)(2) non-exempt income (within the meaning of section 927(d)(6)), or would not (but for section 923(a)(4)) be treated as exempt foreign trade income. For purposes of the preceding sentence, the terms “foreign trade income” and “exempt foreign trade income” have the respective meanings given such terms by section 923. Any reference in this paragraph to section 922, 923, or 927 shall be treated as a reference to such section as in effect before its repeal by the FSC Repeal and Extraterritorial Income Exclusion Act of 2000. Earnings and profits of the foreign corporation attributable to any amount previously included in the gross income of such person under section 1293 with respect to the stock sold or exchanged, but only to the extent the inclusion of such amount did not result in an exclusion of an amount under section 1293(c).

(e) Sales or exchanges of stock in certain domestic corporations Except as provided in regulations prescribed by the Secretary, if— a United States person sells or exchanges stock of a domestic corporation, and such domestic corporation was formed or availed of principally for the holding, directly or indirectly, of stock of one or more foreign corporations, such sale or exchange shall, for purposes of this section, be treated as a sale or exchange of the stock of the foreign corporation or corporations held by the domestic corporation.

(f) Certain nonrecognition transactions Except as provided in regulations prescribed by the Secretary— If— a domestic corporation satisfies the stock ownership requirements of subsection (a)(2) with respect to a foreign corporation, and such domestic corporation distributes stock of such foreign corporation in a distribution to which section 311(a), 337, 355(c)(1), or 361(c)(1) applies, then, notwithstanding any other provision of this subtitle, an amount equal to the excess of the fair market value of such stock over its adjusted basis in the hands of the domestic corporation shall be included in the gross income of the domestic corporation as a dividend to the extent of the earnings and profits of the foreign corporation attributable (under regulations prescribed by the Secretary) to such stock which were accumulated in taxable years of such foreign corporation beginning after December 31, 1962 , and during the period or periods the stock was held by such domestic corporation while such foreign corporation was a controlled foreign corporation. For purposes of subsections (c)(2), (d), and (h), a distribution of stock to which this subsection applies shall be treated as a sale of stock to which subsection (a) applies. In the case of any distribution of stock of a foreign corporation, paragraph (1) shall not apply if such distribution is to a domestic corporation— which is treated under this section as holding such stock for the period for which the stock was held by the distributing corporation, and which, immediately after the distribution, satisfies the stock ownership requirements of subsection (a)(2) with respect to such foreign corporation. To the extent that earnings and profits are taken into account under this subsection, they shall be excluded and not taken into account for purposes of subsection (e).

(g) Exceptions This section shall not apply to— distributions to which section 303 (relating to distributions in redemption of stock to pay death taxes) applies; or any amount to the extent that such amount is, under any other provision of this title, treated as— a dividend (other than an amount treated as a dividend under subsection (f)), ordinary income, or gain from the sale of an asset held for not more than 1 year.

(h) Taxpayer to establish earnings and profits Unless the taxpayer establishes the amount of the earnings and profits of the foreign corporation to be taken into account under subsection (a) or (f), all gain from the sale or exchange shall be considered a dividend under subsection (a) or (f), and unless the taxpayer establishes the amount of foreign taxes to be taken into account under subsection (b), the limitation of such subsection shall not apply.

(i) Treatment of certain indirect transfers If any shareholder of a 10-percent corporate shareholder of a foreign corporation exchanges stock of the 10-percent corporate shareholder for stock of the foreign corporation, such 10-percent corporate shareholder shall recognize gain in the same manner as if the stock of the foreign corporation received in such exchange had been— issued to the 10-percent corporate shareholder, and then distributed by the 10-percent corporate shareholder to such shareholder in redemption or liquidation (whichever is appropriate). The amount of gain recognized by such 10-percent corporate shareholder under the preceding sentence shall not exceed the amount treated as a dividend under this section. For purposes of this subsection, the term “10-percent corporate shareholder” means any domestic corporation which, as of the day before the exchange referred to in paragraph (1), satisfies the stock ownership requirements of subsection (a)(2) with respect to the foreign corporation.

(j) Coordination with dividends received deduction In the case of the sale or exchange by a domestic corporation of stock in a foreign corporation held for 1 year or more, any amount received by the domestic corporation which is treated as a dividend by reason of this section shall be treated as a dividend for purposes of applying section 245A.

(k) Cross reference For provision excluding amounts previously taxed under this section from gross income when subsequently distributed, see section 959(e).

§ 1249 Gain from certain sales or exchanges of patents, etc., to foreign corporations

(a) General rule Gain from the sale or exchange of a patent, an invention, model, or design (whether or not patented), a copyright, a secret formula or process, or any other similar property right to any foreign corporation by any United States person (as defined in section 7701(a)(30)) which controls such foreign corporation shall, if such gain would (but for the provisions of this subsection) be gain from the sale or exchange of a capital asset or of property described in section 1231, be considered as ordinary income.

(b) Control For purposes of subsection (a), control means, with respect to any foreign corporation, the ownership, directly or indirectly, of stock possessing more than 50 percent of the total combined voting power of all classes of stock entitled to vote. For purposes of this subsection, the rules for determining ownership of stock prescribed by section 958 shall apply.

§ 1250 Gain from dispositions of certain depreciable realty

(a) General rule Except as otherwise provided in this section— If section 1250 property is disposed of after December 31, 1975 , then the applicable percentage of the lower of— that portion of the additional depreciation (as defined in subsection (b)(1) or (4)) attributable to periods after December 31, 1975 , in respect of the property, or the excess of the amount realized (in the case of a sale, exchange, or involuntary conversion), or the fair market value of such property (in the case of any other disposition), over the adjusted basis of such property, shall be treated as gain which is ordinary income. Such gain shall be recognized notwithstanding any other provision of this subtitle. For purposes of subparagraph (A), the term “applicable percentage” means— in the case of section 1250 property with respect to which a mortgage is insured under section 221(d)(3) or 236 of the National Housing Act, or housing financed or assisted by direct loan or tax abatement under similar provisions of State or local laws and with respect to which the owner is subject to the restrictions described in section 1039(b)(1)(B) (as in effect on the day before the date of the enactment of the Revenue Reconciliation Act of 1990), 100 percent minus 1 percentage point for each full month the property was held after the date the property was held 100 full months; in the case of dwelling units which, on the average, were held for occupancy by families or individuals eligible to receive subsidies under section 8 of the United States Housing Act of 1937, as amended, or under the provisions of State or local law authorizing similar levels of subsidy for lower-income families, 100 percent minus 1 percentage point for each full month the property was held after the date the property was held 100 full months; in the case of section 1250 property with respect to which a depreciation deduction for rehabilitation expenditures was allowed under section 167(k), 100 percent minus 1 percentage point for each full month in excess of 100 full months after the date on which such property was placed in service; in the case of section 1250 property with respect to which a loan is made or insured under title V of the Housing Act of 1949, 100 percent minus 1 percentage point for each full month the property was held after the date the property was held 100 full months; and in the case of all other section 1250 property, 100 percent. In the case of a building (or a portion of a building devoted to dwelling units), if, on the average, 85 percent or more of the dwelling units contained in such building (or portion thereof) are units described in clause (ii), such building (or portion thereof) shall be treated as property described in clause (ii). Clauses (i), (ii), and (iv) shall not apply with respect to the additional depreciation described in subsection (b)(4) which was allowed under section 167(k). If section 1250 property is disposed of after December 31, 1969 , and the amount determined under paragraph (1)(A)(ii) exceeds the amount determined under paragraph (1)(A)(i), then the applicable percentage of the lower of— that portion of the additional depreciation attributable to periods after December 31, 1969 , and before January 1, 1976 , in respect of the property, or the excess of the amount determined under paragraph (1)(A)(ii) over the amount determined under paragraph (1)(A)(i), shall also be treated as gain which is ordinary income. Such gain shall be recognized notwithstanding any other provision of this subtitle. For purposes of subparagraph (A), the term “applicable percentage” means— in the case of section 1250 property disposed of pursuant to a written contract which was, on July 24, 1969 , and at all times thereafter, binding on the owner of the property, 100 percent minus 1 percentage point for each full month the property was held after the date the property was held 20 full months; in the case of section 1250 property with respect to which a mortgage is insured under section 221(d)(3) or 236 of the National Housing Act, or housing financed or assisted by direct loan or tax abatement under similar provisions of State or local laws, and with respect to which the owner is subject to the restrictions described in section 1039(b)(1)(B) (as in effect on the day before the date of the enactment of the Revenue Reconciliation Act of 1990), 100 percent minus 1 percentage point for each full month the property was held after the date the property was held 20 full months; in the case of residential rental property (as defined in section 167(j)(2)(B)) other than that covered by clauses (i) and (ii), 100 percent minus 1 percentage point for each full month the property was held after the date the property was held 100 full months; in the case of section 1250 property with respect to which a depreciation deduction for rehabilitation expenditures was allowed under section 167(k), 100 percent minus 1 percentage point for each full month in excess of 100 full months after the date on which such property was placed in service; and in the case of all other section 1250 property, 100 percent. Clauses (i), (ii), and (iii) shall not apply with respect to the additional depreciation described in subsection (b)(4). If section 1250 property is disposed of after December 31, 1963 , and the amount determined under paragraph (1)(A)(ii) exceeds the sum of the amounts determined under paragraphs (1)(A)(i) and (2)(A)(i), then the applicable percentage of the lower of— that portion of the additional depreciation attributable to periods before January 1, 1970 , in respect of the property, or the excess of the amount determined under paragraph (1)(A)(ii) over the sum of the amounts determined under paragraphs (1)(A)(i) and (2)(A)(i), shall also be treated as gain which is ordinary income. Such gain shall be recognized notwithstanding any other provision of this subtitle. For purposes of subparagraph (A), the term “applicable percentage” means 100 percent minus 1 percentage point for each full month the property was held after the date on which the property was held for 20 full months. For purposes of this subsection, any reference to section 167(k) or 167(j)(2)(B) shall be treated as a reference to such section as in effect on the day before the date of the enactment of the Revenue Reconciliation Act of 1990. For reduction in the case of corporations on capital gain treatment under this section, see section 291(a)(1).

(b) Additional depreciation defined For purposes of this section— The term “additional depreciation” means, in the case of any property, the depreciation adjustments in respect of such property; except that, in the case of property held more than one year, it means such adjustments only to the extent that they exceed the amount of the depreciation adjustments which would have resulted if such adjustments had been determined for each taxable year under the straight line method of adjustment. In the case of a lessee, in determining the depreciation adjustments which would have resulted in respect of any building erected (or other improvement made) on the leased property, or in respect of any cost of acquiring the lease, the lease period shall be treated as including all renewal periods. For purposes of the preceding sentence— the term “renewal period” means any period for which the lease may be renewed, extended, or continued pursuant to an option exercisable by the lessee, but the inclusion of renewal periods shall not extend the period taken into account by more than ⅔ of the period on the basis of which the depreciation adjustments were allowed. The term “depreciation adjustments” means, in respect of any property, all adjustments attributable to periods after December 31, 1963 , reflected in the adjusted basis of such property on account of deductions (whether in respect of the same or other property) allowed or allowable to the taxpayer or to any other person for exhaustion, wear and tear, obsolescence, or amortization (other than amortization under section 168 (as in effect before its repeal by the Tax Reform Act of 1976), 169, 185 (as in effect before its repeal by the Tax Reform Act of 1986), 188 (as in effect before its repeal by the Revenue Reconciliation Act of 1990), 190, or 193). For purposes of the preceding sentence, if the taxpayer can establish by adequate records or other sufficient evidence that the amount allowed as a deduction for any period was less than the amount allowable, the amount taken into account for such period shall be the amount allowed. The term “additional depreciation” also means, in the case of section 1250 property with respect to which a depreciation or amortization deduction for rehabilitation expenditures was allowed under section 167(k) (as in effect on the day before the date of the enactment of the Revenue Reconciliation Act of 1990) or 191 (as in effect before its repeal by the Economic Recovery Tax Act of 1981), the depreciation or amortization adjustments allowed under such section to the extent attributable to such property, except that, in the case of such property held for more than one year after the rehabilitation expenditures so allowed were incurred, it means such adjustments only to the extent that they exceed the amount of the depreciation adjustments which would have resulted if such adjustments had been determined under the straight line method of adjustment without regard to the useful life permitted under section 167(k) (as in effect on the day before the date of the enactment of the Revenue Reconciliation Act of 1990) or 191 (as in effect before its repeal by the Economic Recovery Tax Act of 1981). For purposes of paragraph (1), the depreciation adjustments which would have resulted for any taxable year under the straight line method shall be determined— in the case of property to which section 168 applies, by determining the adjustments which would have resulted for such year if the taxpayer had elected the straight line method for such year using the recovery period applicable to such property, and in the case any property to which section 168 does not apply, if a useful life (or salvage value) was used in determining the amount allowable as a deduction for any taxable year, by using such life (or value).

(c) Section 1250 property For purposes of this section, the term “section 1250 property” means any real property (other than section 1245 property, as defined in section 1245(a)(3)) which is or has been property of a character subject to the allowance for depreciation provided in section 167.

(d) Exceptions and limitations Subsection (a) shall not apply to a disposition by gift. Except as provided in section 691 (relating to income in respect of a decedent), subsection (a) shall not apply to a transfer at death. If the basis of property in the hands of a transferee is determined by reference to its basis in the hands of the transferor by reason of the application of section 332, 351, 361, 721, or 731, then the amount of gain taken into account by the transferor under subsection (a) shall not exceed the amount of gain recognized to the transferor on the transfer of such property (determined without regard to this section). Except as provided in paragraph (6), this paragraph shall not apply to a disposition to an organization (other than a cooperative described in section 521) which is exempt from the tax imposed by this chapter. If property is disposed of and gain (determined without regard to this section) is not recognized in whole or in part under section 1031 or 1033, then the amount of gain taken into account by the transferor under subsection (a) shall not exceed the greater of the following: the amount of gain recognized on the disposition (determined without regard to this section), increased as provided in subparagraph (B), or the amount determined under subparagraph (C). With respect to any transaction, the increase provided by this subparagraph is the amount equal to the fair market value of any stock purchased in a corporation which (but for this paragraph) would result in nonrecognition of gain under section 1033(a)(2)(A). With respect to any transaction, the amount determined under this subparagraph shall be the excess of— the amount of gain which would (but for this paragraph) be taken into account under subsection (a), over the fair market value (or cost in the case of a transaction described in section 1033(a)(2)) of the section 1250 property acquired in the transaction. In the case of property purchased by the taxpayer in a transaction described in section 1033(a)(2), in applying section 1033(b)(2), such sentence 1 shall be applied— first solely to section 1250 properties and to the amount of gain not taken into account under subsection (a) by reason of this paragraph, and then to all purchased properties to which such sentence applies and to the remaining gain not recognized on the transaction as if the cost of the section 1250 properties were the basis of such properties computed under clause (i). In the case of property acquired in any other transaction to which this paragraph applies, rules consistent with the preceding sentence shall be applied under regulations prescribed by the Secretary. In the case of any transaction described in section 1031 or 1033, the additional depreciation in respect of the section 1250 property acquired which is attributable to the section 1250 property disposed of shall be an amount equal to the amount of the gain which was not taken into account under subsection (a) by reason of the application of this paragraph. For purposes of this section, the basis of section 1250 property distributed by a partnership to a partner shall be deemed to be determined by reference to the adjusted basis of such property to the partnership. In respect of any property described in subparagraph (A), the additional depreciation attributable to periods before the distribution by the partnership shall be— the amount of the gain to which subsection (a) would have applied if such property had been sold by the partnership immediately before the distribution at its fair market value at such time and the applicable percentage for the property had been 100 percent, reduced by if section 751(b) applied to any part of such gain, the amount of such gain to which section 751(b) would have applied if the applicable percentage for the property had been 100 percent. The second sentence of paragraph (3) shall not apply to a disposition of section 1250 property to an organization described in section 511(a)(2) or 511(b)(2) if, immediately after such disposition, such organization uses such property in an unrelated trade or business (as defined in section 513). If any property with respect to the disposition of which gain is not recognized by reason of subparagraph (A) ceases to be used in an unrelated trade or business of the organization acquiring such property, such organization shall be treated for purposes of this section as having disposed of such property on the date of such cessation. If any section 1250 property is disposed of by the taxpayer pursuant to a bid for such property at foreclosure or by operation of an agreement or of process of law after there was a default on indebtedness which such property secured, the applicable percentage referred to in paragraph (1)(B), (2)(B), or (3)(B) of subsection (a), as the case may be, shall be determined as if the taxpayer ceased to hold such property on the date of the beginning of the proceedings pursuant to which the disposition occurred, or, in the event there are no proceedings, such percentage shall be determined as if the taxpayer ceased to hold such property on the date, determined under regulations prescribed by the Secretary, on which such operation of an agreement or process of law, pursuant to which the disposition occurred, began.

(e) Holding period For purposes of determining the applicable percentage under this section, the provisions of section 1223 shall not apply, and the holding period of section 1250 property shall be determined under the following rules: The holding period of section 1250 property shall be deemed to begin— in the case of property acquired by the taxpayer, on the day after the date of acquisition, or in the case of property constructed, reconstructed, or erected by the taxpayer, on the first day of the month during which the property is placed in service. If the basis of property acquired in a transaction described in paragraph (1), (2), or (3) of subsection (d) is determined by reference to its basis in the hands of the transferor, then the holding period of the property in the hands of the transferee shall include the holding period of the property in the hands of the transferor.

(f) Special rules for property which is substantially improved If, in the case of a disposition of section 1250 property, the property is treated as consisting of more than one element by reason of paragraph (3), then the amount taken into account under subsection (a) in respect of such section 1250 property as ordinary income shall be the sum of the amounts determined under paragraph (2). For purposes of paragraph (1), the amount taken into account for any element shall be the sum of a series of amounts determined for the periods set forth in subsection (a), with the amount for any such period being determined by multiplying— the amount which bears the same ratio to the lower of the amounts specified in clause (i) or (ii) of subsection (a)(1)(A), in clause (i) or (ii) of subsection (a)(2)(A), or in clause (i) or (ii) of subsection (a)(3)(A), as the case may be, for the section 1250 property as the additional depreciation for such element attributable to such period bears to the sum of the additional depreciation for all elements attributable to such period, by the applicable percentage for such element for such period. For purposes of this paragraph, determinations with respect to any element shall be made as if it were a separate property. In applying this subsection in the case of any section 1250 property, there shall be treated as a separate element— each separate improvement, if, before completion of section 1250 property, units thereof (as distinguished from improvements) were placed in service, each such unit of section 1250 property, and the remaining property which is not taken into account under subparagraphs (A) and (B). For purposes of this subsection— The term “separate improvement” means each improvement added during the 36–month period ending on the last day of any taxable year to the capital account for the property, but only if the sum of the amounts added to such account during such period exceeds the greatest of— 25 percent of the adjusted basis of the property, 10 percent of the adjusted basis of the property, determined without regard to the adjustments provided in paragraphs (2) and (3) of section 1016(a), or $5, 000. F or p u r p oseso f c l a u ses (i) an d (ii), t h e a d j u s t e d ba s i so f t h e p ro p er t ys ha ll b e d e t er min e d a so f t h e b e g innin g o f t h e f i rs t d a yo f s u c h 36- m o n t h p er i o d, oro f t h e h o l d in g p er i o d o f t h e p ro p er t y (w i t hin t h e m e anin g o f s u b sec t i o n (e)), w hi c h e v er i s t h e l a t er . I m p ro v e m e n t s inan y t a x ab l eye a rs ha ll b e t ak e nin t o a cco u n t f or p u r p oseso f s u b p a r a g r a p h (A) o n l y i f t h es u m o f t h e am o u n t s a dd e d t o t h ec a p i t a l a cco u n t f or t h e p ro p er t y f ors u c h t a x ab l eye a re x cee d s t h e g re a t ero f —$ 2,000, or one percent of the adjusted basis referred to in subparagraph (A)(ii), determined, however, as of the beginning of such taxable year. For purposes of this section, if the amount added to the capital account for any separate improvement does not exceed the greater of clause (i) or (ii), such improvement shall be treated as placed in service on the first day, of a calendar month, which is closest to the middle of the taxable year. The term “improvement” means, in the case of any section 1250 property, any addition to capital account for such property after the initial acquisition or after completion of the property.

(g) Adjustments to basis The Secretary shall prescribe such regulations as he may deem necessary to provide for adjustments to the basis of property to reflect gain recognized under subsection (a).

(h) Application of section This section shall apply notwithstanding any other provision of this subtitle.

[§ 1251 Repealed. Pub. L. 98–369, div. A, title IV, § 492(a), July 18, 1984, 98 Stat. 853]

§ 1252 Gain from disposition of farm land

(a) General rule Except as otherwise provided in this section, if farm land which the taxpayer has held for less than 10 years is disposed of, the lower of— the applicable percentage of the aggregate of the deductions allowed under section 175 (relating to soil and water conservation expenditures) for expenditures made by the taxpayer with respect to the farm land or the excess of— the amount realized (in the case of a sale, exchange, or involuntary conversion), or the fair market value of the farm land (in the case of any other disposition), over the adjusted basis of such land, shall be treated as ordinary income. Such gain shall be recognized notwithstanding any other provision of this subtitle. For purposes of this section, the term “farm land” means any land with respect to which deductions have been allowed under section 175 (relating to soil and water conservation expenditures). For purposes of this section— If the farm land is disposed of— The applicable percentage is— Within 5 years after the date it was acquired 100 percent. Within the sixth year after it was acquired 80 percent. Within the seventh year after it was acquired 60 percent. Within the eighth year after it was acquired 40 percent. Within the ninth year after it was acquired 20 percent. 10 years or more years after it was acquired 0 percent.

(b) Special rules Under regulations prescribed by the Secretary, rules similar to the rules of section 1245 shall be applied for purposes of this section.

§ 1253 Transfers of franchises, trademarks, and trade names

(a) General rule A transfer of a franchise, trademark, or trade name shall not be treated as a sale or exchange of a capital asset if the transferor retains any significant power, right, or continuing interest with respect to the subject matter of the franchise, trademark, or trade name.

(b) Definitions For purposes of this section— The term “franchise” includes an agreement which gives one of the parties to the agreement the right to distribute, sell, or provide goods, services, or facilities, within a specified area. The term “significant power, right, or continuing interest” includes, but is not limited to, the following rights with respect to the interest transferred: A right to disapprove any assignment of such interest, or any part thereof. A right to terminate at will. A right to prescribe the standards of quality of products used or sold, or of services furnished, and of the equipment and facilities used to promote such products or services. A right to require that the transferee sell or advertise only products or services of the transferor. A right to require that the transferee purchase substantially all of his supplies and equipment from the transferor. A right to payments contingent on the productivity, use, or disposition of the subject matter of the interest transferred, if such payments constitute a substantial element under the transfer agreement. The term “transfer” includes the renewal of a franchise, trademark, or trade name.

(c) Treatment of contingent payments by transferor Amounts received or accrued on account of a transfer, sale, or other disposition of a franchise, trademark, or trade name which are contingent on the productivity, use, or disposition of the franchise, trademark, or trade name transferred shall be treated as amounts received or accrued from the sale or other disposition of property which is not a capital asset.

(d) Treatment of payments by transferee Any amount described in subparagraph (B) which is paid or incurred during the taxable year on account of a transfer, sale, or other disposition of a franchise, trademark, or trade name shall be allowed as a deduction under section 162(a) (relating to trade or business expenses). An amount is described in this subparagraph if it— is contingent on the productivity, use, or disposition of the franchise, trademark, or trade name, and is paid as part of a series of payments— which are payable not less frequently than annually throughout the entire term of the transfer agreement, and which are substantially equal in amount (or payable under a fixed formula). Any amount paid or incurred on account of a transfer, sale, or other disposition of a franchise, trademark, or trade name to which paragraph (1) does not apply shall be treated as an amount chargeable to capital account. For purposes of determining the term of a transfer agreement under this section, there shall be taken into account all renewal options (and any other period for which the parties reasonably expect the agreement to be renewed).

§ 1254 Gain from disposition of interest in oil, gas, geothermal, or other mineral properties

(a) General rule If any section 1254 property is disposed of, the lesser of— the aggregate amount of— expenditures which have been deducted by the taxpayer or any person under section 263, 616, or 617 with respect to such property and which, but for such deduction, would have been included in the adjusted basis of such property, and the deductions for depletion under section 611 which reduced the adjusted basis of such property, or the excess of— in the case of— a sale, exchange, or involuntary conversion, the amount realized, or in the case of any other disposition, the fair market value of such property, over the adjusted basis of such property, shall be treated as gain which is ordinary income. Such gain shall be recognized notwithstanding any other provision of this subtitle. For purposes of paragraph (1)— In the case of the disposition of a portion of section 1254 property (other than an undivided interest), the entire amount of the aggregate expenditures or deductions described in paragraph (1)(A) with respect to such property shall be treated as allocable to such portion to the extent of the amount of the gain to which paragraph (1) applies. In the case of the disposition of an undivided interest in a section 1254 property (or a portion thereof), a proportionate part of the expenditures or deductions described in paragraph (1)(A) with respect to such property shall be treated as allocable to such undivided interest to the extent of the amount of the gain to which paragraph (1) applies. This paragraph shall not apply to any expenditures to the extent the taxpayer establishes to the satisfaction of the Secretary that such expenditures do not relate to the portion (or interest therein) disposed of. The term “section 1254 property” means any property (within the meaning of section 614) if— any expenditures described in paragraph (1)(A) are properly chargeable to such property, or the adjusted basis of such property includes adjustments for deductions for depletion under section 611. The amount of the expenditures referred to in paragraph (1)(A)(i) shall be properly adjusted for amounts included in gross income under section 617(b)(1)(A).

(b) Special rules under regulations Under regulations prescribed by the Secretary— rules similar to the rule of subsection (g) of section 617 and to the rules of subsections (b) and (c) of section 1245 shall be applied for purposes of this section; and in the case of the sale or exchange of stock in an S corporation, rules similar to the rules of section 751 shall be applied to that portion of the excess of the amount realized over the adjusted basis of the stock which is attributable to expenditures referred to in subsection (a)(1)(A) of this section.

§ 1255 Gain from disposition of section 126 property

(a) General rule Except as otherwise provided in this section, if section 126 property is disposed of, the lower of— the applicable percentage of the aggregate payments, with respect to such property, excluded from gross income under section 126, or the excess of— the amount realized (in the case of a sale, exchange, or involuntary conversion), or the fair market value of such section 126 property (in the case of any other disposition), over the adjusted basis of such property, shall be treated as ordinary income. Such gain shall be recognized notwithstanding any other provision of this subtitle, except that this section shall not apply to the extent such gain is recognized as ordinary income under any other provision of this part. For purposes of this section, “section 126 property” means any property acquired, improved, or otherwise modified by the application of payments excluded from gross income under section 126. For purposes of this section, if section 126 property is disposed of less than 10 years after the date of receipt of payments excluded from gross income under section 126, the applicable percentage is 100 percent. If section 126 property is disposed of more than 10 years after such date, the applicable percentage is 100 percent reduced (but not below zero) by 10 percent for each year or part thereof in excess of 10 years such property was held after the date of receipt of the payments.

(b) Special rules Under regulations prescribed by the Secretary— rules similar to the rules applicable under section 1245 shall be applied for purposes of this section, and for purposes of sections 170(e) and 751(c), amounts treated as ordinary income under this section shall be treated in the same manner as amounts treated as ordinary income under section 1245.

§ 1256 Section 1256 contracts marked to market

(a) General rule For purposes of this subtitle— each section 1256 contract held by the taxpayer at the close of the taxable year shall be treated as sold for its fair market value on the last business day of such taxable year (and any gain or loss shall be taken into account for the taxable year), proper adjustment shall be made in the amount of any gain or loss subsequently realized for gain or loss taken into account by reason of paragraph (1), any gain or loss with respect to a section 1256 contract shall be treated as— short-term capital gain or loss, to the extent of 40 percent of such gain or loss, and long-term capital gain or loss, to the extent of 60 percent of such gain or loss, and if all the offsetting positions making up any straddle consist of section 1256 contracts to which this section applies (and such straddle is not part of a larger straddle), sections 1092 and 263(g) shall not apply with respect to such straddle.

(b) Section 1256 contract defined For purposes of this section, the term “section 1256 contract” means— any regulated futures contract, any foreign currency contract, any nonequity option, any dealer equity option, and any dealer securities futures contract. The term “section 1256 contract” shall not include— any securities futures contract or option on such a contract unless such contract or option is a dealer securities futures contract, or any interest rate swap, currency swap, basis swap, interest rate cap, interest rate floor, commodity swap, equity swap, equity index swap, credit default swap, or similar agreement.

(c) Terminations, etc. The rules of paragraphs (1), (2), and (3) of subsection (a) shall also apply to the termination (or transfer) during the taxable year of the taxpayer’s obligation (or rights) with respect to a section 1256 contract by offsetting, by taking or making delivery, by exercise or being exercised, by assignment or being assigned, by lapse, or otherwise. If— 2 or more section 1256 contracts are part of a straddle (as defined in section 1092(c)), and the taxpayer takes delivery under or exercises any of such contracts, then, for purposes of this section, each of the other such contracts shall be treated as terminated on the day on which the taxpayer took delivery. For purposes of this subsection, fair market value at the time of the termination (or transfer) shall be taken into account.

(d) Elections with respect to mixed straddles The taxpayer may elect to have this section not to apply to all section 1256 contracts which are part of a mixed straddle. An election under paragraph (1) shall be made at such time and in such manner as the Secretary may by regulations prescribe. An election under paragraph (1) shall apply to the taxpayer’s taxable year for which made and to all subsequent taxable years, unless the Secretary consents to a revocation of such election. For purposes of this subsection, the term “mixed straddle” means any straddle (as defined in section 1092(c))— at least 1 (but not all) of the positions of which are section 1256 contracts, and with respect to which each position forming part of such straddle is clearly identified, before the close of the day on which the first section 1256 contract forming part of the straddle is acquired (or such earlier time as the Secretary may prescribe by regulations), as being part of such straddle.

(e) Mark to market not to apply to hedging transactions Subsection (a) shall not apply in the case of a hedging transaction. For purposes of this subsection, the term “hedging transaction” means any hedging transaction (as defined in section 1221(b)(2)(A)) if, before the close of the day on which such transaction was entered into (or such earlier time as the Secretary may prescribe by regulations), the taxpayer clearly identifies such transaction as being a hedging transaction. Notwithstanding paragraph (2), the term “hedging transaction” shall not include any transaction entered into by or for a syndicate. For purposes of subparagraph (A), the term “syndicate” means any partnership or other entity (other than a corporation which is not an S corporation) if more than 35 percent of the losses of such entity during the taxable year are allocable to limited partners or limited entrepreneurs (within the meaning of section 461(k)(4)). For purposes of subparagraph (B), an interest in an entity shall not be treated as held by a limited partner or a limited entrepreneur (within the meaning of section 461(k)(4))— for any period if during such period such interest is held by an individual who actively participates at all times during such period in the management of such entity, for any period if during such period such interest is held by the spouse, children, grandchildren, and parents of an individual who actively participates at all times during such period in the management of such entity, if such interest is held by an individual who actively participated in the management of such entity for a period of not less than 5 years, if such interest is held by the estate of an individual who actively participated in the management of such entity or is held by the estate of an individual if with respect to such individual such interest was at any time described in clause (ii), or if the Secretary determines (by regulations or otherwise) that such interest should be treated as held by an individual who actively participates in the management of such entity, and that such entity and such interest are not used (or to be used) for tax–avoidance purposes. For purposes of this subparagraph, a legally adopted child of an individual shall be treated as a child of such individual by blood. Any hedging loss for a taxable year which is allocable to any limited partner or limited entrepreneur (within the meaning of paragraph (3)) shall be allowed only to the extent of the taxable income of such limited partner or entrepreneur for such taxable year attributable to the trade or business in which the hedging transactions were entered into. For purposes of the preceding sentence, taxable income shall be determined by not taking into account items attributable to hedging transactions. Any hedging loss disallowed under clause (i) shall be treated as a deduction attributable to a hedging transaction allowable in the first succeeding taxable year. Subparagraph (A)(i) shall not apply to any hedging loss to the extent that such loss exceeds the aggregate unrecognized gains from hedging transactions as of the close of the taxable year attributable to the trade or business in which the hedging transactions were entered into. In the case of any hedging transaction relating to property other than stock or securities, this paragraph shall apply only in the case of a taxpayer described in section 465(a)(1). The term “hedging loss” means the excess of— the deductions allowable under this chapter for the taxable year attributable to hedging transactions (determined without regard to subparagraph (A)(i)), over income received or accrued by the taxpayer during such taxable year from such transactions. The term “unrecognized gain” has the meaning given to such term by section 1092(a)(3).

(f) Special rules For purposes of this title, gain from any property shall in no event be considered as gain from the sale or exchange of a capital asset if such property was at any time personal property (as defined in section 1092(d)(1)) identified under subsection (e)(2) by the taxpayer as being part of a hedging transaction. Paragraph (3) of subsection (a) shall not apply to any gain or loss which, but for such paragraph, would be ordinary income or loss. For purposes of this title, gain or loss from trading of section 1256 contracts shall be treated as gain or loss from the sale or exchange of a capital asset. Subparagraph (A) shall not apply to any section 1256 contract to the extent such contract is held for purposes of hedging property if any loss with respect to such property in the hands of the taxpayer would be ordinary loss. For purposes of determining whether gain or loss with respect to any property is ordinary income or loss, the fact that the taxpayer is actively engaged in dealing in or trading section 1256 contracts related to such property shall not be taken into account. In the case of any gain or loss with respect to dealer equity options, or dealer securities futures contracts, which are allocable to limited partners or limited entrepreneurs (within the meaning of subsection (e)(3))— paragraph (3) of subsection (a) shall not apply to any such gain or loss, and all such gains or losses shall be treated as short-term capital gains or losses, as the case may be. Section 1091 (relating to loss from wash sales of stock or securities) shall not apply to any loss taken into account by reason of paragraph (1) of subsection (a).

(g) Definitions For purposes of this section— The term “regulated futures contract” means a contract— with respect to which the amount required to be deposited and the amount which may be withdrawn depends on a system of marking to market, and which is traded on or subject to the rules of a qualified board or exchange. The term “foreign currency contract” means a contract— which requires delivery of, or the settlement of which depends on the value of, a foreign currency which is a currency in which positions are also traded through regulated futures contracts, which is traded in the interbank market, and which is entered into at arm’s length at a price determined by reference to the price in the interbank market. The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of subparagraph (A), including regulations excluding from the application of subparagraph (A) any contract (or type of contract) if its application thereto would be inconsistent with such purposes. The term “nonequity option” means any listed option which is not an equity option. The term “dealer equity option” means, with respect to an options dealer, any listed option which— is an equity option, is purchased or granted by such options dealer in the normal course of his activity of dealing in options, and is listed on the qualified board or exchange on which such options dealer is registered. The term “listed option” means any option (other than a right to acquire stock from the issuer) which is traded on (or subject to the rules of) a qualified board or exchange. The term “equity option” means any option— to buy or sell stock, or the value of which is determined directly or indirectly by reference to any stock or any narrow-based security index (as defined in section 3(a)(55) of the Securities Exchange Act of 1934, as in effect on the date of the enactment of this paragraph). The term “equity option” includes such an option on a group of stocks only if such group meets the requirements for a narrow-based security index (as so defined). The Secretary may prescribe regulations regarding the status of options the values of which are determined directly or indirectly by reference to any index which becomes (or ceases to be) a narrow-based security index (as so defined). The term “qualified board or exchange” means— a national securities exchange which is registered with the Securities and Exchange Commission, a domestic board of trade designated as a contract market by the Commodity Futures Trading Commission, or any other exchange, board of trade, or other market which the Secretary determines has rules adequate to carry out the purposes of this section. The term “options dealer” means any person registered with an appropriate national securities exchange as a market maker or specialist in listed options. In any case in which the Secretary makes a determination under subparagraph (C) of paragraph (7), the term “options dealer” also includes any person whom the Secretary determines performs functions similar to the persons described in subparagraph (A). Such determinations shall be made to the extent appropriate to carry out the purposes of this section. The term “dealer securities futures contract” means, with respect to any dealer, any securities futures contract, and any option on such a contract, which— is entered into by such dealer (or, in the case of an option, is purchased or granted by such dealer) in the normal course of his activity of dealing in such contracts or options, as the case may be, and is traded on a qualified board or exchange. For purposes of subparagraph (A), a person shall be treated as a dealer in securities futures contracts or options on such contracts if the Secretary determines that such person performs, with respect to such contracts or options, as the case may be, functions similar to the functions performed by persons described in paragraph (8)(A). Such determination shall be made to the extent appropriate to carry out the purposes of this section. The term “securities futures contract” has the meaning given to such term by section 1234B.

§ 1257 Disposition of converted wetlands or highly erodible croplands

(a) Gain treated as ordinary income Any gain on the disposition of converted wetland or highly erodible cropland shall be treated as ordinary income. Such gain shall be recognized notwithstanding any other provision of this subtitle, except that this section shall not apply to the extent such gain is recognized as ordinary income under any other provision of this part.

(b) Loss treated as long-term capital loss Any loss recognized on the disposition of converted wetland or highly erodible cropland shall be treated as a long-term capital loss.

(c) Definitions For purposes of this section— The term “converted wetland” means any converted wetland (as defined in section 1201(a)(7) of the Food Security Act of 1985 ( 16 U.S.C. 3801(7) )) held— by the person whose activities resulted in such land being converted wetland, or by any other person who at any time used such land for farming purposes. The term “highly erodible cropland” means any highly erodible cropland (as defined in section 1201(a)(10) of the Food Security Act of 1985 ( 16 U.S.C. 3801(10) )), if at any time the taxpayer used such land for farming purposes (other than the grazing of animals). If any land is converted wetland or highly erodible cropland in the hands of any person, such land shall be treated as converted wetland or highly erodible cropland in the hands of any other person whose adjusted basis in such land is determined (in whole or in part) by reference to the adjusted basis of such land in the hands of such person.

(d) Special rules Under regulations prescribed by the Secretary, rules similar to the rules applicable under section 1245 shall apply for purposes of subsection (a). For purposes of sections 170(e) and 751(c), amounts treated as ordinary income under subsection (a) shall be treated in the same manner as amounts treated as ordinary income under section 1245.

§ 1258 Recharacterization of gain from certain financial transactions

(a) General rule In the case of any gain— which (but for this section) would be treated as gain from the sale or exchange of a capital asset, and which is recognized on the disposition or other termination of any position which was held as part of a conversion transaction, such gain (to the extent such gain does not exceed the applicable imputed income amount) shall be treated as ordinary income.

(b) Applicable imputed income amount For purposes of subsection (a), the term “applicable imputed income amount” means, with respect to any disposition or other termination referred to in subsection (a), an amount equal to— the amount of interest which would have accrued on the taxpayer’s net investment in the conversion transaction for the period ending on the date of such disposition or other termination (or, if earlier, the date on which the requirements of subsection (c) ceased to be satisfied) at a rate equal to 120 percent of the applicable rate, reduced by the amount treated as ordinary income under subsection (a) with respect to any prior disposition or other termination of a position which was held as a part of such transaction. The Secretary shall by regulations provide for such reductions in the applicable imputed income amount as may be appropriate by reason of amounts capitalized under section 263(g), ordinary income received, or otherwise.

(c) Conversion transaction For purposes of this section, the term “conversion transaction” means any transaction— substantially all of the taxpayer’s expected return from which is attributable to the time value of the taxpayer’s net investment in such transaction, and which is— the holding of any property (whether or not actively traded), and the entering into a contract to sell such property (or substantially identical property) at a price determined in accordance with such contract, but only if such property was acquired and such contract was entered into on a substantially contemporaneous basis, an applicable straddle, any other transaction which is marketed or sold as producing capital gains from a transaction described in paragraph (1), or any other transaction specified in regulations prescribed by the Secretary.

(d) Definitions and special rules For purposes of this section— The term “applicable straddle” means any straddle (within the meaning of section 1092(c)). The term “applicable rate” means— the applicable Federal rate determined under section 1274(d) (compounded semiannually) as if the conversion transaction were a debt instrument, or if the term of the conversion transaction is indefinite, the Federal short-term rates in effect under section 6621(b) during the period of the conversion transaction (compounded daily). If any position with a built-in loss becomes part of a conversion transaction— for purposes of applying this subtitle to such position for periods after such position becomes part of such transaction, such position shall be taken into account at its fair market value as of the time it became part of such transaction, except that upon the disposition or other termination of such position in a transaction in which gain or loss is recognized, such built-in loss shall be recognized and shall have a character determined without regard to this section. For purposes of subparagraph (A), the term “built-in loss” means the loss (if any) which would have been realized if the position had been disposed of or otherwise terminated at its fair market value as of the time such position became part of the conversion transaction. In determining the taxpayer’s net investment in any conversion transaction, there shall be included the fair market value of any position which becomes part of such transaction (determined as of the time such position became part of such transaction). Subsection (a) shall not apply to transactions— of an options dealer in the normal course of the dealer’s trade or business of dealing in options, or of a commodities trader in the normal course of the trader’s trade or business of trading section 1256 contracts. For purposes of this paragraph— The term “options dealer” has the meaning given such term by section 1256(g)(8). The term “commodities trader” means any person who is a member (or, except as otherwise provided in regulations, is entitled to trade as a member) of a domestic board of trade which is designated as a contract market by the Commodity Futures Trading Commission. In the case of any gain from a transaction recognized by an entity which is allocable to a limited partner or limited entrepreneur (within the meaning of section 461(k)(4)), subparagraph (A) shall not apply if— substantially all of the limited partner’s (or limited entrepreneur’s) expected return from the entity is attributable to the time value of the partner’s (or entrepreneur’s) net investment in such entity, the transaction (or the interest in the entity) was marketed or sold as producing capital gains treatment from a transaction described in subsection (c)(1), or the transaction (or the interest in the entity) is a transaction (or interest) specified in regulations prescribed by the Secretary.

§ 1259 Constructive sales treatment for appreciated financial positions

(a) In general If there is a constructive sale of an appreciated financial position— the taxpayer shall recognize gain as if such position were sold, assigned, or otherwise terminated at its fair market value on the date of such constructive sale (and any gain shall be taken into account for the taxable year which includes such date), and for purposes of applying this title for periods after the constructive sale— proper adjustment shall be made in the amount of any gain or loss subsequently realized with respect to such position for any gain taken into account by reason of paragraph (1), and the holding period of such position shall be determined as if such position were originally acquired on the date of such constructive sale.

(b) Appreciated financial position For purposes of this section— Except as provided in paragraph (2), the term “appreciated financial position” means any position with respect to any stock, debt instrument, or partnership interest if there would be gain were such position sold, assigned, or otherwise terminated at its fair market value. The term “appreciated financial position” shall not include— any position with respect to debt if— the position unconditionally entitles the holder to receive a specified principal amount, the interest payments (or other similar amounts) with respect to such position meet the requirements of clause (i) of section 860G(a)(1)(B), and such position is not convertible (directly or indirectly) into stock of the issuer or any related person, any hedge with respect to a position described in subparagraph (A), and any position which is marked to market under any provision of this title or the regulations thereunder. The term “position” means an interest, including a futures or forward contract, short sale, or option.

(c) Constructive sale For purposes of this section— A taxpayer shall be treated as having made a constructive sale of an appreciated financial position if the taxpayer (or a related person)— enters into a short sale of the same or substantially identical property, enters into an offsetting notional principal contract with respect to the same or substantially identical property, enters into a futures or forward contract to deliver the same or substantially identical property, in the case of an appreciated financial position that is a short sale or a contract described in subparagraph (B) or (C) with respect to any property, acquires the same or substantially identical property, or to the extent prescribed by the Secretary in regulations, enters into 1 or more other transactions (or acquires 1 or more positions) that have substantially the same effect as a transaction described in any of the preceding subparagraphs. A taxpayer shall not be treated as having made a constructive sale solely because the taxpayer enters into a contract for sale of any stock, debt instrument, or partnership interest which is not a marketable security (as defined in section 453(f)) if the contract settles within 1 year after the date such contract is entered into. In applying this section, there shall be disregarded any transaction (which would otherwise cause a constructive sale) during the taxable year if— such transaction is closed on or before the 30th day after the close of such taxable year, the taxpayer holds the appreciated financial position throughout the 60-day period beginning on the date such transaction is closed, and at no time during such 60-day period is the taxpayer’s risk of loss with respect to such position reduced by reason of a circumstance which would be described in section 246(c)(4) if references to stock included references to such position. If— a transaction, which would otherwise cause a constructive sale of an appreciated financial position, is closed during the taxable year or during the 30 days thereafter, and another transaction is entered into during the 60-day period beginning on the date the transaction referred to in clause (i) is closed— which would (but for this subparagraph) cause the requirement of subparagraph (A)(iii) not to be met with respect to the transaction described in clause (i) of this subparagraph, which is closed on or before the 30th day after the close of the taxable year in which the transaction referred to in clause (i) occurs, and which meets the requirements of clauses (ii) and (iii) of subparagraph (A), the transaction referred to in clause (ii) shall be disregarded for purposes of determining whether the requirements of subparagraph (A)(iii) are met with respect to the transaction described in clause (i). A person is related to another person with respect to a transaction if— the relationship is described in section 267(b) or 707(b), and such transaction is entered into with a view toward avoiding the purposes of this section.

(d) Other definitions For purposes of this section— The term “forward contract” means a contract to deliver a substantially fixed amount of property (including cash) for a substantially fixed price. The term “offsetting notional principal contract” means, with respect to any property, an agreement which includes— a requirement to pay (or provide credit for) all or substantially all of the investment yield (including appreciation) on such property for a specified period, and a right to be reimbursed for (or receive credit for) all or substantially all of any decline in the value of such property.

(e) Special rules If— there is a constructive sale of any appreciated financial position, such position is subsequently disposed of, and at the time of such disposition, the transaction resulting in the constructive sale of such position is open with respect to the taxpayer or any related person, solely for purposes of determining whether the taxpayer has entered into a constructive sale of any other appreciated financial position held by the taxpayer, the taxpayer shall be treated as entering into such transaction immediately after such disposition. For purposes of the preceding sentence, an assignment or other termination shall be treated as a disposition. For purposes of this section, an interest in a trust which is actively traded (within the meaning of section 1092(d)(1)) shall be treated as stock unless substantially all (by value) of the property held by the trust is debt described in subsection (b)(2)(A). If a taxpayer holds multiple positions in property, the determination of whether a specific transaction is a constructive sale and, if so, which appreciated financial position is deemed sold shall be made in the same manner as actual sales.

(f) Regulations The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section.

§ 1260 Gains from constructive ownership transactions

(a) In general If the taxpayer has gain from a constructive ownership transaction with respect to any financial asset and such gain would (without regard to this section) be treated as a long-term capital gain— such gain shall be treated as ordinary income to the extent that such gain exceeds the net underlying long-term capital gain, and to the extent such gain is treated as a long-term capital gain after the application of paragraph (1), the determination of the capital gain rate (or rates) applicable to such gain under section 1(h) shall be determined on the basis of the respective rate (or rates) that would have been applicable to the net underlying long-term capital gain.

(b) Interest charge on deferral of gain recognition If any gain is treated as ordinary income for any taxable year by reason of subsection (a)(1), the tax imposed by this chapter for such taxable year shall be increased by the amount of interest determined under paragraph (2) with respect to each prior taxable year during any portion of which the constructive ownership transaction was open. Any amount payable under this paragraph shall be taken into account in computing the amount of any deduction allowable to the taxpayer for interest paid or accrued during such taxable year. The amount of interest determined under this paragraph with respect to a prior taxable year is the amount of interest which would have been imposed under section 6601 on the underpayment of tax for such year which would have resulted if the gain (which is treated as ordinary income by reason of subsection (a)(1)) had been included in gross income in the taxable years in which it accrued (determined by treating the income as accruing at a constant rate equal to the applicable Federal rate as in effect on the day the transaction closed). The period during which such interest shall accrue shall end on the due date (without extensions) for the return of tax imposed by this chapter for the taxable year in which such transaction closed. For purposes of paragraph (2), the applicable Federal rate is the applicable Federal rate determined under section 1274(d) (compounded semiannually) which would apply to a debt instrument with a term equal to the period the transaction was open. Any increase in tax under paragraph (1) shall not be treated as tax imposed by this chapter for purposes of determining— the amount of any credit allowable under this chapter, or the amount of the tax imposed by section 55.

(c) Financial asset For purposes of this section— The term “financial asset” means— any equity interest in any pass-thru entity, and to the extent provided in regulations— any debt instrument, and any stock in a corporation which is not a pass-thru entity. For purposes of paragraph (1), the term “pass-thru entity” means— a regulated investment company, a real estate investment trust, an S corporation, a partnership, a trust, a common trust fund, a passive foreign investment company (as defined in section 1297 without regard to subsection (d) thereof), and a REMIC.

(d) Constructive ownership transaction For purposes of this section— The taxpayer shall be treated as having entered into a constructive ownership transaction with respect to any financial asset if the taxpayer— holds a long position under a notional principal contract with respect to the financial asset, enters into a forward or futures contract to acquire the financial asset, is the holder of a call option, and is the grantor of a put option, with respect to the financial asset and such options have substantially equal strike prices and substantially contemporaneous maturity dates, or to the extent provided in regulations prescribed by the Secretary, enters into one or more other transactions (or acquires one or more positions) that have substantially the same effect as a transaction described in any of the preceding subparagraphs. This section shall not apply to any constructive ownership transaction if all of the positions which are part of such transaction are marked to market under any provision of this title or the regulations thereunder. A person shall be treated as holding a long position under a notional principal contract with respect to any financial asset if such person— has the right to be paid (or receive credit for) all or substantially all of the investment yield (including appreciation) on such financial asset for a specified period, and is obligated to reimburse (or provide credit for) all or substantially all of any decline in the value of such financial asset. The term “forward contract” means any contract to acquire in the future (or provide or receive credit for the future value of) any financial asset.

(e) Net underlying long-term capital gain For purposes of this section, in the case of any constructive ownership transaction with respect to any financial asset, the term “net underlying long-term capital gain” means the aggregate net capital gain that the taxpayer would have had if— the financial asset had been acquired for fair market value on the date such transaction was opened and sold for fair market value on the date such transaction was closed, and only gains and losses that would have resulted from the deemed ownership under paragraph (1) were taken into account. The amount of the net underlying long-term capital gain with respect to any financial asset shall be treated as zero unless the amount thereof is established by clear and convincing evidence.

(f) Special rule where taxpayer takes delivery Except as provided in regulations prescribed by the Secretary, if a constructive ownership transaction is closed by reason of taking delivery, this section shall be applied as if the taxpayer had sold all the contracts, options, or other positions which are part of such transaction for fair market value on the closing date. The amount of gain recognized under the preceding sentence shall not exceed the amount of gain treated as ordinary income under subsection (a). Proper adjustments shall be made in the amount of any gain or loss subsequently realized for gain recognized and treated as ordinary income under this subsection.

(g) Regulations The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section, including regulations— to permit taxpayers to mark to market constructive ownership transactions in lieu of applying this section, and to exclude certain forward contracts which do not convey substantially all of the economic return with respect to a financial asset.

§ 1271 Treatment of amounts received on retirement or sale or exchange of debt instruments

(a) General rule For purposes of this title— Amounts received by the holder on retirement of any debt instrument shall be considered as amounts received in exchange therefor. If at the time of original issue there was an intention to call a debt instrument before maturity, any gain realized on the sale or exchange thereof which does not exceed an amount equal to— the original issue discount, reduced by the portion of original issue discount previously includible in the gross income of any holder (without regard to section 1272(a)(7) (or the corresponding provisions of prior law)), shall be treated as ordinary income. This paragraph shall not apply to— any tax-exempt obligation, or any holder who has purchased the debt instrument at a premium. On the sale or exchange of any short-term Government obligation, any gain realized which does not exceed an amount equal to the ratable share of the acquisition discount shall be treated as ordinary income. For purposes of this paragraph, the term “short-term Government obligation” means any obligation of the United States or any of its possessions, or of a State or any political subdivision thereof, or of the District of Columbia, which has a fixed maturity date not more than 1 year from the date of issue. Such term does not include any tax-exempt obligation. For purposes of this paragraph, the term “acquisition discount” means the excess of the stated redemption price at maturity over the taxpayer’s basis for the obligation. For purposes of this paragraph, except as provided in subparagraph (E), the ratable share of the acquisition discount is an amount which bears the same ratio to such discount as— the number of days which the taxpayer held the obligation, bears to the number of days after the date the taxpayer acquired the obligation and up to (and including) the date of its maturity. At the election of the taxpayer with respect to any obligation, the ratable share of the acquisition discount is the portion of the acquisition discount accruing while the taxpayer held the obligation determined (under regulations prescribed by the Secretary) on the basis of— the taxpayer’s yield to maturity based on the taxpayer’s cost of acquiring the obligation, and compounding daily. An election under this subparagraph, once made with respect to any obligation, shall be irrevocable. On the sale or exchange of any short-term nongovernment obligation, any gain realized which does not exceed an amount equal to the ratable share of the original issue discount shall be treated as ordinary income. For purposes of this paragraph, the term “short-term nongovernment obligation” means any obligation which— has a fixed maturity date not more than 1 year from the date of the issue, and is not a short-term Government obligation (as defined in paragraph (3)(B) without regard to the last sentence thereof). For purposes of this paragraph, except as provided in subparagraph (D), the ratable share of the original issue discount is an amount which bears the same ratio to such discount as— the number of days which the taxpayer held the obligation, bears to the number of days after the date of original issue and up to (and including) the date of its maturity. At the election of the taxpayer with respect to any obligation, the ratable share of the original issue discount is the portion of the original issue discount accruing while the taxpayer held the obligation determined (under regulations prescribed by the Secretary) on the basis of— the yield to maturity based on the issue price of the obligation, and compounding daily. Any election under this subparagraph, once made with respect to any obligation, shall be irrevocable.

(b) Exception for certain obligations This section shall not apply to any obligation issued by a natural person before June 9, 1997 . Paragraph (1) shall not apply to any obligation purchased (within the meaning of section 1272(d)(1)) 1 after June 8, 1997 .

(c) Double inclusion in income not required This section and sections 1272 and 1286 shall not require the inclusion of any amount previously includible in gross income.

(“(a) General Rule.— Except as otherwise provided in this section, the amendments made by this subtitle [subtitle C (§§ 41–44) of title I of div. A of Pub. L. 98–369 , enacting this section and sections 1272 to 1288 and 6706, amending sections 103A, 163, 165, 249, 341, 405, 409, 453B, 483, 751, 811, 871, 881, 1016, 1037, 1351, 1441, 6049, 7701, and 7805, and repealing sections 1232, 1232A, and 1232B of this title] shall apply to taxable years ending after the date of the enactment of this Act [ July 18, 1984 ].

(“(b) Treatment of Debt Instruments Received in Exchange for Property.— Except as otherwise provided in this subsection, section 1274 of the Internal Revenue Code of 1986 [formerly I.R.C. 1954] (as added by section 41) and the amendment made by section 41(b) (relating to amendment of section 483) shall apply to sales or exchanges after December 31, 1984 . Section 1274 of such Code and the amendment made by section 41(b) shall not apply to any sale or exchange pursuant to a written contract which was binding on March 1, 1984 , and at all times thereafter before the sale or exchange. Not later than 180 days after the date of the enactment of this Act [ July 18, 1984 ], the Secretary of the Treasury or his delegate shall modify the safe harbor interest rates applicable under the regulations prescribed under section 482 of the Internal Revenue Code of 1986 so that such rates are consistent with the rates applicable under section 483 of such Code by reason of the amendments made by section 41. In the case of any sale or exchange— after March 1, 1984 , nothing in section 483 of the Internal Revenue Code of 1986 shall permit any interest to be deductible before the period to which such interest is properly allocable, or after June 8, 1984 , notwithstanding section 483 of the Internal Revenue Code of 1986 or any other provision of law, no interest shall be deductible before the period to which such interest is properly allocable. In the case of any sale or exchange after March 1, 1984 , such section 483 shall be treated as including provisions similar to the provisions of section 1274(b)(3) of such Code (as added by section 41). Subparagraph (A)(i)(I) shall not apply to any sale or exchange pursuant to a written contract which was binding on March 1, 1984 , and at all times thereafter before the sale or exchange. Subparagraph (A)(i)(II) shall not apply to any sale or exchange pursuant to a written contract which was binding on June 8, 1984 , and at all times thereafter before the sale or exchange. Clause (i) of subparagraph (A) shall not apply to any debt instrument with substantially equal annual payments. In the case of any sale or exchange after December 31, 1984 , and before July 1, 1985 , of property other than new section 38 property— sections 483(c)(1)(B) and 1274(c)(3) of the Internal Revenue Code of 1986 shall be applied by substituting the testing rate determined under subparagraph (B) for 110 percent of the applicable Federal rate determined under section 1274(d) of such Code, and sections 483(b) and 1274(b) of such Code shall be applied by substituting the imputation rate determined under subparagraph (C) for 120 percent of the applicable Federal rate determined under section 1274(d) of such Code. For purposes of this paragraph— The testing rate determined under this subparagraph is the sum of— 9 percent, plus if the borrowed amount exceeds $2, 000, 000, t h ee x cess d e t er min e d u n d erc l a u se (ii) m u lt i pl i e d b y a f r a c t i o n t h e n u m er a t oro f w hi c hi s t h e b orro w e d am o u n tt o t h ee x t e n t i t e x cee d s$ 2,000,000, and the denominator of which is the borrowed amount. For purposes of clause (i), the excess determined under this clause is the excess of 110 percent of the applicable Federal rate determined under section 1274(d) of such Code over 9 percent. For purposes of this paragraph— The imputation rate determined under this subparagraph is the sum of— 10 percent, plus if the borrowed amount exceeds $2, 000, 000, t h ee x cess d e t er min e d u n d erc l a u se (ii) m u lt i pl i e d b y a f r a c t i o n t h e n u m er a t oro f w hi c hi s t h e b orro w e d am o u n tt o t h ee x t e n t i t e x cee d s$ 2,000,000, and the denominator of which is the borrowed amount. For purposes of clause (i), the excess determined under this clause is the excess of 120 percent of the applicable Federal rate determined under section 1274(d) of such Code over 10 percent. For purposes of this paragraph, the term ‘borrowed amount’ means the stated principal amount. For purposes of this paragraph— all sales or exchanges which are part of the same transaction (or a series of related transactions) shall be treated as one sale or exchange, and all debt instruments arising from the same transaction (or a series of related transactions) shall be treated as one debt instrument. In the case of any sale or exchange before July 1, 1985 , of property (other than new section 38 property) used in the active business of farming and in which the borrowed amount does not exceed 100,000,000. The Secretary shall prescribe such regulations as may be appropriate to effect the purpose of this paragraph and paragraph (5), including regulations relating to tax-exempt obligations, government subsidized loans, or other instruments. The Secretary shall prescribe regulations under which any transaction shall be exempt from the application of this paragraph if such exemption is not likely to significantly reduce the tax liability of the purchaser by reason of the overstatement of the adjusted basis of the acquired asset. If any person— assumes, in connection with the sale or exchange of property described in subparagraph (B), any debt obligation, or acquires any such property subject to any such debt obligation, sections 1274 and 483 of the Internal Revenue Code of 1986 shall not be applied to such debt obligation by reason of such assumption (or such acquisition) unless the terms and conditions of such debt obligation are modified in connection with the assumption (or acquisition). This paragraph shall apply to any of the following sales or exchanges: Any sale or exchange of a residence by an individual, an estate, or a testamentary trust, but only if— either— such residence on the date of such sale or exchange (or in the case of an estate or testamentary trust, on the date of death of the decedent) was the principal residence (within the meaning of section 1034) of the individual or decedent, or during the 2-year period ending on such date, no substantial portion of such residence was of a character subject to an allowance under this title [probably means the Internal Revenue Code of 1986] for depreciation (or amortization in lieu thereof) in the hands of such individual or decedent, and such residence was not at any time, in the hands of such individual, estate, testamentary trust, or decedent, described in section 1221(1) (relating to inventory, etc.). Any sale or exchange by a qualified person of— real property which was used as a farm (within the meaning of section 6420(c)(2)) at all times during the 3-year period ending on the date of such sale or exchange, or tangible personal property which was used in the active conduct of the trade or business of farming on such farm and is sold in connection with the sale of such farm, but only if such property is sold or exchanged for use in the active conduct of the trade or business of farming by the transferee of such property. Any sale or exchange by a qualified person of any trade or business. This subparagraph shall not apply to any sale or exchange of any property described in subparagraph (B). This subparagraph shall not apply to the sale or exchange of any property which, in the hands of the transferee, is new section 38 property. Any sale or exchange of any real property used in an active trade or business by a person who would be a qualified person if he disposed of his entire interest. This subparagraph shall not apply to any transaction described in the last sentence of paragraph (6)(B) (relating to transaction in excess of $100,000,000). For purposes of this paragraph— The term ‘qualified person’ means— a person who— is an individual, estate, or testamentary trust, is a corporation which immediately prior to the date of the sale or exchange has 35 or fewer shareholders, or is a partnership which immediately prior to the date of the sale or exchange has 35 or fewer partners, is a 10-percent owner of a farm or a trade or business, pursuant to a plan, disposes of— an interest in a farm or farm property, or his entire interest in a trade or business and all substantially similar trades or businesses, and the ownership interest of whom may be readily established by reason of qualified allocations (of the type described in section 168(j)(9)(B), one class of stock, or the like). The term ‘10-percent owner’ means a person having at least a 10-percent ownership interest, applying the attribution rules of section 318 (other than subsection (a)(4)). The term ‘trade or business’ means any trade or business, including any line of business, qualifying as an active trade or business within the meaning of section 355. For purposes of this clause, the holding of real property for rental shall not be treated as an active trade or business.

(“(c) Market Discount Rules.— Section 1276 of the Internal Revenue Code of 1986 (as added by section 41) shall apply to obligations issued after the date of the enactment of this Act [ July 18, 1984 ] in taxable years ending after such date. Section 1277 of such Code (as added by section 41) shall apply to obligations acquired after the date of the enactment of this Act in taxable years ending after such date.

(“(d) Rules Relating to Discount on Short-Term Obligations.— Subpart C of part V of subchapter P of chapter 1 of such Code (as added by section 41) shall apply to obligations acquired after the date of the enactment of this Act [ July 18, 1984 ].

(“(e) 5-Year Spread of Adjustments Required by Reason of Accrual of Discount on Certain Short-Term Obligations.— A taxpayer may elect for his first taxable year ending after the date of the enactment of this Act [ July 18, 1984 ] to have section 1281 of the Internal Revenue Code of 1986 apply to all short-term obligations described in subsection (b) of such section which were held by the taxpayer at any time during such first taxable year. In the case of any taxpayer who makes an election under paragraph (1)— the provisions of section 1281 of the Internal Revenue Code of 1986 (as added by section 41) shall be treated as a change in the method of accounting of the taxpayer, such change shall be treated as having been made with the consent of the Secretary, and the net amount of the adjustments required by section 481(a) of such Code to be taken into account by the taxpayer in computing taxable income (hereinafter in this paragraph referred to as the ‘net adjustments’) shall be taken into account during the spread period with the amount taken into account in each taxable year in such period determined under subparagraph (B). The amount taken into account for the first taxable year in the spread period shall be the sum of— one-fifth of the net adjustments, and the excess (if any) of—

(“(a) the cash basis income over the accrual basis income, over

(“(b) one-fifth of the net adjustments.

(“(ii) For subsequent years in spread period.— The amount taken into account in the second or any succeeding taxable year in the spread period shall be the sum of— the portion of the net adjustments not taken into account in the preceding taxable year of the spread period divided by the number of remaining taxable years in the spread period (including the year for which the determination is being made), and the excess (if any) of—

(“(a) the excess of the cash basis income over the accrual basis income, over

(“(b) one-fifth of the net adjustments, multiplied by 5 minus the number of years remaining in the spread period (not including the current year).

§ 1272 Current inclusion in income of original issue discount

(a) Original issue discount included in income on basis of constant interest rate For purposes of this title, there shall be included in the gross income of the holder of any debt instrument having original issue discount, an amount equal to the sum of the daily portions of the original issue discount for each day during the taxable year on which such holder held such debt instrument. Paragraph (1) shall not apply to— Any tax-exempt obligation. Any United States savings bond. Any debt instrument which has a fixed maturity date not more than 1 year from the date of issue. Any loan made by a natural person to another natural person if— such loan is not made in the course of a trade or business of the lender, and the amount of such loan (when increased by the outstanding amount of prior loans by such natural person to such other natural person) does not exceed $10,000. Clause (i) shall not apply if the loan has as 1 of its principal purposes the avoidance of any Federal tax. For purposes of this subparagraph, a husband and wife shall be treated as 1 person. The preceding sentence shall not apply where the spouses lived apart at all times during the taxable year in which the loan is made. For purposes of paragraph (1), the daily portion of the original issue discount on any debt instrument shall be determined by allocating to each day in any accrual period its ratable portion of the increase during such accrual period in the adjusted issue price of the debt instrument. For purposes of the preceding sentence, the increase in the adjusted issue price for any accrual period shall be an amount equal to the excess (if any) of— the product of— the adjusted issue price of the debt instrument at the beginning of such accrual period, and the yield to maturity (determined on the basis of compounding at the close of each accrual period and properly adjusted for the length of the accrual period), over the sum of the amounts payable as interest on such debt instrument during such accrual period. For purposes of this subsection, the adjusted issue price of any debt instrument at the beginning of any accrual period is the sum of— the issue price of such debt instrument, plus the adjustments under this subsection to such issue price for all periods before the first day of such accrual period. Except as otherwise provided in regulations prescribed by the Secretary, the term “accrual period” means a 6-month period (or shorter period from the date of original issue of the debt instrument) which ends on a day in the calendar year corresponding to the maturity date of the debt instrument or the date 6 months before such maturity date. In the case of any debt instrument to which this paragraph applies, the daily portion of the original issue discount shall be determined by allocating to each day in any accrual period its ratable portion of the excess (if any) of— the sum of (I) the present value determined under subparagraph (B) of all remaining payments under the debt instrument as of the close of such period, and (II) the payments during the accrual period of amounts included in the stated redemption price of the debt instrument, over the adjusted issue price of such debt instrument at the beginning of such period. For purposes of subparagraph (A), the present value shall be determined on the basis of— the original yield to maturity (determined on the basis of compounding at the close of each accrual period and properly adjusted for the length of the accrual period), events which have occurred before the close of the accrual period, and a prepayment assumption determined in the manner prescribed by regulations. This paragraph applies to— any regular interest in a REMIC or qualified mortgage held by a REMIC, any other debt instrument if payments under such debt instrument may be accelerated by reason of prepayments of other obligations securing such debt instrument (or, to the extent provided in regulations, by reason of other events), or any pool of debt instruments the yield on which may be affected by reason of prepayments (or to the extent provided in regulations, by reason of other events). To the extent provided in regulations prescribed by the Secretary, in the case of a small business engaged in the trade or business of selling tangible personal property at retail, clause (iii) shall not apply to debt instruments incurred in the ordinary course of such trade or business while held by such business. For purposes of this subsection, in the case of any purchase after its original issue of a debt instrument to which this subsection applies, the daily portion for any day shall be reduced by an amount equal to the amount which would be the daily portion for such day (without regard to this paragraph) multiplied by the fraction determined under subparagraph (B). For purposes of subparagraph (A), the fraction determined under this subparagraph is a fraction— the numerator of which is the excess (if any) of— the cost of such debt instrument incurred by the purchaser, over the issue price of such debt instrument, increased by the portion of original issue discount previously includible in the gross income of any holder (computed without regard to this paragraph), and the denominator of which is the sum of the daily portions for such debt instrument for all days after the date of such purchase and ending on the stated maturity date (computed without regard to this paragraph).

(b) Exceptions This section shall not apply to any holder— who has purchased the debt instrument at a premium, or which is a life insurance company to which section 811(b) applies.

(c) Definition and special rule For purposes of this section, the term “purchase” means— any acquisition of a debt instrument, where the basis of the debt instrument is not determined in whole or in part by reference to the adjusted basis of such debt instrument in the hands of the person from whom acquired. The basis of any debt instrument in the hands of the holder thereof shall be increased by the amount included in his gross income pursuant to this section.

§ 1273 Determination of amount of original issue discount

(a) General rule For purposes of this subpart— The term “original issue discount” means the excess (if any) of— the stated redemption price at maturity, over the issue price. The term “stated redemption price at maturity” means the amount fixed by the last modification of the purchase agreement and includes interest and other amounts payable at that time (other than any interest based on a fixed rate, and payable unconditionally at fixed periodic intervals of 1 year or less during the entire term of the debt instrument). If the original issue discount determined under paragraph (1) is less than— ¼ of 1 percent of the stated redemption price at maturity, multiplied by the number of complete years to maturity, then the original issue discount shall be treated as zero.

(b) Issue price For purposes of this subpart— In the case of any issue of debt instruments— publicly offered, and not issued for property, the issue price is the initial offering price to the public (excluding bond houses and brokers) at which price a substantial amount of such debt instruments was sold. In the case of any issue of debt instruments not issued for property and not publicly offered, the issue price of each such instrument is the price paid by the first buyer of such debt instrument. In the case of a debt instrument which is issued for property and which— is part of an issue a portion of which is traded on an established securities market, or is issued for stock or securities which are traded on an established securities market, or to the extent provided in regulations, is issued for property (other than stock or securities) of a kind regularly traded on an established market, the issue price of such debt instrument shall be the fair market value of such property. Except in any case— to which paragraph (1), (2), or (3) of this subsection applies, or to which section 1274 applies, the issue price of a debt instrument which is issued for property shall be the stated redemption price at maturity. In applying this subsection, the term “property” includes services and the right to use property, but such term does not include money.

(c) Special rules for applying subsection (b) For purposes of subsection (b)— The terms “initial offering price” and “price paid by the first buyer” include the aggregate payments made by the purchaser under the purchase agreement, including modifications thereof. In the case of any debt instrument and an option, security, or other property issued together as an investment unit— the issue price for such unit shall be determined in accordance with the rules of this subsection and subsection (b) as if it were a debt instrument, the issue price determined for such unit shall be allocated to each element of such unit on the basis of the relationship of the fair market value of such element to the fair market value of all elements in such unit, and the issue price of any debt instrument included in such unit shall be the portion of the issue price of the unit allocated to the debt instrument under subparagraph (B).

§ 1274 Determination of issue price in the case of certain debt instruments issued for property

(a) In general In the case of any debt instrument to which this section applies, for purposes of this subpart, the issue price shall be— where there is adequate stated interest, the stated principal amount, or in any other case, the imputed principal amount.

(b) Imputed principal amount For purposes of this section— Except as provided in paragraph (3), the imputed principal amount of any debt instrument shall be equal to the sum of the present values of all payments due under such debt instrument. For purposes of paragraph (1), the present value of a payment shall be determined in the manner provided by regulations prescribed by the Secretary— as of the date of the sale or exchange, and by using a discount rate equal to the applicable Federal rate, compounded semiannually. In the case of any potentially abusive situation, the imputed principal amount of any debt instrument received in exchange for property shall be the fair market value of such property adjusted to take into account other consideration involved in the transaction. For purposes of subparagraph (A), the term “potentially abusive situation” means— a tax shelter (as defined in section 6662(d)(2)(C)(ii)), and any other situation which, by reason of— recent sales transactions, nonrecourse financing, financing with a term in excess of the economic life of the property, or other circumstances, is of a type which the Secretary specifies by regulations as having potential for tax avoidance.

(c) Debt instruments to which section applies Except as otherwise provided in this subsection, this section shall apply to any debt instrument given in consideration for the sale or exchange of property if— the stated redemption price at maturity for such debt instrument exceeds— where there is adequate stated interest, the stated principal amount, or in any other case, the imputed principal amount of such debt instrument determined under subsection (b), and some or all of the payments due under such debt instrument are due more than 6 months after the date of such sale or exchange. For purposes of this section, there is adequate stated interest with respect to any debt instrument if the stated principal amount for such debt instrument is less than or equal to the imputed principal amount of such debt instrument determined under subsection (b). This section shall not apply to— Any debt instrument arising from the sale or exchange of a farm (within the meaning of section 6420(c)(2))— by an individual, estate, or testamentary trust, by a corporation which as of the date of the sale or exchange is a small business corporation (as defined in section 1244(c)(3)), or by a partnership which as of the date of the sale or exchange meets requirements similar to those of section 1244(c)(3). Clause (i) shall apply only if it can be determined at the time of the sale or exchange that the sales price cannot exceed $1, 000, 000. F or p u r p oseso f t h e p rece d in g se n t e n ce, a ll s a l es an d e x c han g es w hi c ha re p a r t o f t h es am e t r an s a c t i o n (or a ser i eso f re l a t e d t r an s a c t i o n s) s ha ll b e t re a t e d a s 1 s a l eore x c han g e . A n y d e b t in s t r u m e n t a r i s in g f ro m t h es a l eore x c han g e b y anin d i v i d u a l o f hi s p r in c i p a l res i d e n ce (w i t hin t h e m e anin g o f sec t i o n 121) . A n y d e b t in s t r u m e n t a r i s in g f ro m t h es a l eore x c han g eo f p ro p er t y i f t h es u m o f t h e f o ll o w in g am o u n t s d oes n o t e x cee d$ 250,000: the aggregate amount of the payments due under such debt instrument and all other debt instruments received as consideration for the sale or exchange, and the aggregate amount of any other consideration to be received for the sale or exchange. For purposes of clause (i), any consideration (other than a debt instrument) shall be taken into account at its fair market value. For purposes of this subparagraph, all sales and exchanges which are part of the same transaction (or a series of related transactions) shall be treated as 1 sale or exchange. Any debt instrument to which section 1273(b)(3) applies. In the case of any transfer described in section 1235(a) (relating to sale or exchange of patents), any amount contingent on the productivity, use, or disposition of the property transferred. Any debt instrument to the extent section 483(e) (relating to certain land transfers between related persons) applies to such instrument. If any person— in connection with the sale or exchange of property, assumes any debt instrument, or acquires any property subject to any debt instrument, in determining whether this section or section 483 applies to such debt instrument, such assumption (or such acquisition) shall not be taken into account unless the terms and conditions of such debt instrument are modified (or the nature of the transaction is changed) in connection with the assumption (or acquisition).

(d) Determination of applicable Federal rate For purposes of this section— In the case of a debt instrument with a term of: The applicable Federal rate is: Not over 3 years The Federal short-term rate. Over 3 years but not over 9 years The Federal mid-term rate. Over 9 years The Federal long-term rate. During each calendar month, the Secretary shall determine the Federal short-term rate, mid-term rate, and long-term rate which shall apply during the following calendar month. For purposes of this paragraph— The Federal short-term rate shall be the rate determined by the Secretary based on the average market yield (during any 1-month period selected by the Secretary and ending in the calendar month in which the determination is made) on outstanding marketable obligations of the United States with remaining periods to maturity of 3 years or less. The Federal mid-term and long-term rate shall be determined in accordance with the principles of clause (i). The Secretary may by regulations permit a rate to be used with respect to any debt instrument which is lower than the applicable Federal rate if the taxpayer establishes to the satisfaction of the Secretary that such lower rate is based on the same principles as the applicable Federal rate and is appropriate for the term of such instrument. In the case of any sale or exchange, the applicable Federal rate shall be the lowest 3-month rate. For purposes of subparagraph (A), the term “lowest 3-month rate” means the lowest of the applicable Federal rates in effect for any month in the 3-calendar-month period ending with the 1st calendar month in which there is a binding contract in writing for such sale or exchange. In determining the term of a debt instrument for purposes of this subsection, under regulations prescribed by the Secretary, there shall be taken into account options to renew or extend.

(e) 110 Percent rate where sale-leaseback involved In the case of any debt instrument to which this subsection applies, the discount rate used under subsection (b)(2)(B) or section 483(b) shall be 110 percent of the applicable Federal rate, compounded semiannually. Section 1274A shall not apply to any debt instrument to which this subsection applies. This subsection shall apply to any debt instrument given in consideration for the sale or exchange of any property if, pursuant to a plan, the transferor or any related person leases a portion of such property after such sale or exchange.

§ 1274A Special rules for certain transactions where stated principal amount does not exceed $2,800,000

(a) Lower discount rate In the case of any qualified debt instrument, the discount rate used for purposes of sections 483 and 1274 shall not exceed 9 percent, compounded semiannually.

(b) Qualified debt instrument defined For purposes of this section, the term “qualified debt instrument” means any debt instrument given in consideration for the sale or exchange of property (other than new section 38 property within the meaning of section 48(b), as in effect on the day before the date of the enactment of the Revenue Reconciliation Act of 1990) if the stated principal amount of such instrument does not exceed $2,800,000.

**(c) Election to use cash method where stated principal amount does not exceed $2, 000, 000 * * I n t h ec a seo f an yc a s hm e t h o dd e b t in s t r u m e n t — sec t i o n 1274 s ha ll n o t a ppl y, an d in t eres t o n s u c h d e b t in s t r u m e n t s ha ll b e t ak e nin t o a cco u n t b y b o t h t h e b orro w er an d t h e l e n d er u n d er t h ec a s h rece i pt s an dd i s b u rse m e n t s m e t h o d o f a cco u n t in g . F or p u r p oseso f p a r a g r a p h (1), t h e t er m “ c a s hm e t h o dd e b t in s t r u m e n t ” m e an s an y q u a l i f i e dd e b t in s t r u m e n t i f — t h es t a t e d p r in c i p a l am o u n t d oes n o t e x cee d$ 2,000,000, the lender does not use an accrual method of accounting and is not a dealer with respect to the property sold or exchanged, section 1274 would have applied to such instrument but for an election under this subsection, and an election under this subsection is jointly made with respect to such debt instrument by the borrower and lender. Except as provided in subparagraph (B), paragraph (1) shall apply to any successor to the borrower or lender with respect to a cash method debt instrument. If the lender (or any successor) transfers any cash method debt instrument to a taxpayer who uses an accrual method of accounting, this paragraph shall not apply with respect to such instrument for periods after such transfer. In the case of any cash method debt instrument, section 483 shall be applied as if it included provisions similar to the provisions of section 1274(b)(3).

(d) Other special rules For purposes of this section— all sales or exchanges which are part of the same transaction (or a series of related transactions) shall be treated as 1 sale or exchange, and all debt instruments arising from the same transaction (or a series of related transactions) shall be treated as 1 debt instrument. In the case of any debt instrument arising out of a sale or exchange during any calendar year after 1989, each dollar amount contained in the preceding provisions of this section shall be increased by an amount equal to— such amount, multiplied by the cost-of-living adjustment determined under section 1(f)(3) for the calendar year in which the taxable year begins, by substituting “calendar year 1988” for “calendar year 2016” in subparagraph (A)(ii) thereof. Any increase under the preceding sentence shall be rounded to the nearest multiple of $100 (or, i f s u c hin cre a se i s am u lt i pl eo f$ 50, such increase shall be increased to the nearest multiple of $100).

(e) Regulations The Secretary shall prescribe such regulations as may be necessary to carry out the purposes of this subsection, including— regulations coordinating the provisions of this section with other provisions of this title, regulations necessary to prevent the avoidance of tax through the abuse of the provisions of subsection (c), and regulations relating to the treatment of transfers of cash method debt instruments.

§ 1275 Other definitions and special rules

(a) Definitions For purposes of this subpart— Except as provided in subparagraph (B), the term “debt instrument” means a bond, debenture, note, or certificate or other evidence of indebtedness. The term “debt instrument” shall not include any annuity contract to which section 72 applies and which— depends (in whole or in substantial part) on the life expectancy of 1 or more individuals, or is issued by an insurance company subject to tax under subchapter L (or by an entity described in section 501(c) and exempt from tax under section 501(a) which would be subject to tax under subchapter L were it not so exempt)— in a transaction in which there is no consideration other than cash or another annuity contract meeting the requirements of this clause, pursuant to the exercise of an election under an insurance contract by a beneficiary thereof on the death of the insured party under such contract, or in a transaction involving a qualified pension or employee benefit plan. In the case of any debt instrument which is publicly offered, the term “date of original issue” means the date on which the issue was first issued to the public. In the case of any debt instrument to which section 1273(b)(2) applies, the term “date of original issue” means the date on which the debt instrument was sold by the issuer. In the case of any debt instrument not described in subparagraph (A) or (B), the term “date of original issue” means the date on which the debt instrument was issued in a sale or exchange. The term “tax-exempt obligation” means any obligation if— the interest on such obligation is not includible in gross income under section 103, or the interest on such obligation is exempt from tax (without regard to the identity of the holder) under any other provision of law. Any debt obligation of a corporation distributed by such corporation with respect to its stock shall be treated as if it had been issued by such corporation for property.

(b) Treatment of borrower in the case of certain loans for personal use In the case of the obligor under any debt instrument given in consideration for the sale or exchange of property, sections 1274 and 483 shall not apply if such property is personal use property. In the case of any debt instrument, if— such instrument— is incurred in connection with the acquisition or carrying of personal use property, and has original issue discount (determined after the application of paragraph (1)), and the obligor under such instrument uses the cash receipts and disbursements method of accounting, notwithstanding section 163(e), the original issue discount on such instrument shall be deductible only when paid. For purposes of this subsection, the term “personal use property” means any property substantially all of the use of which by the taxpayer is not in connection with a trade or business of the taxpayer or an activity described in section 212. The determination of whether property is described in the preceding sentence shall be made as of the time of issuance of the debt instrument.

(c) Information requirements In the case of any debt instrument having original issue discount, the Secretary may by regulations require that— the amount of the original issue discount, and the issue date, be set forth on such instrument. In the case of any issue of debt instruments not publicly offered, the regulations prescribed under subparagraph (A) shall not require the information to be set forth on the debt instrument before any disposition of such instrument by the first buyer. In the case of any issue of publicly offered debt instruments having original issue discount, the issuer shall (at such time and in such manner as the Secretary shall by regulation prescribe) furnish the Secretary the following information: The amount of the original issue discount. The issue date. Such other information with respect to the issue as the Secretary may by regulations require. For purposes of the preceding sentence, any person who makes a public offering of stripped bonds (or stripped coupons) shall be treated as the issuer of a publicly offered debt instrument having original issue discount. This subsection shall not apply to any obligation referred to in section 1272(a)(2) (relating to exceptions from current inclusion of original issue discount). For civil penalty for failure to meet requirements of this subsection, see section 6706.

(d) Regulation authority The Secretary may prescribe regulations providing that where, by reason of varying rates of interest, put or call options, indefinite maturities, contingent payments, assumptions of debt instruments, or other circumstances, the tax treatment under this subpart (or section 163(e)) does not carry out the purposes of this subpart (or section 163(e)), such treatment shall be modified to the extent appropriate to carry out the purposes of this subpart (or section 163(e)).

§ 1276 Disposition gain representing accrued market discount treated as ordinary income

(a) Ordinary income Except as otherwise provided in this section, gain on the disposition of any market discount bond shall be treated as ordinary income to the extent it does not exceed the accrued market discount on such bond. Such gain shall be recognized notwithstanding any other provision of this subtitle. For purposes of paragraph (1), a person disposing of any market discount bond in any transaction other than a sale, exchange, or involuntary conversion shall be treated as realizing an amount equal to the fair market value of the bond. Any partial principal payment on a market discount bond shall be included in gross income as ordinary income to the extent such payment does not exceed the accrued market discount on such bond. If subparagraph (A) applies to any partial principal payment on any market discount bond, for purposes of applying this section to any disposition of (or subsequent partial principal payment on) such bond, the amount of accrued market discount shall be reduced by the amount of such partial principal payment included in gross income under subparagraph (A). Except for purposes of sections 103, 871(a), 881, 1441, 1442, and 6049 (and such other provisions as may be specified in regulations), any amount treated as ordinary income under paragraph (1) or (3) shall be treated as interest for purposes of this title.

(b) Accrued market discount For purposes of this section— Except as otherwise provided in this subsection or subsection (c), the accrued market discount on any bond shall be an amount which bears the same ratio to the market discount on such bond as— the number of days which the taxpayer held the bond, bears to the number of days after the date the taxpayer acquired the bond and up to (and including) the date of its maturity. At the election of the taxpayer with respect to any bond, the accrued market discount on such bond shall be the aggregate amount which would have been includible in the gross income of the taxpayer under section 1272(a) (determined without regard to paragraph (2) thereof) with respect to such bond for all periods during which the bond was held by the taxpayer if such bond had been— originally issued on the date on which such bond was acquired by the taxpayer, for an issue price equal to the basis of the taxpayer in such bond immediately after its acquisition. In the case of any bond having original issue discount, for purposes of applying subparagraph (A)— the stated redemption price at maturity of such bond shall be treated as equal to its revised issue price, and the determination of the portion of the original issue discount which would have been includible in the gross income of the taxpayer under section 1272(a) shall be made under regulations prescribed by the Secretary. An election under subparagraph (A), once made with respect to any bond, shall be irrevocable. In the case of a bond the principal of which may be paid in 2 or more payments, the amount of accrued market discount shall be determined under regulations prescribed by the Secretary.

(c) Treatment of nonrecognition transactions Under regulations prescribed by the Secretary— If a market discount bond is transferred in a nonrecognition transaction and such bond is transferred basis property in the hands of the transferee, for purposes of determining the amount of the accrued market discount with respect to the transferee— the transferee shall be treated as having acquired the bond on the date on which it was acquired by the transferor for an amount equal to the basis of the transferor, and proper adjustments shall be made for gain recognized by the transferor on such transfer (and for any original issue discount or market discount included in the gross income of the transferor). If any market discount bond is disposed of by the taxpayer in a nonrecognition transaction and paragraph (1) does not apply to such transaction, any accrued market discount determined with respect to the property disposed of to the extent not theretofore treated as ordinary income under subsection (a)— shall be treated as accrued market discount with respect to the exchanged basis property received by the taxpayer in such transaction if such property is a market discount bond, and shall be treated as ordinary income on the disposition of the exchanged basis property received by the taxpayer in such exchange if such property is not a market discount bond. For purposes of paragraph (1), if the basis of any market discount bond in the hands of a transferee is determined under section 732(a), or 732(b), such property shall be treated as transferred basis property in the hands of such transferee.

(d) Special rules Under regulations prescribed by the Secretary— rules similar to the rules of subsection (b) of section 1245 shall apply for purposes of this section; except that— paragraph (1) of such subsection shall not apply, an exchange qualifying under section 354(a), 355(a), or 356(a) (determined without regard to subsection (a) of this section) shall be treated as an exchange described in paragraph (3) of such subsection, and paragraph (3) of section 1245(b) shall be applied as if it did not contain a reference to section 351, and appropriate adjustments shall be made to the basis of any property to reflect gain recognized under subsection (a).

§ 1277 Deferral of interest deduction allocable to accrued market discount

(a) General rule Except as otherwise provided in this section, the net direct interest expense with respect to any market discount bond shall be allowed as a deduction for the taxable year only to the extent that such expense exceeds the portion of the market discount allocable to the days during the taxable year on which such bond was held by the taxpayer (as determined under the rules of section 1276(b)).

(b) Disallowed deduction allowed for later years If— there is net interest income for any taxable year with respect to any market discount bond, and the taxpayer makes an election under this subparagraph with respect to such bond, any disallowed interest expense with respect to such bond shall be treated as interest paid or accrued by the taxpayer during such taxable year to the extent such disallowed interest expense does not exceed the net interest income with respect to such bond. For purposes of subparagraph (A), the amount of the disallowed interest expense— shall be determined as of the close of the preceding taxable year, and shall not include any amount previously taken into account under subparagraph (A). For purposes of this paragraph, the term “net interest income” means the excess of the amount determined under paragraph (2) of subsection (c) over the amount determined under paragraph (1) of subsection (c). Except as otherwise provided in this paragraph, the amount of the disallowed interest expense with respect to any market discount bond shall be treated as interest paid or accrued by the taxpayer in the taxable year in which such bond is disposed of. If any market discount bond is disposed of in a nonrecognition transaction— the disallowed interest expense with respect to such bond shall be treated as interest paid or accrued in the year of disposition only to the extent of the amount of gain recognized on such disposition, and the disallowed interest expense with respect to such property (to the extent not so treated) shall be treated as disallowed interest expense— in the case of a transaction described in section 1276(c)(1), of the transferee with respect to the transferred basis property, or in the case of a transaction described in section 1276(c)(2), with respect to the exchanged basis property. For purposes of this paragraph, the amount of the disallowed interest expense shall not include any amount previously taken into account under paragraph (1). For purposes of this subsection, the term “disallowed interest expense” means the aggregate amount disallowed under subsection (a) with respect to the market discount bond.

(c) Net direct interest expense For purposes of this section, the term “net direct interest expense” means, with respect to any market discount bond, the excess (if any) of— the amount of interest paid or accrued during the taxable year on indebtedness which is incurred or continued to purchase or carry such bond, over the aggregate amount of interest (including original issue discount) includible in gross income for the taxable year with respect to such bond. In the case of any financial institution which is a bank (as defined in section 585(a)(2)), the determination of whether interest is described in paragraph (1) shall be made under principles similar to the principles of section 291(e)(1)(B)(ii). Under rules similar to the rules of section 265(a)(5), short sale expenses shall be treated as interest for purposes of determining net direct interest expense.

§ 1278 Definitions and special rules

(a) In general For purposes of this part— Except as provided in subparagraph (B), the term “market discount bond” means any bond having market discount. The term “market discount bond” shall not include— Any obligation with a fixed maturity date not exceeding 1 year from the date of issue. Any United States savings bond. Any installment obligation to which section 453B applies. For purposes of section 1277, the term “market discount bond” shall not include any tax-exempt obligation (as defined in section 1275(a)(3)). Except as otherwise provided in this subparagraph or in regulations, the term “market discount bond” shall not include any bond acquired by the taxpayer at its original issue. Clause (i) shall not apply to any bond if— the basis of the taxpayer in such bond is determined under section 1012, and such basis is less than the issue price of such bond determined under subpart A of this part. Clause (i) shall not apply to any bond issued pursuant to a plan of reorganization (within the meaning of section 368(a)(1)) in exchange for another bond having market discount. Solely for purposes of section 1276, the preceding sentence shall not apply if such other bond was issued on or before July 18, 1984 (the date of the enactment of section 1276) and if the bond issued pursuant to such plan of reorganization has the same term and the same interest rate as such other bond had. For purposes of clause (i), if the adjusted basis of any bond in the hands of the taxpayer is determined by reference to the adjusted basis of such bond in the hands of a person who acquired such bond at its original issue, such bond shall be treated as acquired by the taxpayer at its original issue. The term “market discount” means the excess (if any) of— the stated redemption price of the bond at maturity, over the basis of such bond immediately after its acquisition by the taxpayer. In the case of any bond having original issue discount, for purposes of subparagraph (A), the stated redemption price of such bond at maturity shall be treated as equal to its revised issue price. If the market discount is less than ¼ of 1 percent of the stated redemption price of the bond at maturity multiplied by the number of complete years to maturity (after the taxpayer acquired the bond), then the market discount shall be considered to be zero. The term “bond” means any bond, debenture, note, certificate, or other evidence of indebtedness. The term “revised issue price” means the sum of— the issue price of the bond, and the aggregate amount of the original issue discount includible in the gross income of all holders for periods before the acquisition of the bond by the taxpayer (determined without regard to section 1272(a)(7)) or, in the case of a tax-exempt obligation, the aggregate amount of the original issue discount which accrued in the manner provided by section 1272(a) (determined without regard to paragraph (7) thereof) during periods before the acquisition of the bond by the taxpayer. The terms “original issue discount”, “stated redemption price at maturity”, and “issue price” have the respective meanings given such terms by subpart A of this part.

(b) Election to include market discount currently If the taxpayer makes an election under this subsection— sections 1276 and 1277 shall not apply, and market discount on any market discount bond shall be included in the gross income of the taxpayer for the taxable years to which it is attributable (as determined under the rules of subsection (b) of section 1276). Except for purposes of sections 103, 871(a), 881, 1441, 1442, and 6049 (and such other provisions as may be specified in regulations), any amount included in gross income under subparagraph (B) shall be treated as interest for purposes of this title. An election under this subsection shall apply to all market discount bonds acquired by the taxpayer on or after the 1st day of the 1st taxable year to which such election applies. An election under this subsection shall apply to the taxable year for which it is made and for all subsequent taxable years, unless the taxpayer secures the consent of the Secretary to the revocation of such election. The basis of any bond in the hands of the taxpayer shall be increased by the amount included in gross income pursuant to this subsection.

(c) Regulations The Secretary shall prescribe such regulations as may be necessary to carry out the purposes of this subpart, including regulations providing proper adjustments in the case of a bond the principal of which may be paid in 2 or more payments.

§ 1281 Current inclusion in income of discount on certain short-term obligations

(a) General rule In the case of any short-term obligation to which this section applies, for purposes of this title— there shall be included in the gross income of the holder an amount equal to the sum of the daily portions of the acquisition discount for each day during the taxable year on which such holder held such obligation, and any interest payable on the obligation (other than interest taken into account in determining the amount of the acquisition discount) shall be included in gross income as it accrues.

(b) Short-term obligations to which section applies This section shall apply to any short-term obligation which— is held by a taxpayer using an accrual method of accounting, is held primarily for sale to customers in the ordinary course of the taxpayer’s trade or business, is held by a bank (as defined in section 581), is held by a regulated investment company or a common trust fund, is identified by the taxpayer under section 1256(e)(2) as being part of a hedging transaction, or is a stripped bond or stripped coupon held by the person who stripped the bond or coupon (or by any other person whose basis is determined by reference to the basis in the hands of such person). This section shall apply also to— any short-term obligation which is held by a pass-thru entity which is formed or availed of for purposes of avoiding the provisions of this section, and any short-term obligation which is acquired by a pass-thru entity (not described in clause (i)) during the required accrual period. For purposes of subparagraph (A), the term “required accrual period” means the period— which begins with the first taxable year for which the ownership test of subparagraph (C) is met with respect to the pass-thru entity (or a predecessor), and which ends with the first taxable year after the taxable year referred to in clause (i) for which the ownership test of subparagraph (C) is not met and with respect to which the Secretary consents to the termination of the required accrual period. The ownership test of this subparagraph is met for any taxable year if, on at least 90 days during the taxable year, 20 percent or more of the value of the interests in the pass-thru entity are held by persons described in paragraph (1) or by other pass-thru entities to which subparagraph (A) applies. The term “pass-thru entity” means any partnership, S corporation, trust, or other pass-thru entity.

(c) Cross reference For special rules limiting the application of this section to original issue discount in the case of nongovernmental obligations, see section 1283(c).

§ 1282 Deferral of interest deduction allocable to accrued discount

(a) General rule Except as otherwise provided in this section, the net direct interest expense with respect to any short-term obligation shall be allowed as a deduction for the taxable year only to the extent such expense exceeds the sum of— the daily portions of the acquisition discount for each day during the taxable year on which the taxpayer held such obligation, and the amount of any interest payable on the obligation (other than interest taken into account in determining the amount of the acquisition discount) which accrues during the taxable year while the taxpayer held such obligation (and is not included in the gross income of the taxpayer for such taxable year by reason of the taxpayer’s method of accounting).

(b) Section not to apply to obligations to which section 1281 applies This section shall not apply to any short-term obligation to which section 1281 applies. A taxpayer may make an election under this paragraph to have section 1281 apply to all short-term obligations acquired by the taxpayer on or after the 1st day of the 1st taxable year to which such election applies. An election under this paragraph shall apply to the taxable year for which it is made and for all subsequent taxable years, unless the taxpayer secures the consent of the Secretary to the revocation of such election.

(c) Certain rules made applicable Rules similar to the rules of subsections (b) and (c) of section 1277 shall apply for purposes of this section.

(d) Cross reference For special rules limiting the application of this section to original issue discount in the case of nongovernmental obligations, see section 1283(c).

§ 1283 Definitions and special rules

(a) Definitions For purposes of this subpart— Except as provided in subparagraph (B), the term “short-term obligation” means any bond, debenture, note, certificate, or other evidence of indebtedness which has a fixed maturity date not more than 1 year from the date of issue. The term “short-term obligation” shall not include any tax-exempt obligation (as defined in section 1275(a)(3)). The term “acquisition discount” means the excess of— the stated redemption price at maturity (as defined in section 1273), over the taxpayer’s basis for the obligation.

(b) Daily portion For purposes of this subpart— Except as otherwise provided in this subsection, the daily portion of the acquisition discount is an amount equal to— the amount of such discount, divided by the number of days after the day on which the taxpayer acquired the obligation and up to (and including) the day of its maturity. At the election of the taxpayer with respect to any obligation, the daily portion of the acquisition discount for any day is the portion of the acquisition discount accruing on such day determined (under regulations prescribed by the Secretary) on the basis of— the taxpayer’s yield to maturity based on the taxpayer’s cost of acquiring the obligation, and compounding daily. An election under subparagraph (A), once made with respect to any obligation, shall be irrevocable.

(c) Special rules for nongovernmental obligations In the case of any short-term obligation which is not a short-term Government obligation (as defined in section 1271(a)(3)(B))— sections 1281 and 1282 shall be applied by taking into account original issue discount in lieu of acquisition discount, and appropriate adjustments shall be made in the application of subsection (b) of this section. A taxpayer may make an election under this paragraph to have paragraph (1) not apply to all obligations acquired by the taxpayer on or after the first day of the first taxable year to which such election applies. An election under this paragraph shall apply to the taxable year for which it is made and for all subsequent taxable years, unless the taxpayer secures the consent of the Secretary to the revocation of such election.

(d) Other special rules The basis of any short-term obligation in the hands of the holder thereof shall be increased by the amount included in his gross income pursuant to section 1281. Section 1281 shall not require the inclusion of any amount previously includible in gross income. Section 454(b) and paragraphs (3) and (4) of section 1271(a) shall not apply to any short-term obligation to which section 1281 applies.

§ 1286 Tax treatment of stripped bonds

(a) Inclusion in income as if bond and coupons were original issue discount bonds If any person purchases a stripped bond or a stripped coupon, then such bond or coupon while held by such purchaser (or by any other person whose basis is determined by reference to the basis in the hands of such purchaser) shall be treated for purposes of this part as a bond originally issued on the purchase date and having an original issue discount equal to the excess (if any) of— the stated redemption price at maturity (or, in the case of coupon, the amount payable on the due date of such coupon), over such bond’s or coupon’s ratable share of the purchase price. For purposes of paragraph (2), ratable shares shall be determined on the basis of their respective fair market values on the date of purchase.

(b) Tax treatment of person stripping bond For purposes of this subtitle, if any person strips 1 or more coupons from a bond and disposes of the bond or such coupon— such person shall include in gross income an amount equal to the sum of— the interest accrued on such bond while held by such person and before the time such coupon or bond was disposed of (to the extent such interest has not theretofore been included in such person’s gross income), and the accrued market discount on such bond determined as of the time such coupon or bond was disposed of (to the extent such discount has not theretofore been included in such person’s gross income), the basis of the bond and coupons shall be increased by the amount included in gross income under paragraph (1), the basis of the bond and coupons immediately before the disposition (as adjusted pursuant to paragraph (2)) shall be allocated among the items retained by such person and the items disposed of by such person on the basis of their respective fair market values, and for purposes of subsection (a), such person shall be treated as having purchased on the date of such disposition each such item which he retains for an amount equal to the basis allocated to such item under paragraph (3). A rule similar to the rule of paragraph (4) shall apply in the case of any person whose basis in any bond or coupon is determined by reference to the basis of the person described in the preceding sentence.

(c) Special rules for tax-exempt obligations In the case of any tax-exempt obligation (as defined in section 1275(a)(3)) from which 1 or more coupons have been stripped— the amount of the original issue discount determined under subsection (a) with respect to any stripped bond or stripped coupon— shall be treated as original issue discount on a tax-exempt obligation to the extent such discount does not exceed the tax-exempt portion of such discount, and shall be treated as original issue discount on an obligation which is not a tax-exempt obligation to the extent such discount exceeds the tax-exempt portion of such discount, subsection (b)(1)(A) shall not apply, and subsection (b)(2) shall be applied by increasing the basis of the bond or coupon by the sum of— the interest accrued but not paid before such bond or coupon was disposed of (and not previously reflected in basis), plus the amount included in gross income under subsection (b)(1)(B). For purposes of paragraph (1), the tax-exempt portion of the original issue discount determined under subsection (a) is the excess of— the amount referred to in subsection (a)(1), over an issue price which would produce a yield to maturity as of the purchase date equal to the lower of— the coupon rate of interest on the obligation from which the coupons were separated, or the yield to maturity (on the basis of the purchase price) of the stripped obligation or coupon. The purchaser of any stripped obligation or coupon may elect to apply clause (i) by substituting “original yield to maturity of” for “coupon rate of interest on”.

(d) Definitions and special rules For purposes of this section— The term “bond” means a bond, debenture, note, or certificate or other evidence of indebtedness. The term “stripped bond” means a bond issued at any time with interest coupons where there is a separation in ownership between the bond and any coupon which has not yet become payable. The term “stripped coupon” means any coupon relating to a stripped bond. The term “stated redemption price at maturity” has the meaning given such term by section 1273(a)(2). The term “coupon” includes any right to receive interest on a bond (whether or not evidenced by a coupon). The term “purchase” has the meaning given such term by section 1272(d)(1). 1

(e) Treatment of stripped interests in bond and preferred stock funds, etc. In the case of an account or entity substantially all of the assets of which consist of bonds, preferred stock, or a combination thereof, the Secretary may by regulations provide that rules similar to the rules of this section and section 305(e), as appropriate, shall apply to interests in such account or entity to which (but for this subsection) this section or section 305(e), as the case may be, would not apply.

(f) Regulation authority The Secretary may prescribe regulations providing that where, by reason of varying rates of interest, put or call options, or other circumstances, the tax treatment under this section does not accurately reflect the income of the holder of a stripped coupon or stripped bond, or of the person disposing of such bond or coupon, as the case may be, for any period, such treatment shall be modified to require that the proper amount of income be included for such period.

§ 1287 Denial of capital gain treatment for gains on certain obligations not in registered form

(a) In general If any registration-required obligation is not in registered form, any gain on the sale or other disposition of such obligation shall be treated as ordinary income (unless the issuance of such obligation was subject to tax under section 4701).

(b) Definitions For purposes of subsection (a)— The term “registration-required obligation” has the meaning given to such term by section 163(f)(2). The term “registered form” has the same meaning as when used in section 163(f).

§ 1288 Treatment of original issue discount on tax-exempt obligations

(a) General rule Original issue discount on any tax-exempt obligation shall be treated as accruing— for purposes of section 163, in the manner provided by section 1272(a) (determined without regard to paragraph (7) thereof), and for purposes of determining the adjusted basis of the holder, in the manner provided by section 1272(a) (determined with regard to paragraph (7) thereof).

(b) Definitions and special rules For purposes of this section— The term “original issue discount” has the meaning given to such term by section 1273(a) without regard to paragraph (3) thereof. In applying section 483 or 1274, under regulations prescribed by the Secretary, appropriate adjustments shall be made to the applicable Federal rate to take into account the tax exemption for interest on the obligation. The term “tax-exempt obligation” has the meaning given to such term by section 1275(a)(3). In applying this section to obligations with maturity of 1 year or less, rules similar to the rules of section 1283(b) shall apply.

§ 1291 Interest on tax deferral

(a) Treatment of distributions and stock dispositions If a United States person receives an excess distribution in respect of stock in a passive foreign investment company, then— the amount of the excess distribution shall be allocated ratably to each day in the taxpayer’s holding period for the stock, with respect to such excess distribution, the taxpayer’s gross income for the current year shall include (as ordinary income) only the amounts allocated under subparagraph (A) to— the current year, or any period in the taxpayer’s holding period before the 1st day of the 1st taxable year of the company which begins after December 31, 1986 , and for which it was a passive foreign investment company, and the tax imposed by this chapter for the current year shall be increased by the deferred tax amount (determined under subsection (c)). If the taxpayer disposes of stock in a passive foreign investment company, then the rules of paragraph (1) shall apply to any gain recognized on such disposition in the same manner as if such gain were an excess distribution. For purposes of this section— The taxpayer’s holding period shall be determined under section 1223; except that— for purposes of applying this section to an excess distribution, such holding period shall be treated as ending on the date of such distribution, and if section 1296 applied to such stock with respect to the taxpayer for any prior taxable year, such holding period shall be treated as beginning on the first day of the first taxable year beginning after the last taxable year for which section 1296 so applied. The term “current year” means the taxable year in which the excess distribution or disposition occurs.

(b) Excess distribution For purposes of this section, the term “excess distribution” means any distribution in respect of stock received during any taxable year to the extent such distribution does not exceed its ratable portion of the total excess distribution (if any) for such taxable year. For purposes of this subsection— The term “total excess distribution” means the excess (if any) of— the amount of the distributions in respect of the stock received by the taxpayer during the taxable year, over 125 percent of the average amount received in respect of such stock by the taxpayer during the 3 preceding taxable years (or, if shorter, the portion of the taxpayer’s holding period before the taxable year). For purposes of clause (ii), any excess distribution received during such 3-year period shall be taken into account only to the extent it was included in gross income under subsection (a)(1)(B). The total excess distributions with respect to any stock shall be zero for the taxable year in which the taxpayer’s holding period in such stock begins. Under regulations prescribed by the Secretary— determinations under this subsection shall be made on a share-by-share basis, except that shares with the same holding period may be aggregated, proper adjustments shall be made for stock splits and stock dividends, if the taxpayer does not hold the stock during the entire taxable year, distributions received during such year shall be annualized, if the taxpayer’s holding period includes periods during which the stock was held by another person, distributions received by such other person shall be taken into account as if received by the taxpayer, if the distributions are received in a foreign currency, determinations under this subsection shall be made in such currency and the amount of any excess distribution determined in such currency shall be translated into dollars, proper adjustment shall be made for amounts not includible in gross income by reason of section 959(a) or 1293(c), and if a charitable deduction was allowable under section 642(c) to a trust for any distribution of its income, proper adjustments shall be made for the deduction so allowable to the extent allocable to distributions or gain in respect of stock in a passive foreign investment company.

(c) Deferred tax amount For purposes of this section— The term “deferred tax amount” means, with respect to any distribution or disposition to which subsection (a) applies, an amount equal to the sum of— the aggregate increases in taxes described in paragraph (2), plus the aggregate amount of interest (determined in the manner provided under paragraph (3)) on such increases in tax. Any increase in the tax imposed by this chapter for the current year under subsection (a) to the extent attributable to the amount referred to in subparagraph (B) shall be treated as interest paid under section 6601 on the due date for the current year. For purposes of paragraph (1)(A), the aggregate increases in taxes shall be determined by multiplying each amount allocated under subsection (a)(1)(A) to any taxable year (other than any taxable year referred to in subsection (a)(1)(B)) by the highest rate of tax in effect for such taxable year under section 1 or 11, whichever applies. The amount of interest referred to in paragraph (1)(B) on any increase determined under paragraph (2) for any taxable year shall be determined for the period— beginning on the due date for such taxable year, and ending on the due date for the taxable year with or within which the distribution or disposition occurs, by using the rates and method applicable under section 6621 for underpayments of tax for such period. For purposes of this subsection, the term “due date” means the date prescribed by law (determined without regard to extensions) for filing the return of the tax imposed by this chapter for the taxable year.

(d) Coordination with subparts B and C This section shall not apply with respect to any distribution paid by a passive foreign investment company, or any disposition of stock in a passive foreign investment company, if such company is a qualified electing fund with respect to the taxpayer for each of its taxable years— which begins after December 31, 1986 , and for which such company is a passive foreign investment company, and which includes any portion of the taxpayer’s holding period. Except as provided in section 1296(j), this section also shall not apply if an election under section 1296(k) is in effect for the taxpayer’s taxable year. In the case of stock which is marked to market under section 475 or any other provision of this chapter, this section shall not apply, except that rules similar to the rules of section 1296(j) shall apply. If— a passive foreign investment company becomes a qualified electing fund with respect to the taxpayer for a taxable year which begins after December 31, 1986 , the taxpayer holds stock in such company on the first day of such taxable year, and the taxpayer establishes to the satisfaction of the Secretary the fair market value of such stock on such first day, the taxpayer may elect to recognize gain as if he sold such stock on such first day for such fair market value. If— a passive foreign investment company becomes a qualified electing fund with respect to the taxpayer for a taxable year which begins after December 31, 1986 , the taxpayer holds stock in such company on the first day of such taxable year, and such company is a controlled foreign corporation (as defined in section 957(a)), the taxpayer may elect to include in gross income as a dividend received on such first day an amount equal to the portion of the post-1986 earnings and profits of such company attributable (under regulations prescribed by the Secretary) to the stock in such company held by the taxpayer on such first day. The amount treated as a dividend under the preceding sentence shall be treated as an excess distribution and shall be allocated under subsection (a)(1)(A) only to days during periods taken into account in determining the post-1986 earnings and profits so attributable. For purposes of clause (i), the term “post-1986 earnings and profits” means earnings and profits which were accumulated in taxable years of such company beginning after December 31, 1986 , and during the period or periods the stock was held by the taxpayer while the company was a passive foreign investment company. For purposes of section 959(e), any amount included in gross income under this subparagraph shall be treated as included in gross income under section 1248(a). In the case of any stock to which subparagraph (A) or (B) applies— the adjusted basis of such stock shall be increased by the gain recognized under subparagraph (A) or the amount treated as a dividend under subparagraph (B), as the case may be, and the taxpayer’s holding period in such stock shall be treated as beginning on the first day referred to in such subparagraph.

(e) Certain basis, etc., rules made applicable Except to the extent inconsistent with the regulations prescribed under subsection (f), rules similar to the rules of subsections (c), (d), and (e) of section 1246 (as in effect on the day before the date of the enactment of the American Jobs Creation Act of 2004) shall apply for purposes of this section; except that— the reduction under subsection (e) of such section shall be the excess of the basis determined under section 1014 over the adjusted basis of the stock immediately before the decedent’s death, and such a reduction shall not apply in the case of a decedent who was a nonresident alien at all times during his holding period in the stock.

(f) Recognition of gain To the extent provided in regulations, in the case of any transfer of stock in a passive foreign investment company where (but for this subsection) there is not full recognition of gain, the excess (if any) of— the fair market value of such stock, over its adjusted basis, shall be treated as gain from the sale or exchange of such stock and shall be recognized notwithstanding any provision of law. Proper adjustment shall be made to the basis of any such stock for gain recognized under the preceding sentence.

(g) Coordination with foreign tax credit rules If there are creditable foreign taxes with respect to any distribution in respect of stock in a passive foreign investment company— the amount of such distribution shall be determined for purposes of this section with regard to section 78, the excess distribution taxes shall be allocated ratably to each day in the taxpayer’s holding period for the stock, and to the extent— that such excess distribution taxes are allocated to a taxable year referred to in subsection (a)(1)(B), such taxes shall be taken into account under section 901 for the current year, and that such excess distribution taxes are allocated to any other taxable year, such taxes shall reduce (subject to the principles of section 904(d) and not below zero) the increase in tax determined under subsection (c)(2) for such taxable year by reason of such distribution (but such taxes shall not be taken into account under section 901). For purposes of this subsection— The term “creditable foreign taxes” means, with respect to any distribution, any withholding tax imposed with respect to such distribution, but only if the taxpayer chooses the benefits of section 901 and such taxes are creditable under section 901 (determined without regard to paragraph (1)(C)(ii)). The term “excess distribution taxes” means, with respect to any distribution, the portion of the creditable foreign taxes with respect to such distribution which is attributable (on a pro rata basis) to the portion of such distribution which is an excess distribution. The rules of this subsection also shall apply in the case of any gain which but for this section would be includible in gross income as a dividend under section 1248.

§ 1293 Current taxation of income from qualified electing funds

(a) Inclusion Every United States person who owns (or is treated under section 1298(a) as owning) stock of a qualified electing fund at any time during the taxable year of such fund shall include in gross income— as ordinary income, such shareholder’s pro rata share of the ordinary earnings of such fund for such year, and as long-term capital gain, such shareholder’s pro rata share of the net capital gain of such fund for such year. The inclusion under paragraph (1) shall be for the taxable year of the shareholder in which or with which the taxable year of the fund ends.

(b) Pro rata share The pro rata share referred to in subsection (a) in the case of any shareholder is the amount which would have been distributed with respect to the shareholder’s stock if, on each day during the taxable year of the fund, the fund had distributed to each shareholder a pro rata share of that day’s ratable share of the fund’s ordinary earnings and net capital gain for such year. To the extent provided in regulations, if the fund establishes to the satisfaction of the Secretary that it uses a shorter period than the taxable year to determine shareholders’ interests in the earnings of such fund, pro rata shares may be determined by using such shorter period.

(c) Previously taxed amounts distributed tax free If the taxpayer establishes to the satisfaction of the Secretary that any amount distributed by a passive foreign investment company is paid out of earnings and profits of the company which were included under subsection (a) in the income of any United States person, such amount shall be treated, for purposes of this chapter, as a distribution which is not a dividend; except that such distribution shall immediately reduce earnings and profits. If the passive foreign investment company is a controlled foreign corporation (as defined in section 957(a)), the preceding sentence shall not apply to any United States shareholder (as defined in section 951(b)) in such corporation, and, in applying section 959 to any such shareholder, any inclusion under this section shall be treated as an inclusion under section 951(a)(1)(A).

(d) Basis adjustments The basis of the taxpayer’s stock in a passive foreign investment company shall be— increased by any amount which is included in the income of the taxpayer under subsection (a) with respect to such stock, and decreased by any amount distributed with respect to such stock which is not includible in the income of the taxpayer by reason of subsection (c). A similar rule shall apply also in the case of any property if by reason of holding such property the taxpayer is treated under section 1298(a) as owning stock in a qualified electing fund.

(e) Ordinary earnings For purposes of this section— The term “ordinary earnings” means the excess of the earnings and profits of the qualified electing fund for the taxable year over its net capital gain for such taxable year. A qualified electing fund’s net capital gain for any taxable year shall not exceed its earnings and profits for such taxable year. The earnings and profits of any qualified electing fund shall be determined without regard to paragraphs (4), (5), and (6) of section 312(n). Under regulations, the preceding sentence shall not apply to the extent it would increase earnings and profits by an amount which was previously distributed by the qualified electing fund.

(f) Foreign tax credit allowed in the case of 10-percent corporate shareholder For purposes of section 960— any amount included in the gross income under subsection (a) shall be treated as if it were included under section 951(a), any amount excluded from gross income under subsection (c) shall be treated in the same manner as amounts excluded from gross income under section 959, and a domestic corporation which owns (or is treated under section 1298(a) as owning) stock of a qualified electing fund shall be treated in the same manner as a United States shareholder of a controlled foreign corporation (and such qualified electing fund shall be treated in the same manner as such controlled foreign corporation) if such domestic corporation meets the stock ownership requirements of subsection (a) or (b) of section 902 (as in effect before its repeal) with respect to such qualified electing fund.

(g) Other special rules For purposes of determining the amount included in the gross income of any person under this section, the ordinary earnings and net capital gain of a qualified electing fund shall not include any item of income received by such fund if— such fund is a controlled foreign corporation (as defined in section 957(a)) and such person is a United States shareholder (as defined in section 951(b)) in such fund, and such person establishes to the satisfaction of the Secretary that— such income was subject to an effective rate of income tax imposed by a foreign country greater than 90 percent of the maximum rate of tax specified in section 11, or such income is— from sources within the United States, effectively connected with the conduct by the qualified electing fund of a trade or business in the United States, and not exempt from taxation (or subject to a reduced rate of tax) pursuant to a treaty obligation of the United States. The Secretary shall prescribe such adjustment to the provisions of this section as may be necessary to prevent the same item of income of a qualified electing fund from being included in the gross income of a United States person more than once.

§ 1294 Election to extend time for payment of tax on undistributed earnings

(a) Extension allowed by election At the election of the taxpayer, the time for payment of any undistributed PFIC earnings tax liability of the taxpayer for the taxable year shall be extended to the extent and subject to the limitations provided in this section. The taxpayer may not make an election under paragraph (1) with respect to the undistributed PFIC earnings tax liability attributable to a qualified electing fund for the taxable year if any amount is includible in the gross income of the taxpayer under section 951 with respect to such fund for such taxable year.

(b) Definitions For purposes of this section— The term “undistributed PFIC earnings tax liability” means, in the case of any taxpayer, the excess of— the tax imposed by this chapter for the taxable year, over the tax which would be imposed by this chapter for such year without regard to the inclusion in gross income under section 1293 of the undistributed earnings of a qualified electing fund. The term “undistributed earnings” means, with respect to any qualified electing fund, the excess (if any) of— the amount includible in gross income by reason of section 1293(a) for the taxable year, over the amount not includible in gross income by reason of section 1293(c) for such taxable year.

(c) Termination of extension If a distribution is not includible in gross income for the taxable year by reason of section 1293(c), then the extension under subsection (a) for payment of the undistributed PFIC earnings tax liability with respect to the earnings to which such distribution is attributable shall expire on the last date prescribed by law (determined without regard to extensions) for filing the return of tax for such taxable year. For purposes of subparagraph (A), a distribution shall be treated as made from the most recently accumulated earnings and profits. If— stock in a passive foreign investment company is transferred during the taxable year, or a passive foreign investment company ceases to be a qualified electing fund, all extensions under subsection (a) for payment of undistributed PFIC earnings tax liability attributable to such stock (or, in the case of such a cessation, attributable to any stock in such company) which had not expired before the date of such transfer or cessation shall expire on the last date prescribed by law (determined without regard to extensions) for filing the return of tax for the taxable year in which such transfer or cessation occurs. To the extent provided in regulations, the preceding sentence shall not apply in the case of a transfer in a transaction with respect to which gain or loss is not recognized (in whole or in part), and the transferee in such transaction shall succeed to the treatment under this section of the transferor. If the Secretary believes that collection of an amount to which an extension under this section relates is in jeopardy, the Secretary shall immediately terminate such extension with respect to such amount, and notice and demand shall be made by him for payment of such amount.

(d) Election The election under subsection (a) shall be made not later than the time prescribed by law (including extensions) for filing the return of tax imposed by this chapter for the taxable year.

(e) Authority to require bond Section 6165 shall apply to any extension under this section as though the Secretary were extending the time for payment of the tax.

(f) Treatment of loans to shareholder For purposes of this section and section 1293, any loan by a qualified electing fund (directly or indirectly) to a shareholder of such fund shall be treated as a distribution to such shareholder.

(g) Cross reference For provisions providing for interest for the period of the extension under this section, see section 6601.

§ 1295 Qualified electing fund

(a) General rule For purposes of this part, any passive foreign investment company shall be treated as a qualified electing fund with respect to the taxpayer if— an election by the taxpayer under subsection (b) applies to such company for the taxable year, and such company complies with such requirements as the Secretary may prescribe for purposes of— determining the ordinary earnings and net capital gain of such company, and otherwise carrying out the purposes of this subpart.

(b) Election A taxpayer may make an election under this subsection with respect to any passive foreign investment company for any taxable year of the taxpayer. Such an election, once made with respect to any company, shall apply to all subsequent taxable years of the taxpayer with respect to such company unless revoked by the taxpayer with the consent of the Secretary. An election under this subsection may be made for any taxable year at any time on or before the due date (determined with regard to extensions) for filing the return of the tax imposed by this chapter for such taxable year. To the extent provided in regulations, such an election may be made later than as required in the preceding sentence where the taxpayer fails to make a timely election because the taxpayer reasonably believed that the company was not a passive foreign investment company.

§ 1296 Election of mark to market for marketable stock

(a) General rule In the case of marketable stock in a passive foreign investment company which is owned (or treated under subsection (g) as owned) by a United States person at the close of any taxable year of such person, at the election of such person— If the fair market value of such stock as of the close of such taxable year exceeds its adjusted basis, such United States person shall include in gross income for such taxable year an amount equal to the amount of such excess. If the adjusted basis of such stock exceeds the fair market value of such stock as of the close of such taxable year, such United States person shall be allowed a deduction for such taxable year equal to the lesser of— the amount of such excess, or the unreversed inclusions with respect to such stock.

(b) Basis adjustments The adjusted basis of stock in a passive foreign investment company— shall be increased by the amount included in the gross income of the United States person under subsection (a)(1) with respect to such stock, and shall be decreased by the amount allowed as a deduction to the United States person under subsection (a)(2) with respect to such stock. In the case of stock in a passive foreign investment company which the United States person is treated as owning under subsection (g)— the adjustments under paragraph (1) shall apply to such stock in the hands of the person actually holding such stock but only for purposes of determining the subsequent treatment under this chapter of the United States person with respect to such stock, and similar adjustments shall be made to the adjusted basis of the property by reason of which the United States person is treated as owning such stock.

(c) Character and source rules Any amount included in gross income under subsection (a)(1), and any gain on the sale or other disposition of marketable stock in a passive foreign investment company (with respect to which an election under this section is in effect), shall be treated as ordinary income. Any— amount allowed as a deduction under subsection (a)(2), and loss on the sale or other disposition of marketable stock in a passive foreign investment company (with respect to which an election under this section is in effect) to the extent that the amount of such loss does not exceed the unreversed inclusions with respect to such stock, shall be treated as an ordinary loss. The amount so treated shall be treated as a deduction allowable in computing adjusted gross income. The source of any amount included in gross income under subsection (a)(1) (or allowed as a deduction under subsection (a)(2)) shall be determined in the same manner as if such amount were gain or loss (as the case may be) from the sale of stock in the passive foreign investment company.

(d) Unreversed inclusions For purposes of this section, the term “unreversed inclusions” means, with respect to any stock in a passive foreign investment company, the excess (if any) of— the amount included in gross income of the taxpayer under subsection (a)(1) with respect to such stock for prior taxable years, over the amount allowed as a deduction under subsection (a)(2) with respect to such stock for prior taxable years. The amount referred to in paragraph (1) shall include any amount which would have been included in gross income under subsection (a)(1) with respect to such stock for any prior taxable year but for section 1291. In the case of a regulated investment company which elected to mark to market the stock held by such company as of the last day of the taxable year preceding such company’s first taxable year for which such company elects the application of this section, the amount referred to in paragraph (1) shall include amounts included in gross income under such mark to market with respect to such stock for prior taxable years.

(e) Marketable stock For purposes of this section— The term “marketable stock” means— any stock which is regularly traded on— a national securities exchange which is registered with the Securities and Exchange Commission or the national market system established pursuant to section 11A of the Securities and Exchange Act of 1934, or any exchange or other market which the Secretary determines has rules adequate to carry out the purposes of this part, to the extent provided in regulations, stock in any foreign corporation which is comparable to a regulated investment company and which offers for sale or has outstanding any stock of which it is the issuer and which is redeemable at its net asset value, and to the extent provided in regulations, any option on stock described in subparagraph (A) or (B). In the case of any regulated investment company which is offering for sale or has outstanding any stock of which it is the issuer and which is redeemable at its net asset value, all stock in a passive foreign investment company which it owns directly or indirectly shall be treated as marketable stock for purposes of this section. Except as provided in regulations, similar treatment as marketable stock shall apply in the case of any other regulated investment company which publishes net asset valuations at least annually.

(f) Treatment of controlled foreign corporations which are shareholders in passive foreign investment companies In the case of a foreign corporation which is a controlled foreign corporation and which owns (or is treated under subsection (g) as owning) stock in a passive foreign investment company— this section (other than subsection (c)(2)) shall apply to such foreign corporation in the same manner as if such corporation were a United States person, and for purposes of subpart F of part III of subchapter N— any amount included in gross income under subsection (a)(1) shall be treated as foreign personal holding company income described in section 954(c)(1)(A), and any amount allowed as a deduction under subsection (a)(2) shall be treated as a deduction allocable to foreign personal holding company income so described.

(g) Stock owned through certain foreign entities Except as provided in regulations— For purposes of this section, stock owned, directly or indirectly, by or for a foreign partnership or foreign trust or foreign estate shall be considered as being owned proportionately by its partners or beneficiaries. Stock considered to be owned by a person by reason of the application of the preceding sentence shall, for purposes of applying such sentence, be treated as actually owned by such person. In any case in which a United States person is treated as owning stock in a passive foreign investment company by reason of paragraph (1)— any disposition by the United States person or by any other person which results in the United States person being treated as no longer owning such stock, and any disposition by the person owning such stock, shall be treated as a disposition by the United States person of the stock in the passive foreign investment company.

(h) Coordination with section 851(b) For purposes of section 851(b)(2), any amount included in gross income under subsection (a) shall be treated as a dividend.

(i) Stock acquired from a decedent In the case of stock of a passive foreign investment company which is acquired by bequest, devise, or inheritance (or by the decedent’s estate) and with respect to which an election under this section was in effect as of the date of the decedent’s death, notwithstanding section 1014, the basis of such stock in the hands of the person so acquiring it shall be the adjusted basis of such stock in the hands of the decedent immediately before his death (or, if lesser, the basis which would have been determined under section 1014 without regard to this subsection).

(j) Coordination with section 1291 for first year of election If the taxpayer elects the application of this section with respect to any marketable stock in a corporation after the beginning of the taxpayer’s holding period in such stock, and if the requirements of subparagraph (B) are not satisfied, section 1291 shall apply to— any distributions with respect to, or disposition of, such stock in the first taxable year of the taxpayer for which such election is made, and any amount which, but for section 1291, would have been included in gross income under subsection (a) with respect to such stock for such taxable year in the same manner as if such amount were gain on the disposition of such stock. The requirements of this subparagraph are met if, with respect to each of such corporation’s taxable years for which such corporation was a passive foreign investment company and which begin after December 31, 1986 , and included any portion of the taxpayer’s holding period in such stock, such corporation was treated as a qualified electing fund under this part with respect to the taxpayer. If a regulated investment company elects the application of this section with respect to any marketable stock in a corporation after the beginning of the taxpayer’s holding period in such stock, then, with respect to such company’s first taxable year for which such company elects the application of this section with respect to such stock— section 1291 shall not apply to such stock with respect to any distribution or disposition during, or amount included in gross income under this section for, such first taxable year, but such regulated investment company’s tax under this chapter for such first taxable year shall be increased by the aggregate amount of interest which would have been determined under section 1291(c)(3) if section 1291 were applied without regard to this subparagraph. Clause (ii) shall not apply if for the preceding taxable year the company elected to mark to market the stock held by such company as of the last day of such preceding taxable year. No deduction shall be allowed to any regulated investment company for the increase in tax under subparagraph (A)(ii).

(k) Election This section shall apply to marketable stock in a passive foreign investment company which is held by a United States person only if such person elects to apply this section with respect to such stock. Such an election shall apply to the taxable year for which made and all subsequent taxable years unless— such stock ceases to be marketable stock, or the Secretary consents to the revocation of such election.

(l) Transition rule for individuals becoming subject to United States tax If any individual becomes a United States person in a taxable year beginning after December 31, 1997 , solely for purposes of this section, the adjusted basis (before adjustments under subsection (b)) of any marketable stock in a passive foreign investment company owned by such individual on the first day of such taxable year shall be treated as being the greater of its fair market value on such first day or its adjusted basis on such first day.

§ 1297 Passive foreign investment company

(a) In general For purposes of this part, except as otherwise provided in this subpart, the term “passive foreign investment company” means any foreign corporation if— 75 percent or more of the gross income of such corporation for the taxable year is passive income, or the average percentage of assets (as determined in accordance with subsection (e)) held by such corporation during the taxable year which produce passive income or which are held for the production of passive income is at least 50 percent.

(b) Passive income For purposes of this section— Except as provided in paragraph (2), the term “passive income” means any income which is of a kind which would be foreign personal holding company income as defined in section 954(c). Except as provided in regulations, the term “passive income” does not include any income— derived in the active conduct of a banking business by an institution licensed to do business as a bank in the United States (or, to the extent provided in regulations, by any other corporation), derived in the active conduct of an insurance business by a qualifying insurance corporation (as defined in subsection (f)), which is interest, a dividend, or a rent or royalty, which is received or accrued from a related person (within the meaning of section 954(d)(3)) to the extent such amount is properly allocable (under regulations prescribed by the Secretary) to income of such related person which is not passive income, or which is export trade income of an export trade corporation (as defined in section 971). For purposes of subparagraph (C), the term “related person” has the meaning given such term by section 954(d)(3) determined by substituting “foreign corporation” for “controlled foreign corporation” each place it appears in section 954(d)(3).

(c) Look-thru in the case of 25-percent owned corporations If a foreign corporation owns (directly or indirectly) at least 25 percent (by value) of the stock of another corporation, for purposes of determining whether such foreign corporation is a passive foreign investment company, such foreign corporation shall be treated as if it— held its proportionate share of the assets of such other corporation, and received directly its proportionate share of the income of such other corporation.

(d) Exception for United States shareholders of controlled foreign corporations For purposes of this part, a corporation shall not be treated with respect to a shareholder as a passive foreign investment company during the qualified portion of such shareholder’s holding period with respect to stock in such corporation. For purposes of this subsection, the term “qualified portion” means the portion of the shareholder’s holding period— which is after December 31, 1997 , and during which the shareholder is a United States shareholder (as defined in section 951(b)) of the corporation and the corporation is a controlled foreign corporation. Except as provided in subparagraph (B), if the qualified portion of a shareholder’s holding period with respect to any stock ends after December 31, 1997 , solely for purposes of this part, the shareholder’s holding period with respect to such stock shall be treated as beginning as of the first day following such period. Subparagraph (A) shall not apply if such stock was, with respect to such shareholder, stock in a passive foreign investment company at any time before the qualified portion of the shareholder’s holding period with respect to such stock and no election under section 1298(b)(1) is made. Paragraph (1) shall not apply to stock treated as owned by a person by reason of section 1298(a)(4) (relating to the treatment of a person that has an option to acquire stock as owning such stock) unless such person establishes that such stock is owned (within the meaning of section 958(a)) by a United States shareholder (as defined in section 951(b)) who is not exempt from tax under this chapter.

(e) Methods for measuring assets The determination under subsection (a)(2) shall be made on the basis of the value of the assets of a foreign corporation if— such corporation is a publicly traded corporation for the taxable year, or paragraph (2) does not apply to such corporation for the taxable year. The determination under subsection (a)(2) shall be based on the adjusted bases (as determined for the purposes of computing earnings and profits) of the assets of a foreign corporation if such corporation is not described in paragraph (1)(A) and such corporation— is a controlled foreign corporation, or elects the application of this paragraph. An election under subparagraph (B), once made, may be revoked only with the consent of the Secretary. For purposes of this subsection, a foreign corporation shall be treated as a publicly traded corporation if the stock in the corporation is regularly traded on— a national securities exchange which is registered with the Securities and Exchange Commission or the national market system established pursuant to section 11A of the Securities and Exchange Act of 1934, or any exchange or other market which the Secretary determines has rules adequate to carry out the purposes of this subsection.

(f) Qualifying insurance corporation For purposes of subsection (b)(2)(B)— The term “qualifying insurance corporation” means, with respect to any taxable year, a foreign corporation— which would be subject to tax under subchapter L if such corporation were a domestic corporation, and the applicable insurance liabilities of which constitute more than 25 percent of its total assets, determined on the basis of such liabilities and assets as reported on the corporation’s applicable financial statement for the last year ending with or within the taxable year. If a corporation fails to qualify as a qualified insurance corporation under paragraph (1) solely because the percentage determined under paragraph (1)(B) is 25 percent or less, a United States person that owns stock in such corporation may elect to treat such stock as stock of a qualifying insurance corporation if— the percentage so determined for the corporation is at least 10 percent, and under regulations provided by the Secretary, based on the applicable facts and circumstances— the corporation is predominantly engaged in an insurance business, and such failure is due solely to runoff-related or rating-related circumstances involving such insurance business. For purposes of this subsection— The term “applicable insurance liabilities” means, with respect to any life or property and casualty insurance business— loss and loss adjustment expenses, and reserves (other than deficiency, contingency, or unearned premium reserves) for life and health insurance risks and life and health insurance claims with respect to contracts providing coverage for mortality or morbidity risks. Any amount determined under clause (i) or (ii) of subparagraph (A) shall not exceed the lesser of such amount— as reported to the applicable insurance regulatory body in the applicable financial statement described in paragraph (4)(A) (or, if less, the amount required by applicable law or regulation), or as determined under regulations prescribed by the Secretary. For purposes of this subsection— The term “applicable financial statement” means a statement for financial reporting purposes which— is made on the basis of generally accepted accounting principles, is made on the basis of international financial reporting standards, but only if there is no statement that meets the requirement of clause (i), or except as otherwise provided by the Secretary in regulations, is the annual statement which is required to be filed with the applicable insurance regulatory body, but only if there is no statement which meets the requirements of clause (i) or (ii). The term “applicable insurance regulatory body” means, with respect to any insurance business, the entity established by law to license, authorize, or regulate such business and to which the statement described in subparagraph (A) is provided.

§ 1298 Special rules

(a) Attribution of ownership For purposes of this part— This subsection— shall apply to the extent that the effect is to treat stock of a passive foreign investment company as owned by a United States person, and except to the extent provided in regulations, shall not apply to treat stock owned (or treated as owned under this subsection) by a United States person as owned by any other person. If 50 percent or more in value of the stock of a corporation is owned, directly or indirectly, by or for any person, such person shall be considered as owning the stock owned directly or indirectly by or for such corporation in that proportion which the value of the stock which such person so owns bears to the value of all stock in the corporation. For purposes of determining whether a shareholder of a passive foreign investment company is treated as owning stock owned directly or indirectly by or for such company, subparagraph (A) shall be applied without regard to the 50-percent limitation contained therein. Section 1297(d) shall not apply in determining whether a corporation is a passive foreign investment company for purposes of this subparagraph. Stock owned, directly or indirectly, by or for a partnership, estate, or trust shall be considered as being owned proportionately by its partners or beneficiaries. To the extent provided in regulations, if any person has an option to acquire stock, such stock shall be considered as owned by such person. For purposes of this paragraph, an option to acquire such an option, and each one of a series of such options, shall be considered as an option to acquire such stock. Stock considered to be owned by a person by reason of the application of paragraph (2), (3), or (4) shall, for purposes of applying such paragraphs, be considered as actually owned by such person.

(b) Other special rules For purposes of this part— Stock held by a taxpayer shall be treated as stock in a passive foreign investment company if, at any time during the holding period of the taxpayer with respect to such stock, such corporation (or any predecessor) was a passive foreign investment company which was not a qualified electing fund. The preceding sentence shall not apply if the taxpayer elects to recognize gain (as of the last day of the last taxable year for which the company was a passive foreign investment company (determined without regard to the preceding sentence)) under rules similar to the rules of section 1291(d)(2). A corporation shall not be treated as a passive foreign investment company for the first taxable year such corporation has gross income (hereinafter in this paragraph referred to as the “start-up year”) if— no predecessor of such corporation was a passive foreign investment company, it is established to the satisfaction of the Secretary that such corporation will not be a passive foreign investment company for either of the 1st 2 taxable years following the start-up year, and such corporation is not a passive foreign investment company for either of the 1st 2 taxable years following the start-up year. A corporation shall not be treated as a passive foreign investment company for any taxable year if— neither such corporation (nor any predecessor) was a passive foreign investment company for any prior taxable year, it is established to the satisfaction of the Secretary that— substantially all of the passive income of the corporation for the taxable year is attributable to proceeds from the disposition of 1 or more active trades or businesses, and such corporation will not be a passive foreign investment company for either of the 1st 2 taxable years following such taxable year, and such corporation is not a passive foreign investment company for either of such 2 taxable years. Under regulations prescribed by the Secretary, where necessary to carry out the purposes of this part, separate classes of stock (or other interests) in a corporation shall be treated as interests in separate corporations. Under regulations, in any case in which a United States person is treated as owning stock in a passive foreign investment company by reason of subsection (a)— any disposition by the United States person or the person owning such stock which results in the United States person being treated as no longer owning such stock, or any distribution of property in respect of such stock to the person holding such stock, shall be treated as a disposition by, or distribution to, the United States person with respect to the stock in the passive foreign investment company. Rules similar to the rules of section 959(b) shall apply to any amount described in subparagraph (A) and to any amount included in gross income under section 1293(a) (or which would have been so included but for section 951(c)) in respect of stock which the taxpayer is treated as owning under subsection (a). Except as provided in regulations, if a taxpayer uses any stock in a passive foreign investment company as security for a loan, the taxpayer shall be treated as having disposed of such stock. If— a foreign corporation is subject to the tax imposed by section 531 (or waives any benefit under any treaty which would otherwise prevent the imposition of such tax), and such foreign corporation owns at least 25 percent (by value) of the stock of a domestic corporation, for purposes of determining whether such foreign corporation is a passive foreign investment company, any qualified stock held by such domestic corporation shall be treated as an asset which does not produce passive income (and is not held for the production of passive income) and any amount included in gross income with respect to such stock shall not be treated as passive income. For purposes of subparagraph (A), the term “qualified stock” means any stock in a C corporation which is a domestic corporation and which is not a regulated investment company or real estate investment trust. Any amount included in gross income under section 951(a)(1)(B) shall be treated as a distribution received with respect to the stock.

(c) Treatment of stock held by pooled income fund If stock in a passive foreign investment company is owned (or treated as owned under subsection (a)) by a pooled income fund (as defined in section 642(c)(5)) and no portion of any gain from a disposition of such stock may be allocated to income under the terms of the governing instrument of such fund— section 1291 shall not apply to any gain on a disposition of such stock by such fund if (without regard to section 1291) a deduction would be allowable with respect to such gain under section 642(c)(3), section 1293 shall not apply with respect to such stock, and in determining whether section 1291 applies to any distribution in respect of such stock, subsection (d) of section 1291 shall not apply.

(d) Treatment of certain leased property For purposes of this part— Any tangible personal property with respect to which a foreign corporation is the lessee under a lease with a term of at least 12 months shall be treated as an asset actually held by such corporation. The amount taken into account under section 1297(a)(2) with respect to any asset to which paragraph (1) applies shall be the unamortized portion (as determined under regulations prescribed by the Secretary) of the present value of the payments under the lease for the use of such property. For purposes of subparagraph (A), the present value of payments described in subparagraph (A) shall be determined in the manner provided in regulations prescribed by the Secretary— as of the beginning of the lease term, and except as provided in such regulations, by using a discount rate equal to the applicable Federal rate determined under section 1274(d)— by substituting the lease term for the term of the debt instrument, and without regard to paragraph (2) or (3) thereof. This subsection shall not apply in any case where— the lessor is a related person (as defined in section 954(d)(3)) with respect to the foreign corporation, or a principal purpose of leasing the property was to avoid the provisions of this part.

(e) Special rules for certain intangibles For purposes of this part— The adjusted basis of the total assets of a controlled foreign corporation shall be increased by the research or experimental expenditures (within the meaning of section 174) paid or incurred by such foreign corporation during the taxable year and the preceding 2 taxable years. Any expenditure otherwise taken into account under the preceding sentence shall be reduced by the amount of any reimbursement received by the controlled foreign corporation with respect to such expenditure. In the case of any intangible property (as defined in section 367(d)(4)) with respect to which a controlled foreign corporation is a licensee and which is used by such foreign corporation in the active conduct of a trade or business, the adjusted basis of the total assets of such foreign corporation shall be increased by an amount equal to 300 percent of the payments made during the taxable year by such foreign corporation for the use of such intangible property. Subparagraph (A) shall not apply to— any payments to a foreign person if such foreign person is a related person (as defined in section 954(d)(3)) with respect to the controlled foreign corporation, and any payments under a license if a principal purpose of entering into such license was to avoid the provisions of this part. For purposes of this subsection, the term “controlled foreign corporation” has the meaning given such term by section 957(a).

(f) Reporting requirement Except as otherwise provided by the Secretary, each United States person who is a shareholder of a passive foreign investment company shall file an annual report containing such information as the Secretary may require.

(g) Regulations The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this part.

§ 1301 Averaging of farm income

(a) In general At the election of an individual engaged in a farming business or fishing business, the tax imposed by section 1 for such taxable year shall be equal to the sum of— a tax computed under such section on taxable income reduced by elected farm income, plus the increase in tax imposed by section 1 which would result if taxable income for each of the 3 prior taxable years were increased by an amount equal to one-third of the elected farm income. Any adjustment under this section for any taxable year shall be taken into account in applying this section for any subsequent taxable year.

(b) Definitions In this section— The term “elected farm income” means so much of the taxable income for the taxable year— which is attributable to any farming business or fishing business; and which is specified in the election under subsection (a). For purposes of subparagraph (A), gain from the sale or other disposition of property (other than land) regularly used by the taxpayer in such a farming business or fishing business for a substantial period shall be treated as attributable to such a farming business or fishing business. The term “individual” shall not include any estate or trust. The term “farming business” has the meaning given such term by section 263A(e)(4). The term “fishing business” means the conduct of commercial fishing as defined in section 3 of the Magnuson-Stevens Fishery Conservation and Management Act ( 16 U.S.C. 1802 ).

(c) Regulations The Secretary shall prescribe such regulations as may be appropriate to carry out the purposes of this section, including regulations regarding— the order and manner in which items of income, gain, deduction, or loss, or limitations on tax, shall be taken into account in computing the tax imposed by this chapter on the income of any taxpayer to whom this section applies for any taxable year, and the treatment of any short taxable year.

§ 1311 Correction of error

(a) General rule If a determination (as defined in section 1313) is described in one or more of the paragraphs of section 1312 and, on the date of the determination, correction of the effect of the error referred to in the applicable paragraph of section 1312 is prevented by the operation of any law or rule of law, other than this part and other than section 7122 (relating to compromises), then the effect of the error shall be corrected by an adjustment made in the amount and in the manner specified in section 1314.

(b) Conditions necessary for adjustment Except in cases described in paragraphs (3) (B) and (4) of section 1312, an adjustment shall be made under this part only if— in case the amount of the adjustment would be credited or refunded in the same manner as an overpayment under section 1314, there is adopted in the determination a position maintained by the Secretary, or in case the amount of the adjustment would be assessed and collected in the same manner as a deficiency under section 1314, there is adopted in the determination a position maintained by the taxpayer with respect to whom the determination is made, and the position maintained by the Secretary in the case described in subparagraph (A) or maintained by the taxpayer in the case described in subparagraph (B) is inconsistent with the erroneous inclusion, exclusion, omission, allowance, disallowance, recognition, or nonrecognition, as the case may be. In the case of a determination described in section 1312(3)(B) (relating to certain exclusions from income), adjustment shall be made under this part only if assessment of a deficiency for the taxable year in which the item is includible or against the related taxpayer was not barred, by any law or rule of law, at the time the Secretary first maintained, in a notice of deficiency sent pursuant to section 6212 or before the Tax Court, that the item described in section 1312(3)(B) should be included in the gross income of the taxpayer for the taxable year to which the determination relates. In the case of a determination described in section 1312(4) (relating to disallowance of certain deductions and credits), adjustment shall be made under this part only if credit or refund of the overpayment attributable to the deduction or credit described in such section which should have been allowed to the taxpayer or related taxpayer was not barred, by any law or rule of law, at the time the taxpayer first maintained before the Secretary or before the Tax Court, in writing, that he was entitled to such deduction or credit for the taxable year to which the determination relates. In case the amount of the adjustment would be assessed and collected in the same manner as a deficiency (except for cases described in section 1312(3)(B)), the adjustment shall not be made with respect to a related taxpayer unless he stands in such relationship to the taxpayer at the time the latter first maintains the inconsistent position in a return, claim for refund, or petition (or amended petition) to the Tax Court for the taxable year with respect to which the determination is made, or if such position is not so maintained, then at the time of the determination.

§ 1312 Circumstances of adjustment

The circumstances under which the adjustment provided in section 1311 is authorized are as follows: The determination requires the inclusion in gross income of an item which was erroneously included in the gross income of the taxpayer for another taxable year or in the gross income of a related taxpayer. The determination allows a deduction or credit which was erroneously allowed to the taxpayer for another taxable year or to a related taxpayer. The determination requires the exclusion from gross income of an item included in a return filed by the taxpayer or with respect to which tax was paid and which was erroneously excluded or omitted from the gross income of the taxpayer for another taxable year, or from the gross income of a related taxpayer; or The determination requires the exclusion from gross income of an item not included in a return filed by the taxpayer and with respect to which the tax was not paid but which is includible in the gross income of the taxpayer for another taxable year or in the gross income of a related taxpayer. The determination disallows a deduction or credit which should have been allowed to, but was not allowed to, the taxpayer for another taxable year, or to a related taxpayer. The determination allows or disallows any of the additional deductions allowable in computing the taxable income of estates or trusts, or requires or denies any of the inclusions in the computation of taxable income of beneficiaries, heirs, or legatees, specified in subparts A to E, inclusive (secs. 641 and following, relating to estates, trusts, and beneficiaries) of part I of subchapter J of this chapter, or corresponding provisions of prior internal revenue laws, and the correlative inclusion or deduction, as the case may be, has been erroneously excluded, omitted, or included, or disallowed, omitted, or allowed, as the case may be, in respect of the related taxpayer. The determination allows or disallows a deduction (including a credit) in computing the taxable income (or, as the case may be, net income, normal tax net income, or surtax net income) of a corporation, and a correlative deduction or credit has been erroneously allowed, omitted, or disallowed, as the case may be, in respect of a related taxpayer described in section 1313(c)(7). The determination determines the basis of property, and in respect of any transaction on which such basis depends, or in respect of any transaction which was erroneously treated as affecting such basis, there occurred, with respect to a taxpayer described in subparagraph (B) of this paragraph, any of the errors described in subparagraph (C) of this paragraph. The taxpayer with respect to whom the erroneous treatment occurred must be— the taxpayer with respect to whom the determination is made, a taxpayer who acquired title to the property in the transaction and from whom, mediately or immediately, the taxpayer with respect to whom the determination is made derived title, or a taxpayer who had title to the property at the time of the transaction and from whom, mediately or immediately, the taxpayer with respect to whom the determination is made derived title, if the basis of the property in the hands of the taxpayer with respect to whom the determination is made is determined under section 1015(a) (relating to the basis of property acquired by gift). With respect to a taxpayer described in subparagraph (B) of this paragraph— there was an erroneous inclusion in, or omission from, gross income, there was an erroneous recognition, or nonrecognition, of gain or loss, or there was an erroneous deduction of an item properly chargeable to capital account or an erroneous charge to capital account of an item properly deductible. ( Aug. 16, 1954, ch. 736 , 68A Stat. 338 ; Pub. L. 85–866, title I, § 59(a) , Sept. 2, 1958 , 72 Stat. 1647 .)

§ 1313 Definitions

(a) Determination For purposes of this part, the term “determination” means— a decision by the Tax Court or a judgment, decree, or other order by any court of competent jurisdiction, which has become final; a closing agreement made under section 7121; a final disposition by the Secretary of a claim for refund. For purposes of this part, a claim for refund shall be deemed finally disposed of by the Secretary— as to items with respect to which the claim was allowed, on the date of allowance of refund or credit or on the date of mailing notice of disallowance (by reason of offsetting items) of the claim for refund, and as to items with respect to which the claim was disallowed, in whole or in part, or as to items applied by the Secretary in reduction of the refund or credit, on expiration of the time for instituting suit with respect thereto (unless suit is instituted before the expiration of such time); or under regulations prescribed by the Secretary, an agreement for purposes of this part, signed by the Secretary and by any person, relating to the liability of such person (or the person for whom he acts) in respect of a tax under this subtitle for any taxable period.

(b) Taxpayer Notwithstanding section 7701(a)(14), the term “taxpayer” means any person subject to a tax under the applicable revenue law.

(c) Related taxpayer For purposes of this part, the term “related taxpayer” means a taxpayer who, with the taxpayer with respect to whom a determination is made, stood, in the taxable year with respect to which the erroneous inclusion, exclusion, omission, allowance, or disallowance was made, in one of the following relationships: husband and wife, grantor and fiduciary, grantor and beneficiary, fiduciary and beneficiary, legatee, or heir, decedent and decedent’s estate, partner, or member of an affiliated group of corporations (as defined in section 1504).

§ 1314 Amount and method of adjustment

(a) Ascertainment of amount of adjustment In computing the amount of an adjustment under this part there shall first be ascertained the tax previously determined for the taxable year with respect to which the error was made. The amount of the tax previously determined shall be the excess of— the sum of— the amount shown as the tax by the taxpayer on his return (determined as provided in section 6211(b)(1), (3), and (4), relating to the definition of deficiency), if a return was made by the taxpayer and an amount was shown as the tax by the taxpayer thereon, plus the amounts previously assessed (or collected without assessment) as a deficiency, over— the amount of rebates, as defined in section 6211(b)(2), made. There shall then be ascertained the increase or decrease in tax previously determined which results solely from the correct treatment of the item which was the subject of the error (with due regard given to the effect of the item in the computation of gross income, taxable income, and other matters under this subtitle). A similar computation shall be made for any other taxable year affected, or treated as affected, by a net operating loss deduction (as defined in section 172) or by a capital loss carryback or carryover (as defined in section 1212), determined with reference to the taxable year with respect to which the error was made. The amount so ascertained (together with any amounts wrongfully collected as additions to the tax or interest, as a result of such error) for each taxable year shall be the amount of the adjustment for that taxable year.

(b) Method of adjustment The adjustment authorized in section 1311(a) shall be made by assessing and collecting, or refunding or crediting, the amount thereof in the same manner as if it were a deficiency determined by the Secretary with respect to the taxpayer as to whom the error was made or an overpayment claimed by such taxpayer, as the case may be, for the taxable year or years with respect to which an amount is ascertained under subsection (a), and as if on the date of the determination one year remained before the expiration of the periods of limitation upon assessment or filing claim for refund for such taxable year or years. If, as a result of a determination described in section 1313(a)(4), an adjustment has been made by the assessment and collection of a deficiency or the refund or credit of an overpayment, and subsequently such determination is altered or revoked, the amount of the adjustment ascertained under subsection (a) of this section shall be redetermined on the basis of such alteration or revocation and any overpayment or deficiency resulting from such redetermination shall be refunded or credited, or assessed and collected, as the case may be, as an adjustment under this part. In the case of an adjustment resulting from an increase or decrease in a net operating loss or net capital loss which is carried back to the year of adjustment, interest shall not be collected or paid for any period prior to the close of the taxable year in which the net operating loss or net capital loss arises.

(c) Adjustment unaffected by other items The amount to be assessed and collected in the same manner as a deficiency, or to be refunded or credited in the same manner as an overpayment, under this part, shall not be diminished by any credit or set-off based upon any item other than the one which was the subject of the adjustment. The amount of the adjustment under this part, if paid, shall not be recovered by a claim or suit for refund or suit for erroneous refund based upon any item other than the one which was the subject of the adjustment.

(d) Taxes imposed by subtitle C This part shall not apply to any tax imposed by subtitle C (sec. 3101 and following relating to employment taxes).

[§ 1315 Repealed. Pub. L. 94–455, title XIX, § 1901(a)(143), Oct. 4, 1976, 90 Stat. 1788]

[§ 1321 Repealed. Pub. L. 94–455, title XIX, § 1901(a)(144), Oct. 4, 1976, 90 Stat. 1788]

[§§ 1331 to 1337 Repealed. Pub. L. 94–455, title XIX, § 1901(a)(145)(A), Oct. 4, 1976, 90 Stat. 1788]

§ 1341 Computation of tax where taxpayer restores substantial amount held under claim of right

(a) General rule If— an item was included in gross income for a prior taxable year (or years) because it appeared that the taxpayer had an unrestricted right to such item; a deduction is allowable for the taxable year because it was established after the close of such prior taxable year (or years) that the taxpayer did not have an unrestricted right to such item or to a portion of such item; and the amount of such deduction exceeds $3,000, then the tax imposed by this chapter for the taxable year shall be the lesser of the following: the tax for the taxable year computed with such deduction; or an amount equal to— the tax for the taxable year computed without such deduction, minus the decrease in tax under this chapter (or the corresponding provisions of prior revenue laws) for the prior taxable year (or years) which would result solely from the exclusion of such item (or portion thereof) from gross income for such prior taxable year (or years). For purposes of paragraph (5)(B), the corresponding provisions of the Internal Revenue Code of 1939 shall be chapter 1 of such code (other than subchapter E, relating to self-employment income) and subchapter E of chapter 2 of such code.

(b) Special rules If the decrease in tax ascertained under subsection (a)(5)(B) exceeds the tax imposed by this chapter for the taxable year (computed without the deduction) such excess shall be considered to be a payment of tax on the last day prescribed by law for the payment of tax for the taxable year, and shall be refunded or credited in the same manner as if it were an overpayment for such taxable year. Subsection (a) does not apply to any deduction allowable with respect to an item which was included in gross income by reason of the sale or other disposition of stock in trade of the taxpayer (or other property of a kind which would properly have been included in the inventory of the taxpayer if on hand at the close of the prior taxable year) or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business. This paragraph shall not apply if the deduction arises out of refunds or repayments with respect to rates made by a regulated public utility (as defined in section 7701(a)(33) without regard to the limitation contained in the last two sentences thereof) if such refunds or repayments are required to be made by the Government, political subdivision, agency, or instrumentality referred to in such section, or by an order of a court, or are made in settlement of litigation or under threat or imminence of litigation. If the tax imposed by this chapter for the taxable year is the amount determined under subsection (a)(5), then the deduction referred to in subsection (a)(2) shall not be taken into account for any purpose of this subtitle other than this section. For purposes of determining whether paragraph (4) or paragraph (5) of subsection (a) applies— in any case where the deduction referred to in paragraph (4) of subsection (a) results in a net operating loss, such loss shall, for purposes of computing the tax for the taxable year under such paragraph (4), be carried back to the same extent and in the same manner as is provided under section 172; and in any case where the exclusion referred to in paragraph (5)(B) of subsection (a) results in a net operating loss or capital loss for the prior taxable year (or years), such loss shall, for purposes of computing the decrease in tax for the prior taxable year (or years) under such paragraph (5) (B), be carried back and carried over to the same extent and in the same manner as is provided under section 172 or section 1212, except that no carryover beyond the taxable year shall be taken into account. For purposes of this chapter, the net operating loss described in paragraph (4)(A) of this subsection, or the net operating loss or capital loss described in paragraph (4)(B) of this subsection, as the case may be, shall (after the application of paragraph (4) or (5)(B) of subsection (a) for the taxable year) be taken into account under section 172 or 1212 for taxable years after the taxable year to the same extent and in the same manner as— a net operating loss sustained for the taxable year, if paragraph (4) of subsection (a) applied, or a net operating loss or capital loss sustained for the prior taxable year (or years), if paragraph (5)(B) of subsection (a) applied.

[§ 1342 Repealed. Pub. L. 94–455, title XIX, § 1901(a)(147), Oct. 4, 1976, 90 Stat. 1788]

[§ 1346 Repealed. Pub. L. 94–455, title XIX, § 1901(a)(148), Oct. 4, 1976, 90 Stat. 1788]

[§ 1347 Repealed. Pub. L. 94–455, title XIX, § 1951(b)(12)(A), Oct. 4, 1976, 90 Stat. 1840]

[§ 1348 Repealed. Pub. L. 97–34, title I, § 101(c)(1), Aug. 13, 1981, 95 Stat. 183]

§ 1351 Treatment of recoveries of foreign expropriation losses

(a) Election This section shall apply only to a recovery, by a domestic corporation subject to the tax imposed by section 11 or 801, of a foreign expropriation loss sustained by such corporation and only if such corporation was subject to the tax imposed by section 11 or 801, as the case may be, for the year of the loss and elects to have the provisions of this section apply with respect to such loss. An election under paragraph (1) shall be made at such time and in such manner as the Secretary may prescribe by regulations. An election made with respect to any foreign expropriation loss shall apply to all recoveries in respect of such loss.

(b) Definition of foreign expropriation loss For purposes of this section, the term “foreign expropriation loss” means any loss sustained by reason of the expropriation, intervention, seizure, or similar taking of property by the government of any foreign country, any political subdivision thereof, or any agency or instrumentality of the foregoing. For purposes of the preceding sentence, a debt which becomes worthless shall, to the extent of any deduction allowed under section 166(a), be treated as a loss.

(c) Amount of recovery The amount of any recovery of a foreign expropriation loss is the amount of money and the fair market value of other property received in respect of such loss, determined as of the date of receipt. The amount of any recovery of a foreign expropriation loss includes, in the case of a life insurance company, the amount of decrease of any item taken into account under section 807(c), to the extent such decrease is attributable to the release, by reason of such loss, of its liabilities with respect to such item.

(d) Adjustment for prior tax benefits That part of the amount of a recovery of a foreign expropriation loss to which this section applies which, when added to the aggregate of the amounts of previous recoveries with respect to such loss, does not exceed the allowable deductions in prior taxable years on account of such loss shall be excluded from gross income for the taxable year of the recovery for purposes of computing the tax under this subtitle; but there shall be added to, and assessed and collected as a part of, the tax under this subtitle for such taxable year an amount equal to the total increase in the tax under this subtitle for all taxable years which would result by decreasing, in an amount equal to such part of the recovery so excluded, the deductions allowable in the prior taxable years on account of such loss. For purposes of this paragraph, if the loss to which the recovery relates was taken into account as a loss from the sale or exchange of a capital asset, the amount of the loss shall be treated as an allowable deduction even though there were no gains against which to allow such loss. The increase in the tax for each taxable year referred to in paragraph (1) shall be computed in accordance with regulations prescribed by the Secretary. Such regulations shall give effect to previous recoveries of any kind (including recoveries described in section 111, relating to recovery of tax benefit items) with respect to any prior taxable year, but shall otherwise treat the tax previously determined for any taxable year in accordance with the principles set forth in section 1314(a) (relating to correction of errors). Subject to the provisions of paragraph (3), all credits allowable against the tax for any taxable year, and all carryovers and carrybacks affected by so decreasing the allowable deductions, shall be taken into account in computing the increase in the tax. For purposes of this subsection, any choice made under subpart A of part III of subchapter N (relating to foreign tax credit) for any taxable year may be changed. For purposes of this subsection, the rates of tax specified in section 11(b) for the taxable year of the recovery shall be treated as having been in effect for all prior taxable years.

(e) Gain on recovery That part of the amount of a recovery of a foreign expropriation loss to which this section applies which is not excluded from gross income under subsection (d)(1) shall be considered for the taxable year of the recovery as gain on the involuntary conversion of property as a result of its destruction or seizure and shall be recognized or not recognized as provided in section 1033.

(f) Basis of recovered property The basis of property (other than money) received as a recovery of a foreign expropriation loss to which this section applies shall be an amount equal to its fair market value on the date of receipt, reduced by such part of the gain under subsection (e) which is not recognized as provided in section 1033.

(g) Restoration of value of investments For purposes of this section, if the value of any interest in, or with respect to, property (including any interest represented by a security, as defined in section 165(g)(2))— which became worthless by reason of the expropriation, intervention, seizure, or similar taking of such property by the government of any foreign country, any political subdivision thereof, or any agency or instrumentality of the foregoing, and which was taken into account as a loss from the sale or exchange of a capital asset or with respect to which a deduction for a loss was allowed under section 165 or a deduction for a bad debt was allowed under section 166, is restored in whole or in part by reason of any recovery of money or other property in respect of the property which became worthless, the value so restored shall be treated as property received as a recovery in respect of such loss or such bad debt.

(h) Special rule for evidences of indebtedness Bonds or other evidences of indebtedness received as a recovery of a foreign expropriation loss to which this section applies shall not be considered to have any original issue discount within the meaning of section 1273(a).

(i) Adjustments for succeeding years For purposes of this subtitle, proper adjustment shall be made, under regulations prescribed by the Secretary, in— the credit under section 27 (relating to foreign tax credit), the credit under section 38 (relating to general business credit), the net operating loss deduction under section 172, the capital loss carryover under section 1212(a), and such other items as may be specified by such regulations, for the taxable year of a recovery of a foreign expropriation loss to which this section applies, and for succeeding taxable years, to take into account items changed in making the computations under subsection (d) for taxable years prior to the taxable year of such recovery.

§ 1352 Alternative tax on qualifying shipping activities

In the case of an electing corporation, the tax imposed by section 11 shall be the amount equal to the sum of— the tax imposed by section 11 determined after the application of this subchapter, and a tax equal to— the highest rate of tax specified in section 11, multiplied by the notional shipping income for the taxable year. (Added Pub. L. 108–357, title II, § 248(a) , Oct. 22, 2004 , 118 Stat. 1450 .)

§ 1353 Notional shipping income

(a) In general For purposes of this subchapter, the notional shipping income of an electing corporation shall be the sum of the amounts determined under subsection (b) for each qualifying vessel operated by such electing corporation.

(b) Amounts For purposes of subsection (a), the amount of notional shipping income of an electing corporation for each qualifying vessel for the taxable year shall equal the product of— the daily notional shipping income, and the number of days during the taxable year that the electing corporation operated such vessel as a qualifying vessel in United States foreign trade. In the case of a qualifying vessel any of the income from which is not included in gross income by reason of section 883 or otherwise, the amount of notional shipping income from such vessel for the taxable year shall be the amount which bears the same ratio to such shipping income (determined without regard to this paragraph) as the gross income from the operation of such vessel in the United States foreign trade bears to the sum of such gross income and the income so excluded.

(c) Daily notional shipping income For purposes of subsection (b), the daily notional shipping income from the operation of a qualifying vessel is— 40 cents for each 100 tons of so much of the net tonnage of the vessel as does not exceed 25,000 net tons, and 20 cents for each 100 tons of so much of the net tonnage of the vessel as exceeds 25,000 net tons.

(d) Multiple operators of vessel If for any period 2 or more persons are operators of a qualifying vessel, the notional shipping income from the operation of such vessel for such period shall be allocated among such persons on the basis of their respective ownership, charter, and operating agreement interests in such vessel or on such other basis as the Secretary may prescribe by regulations.

§ 1354 Alternative tax election; revocation; termination

(a) In general A qualifying vessel operator may elect the application of this subchapter.

(b) Time and manner; years for which effective An election under this subchapter— shall be made in such form as prescribed by the Secretary, and shall be effective for the taxable year for which made and all succeeding taxable years until terminated under subsection (d). Such election may be effective for any taxable year only if made on or before the due date (including extensions) for filing the corporation’s return for such taxable year.

(c) Consistent elections by members of controlled groups An election under subsection (a) by a member of a controlled group shall apply to all qualifying vessel operators that are members of such group.

(d) Termination An election under subsection (a) may be terminated by revocation. Except as provided in subparagraph (C)— a revocation made during the taxable year and on or before the 15th day of the 4th month thereof shall be effective on the 1st day of such taxable year, and a revocation made during the taxable year but after such 15th day shall be effective on the 1st day of the following taxable year. If the revocation specifies a date for revocation which is on or after the day on which the revocation is made, the revocation shall be effective for taxable years beginning on and after the date so specified. An election under subsection (a) shall be terminated whenever (at any time on or after the 1st day of the 1st taxable year for which the corporation is an electing corporation) such corporation ceases to be a qualifying vessel operator. Any termination under this paragraph shall be effective on and after the date of cessation. The Secretary shall prescribe such annualization and other rules as are appropriate in the case of a termination under this paragraph.

(e) Election after termination If a qualifying vessel operator has made an election under subsection (a) and if such election has been terminated under subsection (d), such operator (and any successor operator) shall not be eligible to make an election under subsection (a) for any taxable year before its 5th taxable year which begins after the 1st taxable year for which such termination is effective, unless the Secretary consents to such election.

§ 1355 Definitions and special rules

(a) Definitions For purposes of this subchapter— The term “electing corporation” means any corporation for which an election is in effect under this subchapter. The term “electing group” means a controlled group of which one or more members is an electing corporation. The term “controlled group” means any group which would be treated as a single employer under subsection (a) or (b) of section 52 if paragraphs (1) and (2) of section 52(a) did not apply. The term “qualifying vessel operator” means any corporation— who operates one or more qualifying vessels, and who meets the shipping activity requirement in subsection (c). The term “qualifying vessel” means a self-propelled (or a combination self-propelled and non-self-propelled) United States flag vessel of not less than 6,000 deadweight tons used exclusively in the United States foreign trade during the period that the election under this subchapter is in effect. The term “United States flag vessel” means any vessel documented under the laws of the United States. The term “United States domestic trade” means the transportation of goods or passengers between places in the United States. The term “United States foreign trade” means the transportation of goods or passengers between a place in the United States and a foreign place or between foreign places.

(b) Operating a vessel For purposes of this subchapter— Except as provided in paragraph (2), a person is treated as operating any vessel during any period if— such vessel is owned by, or chartered (including a time charter) to, the person, or the person provides services for such vessel pursuant to an operating agreement, and such vessel is in use as a qualifying vessel during such period. A person is treated as operating and using a vessel that it has chartered out on bareboat charter terms only if— the vessel is temporarily surplus to the person’s requirements and the term of the charter does not exceed 3 years, or the vessel is bareboat chartered to a member of a controlled group which includes such person or to an unrelated person who sub-bareboats or time charters the vessel to such a member (including the owner of the vessel), and the vessel is used as a qualifying vessel by the person to whom ultimately chartered.

(c) Shipping activity requirement For purposes of this section— Except as otherwise provided in this subsection, a corporation meets the shipping activity requirement of this subsection for any taxable year only if the requirement of paragraph (4) is met for each of the 2 preceding taxable years. A corporation meets the shipping activity requirement of this subsection for the first taxable year for which the election under section 1354(a) is in effect only if the requirement of paragraph (4) is met for the preceding taxable year. A corporation who is a member of a controlled group meets the shipping activity requirement of this subsection only if such requirement is met determined by treating all members of such group as 1 person. The requirement of this paragraph is met for any taxable year if, on average during such year, at least 25 percent of the aggregate tonnage of qualifying vessels used by the corporation were owned by such corporation or chartered to such corporation on bareboat charter terms.

(d) Activities carried on partnerships, etc. In applying this subchapter to a partner in a partnership— each partner shall be treated as operating vessels operated by the partnership, each partner shall be treated as conducting the activities conducted by the partnership, and the extent of a partner’s ownership, charter, or operating agreement interest in any vessel operated by the partnership shall be determined on the basis of the partner’s interest in the partnership. A similar rule shall apply with respect to other pass-thru entities.

(e) Effect of temporarily ceasing to operate a qualifying vessel For purposes of subsections (b) and (c), an electing corporation shall be treated as continuing to use a qualifying vessel during any period of temporary cessation if the electing corporation gives timely notice to the Secretary stating— that it has temporarily ceased to operate the qualifying vessel, and its intention to resume operating the qualifying vessel. Notice shall be deemed timely if given not later than the due date (including extensions) for the corporation’s tax return for the taxable year in which the temporary cessation begins. The period of temporary cessation under paragraph (1) shall continue until the earlier of the date on which— the electing corporation abandons its intention to resume operation of the qualifying vessel, or the electing corporation resumes operation of the qualifying vessel.

(f) Effect of temporarily operating a qualifying vessel in the United States domestic trade For purposes of this subchapter, an electing corporation shall be treated as continuing to use a qualifying vessel in the United States foreign trade during any period of temporary use in the United States domestic trade if the electing corporation gives timely notice to the Secretary stating— that it temporarily operates or has operated in the United States domestic trade a qualifying vessel which had been used in the United States foreign trade, and its intention to resume operation of the vessel in the United States foreign trade. Notice shall be deemed timely if given not later than the due date (including extensions) for the corporation’s tax return for the taxable year in which the temporary cessation begins. The period of temporary use under paragraph (1) continues until the earlier of the date on which— the electing corporation abandons its intention to resume operations of the vessel in the United States foreign trade, or the electing corporation resumes operation of the vessel in the United States foreign trade. Paragraph (1) shall not apply to any qualifying vessel which is operated in the United States domestic trade for more than 30 days during the taxable year.

(g) Great Lakes domestic shipping to not disqualify vessel If the electing corporation elects (at such time and in such manner as the Secretary may require) to apply this subsection for any taxable year to any qualifying vessel which is used in qualified zone domestic trade during the taxable year— solely for purposes of subsection (a)(4), such use shall be treated as use in United States foreign trade (and not as use in United States domestic trade), and subsection (f) shall not apply with respect to such vessel for such taxable year. In the case of a qualifying vessel to which this subsection applies— An electing corporation shall be treated as using such vessel in qualified zone domestic trade during any period of temporary use in the United States domestic trade (other than qualified zone domestic trade) if the electing corporation gives timely notice to the Secretary stating— that it temporarily operates or has operated in the United States domestic trade (other than qualified zone domestic trade) a qualifying vessel which had been used in the United States foreign trade or qualified zone domestic trade, and its intention to resume operation of the vessel in the United States foreign trade or qualified zone domestic trade. Notice shall be deemed timely if given not later than the due date (including extensions) for the corporation’s tax return for the taxable year in which the temporary cessation begins. The period of temporary use under subparagraph (A) continues until the earlier of the date of which— the electing corporation abandons its intention to resume operations of the vessel in the United States foreign trade or qualified zone domestic trade, or the electing corporation resumes operation of the vessel in the United States foreign trade or qualified zone domestic trade. Subparagraph (A) shall not apply to any qualifying vessel which is operated in the United States domestic trade (other than qualified zone domestic trade) for more than 30 days during the taxable year. In the case of a qualifying vessel to which this subsection applies, the Secretary shall prescribe rules for the proper allocation of income, expenses, losses, and deductions between the qualified shipping activities and the other activities of such vessel. For purposes of this subsection— The term “qualified zone domestic trade” means the transportation of goods or passengers between places in the qualified zone if such transportation is in the United States domestic trade. The term “qualified zone” means the Great Lakes Waterway and the St. Lawrence Seaway.

(h) Regulations The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section.

§ 1356 Qualifying shipping activities

(a) Qualifying shipping activities For purposes of this subchapter, the term “qualifying shipping activities” means— core qualifying activities, qualifying secondary activities, and qualifying incidental activities.

(b) Core qualifying activities For purposes of this subchapter, the term “core qualifying activities” means activities in operating qualifying vessels in United States foreign trade.

(c) Qualifying secondary activities For purposes of this section— The term “qualifying secondary activities” means secondary activities but only to the extent that, without regard to this subchapter, the gross income derived by such corporation from such activities does not exceed 20 percent of the gross income derived by the corporation from its core qualifying activities. The term “secondary activities” means— the active management or operation of vessels other than qualifying vessels in the United States foreign trade, the provision of vessel, barge, container, or cargo-related facilities or services to any person, other activities of the electing corporation and other members of its electing group that are an integral part of its business of operating qualifying vessels in United States foreign trade, including— ownership or operation of barges, containers, chassis, and other equipment that are the complement of, or used in connection with, a qualifying vessel in United States foreign trade, the inland haulage of cargo shipped, or to be shipped, on qualifying vessels in United States foreign trade, and the provision of terminal, maintenance, repair, logistical, or other vessel, barge, container, or cargo-related services that are an integral part of operating qualifying vessels in United States foreign trade, and such other activities as may be prescribed by the Secretary pursuant to regulations. Such term shall not include any core qualifying activities.

(d) Qualifying incidental activities For purposes of this section, the term “qualified incidental activities” means shipping-related activities if— they are incidental to the corporation’s core qualifying activities, they are not qualifying secondary activities, and without regard to this subchapter, the gross income derived by such corporation from such activities does not exceed 0.1 percent of the corporation’s gross income from its core qualifying activities.

(e) Application of gross income tests in case of electing group In the case of an electing group, subsections (c)(1) and (d)(3) shall be applied as if such group were 1 entity, and the limitations under such subsections shall be allocated among the corporations in such group.

§ 1357 Items not subject to regular tax; depreciation; interest

(a) Exclusion from gross income Gross income of an electing corporation shall not include its income from qualifying shipping activities.

(b) Electing group member Gross income of a corporation (other than an electing corporation) which is a member of an electing group shall not include its income from qualifying shipping activities conducted by such member.

(c) Denial of losses, deductions, and credits Subject to paragraph (2), each item of loss, deduction (other than for interest expense), or credit of any taxpayer with respect to any activity the income from which is excluded from gross income under this section shall be disallowed. Notwithstanding paragraph (1), the adjusted basis (for purposes of determining gain) of any qualifying vessel shall be determined as if the deduction for depreciation had been allowed. Except as provided in clause (ii), the straight-line method of depreciation shall apply to qualifying vessels the income from operation of which is excluded from gross income under this section. Clause (i) shall not apply to any qualifying vessel which is subject to a charter entered into before the date of the enactment of this subchapter. Except as provided in subparagraph (B), the interest expense of an electing corporation shall be disallowed in the ratio that the fair market value of such corporation’s qualifying vessels bears to the fair market value of such corporation’s total assets. In the case of a corporation which is a member of an electing group, the interest expense of such corporation shall be disallowed in the ratio that the fair market value of such corporation’s qualifying vessels bears to the fair market value of the electing groups total assets.

§ 1358 Allocation of credits, income, and deductions

(a) Qualifying shipping activities For purposes of this chapter, the qualifying shipping activities of an electing corporation shall be treated as a separate trade or business activity distinct from all other activities conducted by such corporation.

(b) Exclusion of credits or deductions No deduction shall be allowed against the notional shipping income of an electing corporation, and no credit shall be allowed against the tax imposed by section 1352(2). No deduction shall be allowed for any net operating loss attributable to the qualifying shipping activities of any person to the extent that such loss is carried forward by such person from a taxable year preceding the first taxable year for which such person was an electing corporation.

(c) Transactions not at arm’s length Section 482 applies in accordance with this subsection to a transaction or series of transactions— as between an electing corporation and another person, or as between a person’s qualifying shipping activities and other activities carried on by it.

§ 1359 Disposition of qualifying vessels

(a) In general If any qualifying vessel operator sells or disposes of any qualifying vessel in an otherwise taxable transaction, at the election of such operator, no gain shall be recognized if any replacement qualifying vessel is acquired during the period specified in subsection (b), except to the extent that the amount realized upon such sale or disposition exceeds the cost of the replacement qualifying vessel.

(b) Period within which property must be replaced The period referred to in subsection (a) shall be the period beginning one year prior to the disposition of the qualifying vessel and ending— 3 years after the close of the first taxable year in which the gain is realized, or subject to such terms and conditions as may be specified by the Secretary, on such later date as the Secretary may designate on application by the taxpayer. Such application shall be made at such time and in such manner as the Secretary may by regulations prescribe.

(c) Application of section to noncorporate operators For purposes of this section, the term “qualifying vessel operator” includes any person who would be a qualifying vessel operator were such person a corporation.

(d) Time for assessment of deficiency attributable to gain If a qualifying vessel operator has made the election provided in subsection (a), then— the statutory period for the assessment of any deficiency, for any taxable year in which any part of the gain is realized, attributable to such gain shall not expire prior to the expiration of 3 years from the date the Secretary is notified by such operator (in such manner as the Secretary may by regulations prescribe) of the replacement qualifying vessel or of an intention not to replace, and such deficiency may be assessed before the expiration of such 3-year period notwithstanding the provisions of section 6212(c) or the provisions of any other law or rule of law which would otherwise prevent such assessment.

(e) Basis of replacement qualifying vessel In the case of any replacement qualifying vessel purchased by the qualifying vessel operator which resulted in the nonrecognition of any part of the gain realized as the result of a sale or other disposition of a qualifying vessel, the basis shall be the cost of the replacement qualifying vessel decreased in the amount of the gain not so recognized; and if the property purchased consists of more than one piece of property, the basis determined under this sentence shall be allocated to the purchased properties in proportion to their respective costs.

§ 1361 S corporation defined

(a) S corporation defined For purposes of this title, the term “S corporation” means, with respect to any taxable year, a small business corporation for which an election under section 1362(a) is in effect for such year. For purposes of this title, the term “C corporation” means, with respect to any taxable year, a corporation which is not an S corporation for such year.

(b) Small business corporation For purposes of this subchapter, the term “small business corporation” means a domestic corporation which is not an ineligible corporation and which does not— have more than 100 shareholders, have as a shareholder a person (other than an estate, a trust described in subsection (c)(2), or an organization described in subsection (c)(6)) who is not an individual, have a nonresident alien as a shareholder, and have more than 1 class of stock. For purposes of paragraph (1), the term “ineligible corporation” means any corporation which is— a financial institution which uses the reserve method of accounting for bad debts described in section 585, an insurance company subject to tax under subchapter L, or a DISC or former DISC. Except as provided in regulations prescribed by the Secretary, for purposes of this title— a corporation which is a qualified subchapter S subsidiary shall not be treated as a separate corporation, and all assets, liabilities, and items of income, deduction, and credit of a qualified subchapter S subsidiary shall be treated as assets, liabilities, and such items (as the case may be) of the S corporation. For purposes of this paragraph, the term “qualified subchapter S subsidiary” means any domestic corporation which is not an ineligible corporation (as defined in paragraph (2)), if— 100 percent of the stock of such corporation is held by the S corporation, and the S corporation elects to treat such corporation as a qualified subchapter S subsidiary. For purposes of this title, if any corporation which was a qualified subchapter S subsidiary ceases to meet the requirements of subparagraph (B), such corporation shall be treated as a new corporation acquiring all of its assets (and assuming all of its liabilities) immediately before such cessation from the S corporation in exchange for its stock. If the failure to meet the requirements of subparagraph (B) is by reason of the sale of stock of a corporation which is a qualified subchapter S subsidiary, the sale of such stock shall be treated as if— the sale were a sale of an undivided interest in the assets of such corporation (based on the percentage of the corporation’s stock sold), and the sale were followed by an acquisition by such corporation of all of its assets (and the assumption by such corporation of all of its liabilities) in a transaction to which section 351 applies. If a corporation’s status as a qualified subchapter S subsidiary terminates, such corporation (and any successor corporation) shall not be eligible to make— an election under subparagraph (B)(ii) to be treated as a qualified subchapter S subsidiary, or an election under section 1362(a) to be treated as an S corporation, before its 5th taxable year which begins after the 1st taxable year for which such termination was effective, unless the Secretary consents to such election. Except to the extent provided by the Secretary, this paragraph shall not apply to part III of subchapter A of chapter 61 (relating to information returns).

(c) Special rules for applying subsection (b) For purposes of subsection (b)(1)(A), there shall be treated as one shareholder— a husband and wife (and their estates), and all members of a family (and their estates). For purposes of this paragraph— The term “members of a family” means a common ancestor, any lineal descendant of such common ancestor, and any spouse or former spouse of such common ancestor or any such lineal descendant. An individual shall not be considered to be a common ancestor if, on the applicable date, the individual is more than 6 generations removed from the youngest generation of shareholders who would (but for this subparagraph) be members of the family. For purposes of the preceding sentence, a spouse (or former spouse) shall be treated as being of the same generation as the individual to whom such spouse is (or was) married. The term “applicable date” means the latest of— the date the election under section 1362(a) is made, the earliest date that an individual described in clause (i) holds stock in the S corporation, or October 22, 2004 . Any legally adopted child of an individual, any child who is lawfully placed with an individual for legal adoption by the individual, and any eligible foster child of an individual (within the meaning of section 152(f)(1)(C)), shall be treated as a child of such individual by blood. For purposes of subsection (b)(1)(B), the following trusts may be shareholders: A trust all of which is treated (under subpart E of part I of subchapter J of this chapter) as owned by an individual who is a citizen or resident of the United States. A trust which was described in clause (i) immediately before the death of the deemed owner and which continues in existence after such death, but only for the 2-year period beginning on the day of the deemed owner’s death. A trust with respect to stock transferred to it pursuant to the terms of a will, but only for the 2-year period beginning on the day on which such stock is transferred to it. A trust created primarily to exercise the voting power of stock transferred to it. An electing small business trust. In the case of a corporation which is a bank (as defined in section 581) or a depository institution holding company (as defined in section 3(w)(1) of the Federal Deposit Insurance Act ( 12 U.S.C. 1813(w)(1) ), a trust which constitutes an individual retirement account under section 408(a), including one designated as a Roth IRA under section 408A, but only to the extent of the stock held by such trust in such bank or company as of the date of the enactment of this clause. This subparagraph shall not apply to any foreign trust. For purposes of subsection (b)(1)— In the case of a trust described in clause (i) of subparagraph (A), the deemed owner shall be treated as the shareholder. In the case of a trust described in clause (ii) of subparagraph (A), the estate of the deemed owner shall be treated as the shareholder. In the case of a trust described in clause (iii) of subparagraph (A), the estate of the testator shall be treated as the shareholder. In the case of a trust described in clause (iv) of subparagraph (A), each beneficiary of the trust shall be treated as a shareholder. In the case of a trust described in clause (v) of subparagraph (A), each potential current beneficiary of such trust shall be treated as a shareholder; except that, if for any period there is no potential current beneficiary of such trust, such trust shall be treated as the shareholder during such period. This clause shall not apply for purposes of subsection (b)(1)(C). In the case of a trust described in clause (vi) of subparagraph (A), the individual for whose benefit the trust was created shall be treated as the shareholder. For purposes of subsection (b)(1)(B), the term “estate” includes the estate of an individual in a case under title 11 of the United States Code. For purposes of subsection (b)(1)(D), a corporation shall not be treated as having more than 1 class of stock solely because there are differences in voting rights among the shares of common stock. For purposes of subsection (b)(1)(D), straight debt shall not be treated as a second class of stock. For purposes of this paragraph, the term “straight debt” means any written unconditional promise to pay on demand or on a specified date a sum certain in money if— the interest rate (and interest payment dates) are not contingent on profits, the borrower’s discretion, or similar factors, there is no convertibility (directly or indirectly) into stock, and the creditor is an individual (other than a nonresident alien), an estate, a trust described in paragraph (2), or a person which is actively and regularly engaged in the business of lending money. The Secretary shall prescribe such regulations as may be necessary or appropriate to provide for the proper treatment of straight debt under this subchapter and for the coordination of such treatment with other provisions of this title. For purposes of subsection (b)(1)(B), an organization which is— described in section 401(a) or 501(c)(3), and exempt from taxation under section 501(a), may be a shareholder in an S corporation.

(d) Special rule for qualified subchapter S trust In the case of a qualified subchapter S trust with respect to which a beneficiary makes an election under paragraph (2)— such trust shall be treated as a trust described in subsection (c)(2)(A)(i), for purposes of section 678(a), the beneficiary of such trust shall be treated as the owner of that portion of the trust which consists of stock in an S corporation with respect to which the election under paragraph (2) is made, and for purposes of applying sections 465 and 469 to the beneficiary of the trust, the disposition of the S corporation stock by the trust shall be treated as a disposition by such beneficiary. A beneficiary of a qualified subchapter S trust (or his legal representative) may elect to have this subsection apply. An election under this paragraph shall be made separately with respect to each corporation the stock of which is held by the trust. If there is an election under this paragraph with respect to any beneficiary, an election under this paragraph shall be treated as made by each successive beneficiary unless such beneficiary affirmatively refuses to consent to such election. Any election, or refusal, under this paragraph shall be made in such manner and form, and at such time, as the Secretary may prescribe. An election under this paragraph, once made, may be revoked only with the consent of the Secretary. An election under this paragraph shall be effective up to 15 days and 2 months before the date of the election. For purposes of this subsection, the term “qualified subchapter S trust” means a trust— the terms of which require that— during the life of the current income beneficiary, there shall be only 1 income beneficiary of the trust, any corpus distributed during the life of the current income beneficiary may be distributed only to such beneficiary, the income interest of the current income beneficiary in the trust shall terminate on the earlier of such beneficiary’s death or the termination of the trust, and upon the termination of the trust during the life of the current income beneficiary, the trust shall distribute all of its assets to such beneficiary, and all of the income (within the meaning of section 643(b)) of which is distributed (or required to be distributed) currently to 1 individual who is a citizen or resident of the United States. A substantially separate and independent share of a trust within the meaning of section 663(c) shall be treated as a separate trust for purposes of this subsection and subsection (c). If a qualified subchapter S trust ceases to meet any requirement of paragraph (3)(A), the provisions of this subsection shall not apply to such trust as of the date it ceases to meet such requirement. If any qualified subchapter S trust ceases to meet any requirement of paragraph (3)(B) but continues to meet the requirements of paragraph (3)(A), the provisions of this subsection shall not apply to such trust as of the first day of the first taxable year beginning after the first taxable year for which it failed to meet the requirements of paragraph (3)(B).

(e) Electing small business trust defined For purposes of this section— Except as provided in subparagraph (B), the term “electing small business trust” means any trust if— such trust does not have as a beneficiary any person other than (I) an individual, (II) an estate, (III) an organization described in paragraph (2), (3), (4), or (5) of section 170(c), or (IV) an organization described in section 170(c)(1) which holds a contingent interest in such trust and is not a potential current beneficiary, no interest in such trust was acquired by purchase, and an election under this subsection applies to such trust. The term “electing small business trust” shall not include— any qualified subchapter S trust (as defined in subsection (d)(3)) if an election under subsection (d)(2) applies to any corporation the stock of which is held by such trust, any trust exempt from tax under this subtitle, and any charitable remainder annuity trust or charitable remainder unitrust (as defined in section 664(d)). For purposes of subparagraph (A), the term “purchase” means any acquisition if the basis of the property acquired is determined under section 1012. For purposes of this section, the term “potential current beneficiary” means, with respect to any period, any person who at any time during such period is entitled to, or at the discretion of any person may receive, a distribution from the principal or income of the trust (determined without regard to any power of appointment to the extent such power remains unexercised at the end of such period). If a trust disposes of all of the stock which it holds in an S corporation, then, with respect to such corporation, the term “potential current beneficiary” does not include any person who first met the requirements of the preceding sentence during the 1-year period ending on the date of such disposition. An election under this subsection shall be made by the trustee. Any such election shall apply to the taxable year of the trust for which made and all subsequent taxable years of such trust unless revoked with the consent of the Secretary. For special treatment of electing small business trusts, see section 641(c).

(f) Restricted bank director stock Restricted bank director stock shall not be taken into account as outstanding stock of the S corporation in applying this subchapter (other than section 1368(f)). For purposes of this subsection, the term “restricted bank director stock” means stock in a bank (as defined in section 581) or a depository institution holding company (as defined in section 3(w)(1) of the Federal Deposit Insurance Act ( 12 U.S.C. 1813(w)(1) )), if such stock— is required to be held by an individual under applicable Federal or State law in order to permit such individual to serve as a director, and is subject to an agreement with such bank or company (or a corporation which controls (within the meaning of section 368(c)) such bank or company) pursuant to which the holder is required to sell back such stock (at the same price as the individual acquired such stock) upon ceasing to hold the office of director. For treatment of certain distributions with respect to restricted bank director stock, see section 1368(f).

(g) Special rule for bank required to change from the reserve method of accounting on becoming S corporation In the case of a bank which changes from the reserve method of accounting for bad debts described in section 585 or 593 for its first taxable year for which an election under section 1362(a) is in effect, the bank may elect to take into account any adjustments under section 481 by reason of such change for the taxable year immediately preceding such first taxable year.

“In the case of a corporation which is— described in section 1311(a)(1) of the Small Business Job Protection Act of 1996 [ Pub. L. 104–188 , set out below], and not described in section 1311(a)(2) of such Act, the amount of such corporation’s accumulated earnings and profits (for the first taxable year beginning after the date of the enactment of this Act [ May 25, 2007 ]) shall be reduced by an amount equal to the portion (if any) of such accumulated earnings and profits which were accumulated in any taxable year beginning before January 1, 1983 , for which such corporation was an electing small business corporation under subchapter S of the Internal Revenue Code of 1986.”

“If— a corporation was an electing small business corporation under subchapter S of chapter 1 of the Internal Revenue Code of 1986 for any taxable year beginning before January 1, 1983 , and such corporation is an S corporation under subchapter S of chapter 1 of such Code for its first taxable year beginning after December 31, 1996 , the amount of such corporation’s accumulated earnings and profits (as of the beginning of such first taxable year) shall be reduced by an amount equal to the portion (if any) of such accumulated earnings and profits which were accumulated in any taxable year beginning before January 1, 1983 , for which such corporation was an electing small business corporation under such subchapter S.”

“If— after September 30, 1982 , and on or before the date of the enactment of this Act [ Jan. 12, 1983 ], stock or securities were transferred to a small business corporation (as defined in section 1361(b) of the Internal Revenue Code of 1986 [formerly I.R.C. 1954] as amended by the Subchapter S Revision Act of 1982 [ Pub. L. 97–354 ]) in a transaction to which section 351 of such Code applies, and such corporation is liquidated under section 333 of such Code before March 1, 1983 , then such stock or securities shall not be taken into account under section 333(e)(2) of such Code.”

§ 1362 Election; revocation; termination

(a) Election Except as provided in subsection (g), a small business corporation may elect, in accordance with the provisions of this section, to be an S corporation. An election under this subsection shall be valid only if all persons who are shareholders in such corporation on the day on which such election is made consent to such election.

(b) When made An election under subsection (a) may be made by a small business corporation for any taxable year— at any time during the preceding taxable year, or at any time during the taxable year and on or before the 15th day of the 3d month of the taxable year. If— an election under subsection (a) is made for any taxable year during such year and on or before the 15th day of the 3d month of such year, but either— on 1 or more days in such taxable year before the day on which the election was made the corporation did not meet the requirements of subsection (b) of section 1361, or 1 or more of the persons who held stock in the corporation during such taxable year and before the election was made did not consent to the election, then such election shall be treated as made for the following taxable year. If— a small business corporation makes an election under subsection (a) for any taxable year, and such election is made after the 15th day of the 3d month of the taxable year and on or before the 15th day of the 3rd month of the following taxable year, then such election shall be treated as made for the following taxable year. For purposes of this subsection, an election for a taxable year made not later than 2 months and 15 days after the first day of the taxable year shall be treated as timely made during such year. If— an election under subsection (a) is made for any taxable year (determined without regard to paragraph (3)) after the date prescribed by this subsection for making such election for such taxable year or no such election is made for any taxable year, and the Secretary determines that there was reasonable cause for the failure to timely make such election, the Secretary may treat such an election as timely made for such taxable year (and paragraph (3) shall not apply).

(c) Years for which effective An election under subsection (a) shall be effective for the taxable year of the corporation for which it is made and for all succeeding taxable years of the corporation, until such election is terminated under subsection (d).

(d) Termination An election under subsection (a) may be terminated by revocation. An election may be revoked only if shareholders holding more than one-half of the shares of stock of the corporation on the day on which the revocation is made consent to the revocation. Except as provided in subparagraph (D)— a revocation made during the taxable year and on or before the 15th day of the 3d month thereof shall be effective on the 1st day of such taxable year, and a revocation made during the taxable year but after such 15th day shall be effective on the 1st day of the following taxable year. If the revocation specifies a date for revocation which is on or after the day on which the revocation is made, the revocation shall be effective on and after the date so specified. An election under subsection (a) shall be terminated whenever (at any time on or after the 1st day of the 1st taxable year for which the corporation is an S corporation) such corporation ceases to be a small business corporation. Any termination under this paragraph shall be effective on and after the date of cessation. An election under subsection (a) shall be terminated whenever the corporation— has accumulated earnings and profits at the close of each of 3 consecutive taxable years, and has gross receipts for each of such taxable years more than 25 percent of which are passive investment income. Any termination under this paragraph shall be effective on and after the first day of the first taxable year beginning after the third consecutive taxable year referred to in clause (i). A prior taxable year shall not be taken into account under clause (i) unless the corporation was an S corporation for such taxable year. For purposes of this paragraph— in the case of dispositions of capital assets (other than stock and securities), gross receipts from such dispositions shall be taken into account only to the extent of the capital gain net income therefrom, and in the case of sales or exchanges of stock or securities, gross receipts shall be taken into account only to the extent of the gains therefrom. Except as otherwise provided in this subparagraph, the term “passive investment income” means gross receipts derived from royalties, rents, dividends, interest, and annuities. The term “passive investment income” shall not include interest on any obligation acquired in the ordinary course of the corporation’s trade or business from its sale of property described in section 1221(a)(1). If the S corporation meets the requirements of section 542(c)(6) for the taxable year, the term “passive investment income” shall not include gross receipts for the taxable year which are derived directly from the active and regular conduct of a lending or finance business (as defined in section 542(d)(1)). If an S corporation holds stock in a C corporation meeting the requirements of section 1504(a)(2), the term “passive investment income” shall not include dividends from such C corporation to the extent such dividends are attributable to the earnings and profits of such C corporation derived from the active conduct of a trade or business. In the case of a bank (as defined in section 581) or a depository institution holding company (as defined in section 3(w)(1) of the Federal Deposit Insurance Act ( 12 U.S.C. 1813(w)(1) )), the term “passive investment income” shall not include— interest income earned by such bank or company, or dividends on assets required to be held by such bank or company, including stock in the Federal Reserve Bank, the Federal Home Loan Bank, or the Federal Agricultural Mortgage Bank or participation certificates issued by a Federal Intermediate Credit Bank.

(e) Treatment of S termination year In the case of an S termination year, for purposes of this title— The portion of such year ending before the 1st day for which the termination is effective shall be treated as a short taxable year for which the corporation is an S corporation. The portion of such year beginning on such 1st day shall be treated as a short taxable year for which the corporation is a C corporation. Except as provided in paragraph (3) and subparagraphs (C) and (D) of paragraph (6), the determination of which items are to be taken into account for each of the short taxable years referred to in paragraph (1) shall be made— first by determining for the S termination year— the amount of each of the items of income, loss, deduction, or credit described in section 1366(a)(1)(A), and the amount of the nonseparately computed income or loss, and then by assigning an equal portion of each amount determined under subparagraph (A) to each day of the S termination year. A corporation may elect to have paragraph (2) not apply. An election under this subsection shall be valid only if all persons who are shareholders in the corporation at any time during the S short year and all persons who are shareholders in the corporation on the first day of the C short year consent to such election. For purposes of this subsection, the term “S termination year” means any taxable year of a corporation (determined without regard to this subsection) in which a termination of an election made under subsection (a) takes effect (other than on the 1st day thereof). The taxable income for the short year described in subparagraph (B) of paragraph (1) shall be placed on an annual basis by multiplying the taxable income for such short year by the number of days in the S termination year and by dividing the result by the number of days in the short year. The tax shall be the same part of the tax computed on the annual basis as the number of days in such short year is of the number of days in the S termination year. Subsection (d) of section 443 shall apply to the short taxable year described in subparagraph (B) of paragraph (1). For purposes of this title— The short taxable year described in subparagraph (A) of paragraph (1) shall not be taken into account for purposes of determining the number of taxable years to which any item may be carried back or carried forward by the corporation. The due date for filing the return for the short taxable year described in subparagraph (A) of paragraph (1) shall be the same as the due date for filing the return for the short taxable year described in subparagraph (B) of paragraph (1) (including extensions thereof). Paragraph (2) shall not apply with respect to any item resulting from the application of section 338. Paragraph (2) shall not apply to an S termination year if there is a sale or exchange of 50 percent or more of the stock in such corporation during such year.

(f) Inadvertent invalid elections or terminations If— an election under subsection (a) or section 1361(b)(3)(B)(ii) by any corporation— was not effective for the taxable year for which made (determined without regard to subsection (b)(2)) by reason of a failure to meet the requirements of section 1361(b) or to obtain shareholder consents, or was terminated under paragraph (2) or (3) of subsection (d) or section 1361(b)(3)(C), the Secretary determines that the circumstances resulting in such ineffectiveness or termination were inadvertent, no later than a reasonable period of time after discovery of the circumstances resulting in such ineffectiveness or termination, steps were taken— so that the corporation for which the election was made or the termination occurred is a small business corporation or a qualified subchapter S subsidiary, as the case may be, or to acquire the required shareholder consents, and the corporation for which the election was made or the termination occurred, and each person who was a shareholder in such corporation at any time during the period specified pursuant to this subsection, agrees to make such adjustments (consistent with the treatment of such corporation as an S corporation or a qualified subchapter S subsidiary, as the case may be) as may be required by the Secretary with respect to such period, then, notwithstanding the circumstances resulting in such ineffectiveness or termination, such corporation shall be treated as an S corporation or a qualified subchapter S subsidiary, as the case may be, during the period specified by the Secretary.

(g) Election after termination If a small business corporation has made an election under subsection (a) and if such election has been terminated under subsection (d), such corporation (and any successor corporation) shall not be eligible to make an election under subsection (a) for any taxable year before its 5th taxable year which begins after the 1st taxable year for which such termination is effective, unless the Secretary consents to such election.

“If a commodities dealer or an options dealer— becomes a small business corporation (as defined in section 1361(b) of the Internal Revenue Code of 1986 [formerly I.R.C. 1954]) at any time before the close of the 75th day after the date of the enactment of this Act [ July 18, 1984 ], and makes the election under section 1362(a) of such Code before the close of such 75th day, then such dealer shall be treated as having received approval for and adopted a taxable year beginning on the first day during 1984 on which it was a small business corporation (as so defined) or such other day as may be permitted under regulations and ending on the date determined under section 1378 of such Code and such election shall be effective for such taxable year.”

§ 1363 Effect of election on corporation

(a) General rule Except as otherwise provided in this subchapter, an S corporation shall not be subject to the taxes imposed by this chapter.

(b) Computation of corporation’s taxable income The taxable income of an S corporation shall be computed in the same manner as in the case of an individual, except that— the items described in section 1366(a)(1)(A) shall be separately stated, the deductions referred to in section 703(a)(2) shall not be allowed to the corporation, section 248 shall apply, and section 291 shall apply if the S corporation (or any predecessor) was a C corporation for any of the 3 immediately preceding taxable years.

(c) Elections of the S corporation Except as provided in paragraph (2), any election affecting the computation of items derived from an S corporation shall be made by the corporation. In the case of an S corporation, elections under the following provisions shall be made by each shareholder separately— section 617 (relating to deduction and recapture of certain mining exploration expenditures), and section 901 (relating to taxes of foreign countries and possessions of the United States).

(d) Recapture of LIFO benefits If— an S corporation was a C corporation for the last taxable year before the first taxable year for which the election under section 1362(a) was effective, and the corporation inventoried goods under the LIFO method for such last taxable year, the LIFO recapture amount shall be included in the gross income of the corporation for such last taxable year (and appropriate adjustments to the basis of inventory shall be made to take into account the amount included in gross income under this paragraph). Any increase in the tax imposed by this chapter by reason of this subsection shall be payable in 4 equal installments. The first installment under subparagraph (A) shall be paid on or before the due date (determined without regard to extensions) for the return of the tax imposed by this chapter for the last taxable year for which the corporation was a C corporation and the 3 succeeding installments shall be paid on or before the due date (as so determined) for the corporation’s return for the 3 succeeding taxable years. Notwithstanding section 6601(b), for purposes of section 6601, the date prescribed for the payment of each installment under this paragraph shall be determined under this paragraph. For purposes of this subsection, the term “LIFO recapture amount” means the amount (if any) by which— the inventory amount of the inventory asset under the first-in, first-out method authorized by section 471, exceeds the inventory amount of such assets under the LIFO method. For purposes of the preceding sentence, inventory amounts shall be determined as of the close of the last taxable year referred to in paragraph (1). For purposes of this subsection— The term “LIFO method” means the method authorized by section 472. The term “inventory assets” means stock in trade of the corporation, or other property of a kind which would properly be included in the inventory of the corporation if on hand at the close of the taxable year. The inventory amount of assets under a method authorized by section 471 shall be determined— if the corporation uses the retail method of valuing inventories under section 472, by using such method, or if clause (i) does not apply, by using cost or market, whichever is lower. Except as provided in regulations, the corporation referred to in paragraph (1) shall not be treated as a member of an affiliated group with respect to the amount included in gross income under paragraph (1). Sections 1367(a)(2)(D) and 1371(c)(1) shall not apply with respect to any increase in the tax imposed by reason of this subsection.

§ 1366 Pass-thru of items to shareholders

(a) Determination of shareholder’s tax liability In determining the tax under this chapter of a shareholder for the shareholder’s taxable year in which the taxable year of the S corporation ends (or for the final taxable year of a shareholder who dies, or of a trust or estate which terminates, before the end of the corporation’s taxable year), there shall be taken into account the shareholder’s pro rata share of the corporation’s— items of income (including tax-exempt income), loss, deduction, or credit the separate treatment of which could affect the liability for tax of any shareholder, and nonseparately computed income or loss. For purposes of the preceding sentence, the items referred to in subparagraph (A) shall include amounts described in paragraph (4) or (6) of section 702(a). For purposes of this subchapter, the term “nonseparately computed income or loss” means gross income minus the deductions allowed to the corporation under this chapter, determined by excluding all items described in paragraph (1)(A).

(b) Character passed thru The character of any item included in a shareholder’s pro rata share under paragraph (1) of subsection (a) shall be determined as if such item were realized directly from the source from which realized by the corporation, or incurred in the same manner as incurred by the corporation.

(c) Gross income of a shareholder In any case where it is necessary to determine the gross income of a shareholder for purposes of this title, such gross income shall include the shareholder’s pro rata share of the gross income of the corporation.

(d) Special rules for losses and deductions The aggregate amount of losses and deductions taken into account by a shareholder under subsection (a) for any taxable year shall not exceed the sum of— the adjusted basis of the shareholder’s stock in the S corporation (determined with regard to paragraphs (1) and (2)(A) of section 1367(a) for the taxable year), and the shareholder’s adjusted basis of any indebtedness of the S corporation to the shareholder (determined without regard to any adjustment under paragraph (2) of section 1367(b) for the taxable year). Except as provided in subparagraph (B), any loss or deduction which is disallowed for any taxable year by reason of paragraph (1) shall be treated as incurred by the corporation in the succeeding taxable year with respect to that shareholder. In the case of any transfer described in section 1041(a) of stock of an S corporation, any loss or deduction described in subparagraph (A) with respect such stock shall be treated as incurred by the corporation in the succeeding taxable year with respect to the transferee. If for the last taxable year of a corporation for which it was an S corporation a loss or deduction was disallowed by reason of paragraph (1), such loss or deduction shall be treated as incurred by the shareholder on the last day of any post-termination transition period. The aggregate amount of losses and deductions taken into account by a shareholder under subparagraph (A) shall not exceed the adjusted basis of the shareholder’s stock in the corporation (determined at the close of the last day of the post-termination transition period and without regard to this paragraph). The shareholder’s basis in the stock of the corporation shall be reduced by the amount allowed as a deduction by reason of this paragraph. To the extent that any increase in adjusted basis described in subparagraph (B) would have increased the shareholder’s amount at risk under section 465 if such increase had occurred on the day preceding the commencement of the post-termination transition period, rules similar to the rules described in subparagraphs (A) through (C) shall apply to any losses disallowed by reason of section 465(a). In the case of any charitable contribution of property to which the second sentence of section 1367(a)(2) applies, paragraph (1) shall not apply to the extent of the excess (if any) of— the shareholder’s pro rata share of such contribution, over the shareholder’s pro rata share of the adjusted basis of such property.

(e) Treatment of family group If an individual who is a member of the family (within the meaning of section 704(e)(2) of one or more shareholders of an S corporation renders services for the corporation or furnishes capital to the corporation without receiving reasonable compensation therefor, the Secretary shall make such adjustments in the items taken into account by such individual and such shareholders as may be necessary in order to reflect the value of such services or capital.

(f) Special rules Subsection (a) shall not apply with respect to any credit allowable under section 34 (relating to certain uses of gasoline and special fuels). If any tax is imposed under section 1374 for any taxable year on an S corporation, for purposes of subsection (a), the amount so imposed shall be treated as a loss sustained by the S corporation during such taxable year. The character of such loss shall be determined by allocating the loss proportionately among the recognized built-in gains giving rise to such tax. If any tax is imposed under section 1375 for any taxable year on an S corporation, for purposes of subsection (a), each item of passive investment income shall be reduced by an amount which bears the same ratio to the amount of such tax as— the amount of such item, bears to the total passive investment income for the taxable year.

§ 1367 Adjustments to basis of stock of shareholders, etc.

(a) General rule The basis of each shareholder’s stock in an S corporation shall be increased for any period by the sum of the following items determined with respect to that shareholder for such period: the items of income described in subparagraph (A) of section 1366(a)(1), any nonseparately computed income determined under subparagraph (B) of section 1366(a)(1), and the excess of the deductions for depletion over the basis of the property subject to depletion. The basis of each shareholder’s stock in an S corporation shall be decreased for any period (but not below zero) by the sum of the following items determined with respect to the shareholder for such period: distributions by the corporation which were not includible in the income of the shareholder by reason of section 1368, the items of loss and deduction described in subparagraph (A) of section 1366(a)(1), any nonseparately computed loss determined under subparagraph (B) of section 1366(a)(1), any expense of the corporation not deductible in computing its taxable income and not properly chargeable to capital account, and the amount of the shareholder’s deduction for depletion for any oil and gas property held by the S corporation to the extent such deduction does not exceed the proportionate share of the adjusted basis of such property allocated to such shareholder under section 613A(c)(11)(B). The decrease under subparagraph (B) by reason of a charitable contribution (as defined in section 170(c)) of property shall be the amount equal to the shareholder’s pro rata share of the adjusted basis of such property.

(b) Special rules An amount which is required to be included in the gross income of a shareholder and shown on his return shall be taken into account under subparagraph (A) or (B) of subsection (a)(1) only to the extent such amount is included in the shareholder’s gross income on his return, increased or decreased by any adjustment of such amount in a redetermination of the shareholder’s tax liability. If for any taxable year the amounts specified in subparagraphs (B), (C), (D), and (E) of subsection (a)(2) exceed the amount which reduces the shareholder’s basis to zero, such excess shall be applied to reduce (but not below zero) the shareholder’s basis in any indebtedness of the S corporation to the shareholder. If for any taxable year beginning after December 31, 1982 , there is a reduction under subparagraph (A) in the shareholder’s basis in the indebtedness of an S corporation to a shareholder, any net increase (after the application of paragraphs (1) and (2) of subsection (a)) for any subsequent taxable year shall be applied to restore such reduction in basis before any of it may be used to increase the shareholder’s basis in the stock of the S corporation. This section and section 1366 shall be applied before the application of sections 165(g) and 166(d) to any taxable year of the shareholder or the corporation in which the security or debt becomes worthless. If any person acquires stock in an S corporation by reason of the death of a decedent or by bequest, devise, or inheritance, section 691 shall be applied with respect to any item of income of the S corporation in the same manner as if the decedent had held directly his pro rata share of such item. The basis determined under section 1014 of any stock in an S corporation shall be reduced by the portion of the value of the stock which is attributable to items constituting income in respect of the decedent.

§ 1368 Distributions

(a) General rule A distribution of property made by an S corporation with respect to its stock to which (but for this subsection) section 301(c) would apply shall be treated in the manner provided in subsection (b) or (c), whichever applies.

(b) S corporation having no earnings and profits In the case of a distribution described in subsection (a) by an S corporation which has no accumulated earnings and profits— The distribution shall not be included in gross income to the extent that it does not exceed the adjusted basis of the stock. If the amount of the distribution exceeds the adjusted basis of the stock, such excess shall be treated as gain from the sale or exchange of property.

(c) S corporation having earnings and profits In the case of a distribution described in subsection (a) by an S corporation which has accumulated earnings and profits— That portion of the distribution which does not exceed the accumulated adjustments account shall be treated in the manner provided by subsection (b). That portion of the distribution which remains after the application of paragraph (1) shall be treated as a dividend to the extent it does not exceed the accumulated earnings and profits of the S corporation. Any portion of the distribution remaining after the application of paragraph (2) of this subsection shall be treated in the manner provided by subsection (b). Except to the extent provided in regulations, if the distributions during the taxable year exceed the amount in the accumulated adjustments account at the close of the taxable year, for purposes of this subsection, the balance of such account shall be allocated among such distributions in proportion to their respective sizes.

(d) Certain adjustments taken into account Subsections (b) and (c) shall be applied by taking into account (to the extent proper)— the adjustments to the basis of the shareholder’s stock described in section 1367, and the adjustments to the accumulated adjustments account which are required by subsection (e)(1). In the case of any distribution made during any taxable year, the adjusted basis of the stock shall be determined with regard to the adjustments provided in paragraph (1) of section 1367(a) for the taxable year.

(e) Definitions and special rules For purposes of this section— Except as otherwise provided in this paragraph, the term “accumulated adjustments account” means an account of the S corporation which is adjusted for the S period in a manner similar to the adjustments under section 1367 (except that no adjustment shall be made for income (and related expenses) which is exempt from tax under this title and the phrase “(but not below zero)” shall be disregarded in section 1367(a)(2)) and no adjustment shall be made for Federal taxes attributable to any taxable year in which the corporation was a C corporation. In the case of any redemption which is treated as an exchange under section 302(a) or 303(a), the adjustment in the accumulated adjustments account shall be an amount which bears the same ratio to the balance in such account as the number of shares redeemed in such redemption bears to the number of shares of stock in the corporation immediately before such redemption. In applying this section to distributions made during any taxable year, the amount in the accumulated adjustments account as of the close of such taxable year shall be determined without regard to any net negative adjustment for such taxable year. For purposes of clause (i), the term “net negative adjustment” means, with respect to any taxable year, the excess (if any) of— the reductions in the account for the taxable year (other than for distributions), over the increases in such account for such taxable year. The term “S period” means the most recent continuous period during which the corporation has been an S corporation. Such period shall not include any taxable year beginning before January 1, 1983 . An S corporation may, with the consent of all of its affected shareholders, elect to have paragraph (1) of subsection (c) not apply to all distributions made during the taxable year for which the election is made. For purposes of subparagraph (A), the term “affected shareholder” means any shareholder to whom a distribution is made by the S corporation during the taxable year.

(f) Restricted bank director stock If a director receives a distribution (not in part or full payment in exchange for stock) from an S corporation with respect to any restricted bank director stock (as defined in section 1361(f)), the amount of such distribution— shall be includible in gross income of the director, and shall be deductible by the corporation for the taxable year of such corporation in which or with which ends the taxable year in which such amount is included in the gross income of the director.

§ 1371 Coordination with subchapter C

(a) Application of subchapter C rules Except as otherwise provided in this title, and except to the extent inconsistent with this subchapter, subchapter C shall apply to an S corporation and its shareholders.

(b) No carryover between C year and S year No carryforward, and no carryback, arising for a taxable year for which a corporation is a C corporation may be carried to a taxable year for which such corporation is an S corporation. No carryforward, and no carryback, shall arise at the corporate level for a taxable year for which a corporation is an S corporation. Nothing in paragraphs (1) and (2) shall prevent treating a taxable year for which a corporation is an S corporation as a taxable year for purposes of determining the number of taxable years to which an item may be carried back or carried forward.

(c) Earnings and profits Except as provided in paragraphs (2) and (3) and subsection (d)(3), no adjustment shall be made to the earnings and profits of an S corporation. In the case of any transaction involving the application of subchapter C to any S corporation, proper adjustment to any accumulated earnings and profits of the corporation shall be made. Paragraph (1) shall not apply with respect to that portion of a distribution which is treated as a dividend under section 1368(c)(2).

(d) Coordination with investment credit recapture Any election under section 1362 shall be treated as a mere change in the form of conducting a trade or business for purposes of the second sentence of section 50(a)(6). Notwithstanding an election under section 1362, an S corporation shall continue to be liable for any increase in tax under section 49(b) or 50(a) attributable to credits allowed for taxable years for which such corporation was not an S corporation. Paragraph (1) of subsection (c) shall not apply to any increase in tax under section 49(b) or 50(a) for which the S corporation is liable.

(e) Cash distributions during post-termination transition period Any distribution of money by a corporation with respect to its stock during a post-termination transition period shall be applied against and reduce the adjusted basis of the stock, to the extent that the amount of the distribution does not exceed the accumulated adjustments account (within the meaning of section 1368(e)). An S corporation may elect to have paragraph (1) not apply to all distributions made during a post-termination transition period described in section 1377(b)(1)(A). Such election shall not be effective unless all shareholders of the S corporation to whom distributions are made by the S corporation during such post-termination transition period consent to such election.

(f) Cash distributions following post-termination transition period In the case of a distribution of money by an eligible terminated S corporation (as defined in section 481(d)) after the post-termination transition period, the accumulated adjustments account shall be allocated to such distribution, and the distribution shall be chargeable to accumulated earnings and profits, in the same ratio as the amount of such accumulated adjustments account bears to the amount of such accumulated earnings and profits.

§ 1372 Partnership rules to apply for fringe benefit purposes

(a) General rule For purposes of applying the provisions of this subtitle which relate to employee fringe benefits— the S corporation shall be treated as a partnership, and any 2-percent shareholder of the S corporation shall be treated as a partner of such partnership.

(b) 2-percent shareholder defined For purposes of this section, the term “2-percent shareholder” means any person who owns (or is considered as owning within the meaning of section 318) on any day during the taxable year of the S corporation more than 2 percent of the outstanding stock of such corporation or stock possessing more than 2 percent of the total combined voting power of all stock of such corporation.

§ 1373 Foreign income

(a) S corporation treated as partnership, etc. For purposes of subparts A and F of part III, and part V, of subchapter N (relating to income from sources without the United States)— an S corporation shall be treated as a partnership, and the shareholders of such corporation shall be treated as partners of such partnership.

(b) Recapture of overall foreign loss For purposes of section 904(f) (relating to recapture of overall foreign loss), the making or termination of an election to be treated as an S corporation shall be treated as a disposition of the business.

§ 1374 Tax imposed on certain built-in gains

(a) General rule If for any taxable year beginning in the recognition period an S corporation has a net recognized built-in gain, there is hereby imposed a tax (computed under subsection (b)) on the income of such corporation for such taxable year.

(b) Amount of tax The amount of the tax imposed by subsection (a) shall be computed by applying the highest rate of tax specified in section 11(b) to the net recognized built-in gain of the S corporation for the taxable year. Notwithstanding section 1371(b)(1), any net operating loss carryforward arising in a taxable year for which the corporation was a C corporation shall be allowed for purposes of this section as a deduction against the net recognized built-in gain of the S corporation for the taxable year. For purposes of determining the amount of any such loss which may be carried to subsequent taxable years, the amount of the net recognized built-in gain shall be treated as taxable income. Rules similar to the rules of the preceding sentences of this paragraph shall apply in the case of a capital loss carryforward arising in a taxable year for which the corporation was a C corporation. Except as provided in subparagraph (B), no credit shall be allowable under part IV of subchapter A of this chapter (other than under section 34) against the tax imposed by subsection (a). Notwithstanding section 1371(b)(1), any business credit carryforward under section 39 arising in a taxable year for which the corporation was a C corporation shall be allowed as a credit against the tax imposed by subsection (a) in the same manner as if it were imposed by section 11.

(c) Limitations Subsection (a) shall not apply to any corporation if an election under section 1362(a) has been in effect with respect to such corporation for each of its taxable years. Except as provided in regulations, an S corporation and any predecessor corporation shall be treated as 1 corporation for purposes of the preceding sentence. The amount of the net recognized built-in gain taken into account under this section for any taxable year shall not exceed the excess (if any) of— the net unrealized built-in gain, over the net recognized built-in gain for prior taxable years beginning in the recognition period.

(d) Definitions and special rules For purposes of this section— The term “net unrealized built-in gain” means the amount (if any) by which— the fair market value of the assets of the S corporation as of the beginning of its 1st taxable year for which an election under section 1362(a) is in effect, exceeds the aggregate adjusted bases of such assets at such time. The term “net recognized built-in gain” means, with respect to any taxable year in the recognition period, the lesser of— the amount which would be the taxable income of the S corporation for such taxable year if only recognized built-in gains and recognized built-in losses were taken into account, or such corporation’s taxable income for such taxable year (determined as provided in section 1375(b)(1)(B)). If, for any taxable year described in subparagraph (A), the amount referred to in clause (i) of subparagraph (A) exceeds the amount referred to in clause (ii) of subparagraph (A), such excess shall be treated as a recognized built-in gain in the succeeding taxable year. The term “recognized built-in gain” means any gain recognized during the recognition period on the disposition of any asset except to the extent that the S corporation establishes that— such asset was not held by the S corporation as of the beginning of the 1st taxable year for which it was an S corporation, or such gain exceeds the excess (if any) of— the fair market value of such asset as of the beginning of such 1st taxable year, over the adjusted basis of the asset as of such time. The term “recognized built-in loss” means any loss recognized during the recognition period on the disposition of any asset to the extent that the S corporation establishes that— such asset was held by the S corporation as of the beginning of the 1st taxable year referred to in paragraph (3), and such loss does not exceed the excess of— the adjusted basis of such asset as of the beginning of such 1st taxable year, over the fair market value of such asset as of such time. Any item of income which is properly taken into account during the recognition period but which is attributable to periods before the 1st taxable year for which the corporation was an S corporation shall be treated as a recognized built-in gain for the taxable year in which it is properly taken into account. Any amount which is allowable as a deduction during the recognition period (determined without regard to any carryover) but which is attributable to periods before the 1st taxable year referred to in subparagraph (A) shall be treated as a recognized built-in loss for the taxable year for which it is allowable as a deduction. The amount of the net unrealized built-in gain shall be properly adjusted for amounts which would be treated as recognized built-in gains or losses under this paragraph if such amounts were properly taken into account (or allowable as a deduction) during the recognition period. If the adjusted basis of any asset is determined (in whole or in part) by reference to the adjusted basis of any other asset held by the S corporation as of the beginning of the 1st taxable year referred to in paragraph (3)— such asset shall be treated as held by the S corporation as of the beginning of such 1st taxable year, and any determination under paragraph (3)(B) or (4)(B) with respect to such asset shall be made by reference to the fair market value and adjusted basis of such other asset as of the beginning of such 1st taxable year. The term “recognition period” means the 5-year period beginning with the 1st day of the 1st taxable year for which the corporation was an S corporation. For purposes of applying this section to any amount includible in income by reason of distributions to shareholders pursuant to section 593(e), the preceding sentence shall be applied without regard to the phrase “5-year”. If an S corporation sells an asset and reports the income from the sale using the installment method under section 453, the treatment of all payments received shall be governed by the provisions of this paragraph applicable to the taxable year in which such sale was made. Except to the extent provided in regulations, if— an S corporation acquires any asset, and the S corporation’s basis in such asset is determined (in whole or in part) by reference to the basis of such asset (or any other property) in the hands of a C corporation, then a tax is hereby imposed on any net recognized built-in gain attributable to any such assets for any taxable year beginning in the recognition period. The amount of such tax shall be determined under the rules of this section as modified by subparagraph (B). For purposes of this paragraph, the modifications of this subparagraph are as follows: The preceding paragraphs of this subsection shall be applied by taking into account the day on which the assets were acquired by the S corporation in lieu of the beginning of the 1st taxable year for which the corporation was an S corporation. Subsection (c)(1) shall not apply. Any reference in this section to the 1st taxable year for which the corporation was an S corporation shall be treated as a reference to the 1st taxable year for which the corporation was an S corporation pursuant to its most recent election under section 1362.

(e) Regulations The Secretary shall prescribe such regulations as may be necessary to carry out the purposes of this section including regulations providing for the appropriate treatment of successor corporations.

§ 1375 Tax imposed when passive investment income of corporation having accumulated earnings and profits exceeds 25 percent of gross receipts

(a) General rule If for the taxable year an S corporation has— accumulated earnings and profits at the close of such taxable year, and gross receipts more than 25 percent of which are passive investment income, then there is hereby imposed a tax on the income of such corporation for such taxable year. Such tax shall be computed by multiplying the excess net passive income by the highest rate of tax specified in section 11(b).

(b) Definitions For purposes of this section— Except as provided in subparagraph (B), the term “excess net passive income” means an amount which bears the same ratio to the net passive income for the taxable year as— the amount by which the passive investment income for the taxable year exceeds 25 percent of the gross receipts for the taxable year, bears to the passive investment income for the taxable year. The amount of the excess net passive income for any taxable year shall not exceed the amount of the corporation’s taxable income for such taxable year as determined under section 63(a)— without regard to the deductions allowed by part VIII of subchapter B (other than the deduction allowed by section 248, relating to organization expenditures), and without regard to the deduction under section 172. The term “net passive income” means— passive investment income, reduced by the deductions allowable under this chapter which are directly connected with the production of such income (other than deductions allowable under section 172 and part VIII of subchapter B). The terms “passive investment income” and “gross receipts” have the same respective meanings as when used in paragraph (3) of section 1362(d). Notwithstanding paragraph (3), the amount of passive investment income shall be determined by not taking into account any recognized built-in gain or loss of the S corporation for any taxable year in the recognition period. Terms used in the preceding sentence shall have the same respective meanings as when used in section 1374.

(c) Credits not allowable No credit shall be allowed under part IV of subchapter A of this chapter (other than section 34) against the tax imposed by subsection (a).

(d) Waiver of tax in certain cases If the S corporation establishes to the satisfaction of the Secretary that— it determined in good faith that it had no accumulated earnings and profits at the close of a taxable year, and during a reasonable period of time after it was determined that it did have accumulated earnings and profits at the close of such taxable year such earnings and profits were distributed, the Secretary may waive the tax imposed by subsection (a) for such taxable year.

§ 1377 Definitions and special rule

(a) Pro rata share For purposes of this subchapter— Except as provided in paragraph (2), each shareholder’s pro rata share of any item for any taxable year shall be the sum of the amounts determined with respect to the shareholder— by assigning an equal portion of such item to each day of the taxable year, and then by dividing that portion pro rata among the shares outstanding on such day. Under regulations prescribed by the Secretary, if any shareholder terminates the shareholder’s interest in the corporation during the taxable year and all affected shareholders and the corporation agree to the application of this paragraph, paragraph (1) shall be applied to the affected shareholders as if the taxable year consisted of 2 taxable years the first of which ends on the date of the termination. For purposes of subparagraph (A), the term “affected shareholders” means the shareholder whose interest is terminated and all shareholders to whom such shareholder has transferred shares during the taxable year. If such shareholder has transferred shares to the corporation, the term “affected shareholders” shall include all persons who are shareholders during the taxable year.

(b) Post-termination transition period For purposes of this subchapter, the term “post-termination transition period” means— the period beginning on the day after the last day of the corporation’s last taxable year as an S corporation and ending on the later of— the day which is 1 year after such last day, or the due date for filing the return for such last year as an S corporation (including extensions), the 120-day period beginning on the date of any determination pursuant to an audit of the taxpayer which follows the termination of the corporation’s election and which adjusts a subchapter S item of income, loss, or deduction of the corporation arising during the S period (as defined in section 1368(e)(2)), and the 120-day period beginning on the date of a determination that the corporation’s election under section 1362(a) had terminated for a previous taxable year. For purposes of paragraph (1), the term “determination” means— a determination as defined in section 1313(a), or an agreement between the corporation and the Secretary that the corporation failed to qualify as an S corporation. Paragraph (1)(B) shall not apply for purposes of section 1366(d)(3). Paragraph (1)(B) shall apply to a distribution described in section 1371(e) only to the extent that the amount of such distribution does not exceed the aggregate increase (if any) in the accumulated adjustments account (within the meaning of section 1368(e)) by reason of the adjustments referred to in such paragraph.

(c) Manner of making elections, etc. Any election under this subchapter, and any revocation under section 1362(d)(1), shall be made in such manner as the Secretary shall by regulations prescribe.

§ 1378 Taxable year of S corporation

(a) General rule For purposes of this subtitle, the taxable year of an S corporation shall be a permitted year.

(b) Permitted year defined For purposes of this section, the term “permitted year” means a taxable year which— is a year ending December 31, or is any other accounting period for which the corporation establishes a business purpose to the satisfaction of the Secretary. For purposes of paragraph (2), any deferral of income to shareholders shall not be treated as a business purpose.

§ 1379 Transitional rules on enactment

(a) Old elections Any election made under section 1372(a) (as in effect before the enactment of the Subchapter S Revision Act of 1982) shall be treated as an election made under section 1362.

(b) References to prior law included Any references in this title to a provision of this subchapter shall, to the extent not inconsistent with the purposes of this subchapter, include a reference to the corresponding provision as in effect before the enactment of the Subchapter S Revision Act of 1982.

(c) Distributions of undistributed taxable income If a corporation was an electing small business corporation for the last preenactment year, subsections (f) and (d) of section 1375 (as in effect before the enactment of the Subchapter S Revision Act of 1982) shall continue to apply with respect to distributions of undistributed taxable income for any taxable year beginning before January 1, 1983 .

(d) Carryforwards If a corporation was an electing small business corporation for the last preenactment year and is an S corporation for the 1st postenactment year, any carryforward to the 1st postenactment year which arose in a taxable year for which the corporation was an electing small business corporation shall be treated as arising in the 1st postenactment year.

(e) Preenactment and postenactment years defined For purposes of this subsection— The term “last preenactment year” means the last taxable year of a corporation which begins before January 1, 1983 . The term “1st postenactment year” means the 1st taxable year of a corporation which begins after December 31, 1982 .

§ 1381 Organizations to which part applies

(a) In general This part shall apply to— any organization exempt from tax under section 521 (relating to exemption of farmers’ cooperatives from tax), and any corporation operating on a cooperative basis other than an organization— which is exempt from tax under this chapter, which is subject to the provisions of— part II of subchapter H (relating to mutual savings banks, etc.), or subchapter L (relating to insurance companies), or which is engaged in furnishing electric energy, or providing telephone service, to persons in rural areas.

(b) Tax on certain farmers’ cooperatives An organization described in subsection (a)(1) shall be subject to the tax imposed by section 11.

(c) Cross reference For treatment of income from load loss transactions of organizations described in subsection (a)(2)(C), see section 501(c)(12)(H).

§ 1382 Taxable income of cooperatives

(a) Gross income Except as provided in subsection (b), the gross income of any organization to which this part applies shall be determined without any adjustment (as a reduction in gross receipts, an increase in cost of goods sold, or otherwise) by reason of any allocation or distribution to a patron out of the net earnings of such organization or by reason of any amount paid to a patron as a per-unit retain allocation (as defined in section 1388(f)).

(b) Patronage dividends and per-unit retain allocations In determining the taxable income of an organization to which this part applies, there shall not be taken into account amounts paid during the payment period for the taxable year— as patronage dividends (as defined in section 1388(a)), to the extent paid in money, qualified written notices of allocation (as defined in section 1388(c)), or other property (except nonqualified written notices of allocation (as defined in section 1388(d))) with respect to patronage occurring during such taxable year; in money or other property (except written notices of allocation) in redemption of a nonqualified written notice of allocation which was paid as a patronage dividend during the payment period for the taxable year during which the patronage occurred; as per-unit retain allocations (as defined in section 1388(f)), to the extent paid in money, qualified per-unit retain certificates (as defined in section 1388(h)), or other property (except nonqualified per-unit retain certificates, as defined in section 1388(i)) with respect to marketing occurring during such taxable year; or in money or other property (except per-unit retain certificates) in redemption of a nonqualified per-unit retain certificate which was paid as a per-unit retain allocation during the payment period for the taxable year during which the marketing occurred. For purposes of this title, any amount not taken into account under the preceding sentence shall, in the case of an amount described in paragraph (1) or (2), be treated in the same manner as an item of gross income and as a deduction therefrom, and in the case of an amount described in paragraph (3) or (4), be treated as a deduction in arriving at gross income.

(c) Deduction for nonpatronage distributions, etc. In determining the taxable income of an organization described in section 1381(a)(1), there shall be allowed as a deduction (in addition to other deductions allowable under this chapter)— amounts paid during the taxable year as dividends on its capital stock; and amounts paid during the payment period for the taxable year— in money, qualified written notices of allocation, or other property (except nonqualified written notices of allocation) on a patronage basis to patrons with respect to its earnings during such taxable year which are derived from business done for the United States or any of its agencies or from sources other than patronage, or in money or other property (except written notices of allocation) in redemption of a nonqualified written notice of allocation which was paid, during the payment period for the taxable year during which the earnings were derived, on a patronage basis to a patron with respect to earnings derived from business or sources described in subparagraph (A).

(d) Payment period for each taxable year For purposes of subsections (b) and (c)(2), the payment period for any taxable year is the period beginning with the first day of such taxable year and ending with the fifteenth day of the ninth month following the close of such year. For purposes of subsections (b)(1) and (c)(2)(A), a qualified check issued during the payment period shall be treated as an amount paid in money during such period if endorsed and cashed on or before the 90th day after the close of such period.

(e) Products marketed under pooling arrangements For purposes of subsection (b), in the case of a pooling arrangement for the marketing of products— the patronage shall (to the extent provided in regulations prescribed by the Secretary) be treated as patronage occurring during the taxable year in which the pool closes, and the marketing of products shall be treated as occurring during any of the taxable years in which the pool is open.

(f) Treatment of earnings received after patronage occurred If any portion of the earnings from business done with or for patrons is includible in the organization’s gross income for a taxable year after the taxable year during which the patronage occurred, then for purposes of applying paragraphs (1) and (2) of subsection (b) to such portion the patronage shall, to the extent provided in regulations prescribed by the Secretary, be considered to have occurred during the taxable year of the organization during which such earnings are includible in gross income.

(g) Use of completed crop pool method of accounting An organization described in section 1381(a) which is engaged in pooling arrangements for the marketing of products may compute its taxable income with respect to any pool opened prior to March 1, 1978 , under the completed crop pool method of accounting if— the organization has computed its taxable income under such method for the 10 taxable years ending with its first taxable year beginning after December 31, 1976 , and with respect to the pool, the organization has entered into an agreement with the United States or any of its agencies which includes provisions to the effect that— the United States or such agency shall provide a loan to the organization with the products comprising the pool serving as collateral for such loan, the organization shall use an amount equal to the proceeds of such loan to make price support advances to eligible producers (as determined by the United States or such agency), to defray costs of handling, processing, and storing such products, or to pay all or part of any administrative costs associated with the price support program, an amount equal to the net proceeds (as determined under such agreement) from the sale or exchange of the products in the pool shall be used to repay such loan until such loan is repaid in full (or all the products in the pool are disposed of), and the net gains (as determined under such agreement) from the sale or exchange of such products shall be distributed to eligible producers, except to the extent that the United States or such agency permits otherwise. For purposes of this subsection, the term “completed crop pool method of accounting” means a method of accounting under which gain or loss is computed separately for each crop year pool in the year in which the last of the products in the pool are disposed of.

§ 1383 Computation of tax where cooperative redeems nonqualified written notices of allocation or nonqualified per-unit retain certificates

(a) General rule If, under section 1382(b)(2) or (4), or (c)(2)(B), a deduction is allowable to an organization for the taxable year for amounts paid in redemption of nonqualified written notices of allocation or nonqualified per-unit retain certificates, then the tax imposed by this chapter on such organization for the taxable year shall be the lesser of the following: the tax for the taxable year computed with such deduction; or an amount equal to— the tax for the taxable year computed without such deduction, minus the decrease in tax under this chapter for any prior taxable year (or years) which would result solely from treating such nonqualified written notices of allocation or nonqualified per-unit retain certificates as qualified written notices of allocation or qualified per-unit retain certificates (as the case may be).

(b) Special rules If the decrease in tax ascertained under subsection (a)(2)(B) exceeds the tax for the taxable year (computed without the deduction described in subsection (a)) such excess shall be considered to be a payment of tax on the last day prescribed by law for the payment of tax for the taxable year, and shall be refunded or credited in the same manner as if it were an overpayment for such taxable year. For purposes of determining the decrease in tax under subsection (a)(2)(B), the stated dollar amount of any nonqualified written notice of allocation or nonqualified per-unit retain certificate which is to be treated under such subsection as a qualified written notice of allocation or qualified per-unit retain certificate (as the case may be) shall be the amount paid in redemption of such written notice of allocation or per-unit retain certificate which is allowable as a deduction under section 1382(b)(2) or (4), or (c)(2)(B) for the taxable year. If the tax imposed by this chapter for the taxable year is the amount determined under subsection (a)(2), then the deduction described in subsection (a) shall not be taken into account for any purpose of this subtitle other than for purposes of this section.

§ 1385 Amounts includible in patron’s gross income

(a) General rule Except as otherwise provided in subsection (b), each person shall include in gross income— the amount of any patronage dividend which is paid in money, a qualified written notice of allocation, or other property (except a nonqualified written notice of allocation), and which is received by him during the taxable year from an organization described in section 1381(a), any amount, described in section 1382 (c)(2)(A) (relating to certain nonpatronage distributions by tax-exempt farmers’ cooperatives), which is paid in money, a qualified written notice of allocation, or other property (except a nonqualified written notice of allocation), and which is received by him during the taxable year from an organization described in section 1381(a)(1), and the amount of any per-unit retain allocation which is paid in qualified per-unit retain certificates and which is received by him during the taxable year from an organization described in section 1381(a).

(b) Exclusion from gross income Under regulations prescribed by the Secretary, the amount of any patronage dividend, and any amount received on the redemption, sale, or other disposition of a nonqualified written notice of allocation which was paid as a patronage dividend, shall not be included in gross income to the extent that such amount— is properly taken into account as an adjustment to basis of property, or is attributable to personal, living, or family items.

(c) Treatment of certain nonqualified written notices of allocation and certain nonqualified per-unit retain certificates This subsection shall apply to— any nonqualified written notice of allocation which— was paid as a patronage dividend, or was paid by an organization described in section 1381(a)(1) on a patronage basis with respect to earnings derived from business or sources described in section 1382(c)(2)(A), and any nonqualified per-unit retain certificate which was paid as a per-unit retain allocation. In the case of any nonqualified written notice of allocation or nonqualified per-unit retain certificate to which this subsection applies, for purposes of this chapter— the basis of such written notice of allocation or per-unit retain certificate in the hands of the patron to whom such written notice of allocation or per-unit retain certificate was paid shall be zero, the basis of such written notice of allocation or per-unit retain certificate which was acquired from a decedent shall be its basis in the hands of the decedent, and gain on the redemption, sale, or other disposition of such written notice of allocation or per-unit retain certificate by any person shall, to the extent that the stated dollar amount of such written notice of allocation or per-unit retain certificate exceeds its basis, be considered as ordinary income.

§ 1388 Definitions; special rules

(a) Patronage dividend For purposes of this subchapter, the term “patronage dividend” means an amount paid to a patron by an organization to which part I of this subchapter applies— on the basis of quantity or value of business done with or for such patron, under an obligation of such organization to pay such amount, which obligation existed before the organization received the amount so paid, and which is determined by reference to the net earnings of the organization from business done with or for its patrons. Such term does not include any amount paid to a patron to the extent that (A) such amount is out of earnings other than from business done with or for patrons, or (B) such amount is out of earnings from business done with or for other patrons to whom no amounts are paid, or to whom smaller amounts are paid, with respect to substantially identical transactions. For purposes of paragraph (3), net earnings shall not be reduced by amounts paid during the year as dividends on capital stock or other proprietary capital interests of the organization to the extent that the articles of incorporation or bylaws of such organization or other contract with patrons provide that such dividends are in addition to amounts otherwise payable to patrons which are derived from business done with or for patrons during the taxable year.

(b) Written notice of allocation For purposes of this subchapter, the term “written notice of allocation” means any capital stock, revolving fund certificate, retain certificate, certificate of indebtedness, letter of advice, or other written notice, which discloses to the recipient the stated dollar amount allocated to him by the organization and the portion thereof, if any, which constitutes a patronage dividend.

(c) Qualified written notice of allocation For purposes of this subchapter, the term “qualified written notice of allocation” means— a written notice of allocation which may be redeemed in cash at its stated dollar amount at any time within a period beginning on the date such written notice of allocation is paid and ending not earlier than 90 days from such date, but only if the distributee receives written notice of the right of redemption at the time he receives such written notice of allocation; and a written notice of allocation which the distributee has consented, in the manner provided in paragraph (2), to take into account at its stated dollar amount as provided in section 1385(a). Such term does not include any written notice of allocation which is paid as part of a patronage dividend or as part of a payment described in section 1382(c)(2)(A), unless 20 percent or more of the amount of such patronage dividend, or such payment, is paid in money or by qualified check. A distributee shall consent to take a written notice of allocation into account as provided in paragraph (1)(B) only by— making such consent in writing, obtaining or retaining membership in the organization after— such organization has adopted (after October 16, 1962 ) a bylaw providing that membership in the organization constitutes such consent, and he has received a written notification and copy of such bylaw, or if neither subparagraph (A) nor (B) applies, endorsing and cashing a qualified check, paid as a part of the patronage dividend or payment of which such written notice of allocation is also a part, on or before the 90th day after the close of the payment period for the taxable year of the organization for which such patronage dividend or payment is paid. Except as provided in subparagraph (B)— a consent described in paragraph (2) (A) shall be a consent with respect to all patronage of the distributee with the organization occurring (determined with the application of section 1382(e)) during the taxable year of the organization during which such consent is made and all subsequent taxable years of the organization; and a consent described in paragraph (2) (B) shall be a consent with respect to all patronage of the distributee with the organization occurring (determined without the application of section 1382(e)) after he received the notification and copy described in paragraph (2)(B)(ii). Any consent described in paragraph (2)(A) may be revoked (in writing) by the distributee at any time. Any such revocation shall be effective with respect to patronage occurring on or after the first day of the first taxable year of the organization beginning after the revocation is filed with such organization; except that in the case of a pooling arrangement described in section 1382(e), a revocation made by a distributee shall not be effective as to any pool with respect to which the distributee has been a patron before such revocation. Any consent described in paragraph (2)(B) shall not be effective with respect to any patronage occurring (determined without the application of section 1382(e)) after the distributee ceases to be a member of the organization or after the bylaws of the organization cease to contain the provision described in paragraph (2)(B)(i). For purposes of this subchapter, the term “qualified check” means only a check (or other instrument which is redeemable in money) which is paid as a part of a patronage dividend, or as a part of a payment described in section 1382(c)(2)(A), to a distributee who has not given consent as provided in paragraph (2)(A) or (B) with respect to such patronage dividend or payment, and on which there is clearly imprinted a statement that the endorsement and cashing of the check (or other instrument) constitutes the consent of the payee to include in his gross income, as provided in the Federal income tax laws, the stated dollar amount of the written notice of allocation which is a part of the patronage dividend or payment of which such qualified check is also a part. Such term does not include any check (or other instrument) which is paid as part of a patronage dividend or payment which does not include a written notice of allocation (other than a written notice of allocation described in paragraph (1)(A)).

(d) Nonqualified written notice of allocation For purposes of this subchapter, the term “nonqualified written notice of allocation” means a written notice of allocation which is not described in subsection (c) or a qualified check which is not cashed on or before the 90th day after the close of the payment period for the taxable year for which the distribution of which it is a part is paid.

(e) Determination of amount paid or received For purposes of this subchapter, in determining amounts paid or received— property (other than a written notice of allocation or a per-unit retain certificate) shall be taken into account at its fair market value, and a qualified written notice of allocation or qualified per-unit retain certificate shall be taken into account at its stated dollar amount.

(f) Per-unit retain allocation For purposes of this subchapter, the term “per-unit retain allocation” means any allocation, by an organization to which part I of this subchapter applies, to a patron with respect to products marketed for him, the amount of which is fixed without reference to the net earnings of the organization pursuant to an agreement between the organization and the patron.

(g) Per-unit retain certificate For purposes of this subchapter, the term “per-unit retain certificate” means any written notice which discloses to the recipient the stated dollar amount of a per-unit retain allocation to him by the organization.

(h) Qualified per-unit retain certificate For purposes of this subchapter, the term “qualified per-unit retain certificate” means any per-unit retain certificate which the distributee has agreed, in the manner provided in paragraph (2), to take into account at its stated dollar amount as provided in section 1385(a). A distributee shall agree to take a per-unit retain certificate into account as provided in paragraph (1) only by— making such agreement in writing, or obtaining or retaining membership in the organization after— such organization has adopted (after November 13, 1966 ) a bylaw providing that membership in the organization constitutes such agreement, and he has received a written notification and copy of such bylaw. Except as provided in subparagraph (B)— an agreement described in paragraph (2)(A) shall be an agreement with respect to all products delivered by the distributee to the organization during the taxable year of the organization during which such agreement is made and all subsequent taxable years of the organization; and an agreement described in paragraph (2)(B) shall be an agreement with respect to all products delivered by the distributee to the organization after he received the notification and copy described in paragraph (2)(B)(ii). Any agreement described in paragraph (2)(A) may be revoked (in writing) by the distributee at any time. Any such revocation shall be effective with respect to products delivered by the distributee on or after the first day of the first taxable year of the organization beginning after the revocation is filed with the organization; except that in the case of a pooling arrangement described in section 1382(e) a revocation made by a distributee shall not be effective as to any products which were delivered to the organization by the distributee before such revocation. Any agreement described in paragraph (2)(B) shall not be effective with respect to any products delivered after the distributee ceases to be a member of the organization or after the bylaws of the organization cease to contain the provision described in paragraph (2)(B)(i).

(i) Nonqualified per-unit retain certificate For purposes of this subchapter, the term “nonqualified per-unit retain certificate” means a per-unit retain certificate which is not described in subsection (h).

(j) Special rules for the netting of gains and losses by cooperatives For purposes of this subchapter, in the case of any organization to which part I of this subchapter applies— The net earnings of such organization may, at its option, be determined by offsetting patronage losses (including any patronage loss carried to such year) which are attributable to 1 or more allocation units (whether such units are functional, divisional, departmental, geographic, or otherwise) against patronage earnings of 1 or more other such allocation units. If such an organization acquires the assets of another such organization in a transaction described in section 381(a), the acquiring organization may, in computing its net earnings for taxable years ending after the date of acquisition, offset losses of 1 or more allocation units of the acquiring or acquired organization against earnings of the acquired or acquiring organization, respectively, but only to the extent— such earnings are properly allocable to periods after the date of acquisition, and such earnings could have been offset by such losses if such earnings and losses had been derived from allocation units of the same organization. In the case of any organization which exercises its option under paragraph (1) for any taxable year, such organization shall, on or before the 15th day of the 9th month following the close of such taxable year, provide to its patrons a written notice which— states that the organization has offset earnings and losses from 1 or more of its allocation units and that such offset may have affected the amount which is being distributed to its patrons, states generally the identity of the offsetting allocation units, and states briefly what rights, if any, its patrons may have to additional financial information of such organization under terms of its charter, articles of incorporation, or bylaws, or under any provision of law. An organization may exclude from the information required to be provided under clause (ii) of subparagraph (A) any detailed or specific data regarding earnings or losses of such units which such organization determines would disclose commercially sensitive information which— could result in a competitive disadvantage to such organization, or could create a competitive advantage to the benefit of a competitor of such organization. If the Secretary determines that an organization failed to provide sufficient notice under this paragraph— the Secretary shall notify such organization, and such organization shall, upon receipt of such notification, provide to its patrons a revised notice meeting the requirements of this paragraph. Any such failure shall not affect the treatment of the organization under any provision of this subchapter or section 521. For purposes of this subsection, the terms “patronage earnings” and “patronage losses” means 1 earnings and losses, respectively, which are derived from business done with or for patrons of the organization.

(k) Cooperative marketing includes value-added processing involving animals For purposes of section 521 and this subchapter, the marketing of the products of members or other producers shall include the feeding of such products to cattle, hogs, fish, chickens, or other animals and the sale of the resulting animals or animal products.

§ 1391 Designation procedure

(a) In general From among the areas nominated for designation under this section, the appropriate Secretaries may designate empowerment zones and enterprise communities.

(b) Number of designations The appropriate Secretaries may designate in the aggregate 95 nominated areas as enterprise communities under this section, subject to the availability of eligible nominated areas. Of that number, not more than 65 may be designated in urban areas and not more than 30 may be designated in rural areas. The appropriate Secretaries may designate in the aggregate 11 nominated areas as empowerment zones under this section, subject to the availability of eligible nominated areas. Of that number, not more than 8 may be designated in urban areas and not more than 3 may be designated in rural areas. If 8 empowerment zones are designated in urban areas, no less than 1 shall be designated in an urban area the most populous city of which has a population of 500,000 or less and no less than 1 shall be a nominated area which includes areas in 2 States and which has a population of 50,000 or less. The Secretary of Housing and Urban Development shall designate empowerment zones located in urban areas in such a manner that the aggregate population of all such zones does not exceed 1,000,000.

(c) Period designations may be made A designation may be made under subsection (a) only after 1993 and before 1996.

(d) Period for which designation is in effect Any designation under this section shall remain in effect during the period beginning on the date of the designation and ending on the earliest of— in the case of an empowerment zone, December 31, 2025 , or in the case of an enterprise community, the close of the 10th calendar year beginning on or after such date of designation, the termination date designated by the State and local governments as provided for in their nomination, or the date the appropriate Secretary revokes the designation. The appropriate Secretary may revoke the designation under this section of an area if such Secretary determines that the local government or the State in which it is located— has modified the boundaries of the area, or is not complying substantially with, or fails to make progress in achieving the benchmarks set forth in, the strategic plan under subsection (f)(2).

(e) Limitations on designations No area may be designated under this section unless— the area is nominated by 1 or more local governments and the State or States in which it is located for designation under this section, such State or States and the local governments have the authority— to nominate the area for designation under this section, and to provide the assurances described in paragraph (3), such State or States and the local governments provide written assurances satisfactory to the appropriate Secretary that the strategic plan described in the application under subsection (f)(2) for such area will be implemented, the appropriate Secretary determines that any information furnished is reasonably accurate, and such State or States and local governments certify that no portion of the area nominated is already included in an empowerment zone or in an enterprise community or in an area otherwise nominated to be designated under this section.

(f) Application No area may be designated under this section unless the application for such designation— demonstrates that the nominated area satisfies the eligibility criteria described in section 1392, includes a strategic plan for accomplishing the purposes of this subchapter that— describes the coordinated economic, human, community, and physical development plan and related activities proposed for the nominated area, describes the process by which the affected community is a full partner in the process of developing and implementing the plan and the extent to which local institutions and organizations have contributed to the planning process, identifies the amount of State, local, and private resources that will be available in the nominated area and the private/public partnerships to be used, which may include participation by, and cooperation with, universities, medical centers, and other private and public entities, identifies the funding requested under any Federal program in support of the proposed economic, human, community, and physical development and related activities, identifies baselines, methods, and benchmarks for measuring the success of carrying out the strategic plan, including the extent to which poor persons and families will be empowered to become economically self-sufficient, and does not include any action to assist any establishment in relocating from one area outside the nominated area to the nominated area, except that assistance for the expansion of an existing business entity through the establishment of a new branch, affiliate, or subsidiary is permitted if— the establishment of the new branch, affiliate, or subsidiary will not result in a decrease in employment in the area of original location or in any other area where the existing business entity conducts business operations, and there is no reason to believe that the new branch, affiliate, or subsidiary is being established with the intention of closing down the operations of the existing business entity in the area of its original location or in any other area where the existing business entity conducts business operation, and includes such other information as may be required by the appropriate Secretary.

(g) Additional designations permitted In addition to the areas designated under subsection (a), the appropriate Secretaries may designate in the aggregate an additional 20 nominated areas as empowerment zones under this section, subject to the availability of eligible nominated areas. Of that number, not more than 15 may be designated in urban areas and not more than 5 may be designated in rural areas. A designation may be made under this subsection after the date of the enactment of this subsection and before January 1, 1999 . A nominated area shall be eligible for designation under this subsection only if the poverty rate for each population census tract within the nominated area is not less than 20 percent and the poverty rate for at least 90 percent of the population census tracts within the nominated area is not less than 25 percent. A population census tract with a population of less than 2,000 shall be treated as having a poverty rate of not less than 25 percent if— more than 75 percent of such tract is zoned for commercial or industrial use, and such tract is contiguous to 1 or more other population census tracts which have a poverty rate of not less than 25 percent (determined without regard to this clause). Clause (i) shall not apply to up to 3 noncontiguous parcels in a nominated area which may be developed for commercial or industrial purposes. The aggregate area of noncontiguous parcels to which the preceding sentence applies with respect to any nominated area shall not exceed 2,000 acres. Section 1392(a)(4) (and so much of paragraphs (1) and (2) of section 1392(b) as relate to section 1392(a)(4)) shall not apply to an area nominated for designation under this subsection. The Secretary of Agriculture may designate not more than 1 empowerment zone in a rural area without regard to clause (i) if such area satisfies emigration criteria specified by the Secretary of Agriculture. The parcels described in subparagraph (A)(iii) shall not be taken into account in determining whether the requirement of subparagraph (A) or (B) of section 1392(a)(3) is met. If a population census tract (or equivalent division under section 1392(b)(4)) in a rural area exceeds 1,000 square miles or includes a substantial amount of land owned by the Federal, State, or local government, the nominated area may exclude such excess square mileage or governmentally owned land and the exclusion of that area will not be treated as violating the continuous boundary requirement of section 1392(a)(3)(B). The aggregate population limitation under the last sentence of subsection (b)(2) shall not apply to a designation under paragraph (1). Subsection (e)(5) shall not apply to any enterprise community designated under subsection (a) that is also nominated for designation under this subsection. Section 1393(a)(4) shall not apply to an area nominated for designation under this subsection. An area in an Indian reservation shall be treated as nominated by a State and a local government if it is nominated by the reservation governing body (as determined by the Secretary of the Interior).

(h) Additional designations permitted In addition to the areas designated under subsections (a) and (g), the appropriate Secretaries may designate in the aggregate an additional 9 nominated areas as empowerment zones under this section, subject to the availability of eligible nominated areas. Of that number, not more than seven may be designated in urban areas and not more than 2 may be designated in rural areas. A designation may be made under this subsection after the date of the enactment of this subsection and before January 1, 2002 . The rules of subsection (g)(3) shall apply to designations under this subsection. The number of areas which may be designated as empowerment zones under this subsection shall be increased by 1 for each area which ceases to be an empowerment zone by reason of section 1400E(e). 1 Each additional area designated by reason of the preceding sentence shall have the same urban or rural character as the area it is replacing.

§ 1392 Eligibility criteria

(a) In general A nominated area shall be eligible for designation under section 1391 only if it meets the following criteria: The nominated area has a maximum population of— in the case of an urban area, the lesser of— 200,000, or the greater of 50,000 or 10 percent of the population of the most populous city located within the nominated area, and in the case of a rural area, 30,000. The nominated area is one of pervasive poverty, unemployment, and general distress. The nominated area— does not exceed 20 square miles if an urban area or 1,000 square miles if a rural area, has a boundary which is continuous, or, except in the case of a rural area located in more than 1 State, consists of not more than 3 noncontiguous parcels, in the case of an urban area, is located entirely within no more than 2 contiguous States, and in the case of a rural area, is located entirely within no more than 3 contiguous States, and does not include any portion of a central business district (as such term is used for purposes of the most recent Census of Retail Trade) unless the poverty rate for each population census tract in such district is not less than 35 percent (30 percent in the case of an enterprise community). The poverty rate— for each population census tract within the nominated area is not less than 20 percent, for at least 90 percent of the population census tracts within the nominated area is not less than 25 percent, and for at least 50 percent of the population census tracts within the nominated area is not less than 35 percent.

(b) Special rules relating to determination of poverty rate For purposes of subsection (a)(4)— In the case of a population census tract with no population— such tract shall be treated as having a poverty rate which meets the requirements of subparagraphs (A) and (B) of subsection (a)(4), but such tract shall be treated as having a zero poverty rate for purposes of applying subparagraph (C) thereof. A population census tract with a population of less than 2,000 shall be treated as having a poverty rate which meets the requirements of subparagraphs (A) and (B) of subsection (a)(4) if more than 75 percent of such tract is zoned for commercial or industrial use. In determining whether a nominated area is eligible for designation as an enterprise community, the appropriate Secretary may, where necessary to carry out the purposes of this subchapter, reduce by 5 percentage points one of the following thresholds for not more than 10 percent of the population census tracts (or, if fewer, 5 population census tracts) in the nominated area: The 20 percent threshold in subsection (a)(4)(A). The 25 percent threshold in subsection (a)(4)(B). The 35 percent threshold in subsection (a)(4)(C). If the appropriate Secretary elects to reduce the threshold under subparagraph (C), such Secretary may (in lieu of applying the preceding sentence) reduce by 10 percentage points the threshold under subparagraph (C) for 3 population census tracts. A nominated area may not include a noncontiguous parcel unless such parcel separately meets (subject to paragraphs (1) and (2)) the criteria set forth in subsection (a)(4). In the case of an area which is not tracted for population census tracts, the equivalent county divisions (as defined by the Bureau of the Census for purposes of defining poverty areas) shall be used for purposes of determining poverty rates.

(c) Factors to consider From among the nominated areas eligible for designation under section 1391 by the appropriate Secretary, such appropriate Secretary shall make designations of empowerment zones and enterprise communities on the basis of— the effectiveness of the strategic plan submitted pursuant to section 1391(f)(2) and the assurances made pursuant to section 1391(e)(3), and criteria specified by the appropriate Secretary.

(d) Special eligibility for nominated areas located in Alaska or Hawaii A nominated area in Alaska or Hawaii shall be treated as meeting the requirements of paragraphs (2), (3), and (4) of subsection (a) if for each census tract or block group within such area 20 percent or more of the families have income which is 50 percent or less of the statewide median family income (as determined under section 143).

§ 1393 Definitions and special rules

(a) In general For purposes of this subchapter— The term “appropriate Secretary” means— the Secretary of Housing and Urban Development in the case of any nominated area which is located in an urban area, and the Secretary of Agriculture in the case of any nominated area which is located in a rural area. The term “rural area” means any area which is— outside of a metropolitan statistical area (within the meaning of section 143(k)(2)(B)), or determined by the Secretary of Agriculture, after consultation with the Secretary of Commerce, to be a rural area. The term “urban area” means an area which is not a rural area. No empowerment zone or enterprise community may include any area within an Indian reservation. The term “Indian reservation” has the meaning given such term by section 168(j)(6). The term “local government” means— any county, city, town, township, parish, village, or other general purpose political subdivision of a State, and any combination of political subdivisions described in subparagraph (A) recognized by the appropriate Secretary. The term “nominated area” means an area which is nominated by 1 or more local governments and the State or States in which it is located for designation under section 1391. If more than 1 State or local government seeks to nominate an area under this part, any reference to, or requirement of, this subchapter shall apply to all such governments. An area shall be treated as nominated by a State and a local government if it is nominated by an economic development corporation chartered by the State. Population and poverty rate shall be determined by the most recent decennial census data available.

(b) Empowerment zone; enterprise community For purposes of this title, the terms “empowerment zone” and “enterprise community” mean areas designated as such under section 1391.

§ 1394 Tax-exempt enterprise zone facility bonds

(a) In general For purposes of part IV of subchapter B of this chapter (relating to tax exemption requirements for State and local bonds), the term “exempt facility bond” includes any bond issued as part of an issue 95 percent or more of the net proceeds (as defined in section 150(a)(3)) of which are to be used to provide any enterprise zone facility.

(b) Enterprise zone facility For purposes of this section— The term “enterprise zone facility” means any qualified zone property the principal user of which is an enterprise zone business, and any land which is functionally related and subordinate to such property. The term “qualified zone property” has the meaning given such term by section 1397D; except that— the references to empowerment zones shall be treated as including references to enterprise communities, and section 1397D(a)(2) shall be applied by substituting “an amount equal to 15 percent of the adjusted basis” for “an amount equal to the adjusted basis”. Except as modified in this paragraph, the term “enterprise zone business” has the meaning given such term by section 1397C. In applying section 1397C for purposes of this section— Except as provided in subclause (II), references in section 1397C to empowerment zones shall be treated as including references to enterprise communities. For purposes of subsections (b)(6) and (c)(5) of section 1397C, an employee shall be treated as a resident of an empowerment zone if such employee is a resident of an empowerment zone, an enterprise community, or a qualified low-income community within an applicable nominating jurisdiction. A business shall not fail to be treated as an enterprise zone business during the startup period if— as of the beginning of the startup period, it is reasonably expected that such business will be an enterprise zone business (as defined in section 1397C as modified by this paragraph) at the end of such period, and such business makes bona fide efforts to be such a business. A business shall not fail to be treated as an enterprise zone business for any taxable year beginning after the testing period by reason of failing to meet any requirement of subsection (b) or (c) of section 1397C if at least 35 percent of the employees of such business for such year are residents of an empowerment zone, an enterprise community, or a qualified low-income community within an applicable nominating jurisdiction. The preceding sentence shall not apply to any business which is not a qualified business by reason of paragraph (1), (4), or (5) of section 1397C(d). For purposes of subparagraph (B)— The term “qualified low-income community” means any population census tract if— the poverty rate for such tract is at least 20 percent, or the median family income for such tract does not exceed 80 percent of statewide median family income (or, in the case of a tract located within a metropolitan area, metropolitan area median family income if greater). Subclause (II) shall be applied using possessionwide median family income in the case of census tracts located within a possession of the United States. The Secretary shall prescribe regulations under which 1 or more targeted populations (within the meaning of section 103(20) of the Riegle Community Development and Regulatory Improvement Act of 1994) may be treated as qualified low-income communities. In the case of an area which is not tracted for population census tracts, the equivalent county divisions (as defined by the Bureau of the Census for purposes of defining poverty areas) shall be used for purposes of determining poverty rates and median family income. In the case of a population census tract located within a high migration rural county, clause (i)(II) shall be applied to areas not located within a metropolitan area by substituting “85 percent” for “80 percent”. For purposes of this clause, the term “high migration rural county” means any county which, during the 20-year period ending with the year in which the most recent census was conducted, has a net out-migration of inhabitants from the county of at least 10 percent of the population of the county at the beginning of such period. For purposes of subparagraph (B)— The term “startup period” means, with respect to any property being provided for any business, the period before the first taxable year beginning more than 2 years after the later of— the date of issuance of the issue providing such property, or the date such property is first placed in service after such issuance (or, if earlier, the date which is 3 years after the date described in subclause (I)). The term “testing period” means the first 3 taxable years beginning after the startup period. The term “applicable nominating jurisdiction” means, with respect to any empowerment zone or enterprise community, any local government that nominated such community for designation under section 1391. The term “enterprise zone business” includes any trades or businesses which would qualify as an enterprise zone business (determined after the modifications of subparagraph (B)) if such trades or businesses were separately incorporated.

(c) Limitation on amount of bonds Subsection (a) shall not apply to any issue if the aggregate amount of outstanding enterprise zone facility bonds allocable to any person (taking into account such issue) exceeds— $3, 000, 000 w i t h res p ec tt o an y 1 e m p o w er m e n t zo n eore n t er p r i seco mm u ni t y, or$ 20,000,000 with respect to all empowerment zones and enterprise communities. For purposes of paragraph (1), the aggregate amount of outstanding enterprise zone facility bonds allocable to any person shall be determined under rules similar to the rules of section 144(a)(10), taking into account only bonds to which subsection (a) applies.

(d) Acquisition of land and existing property permitted The requirements of sections 147(c)(1)(A) and 147(d) shall not apply to any bond described in subsection (a).

(e) Penalty for ceasing to meet requirements An issue which fails to meet 1 or more of the requirements of subsections (a) and (b) shall be treated as meeting such requirements if— the issuer and any principal user in good faith attempted to meet such requirements, and any failure to meet such requirements is corrected within a reasonable period after such failure is first discovered. No deduction shall be allowed under this chapter for interest on any financing provided from any bond to which subsection (a) applies with respect to any facility to the extent such interest accrues during the period beginning on the first day of the calendar year which includes the date on which— substantially all of the facility with respect to which the financing was provided ceases to be used in an empowerment zone or enterprise community, or the principal user of such facility ceases to be an enterprise zone business (as defined in subsection (b)). Paragraphs (1) and (2) shall not apply solely by reason of the termination or revocation of a designation as an empowerment zone or an enterprise community. Paragraphs (1) and (2) shall not apply to any cessation resulting from bankruptcy.

(f) Bonds for empowerment zones In the case of an empowerment zone facility bond— such bond shall not be treated as a private activity bond for purposes of section 146, and subsection (c) of this section shall not apply. Paragraph (1) shall apply to an empowerment zone facility bond only if such bond is designated for purposes of this subsection by the local government which nominated the area to which such bond relates. The aggregate face amount of bonds which may be designated under subparagraph (A) with respect to any empowerment zone shall not exceed— $60, 000, 000 i f s u c h zo n e i s ina r u r a l a re a,$ 130,000,000 if such zone is in an urban area and the zone has a population of less than 100,000, and $230,000,000 if such zone is in an urban area and the zone has a population of at least 100,000. Bonds to which paragraph (1) applies shall not be taken into account in applying the limitation of subsection (c) to other bonds. In the case of a refunding (or series of refundings) of a bond designated under this paragraph, the refunding obligation shall be treated as designated under this paragraph (and shall not be taken into account in applying subparagraph (B)) if— the amount of the refunding bond does not exceed the outstanding amount of the refunded bond, and the refunded bond is redeemed not later than 90 days after the date of issuance of the refunding bond. For purposes of this subsection, the term “empowerment zone facility bond” means any bond which would be described in subsection (a) if— in the case of obligations issued before January 1, 2002 , only empowerment zones designated under section 1391(g) were taken into account under sections 1397C and 1397D, and in the case of obligations issued after December 31, 2001 , all empowerment zones (other than the District of Columbia Enterprise Zone) were taken into account under sections 1397C and 1397D.

§ 1396 Empowerment zone employment credit

(a) Amount of credit For purposes of section 38, the amount of the empowerment zone employment credit determined under this section with respect to any employer for any taxable year is the applicable percentage of the qualified zone wages paid or incurred during the calendar year which ends with or within such taxable year.

(b) Applicable percentage For purposes of this section, the applicable percentage is 20 percent.

(c) Qualified zone wages For purposes of this section, the term “qualified zone wages” means any wages paid or incurred by an employer for services performed by an employee while such employee is a qualified zone employee. With respect to each qualified zone employee, the amount of qualified zone wages which may be taken into account for a calendar year shall not exceed $15, 000. T h e t er m “ q u a l i f i e d zo n e w a g es ” s ha ll n o t in c l u d e w a g es t ak e nin t o a cco u n t in d e t er minin g t h ecre d i t u n d ersec t i o n 51. T h e$ 15,000 amount in paragraph (2) shall be reduced for any calendar year by the amount of wages paid or incurred during such year which are taken into account in determining the credit under section 51.

(d) Qualified zone employee For purposes of this section— Except as otherwise provided in this subsection, the term “qualified zone employee” means, with respect to any period, any employee of an employer if— substantially all of the services performed during such period by such employee for such employer are performed within an empowerment zone in a trade or business of the employer, and the principal place of abode of such employee while performing such services is within such empowerment zone. The term “qualified zone employee” shall not include— any individual described in subparagraph (A), (B), or (C) of section 51(i)(1), any 5-percent owner (as defined in section 416(i)(1)(B)), any individual employed by the employer for less than 90 days, any individual employed by the employer at any facility described in section 144(c)(6)(B), and any individual employed by the employer in a trade or business the principal activity of which is farming (within the meaning of subparagraph (A) or (B) of section 2032A(e)(5)), but only if, as of the close of the taxable year, the sum of— the aggregate unadjusted bases (or, if greater, the fair market value) of the assets owned by the employer which are used in such a trade or business, and the aggregate value of assets leased by the employer which are used in such a trade or business (as determined under regulations prescribed by the Secretary), exceeds $500,000. Paragraph (2)(C) shall not apply to— a termination of employment of an individual who before the close of the period referred to in paragraph (2)(C) becomes disabled to perform the services of such employment unless such disability is removed before the close of such period and the taxpayer fails to offer reemployment to such individual, or a termination of employment of an individual if it is determined under the applicable State unemployment compensation law that the termination was due to the misconduct of such individual. For purposes of paragraph (2)(C), the employment relationship between the taxpayer and an employee shall not be treated as terminated— by a transaction to which section 381(a) applies if the employee continues to be employed by the acquiring corporation, or by reason of a mere change in the form of conducting the trade or business of the taxpayer if the employee continues to be employed in such trade or business and the taxpayer retains a substantial interest in such trade or business.

§ 1397 Other definitions and special rules

(a) Wages For purposes of this subpart— The term “wages” has the same meaning as when used in section 51. The following amounts shall be treated as wages paid to an employee: Any amount paid or incurred by an employer which is excludable from the gross income of an employee under section 127, but only to the extent paid or incurred to a person not related to the employer. In the case of an employee who has not attained the age of 19, any amount paid or incurred by an employer for any youth training program operated by such employer in conjunction with local education officials. A person is related to any other person if the person bears a relationship to such other person specified in section 267(b) or 707(b)(1), or such person and such other person are engaged in trades or businesses under common control (within the meaning of subsections (a) and (b) of section 52). For purposes of the preceding sentence, in applying section 267(b) or 707(b)(1), “10 percent” shall be substituted for “50 percent”.

(b) Controlled groups For purposes of this subpart— all employers treated as a single employer under subsection (a) or (b) of section 52 shall be treated as a single employer for purposes of this subpart, and the credit (if any) determined under section 1396 with respect to each such employer shall be its proportionate share of the wages giving rise to such credit.

(c) Certain other rules made applicable For purposes of this subpart, rules similar to the rules of section 51(k) and subsections (c), (d), and (e) of section 52 shall apply.

§ 1397A Increase in expensing under section 179

(a) General rule In the case of an enterprise zone business, for purposes of section 179— the limitation under section 179(b)(1) shall be increased by the lesser of— $35,000, or the cost of section 179 property which is qualified zone property placed in service during the taxable year, and the amount taken into account under section 179(b)(2) with respect to any section 179 property which is qualified zone property shall be 50 percent of the cost thereof.

(b) Recapture Rules similar to the rules under section 179(d)(10) shall apply with respect to any qualified zone property which ceases to be used in an empowerment zone by an enterprise zone business.

(c) Termination This section shall not apply to any property placed in service in taxable years beginning after December 31, 2020 .

§ 1397B Nonrecognition of gain on rollover of empowerment zone investments

(a) Nonrecognition of gain In the case of any sale of a qualified empowerment zone asset held by the taxpayer for more than 1 year and with respect to which such taxpayer elects the application of this section, gain from such sale shall be recognized only to the extent that the amount realized on such sale exceeds— the cost of any qualified empowerment zone asset (with respect to the same zone as the asset sold) purchased by the taxpayer during the 60-day period beginning on the date of such sale, reduced by any portion of such cost previously taken into account under this section.

(b) Definitions and special rules For purposes of this section— The term “qualified empowerment zone asset” means any property which would be a qualified community asset (as defined in section 1400F) 1 if in section 1400F 1 — references to empowerment zones were substituted for references to renewal communities, references to enterprise zone businesses (as defined in section 1397C) were substituted for references to renewal community businesses, the date of the enactment of this paragraph were substituted for “ December 31, 2001 ” each place it appears, and the day after the date set forth in section 1391(d)(1)(A)(i) were substituted for “ January 1, 2010 ” each place it appears. Any reference in this paragraph to section 1400F shall be treated as reference to such section before its repeal. This section shall not apply to— any gain which is treated as ordinary income for purposes of this subtitle, and any gain which is attributable to real property, or an intangible asset, which is not an integral part of an enterprise zone business. A taxpayer shall be treated as having purchased any property if, but for paragraph (4), the unadjusted basis of such property in the hands of the taxpayer would be its cost (within the meaning of section 1012). If gain from any sale is not recognized by reason of subsection (a), such gain shall be applied to reduce (in the order acquired) the basis for determining gain or loss of any qualified empowerment zone asset which is purchased by the taxpayer during the 60-day period described in subsection (a). This paragraph shall not apply for purposes of section 1202. For purposes of determining whether the nonrecognition of gain under subsection (a) applies to any qualified empowerment zone asset which is sold, the taxpayer’s holding period for such asset and the asset referred to in subsection (a)(1) shall be determined without regard to section 1223.

(c) Termination This section shall not apply to sales in taxable years beginning after December 31, 2020 .

§ 1397C Enterprise zone business defined

(a) In general For purposes of this part, the term “enterprise zone business” means— any qualified business entity, and any qualified proprietorship.

(b) Qualified business entity For purposes of this section, the term “qualified business entity” means, with respect to any taxable year, any corporation or partnership if for such year— every trade or business of such entity is the active conduct of a qualified business within an empowerment zone, at least 50 percent of the total gross income of such entity is derived from the active conduct of such business, a substantial portion of the use of the tangible property of such entity (whether owned or leased) is within an empowerment zone, a substantial portion of the intangible property of such entity is used in the active conduct of any such business, a substantial portion of the services performed for such entity by its employees are performed in an empowerment zone, at least 35 percent of its employees are residents of an empowerment zone, less than 5 percent of the average of the aggregate unadjusted bases of the property of such entity is attributable to collectibles (as defined in section 408(m)(2)) other than collectibles that are held primarily for sale to customers in the ordinary course of such business, and less than 5 percent of the average of the aggregate unadjusted bases of the property of such entity is attributable to nonqualified financial property.

(c) Qualified proprietorship For purposes of this section, the term “qualified proprietorship” means, with respect to any taxable year, any qualified business carried on by an individual as a proprietorship if for such year— at least 50 percent of the total gross income of such individual from such business is derived from the active conduct of such business in an empowerment zone, a substantial portion of the use of the tangible property of such individual in such business (whether owned or leased) is within an empowerment zone, a substantial portion of the intangible property of such business is used in the active conduct of such business, a substantial portion of the services performed for such individual in such business by employees of such business are performed in an empowerment zone, at least 35 percent of such employees are residents of an empowerment zone, less than 5 percent of the average of the aggregate unadjusted bases of the property of such individual which is used in such business is attributable to collectibles (as defined in section 408(m)(2)) other than collectibles that are held primarily for sale to customers in the ordinary course of such business, and less than 5 percent of the average of the aggregate unadjusted bases of the property of such individual which is used in such business is attributable to nonqualified financial property. For purposes of this subsection, the term “employee” includes the proprietor.

(d) Qualified business For purposes of this section— Except as otherwise provided in this subsection, the term “qualified business” means any trade or business. The rental to others of real property located in an empowerment zone shall be treated as a qualified business if and only if— the property is not residential rental property (as defined in section 168(e)(2)), and at least 50 percent of the gross rental income from the real property is from enterprise zone businesses. For purposes of subparagraph (B), the lessor of the property may rely on a lessee’s certification that such lessee is an enterprise zone business. The rental to others of tangible personal property shall be treated as a qualified business if and only if at least 50 percent of the rental of such property is by enterprise zone businesses or by residents of an empowerment zone. The term “qualified business” shall not include any trade or business consisting predominantly of the development or holding of intangibles for sale or license. The term “qualified business” shall not include— any trade or business consisting of the operation of any facility described in section 144(c)(6)(B), and any trade or business the principal activity of which is farming (within the meaning of subparagraph (A) or (B) of section 2032A(e)(5)), but only if, as of the close of the taxable year, the sum of— the aggregate unadjusted bases (or, if greater, the fair market value) of the assets owned by the taxpayer which are used in such a trade or business, and the aggregate value of assets leased by the taxpayer which are used in such a trade or business, exceeds $500,000. For purposes of subparagraph (B), rules similar to the rules of section 1397(b) shall apply.

(e) Nonqualified financial property For purposes of this section, the term “nonqualified financial property” means debt, stock, partnership interests, options, futures contracts, forward contracts, warrants, notional principal contracts, annuities, and other similar property specified in regulations; except that such term shall not include— reasonable amounts of working capital held in cash, cash equivalents, or debt instruments with a term of 18 months or less, or debt instruments described in section 1221(a)(4).

(f) Treatment of businesses straddling census tract lines For purposes of this section, if— a business entity or proprietorship uses real property located within an empowerment zone, the business entity or proprietorship also uses real property located outside the empowerment zone, the amount of real property described in paragraph (1) is substantial compared to the amount of real property described in paragraph (2), and the real property described in paragraph (2) is contiguous to part or all of the real property described in paragraph (1), then all the services performed by employees, all business activities, all tangible property, and all intangible property of the business entity or proprietorship that occur in or is located on the real property described in paragraphs (1) and (2) shall be treated as occurring or situated in an empowerment zone.

§ 1397D Qualified zone property defined

(a) General rule For purposes of this part— The term “qualified zone property” means any property to which section 168 applies (or would apply but for section 179) if— such property was acquired by the taxpayer by purchase (as defined in section 179(d)(2)) after the date on which the designation of the empowerment zone took effect, the original use of which in an empowerment zone commences with the taxpayer, and substantially all of the use of which is in an empowerment zone and is in the active conduct of a qualified business by the taxpayer in such zone. In the case of any property which is substantially renovated by the taxpayer, the requirements of subparagraphs (A) and (B) of paragraph (1) shall be treated as satisfied. For purposes of the preceding sentence, property shall be treated as substantially renovated by the taxpayer if, during any 24-month period beginning after the date on which the designation of the empowerment zone took effect, additions to basis with respect to such property in the hands of the taxpayer exceed the greater of (i) an amount equal to the adjusted basis at the beginning of such 24-month period in the hands of the taxpayer, or (ii) $5,000.

(b) Special rules for sale-leasebacks For purposes of subsection (a)(1)(B), if property is sold and leased back by the taxpayer within 3 months after the date such property was originally placed in service, such property shall be treated as originally placed in service not earlier than the date on which such property is used under the leaseback.

[§ 1397E Repealed. Pub. L. 115–97, title I, § 13404(c)(1), Dec. 22, 2017, 131 Stat. 2138]

§ 1397F Regulations

The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of parts II and III, including— regulations limiting the benefit of parts II and III in circumstances where such benefits, in combination with benefits provided under other Federal programs, would result in an activity being 100 percent or more subsidized by the Federal Government, regulations preventing abuse of the provisions of parts II and III, and regulations dealing with inadvertent failures of entities to be enterprise zone businesses. (Added Pub. L. 103–66, title XIII, § 13301(a) , Aug. 10, 1993 , 107 Stat. 555 , § 1397D; renumbered § 1397F, Pub. L. 105–34, title II, § 226(a) , Aug. 5, 1997 , 111 Stat. 820 ; amended Pub. L. 105–206, title VI, § 6004(g)(1) , July 22, 1998 , 112 Stat. 796 .)

§ 1398 Rules relating to individuals’ title 11 cases

(a) Cases to which section applies Except as provided in subsection (b), this section shall apply to any case under chapter 7 (relating to liquidations) or chapter 11 (relating to reorganizations) of title 11 of the United States Code in which the debtor is an individual.

(b) Exceptions where case is dismissed, etc. This section shall not apply if the case under chapter 7 or 11 of title 11 of the United States Code is dismissed. For purposes of subsection (a), a partnership shall not be treated as an individual, but the interest in a partnership of a debtor who is an individual shall be taken into account under this section in the same manner as any other interest of the debtor.

(c) Computation and payment of tax; basic standard deduction Except as otherwise provided in this section, the taxable income of the estate shall be computed in the same manner as for an individual. The tax shall be computed on such taxable income and shall be paid by the trustee. The tax on the taxable income of the estate shall be determined under subsection (d) of section 1. In the case of an estate which does not itemize deductions, the basic standard deduction for the estate for the taxable year shall be the same as for a married individual filing a separate return for such year.

(d) Taxable year of debtors Except as provided in paragraph (2), the taxable year of the debtor shall be determined without regard to the case under title 11 of the United States Code to which this section applies. Notwithstanding section 442, the debtor may (without the approval of the Secretary) elect to treat the debtor’s taxable year which includes the commencement date as 2 taxable years— the first of which ends on the day before the commencement date, and the second of which begins on the commencement date. In the case of a married individual (within the meaning of section 7703), the spouse may elect to have the debtor’s election under subparagraph (A) also apply to the spouse, but only if the debtor and the spouse file a joint return for the taxable year referred to in subparagraph (A)(i). No election may be made under subparagraph (A) by a debtor who has no assets other than property which the debtor may treat as exempt property under section 522 of title 11 of the United States Code. An election under subparagraph (A) or (B) may be made only on or before the due date for filing the return for the taxable year referred to in subparagraph (A)(i). Any such election, once made, shall be irrevocable. A return shall be made for each of the taxable years specified in subparagraph (A). For purposes of subsections (b), (c), and (d) of section 443, a return filed for either of the taxable years referred to in subparagraph (A) shall be treated as a return made under paragraph (1) of subsection (a) of section 443. For purposes of this subsection, the term “commencement date” means the day on which the case under title 11 of the United States Code to which this section applies commences.

(e) Treatment of income, deductions, and credits The gross income of the estate for each taxable year shall include the gross income of the debtor to which the estate is entitled under title 11 of the United States Code. The preceding sentence shall not apply to any amount received or accrued by the debtor before the commencement date (as defined in subsection (d)(3)). The gross income of the debtor for any taxable year shall not include any item to the extent that such item is included in the gross income of the estate by reason of paragraph (1). Except as otherwise provided in this section, the determination of whether or not any amount paid or incurred by the estate— is allowable as a deduction or credit under this chapter, or is wages for purposes of subtitle C, shall be made as if the amount were paid or incurred by the debtor and as if the debtor were still engaged in the trades and businesses, and in the activities, the debtor was engaged in before the commencement of the case.

(f) Treatment of transfers between debtor and estate A transfer (other than by sale or exchange) of an asset from the debtor to the estate shall not be treated as a disposition for purposes of any provision of this title assigning tax consequences to a disposition, and the estate shall be treated as the debtor would be treated with respect to such asset. In the case of a termination of the estate, a transfer (other than by sale or exchange) of an asset from the estate to the debtor shall not be treated as a disposition for purposes of any provision of this title assigning tax consequences to a disposition, and the debtor shall be treated as the estate would be treated with respect to such asset.

(g) Estate succeeds to tax attributes of debtor The estate shall succeed to and take into account the following items (determined as of the first day of the debtor’s taxable year in which the case commences) of the debtor— The net operating loss carryovers determined under section 172. The carryover of excess charitable contributions determined under section 170(d)(1). Any amount to which section 111 (relating to recovery of tax benefit items) applies. The carryovers of any credit, and all other items which, but for the commencement of the case, would be required to be taken into account by the debtor with respect to any credit. The capital loss carryover determined under section 1212. In the case of any asset acquired (other than by sale or exchange) by the estate from the debtor, the basis, holding period, and character it had in the hands of the debtor. The method of accounting used by the debtor. Other tax attributes of the debtor, to the extent provided in regulations prescribed by the Secretary as necessary or appropriate to carry out the purposes of this section.

(h) Administration, liquidation, and reorganization expenses; carryovers and carrybacks of certain excess expenses Any administrative expense allowed under section 503 of title 11 of the United States Code, and any fee or charge assessed against the estate under chapter 123 of title 28 of the United States Code, to the extent not disallowed under any other provision of this title, shall be allowed as a deduction. There shall be allowed as a deduction for the taxable year an amount equal to the aggregate of (i) the administrative expense carryovers to such year, plus (ii) the administrative expense carrybacks to such year. If a net operating loss would be created or increased for any estate taxable year if section 172(c) were applied without the modification contained in paragraph (4) of section 172(d), then the amount of the net operating loss so created (or the amount of the increase in the net operating loss) shall be an administrative expense loss for such taxable year which shall be an administrative expense carryback to each of the 3 preceding taxable years and an administrative expense carryover to each of the 7 succeeding taxable years. The portion of any administrative expense loss which may be carried to any other taxable year shall be determined under section 172(b)(2), except that for each taxable year the computation under section 172(b)(2) with respect to the net operating loss shall be made before the computation under this paragraph. The deductions allowable under this chapter solely by reason of paragraph (1), and the deduction provided by subparagraph (A) of this paragraph, shall be allowable only to the estate.

(i) Debtor succeeds to tax attributes of estate In the case of a termination of an estate, the debtor shall succeed to and take into account the items referred to in paragraphs (1), (2), (3), (4), (5), and (6) of subsection (g) in a manner similar to that provided in such paragraphs (but taking into account that the transfer is from the estate to the debtor instead of from the debtor to the estate). In addition, the debtor shall succeed to and take into account the other tax attributes of the estate, to the extent provided in regulations prescribed by the Secretary as necessary or appropriate to carry out the purposes of this section.

(j) Other special rules Notwithstanding section 442, the estate may change its annual accounting period one time without the approval of the Secretary. If any carryback year of the estate is a taxable year before the estate’s first taxable year, the carryback to such carryback year shall be taken into account for the debtor’s taxable year corresponding to the carryback year. The debtor may not carry back to a taxable year before the debtor’s taxable year in which the case commences any carryback from a taxable year ending after the case commences. For purposes of this paragraph— The term “carryback” means a net operating loss carryback under section 172 or a carryback of any credit provided by part IV of subchapter A. The term “carryback year” means the taxable year to which a carryback is carried.

§ 1399 No separate taxable entities for partnerships, corporations, etc.

Except in any case to which section 1398 applies, no separate taxable entity shall result from the commencement of a case under title 11 of the United States Code. (Added Pub. L. 96–589, § 3(a)(1) , Dec. 24, 1980 , 94 Stat. 3400 .)

[§§ 1400 to 1400C Repealed. Pub. L. 115–141, div. U, title IV, § 401(d)(4)(A), Mar. 23, 2018, 132 Stat. 1209]

[§§ 1400E to 1400J Repealed. Pub. L. 115–141, div. U, title IV, § 401(d)(5)(A), Mar. 23, 2018, 132 Stat. 1210]

[§§ 1400L to 1400U–3 Repealed. Pub. L. 115–141, div. U, title IV, § 401(d)(6)(A), Mar. 23, 2018, 132 Stat. 1211]

§ 1400Z–1 Designation

(a) Qualified opportunity zone defined For the purposes of this subchapter, the term “qualified opportunity zone” means a population census tract that is a low-income community that is designated as a qualified opportunity zone.

(b) Designation For purposes of subsection (a), a population census tract that is a low-income community is designated as a qualified opportunity zone if— not later than the end of the determination period, the chief executive officer of the State in which the tract is located— nominates the tract for designation as a qualified opportunity zone, and notifies the Secretary in writing of such nomination, and the Secretary certifies such nomination and designates such tract as a qualified opportunity zone before the end of the consideration period. A chief executive officer of a State may request that the Secretary extend either the determination or consideration period, or both (determined without regard to this subparagraph), 1 for an additional 30 days. Each population census tract in Puerto Rico that is a low-income community shall be deemed to be certified and designated as a qualified opportunity zone, effective on the date of the enactment of Public Law 115–97 .

(c) Other definitions For purposes of this section— The term “low-income community” means any population census tract if— such population census tract has a median family income that— in the case of a population census tract not located within a metropolitan area, does not exceed 70 percent of the statewide median family income, or in the case of a population census tract located within a metropolitan area, does not exceed 70 percent of the metropolitan area median family income, or such population census tract— has a poverty rate of at least 20 percent, and has a median family income that— in the case of a population census tract not located within a metropolitan area, does not exceed 125 percent of the statewide median family income, or in the case of a population census tract located within a metropolitan area, does not exceed 125 percent of the metropolitan area median family income. The term “consideration period” means the 30-day period beginning on the date on which the Secretary receives notice under subsection (b)(1)(A)(ii), as extended under subsection (b)(2). The term “determination period” means the 90-day period beginning on the decennial determination date, as extended under subsection (b)(2). The term “decennial determination date” means— July 1, 2026 , and each July 1 of the year that is 10 years after the preceding decennial determination date under this subparagraph. For purposes of this section, the term “State” includes any possession of the United States.

(d) Number of designations Except as provided by paragraph (2), the number of population census tracts in a State that may be designated as qualified opportunity zones under this section during any period may not exceed 25 percent of the number of low-income communities in the State. If the number of low-income communities in a State is less than 100, then a total of 25 of such tracts may be designated as qualified opportunity zones during any period.

(e) Period for which designation is in effect A designation as a qualified opportunity zone shall remain in effect for the period beginning on the applicable start date and ending on the day before the date that is 10 years after the applicable start date. For purposes of this section, the term “applicable start date” means, with respect to any qualified opportunity zone designated under this section, the January 1 following the date on which such qualified opportunity zone was certified and designated by the Secretary under subsection (b)(1)(B).

§ 1400Z–2 Special rules for capital gains invested in opportunity zones

(a) In general In the case of gain from the sale to, or exchange with, an unrelated person of any property held by the taxpayer, at the election of the taxpayer— gross income for the taxable year shall not include so much of such gain as does not exceed the aggregate amount invested by the taxpayer in a qualified opportunity fund during the 180-day period beginning on the date of such sale or exchange, the amount of gain excluded by subparagraph (A) shall be included in gross income as provided by subsection (b), and subsection (c) shall apply. No election may be made under paragraph (1)— with respect to a sale or exchange if an election previously made with respect to such sale or exchange is in effect, or with respect to any sale or exchange after December 31, 2026 .

(b) Deferral of gain invested in opportunity zone property Gain to which subsection (a)(1)(B) applies shall be included in income in the taxable year which includes the earlier of— the date on which such investment is sold or exchanged, or December 31, 2026 . The amount of gain included in gross income under subsection (a)(1)(A) shall be the excess of— the lesser of the amount of gain excluded under paragraph (1) or the fair market value of the investment as determined as of the date described in paragraph (1), over the taxpayer’s basis in the investment. Except as otherwise provided in this clause or subsection (c), the taxpayer’s basis in the investment shall be zero. The basis in the investment shall be increased by the amount of gain recognized by reason of subsection (a)(1)(B) with respect to such property. In the case of any investment held for at least 5 years, the basis of such investment shall be increased by an amount equal to 10 percent of the amount of gain deferred by reason of subsection (a)(1)(A). In the case of any investment held by the taxpayer for at least 7 years, in addition to any adjustment made under clause (iii), the basis of such property shall be increased by an amount equal to 5 percent of the amount of gain deferred by reason of subsection (a)(1)(A).

(c) Special rule for investments held for at least 10 years In the case of any investment held by the taxpayer for at least 10 years and with respect to which the taxpayer makes an election under this clause, the basis of such property shall be equal to the fair market value of such investment on the date that the investment is sold or exchanged.

(d) Qualified opportunity fund For purposes of this section— The term “qualified opportunity fund” means any investment vehicle which is organized as a corporation or a partnership for the purpose of investing in qualified opportunity zone property (other than another qualified opportunity fund) that holds at least 90 percent of its assets in qualified opportunity zone property, determined by the average of the percentage of qualified opportunity zone property held in the fund as measured— on the last day of the first 6-month period of the taxable year of the fund, and on the last day of the taxable year of the fund. The term “qualified opportunity zone property” means property which is— qualified opportunity zone stock, qualified opportunity zone partnership interest, or qualified opportunity zone business property. Except as provided in clause (ii), the term “qualified opportunity zone stock” means any stock in a domestic corporation if— such stock is acquired by the qualified opportunity fund after December 31, 2017 , at its original issue (directly or through an underwriter) from the corporation solely in exchange for cash, as of the time such stock was issued, such corporation was a qualified opportunity zone business (or, in the case of a new corporation, such corporation was being organized for purposes of being a qualified opportunity zone business), and during substantially all of the qualified opportunity fund’s holding period for such stock, such corporation qualified as a qualified opportunity zone business. A rule similar to the rule of section 1202(c)(3) shall apply for purposes of this paragraph. The term “qualified opportunity zone partnership interest” means any capital or profits interest in a domestic partnership if— such interest is acquired by the qualified opportunity fund after December 31, 2017 , from the partnership solely in exchange for cash, as of the time such interest was acquired, such partnership was a qualified opportunity zone business (or, in the case of a new partnership, such partnership was being organized for purposes of being a qualified opportunity zone business), and during substantially all of the qualified opportunity fund’s holding period for such interest, such partnership qualified as a qualified opportunity zone business. The term “qualified opportunity zone business property” means tangible property used in a trade or business of the qualified opportunity fund if— such property was acquired by the qualified opportunity fund by purchase (as defined in section 179(d)(2)) after December 31, 2017 , the original use of such property in the qualified opportunity zone commences with the qualified opportunity fund or the qualified opportunity fund substantially improves the property, and during substantially all of the qualified opportunity fund’s holding period for such property, substantially all of the use of such property was in a qualified opportunity zone. For purposes of subparagraph (A)(ii), property shall be treated as substantially improved by the qualified opportunity fund only if, during any 30-month period beginning after the date of acquisition of such property, additions to basis with respect to such property in the hands of the qualified opportunity fund exceed an amount equal to the adjusted basis of such property (50 percent of such adjusted basis in the case of property in a qualified opportunity zone comprised entirely of a rural area (as defined in subsection (b)(2)(C)(ii)) 1 at the beginning of such 30-month period in the hands of the qualified opportunity fund. For purposes of subparagraph (A)(i), the related person rule of section 179(d)(2) shall be applied pursuant to paragraph (8) of this subsection 2 in lieu of the application of such rule in section 179(d)(2)(A). The term “qualified opportunity zone business” means a trade or business— in which substantially all of the tangible property owned or leased by the taxpayer is qualified opportunity zone business property (determined by substituting “qualified opportunity zone business” for “qualified opportunity fund” each place it appears in paragraph (2)(D)), which satisfies the requirements of paragraphs (2), (4), and (8) of section 1397C(b), and which is not described in section 144(c)(6)(B). For purposes of subparagraph (A), tangible property that ceases to be a qualified opportunity zone business property shall continue to be treated as a qualified opportunity zone business property for the lesser of— 5 years after the date on which such tangible property ceases to be so qualified, or the date on which such tangible property is no longer held by the qualified opportunity zone business.

(e) Applicable rules In the case of any investment in a qualified opportunity fund only a portion of which consists of investments of gain to which an election under subsection (a) is in effect— such investment shall be treated as 2 separate investments, consisting of— one investment that only includes amounts to which the election under subsection (a) applies, and a separate investment consisting of other amounts, and subsections (a), (b), and (c) shall only apply to the investment described in subparagraph (A)(i). For purposes of this section, persons are related to each other if such persons are described in section 267(b) or 707(b)(1), determined by substituting “20 percent” for “50 percent” each place it occurs in such sections. In the case of a decedent, amounts recognized under this section shall, if not properly includible in the gross income of the decedent, be includible in gross income as provided by section 691. The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section, including— rules for the certification of qualified opportunity funds for the purposes of this section, rules to ensure a qualified opportunity fund has a reasonable period of time to reinvest the return of capital from investments in qualified opportunity zone stock and qualified opportunity zone partnership interests, and to reinvest proceeds received from the sale or disposition of qualified opportunity zone property, and rules to prevent abuse.

(f) Failure of qualified opportunity fund to maintain investment standard If a qualified opportunity fund fails to meet the 90-percent requirement of subsection (c)(1), 3 the qualified opportunity fund shall pay a penalty for each month it fails to meet the requirement in an amount equal to the product of— the excess of— the amount equal to 90 percent of its aggregate assets, over the aggregate amount of qualified opportunity zone property held by the fund, multiplied by the underpayment rate established under section 6621(a)(2) for such month. In the case that the qualified opportunity fund is a partnership, the penalty imposed by paragraph (1) shall be taken into account proportionately as part of the distributive share of each partner of the partnership. No penalty shall be imposed under this subsection with respect to any failure if it is shown that such failure is due to reasonable cause.

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CHAPTER 1 - NORMAL TAXES AND SURTAXES

CHAPTER 1 - NORMAL TAXES AND SURTAXES

Sections (944)

§ 1 Tax imposed

§ 2 Definitions and special rules

§ 3 Tax tables for individuals

[§ 4 Repealed. Pub. L. 94–455, title V, § 501(b)(1), Oct. 4, 1976, 90 Stat. 1558]

§ 5 Cross references relating to tax on individuals

§ 11 Tax imposed

§ 12 Cross references relating to tax on corporations

§ 15 Effect of changes

§ 21 Expenses for household and dependent care services necessary for gainful employment

§ 22 Credit for the elderly and the permanently and totally disabled

§ 23 Adoption expenses

§ 24 Child tax credit

§ 25 Interest on certain home mortgages

§ 25A American Opportunity and Lifetime Learning credits

§ 25B Elective deferrals and IRA contributions by certain individuals

§ 25C Energy efficient home improvement credit

§ 25D Residential clean energy credit

§ 25E Previously-owned clean vehicles

§ 25F Qualified elementary and secondary education scholarships

§ 26 Limitation based on tax liability; definition of tax liability

§ 27 Taxes of foreign countries and possessions of the United States

[§ 28 Renumbered § 45C]

[§ 29 Renumbered § 45K]

[§ 30 Repealed. Pub. L. 113–295, div. A, title II, § 221(a)(2)(A), Dec. 19, 2014, 128 Stat. 4037]

[§ 30A Repealed. Pub. L. 115–141, div. U, title IV, § 401(d)(1)(B), Mar. 23, 2018, 132 Stat. 1206]

§ 30B Alternative motor vehicle credit

§ 30C Alternative fuel vehicle refueling property credit

§ 30D Clean vehicle credit

§ 31 Tax withheld on wages

§ 32 Earned income

§ 33 Tax withheld at source on nonresident aliens and foreign corporations

§ 34 Certain uses of gasoline and special fuels

§ 35 Health insurance costs of eligible individuals

§ 36 First-time homebuyer credit

[§ 36A Repealed. Pub. L. 113–295, div. A, title II, § 221(a)(5)(A), Dec. 19, 2014, 128 Stat. 4037]

§ 36B Refundable credit for coverage under a qualified health plan

[§ 36C Renumbered § 23]

§ 37 Overpayments of tax

§ 38 General business credit

§ 39 Carryback and carryforward of unused credits

§ 40 Alcohol, etc., used as fuel

§ 40A Biodiesel and renewable diesel used as fuel

§ 40B Sustainable aviation fuel credit

§ 41 Credit for increasing research activities

§ 42 Low-income housing credit

§ 43 Enhanced oil recovery credit

§ 44 Expenditures to provide access to disabled individuals

[§ 44A Renumbered § 21]

[§ 44B Repealed. Pub. L. 98–369, div. A, title IV, § 474(m)(1), July 18, 1984, 98 Stat. 833]

[§ 44C Renumbered § 23]

[§ 44D Renumbered § 29]

[§ 44E Renumbered § 40]

[§ 44F Renumbered § 30]

[§ 44G Renumbered § 41]

[§ 44H Renumbered § 45C]

§ 45 Electricity produced from certain renewable resources, etc.

§ 45A Indian employment credit

§ 45B Credit for portion of employer social security taxes paid with respect to employee cash tips

§ 45C Clinical testing expenses for certain drugs for rare diseases or conditions

§ 45D New markets tax credit

§ 45E Small employer pension plan startup costs

§ 45F Employer-provided child care credit

§ 45G Railroad track maintenance credit

§ 45H Credit for production of low sulfur diesel fuel

§ 45I Credit for producing oil and gas from marginal wells

§ 45J Credit for production from advanced nuclear power facilities

§ 45K Credit for producing fuel from a nonconventional source

§ 45L New energy efficient home credit

[§ 45M Repealed. Pub. L. 115–141, div. U, title IV, § 401(d)(2)(A), Mar. 23, 2018, 132 Stat. 1208]

§ 45N Mine rescue team training credit

§ 45O Agricultural chemicals security credit

§ 45P Employer wage credit for employees who are active duty members of the uniformed services

§ 45Q Credit for carbon oxide sequestration

§ 45R Employee health insurance expenses of small employers

§ 45S Employer credit for paid family and medical leave

§ 1 Tax imposed

§ 2 Definitions and special rules

§ 3 Tax tables for individuals

[§ 4 Repealed. Pub. L. 94–455, title V, § 501(b)(1), Oct. 4, 1976, 90 Stat. 1558]

§ 5 Cross references relating to tax on individuals

§ 11 Tax imposed

§ 12 Cross references relating to tax on corporations

§ 15 Effect of changes

§ 21 Expenses for household and dependent care services necessary for gainful employment

§ 22 Credit for the elderly and the permanently and totally disabled

§ 23 Adoption expenses

§ 24 Child tax credit

§ 25 Interest on certain home mortgages

§ 25A American Opportunity and Lifetime Learning credits

§ 25B Elective deferrals and IRA contributions by certain individuals

§ 25C Energy efficient home improvement credit

§ 25D Residential clean energy credit

§ 25E Previously-owned clean vehicles

§ 25F Qualified elementary and secondary education scholarships

§ 26 Limitation based on tax liability; definition of tax liability

§ 27 Taxes of foreign countries and possessions of the United States

[§ 28 Renumbered § 45C]

[§ 29 Renumbered § 45K]

[§ 30 Repealed. Pub. L. 113–295, div. A, title II, § 221(a)(2)(A), Dec. 19, 2014, 128 Stat. 4037]

[§ 30A Repealed. Pub. L. 115–141, div. U, title IV, § 401(d)(1)(B), Mar. 23, 2018, 132 Stat. 1206]

§ 30B Alternative motor vehicle credit

§ 30C Alternative fuel vehicle refueling property credit

§ 30D Clean vehicle credit

§ 31 Tax withheld on wages

§ 32 Earned income

§ 33 Tax withheld at source on nonresident aliens and foreign corporations

§ 34 Certain uses of gasoline and special fuels

§ 35 Health insurance costs of eligible individuals

§ 36 First-time homebuyer credit

[§ 36A Repealed. Pub. L. 113–295, div. A, title II, § 221(a)(5)(A), Dec. 19, 2014, 128 Stat. 4037]

§ 36B Refundable credit for coverage under a qualified health plan

[§ 36C Renumbered § 23]

§ 37 Overpayments of tax

§ 38 General business credit

§ 39 Carryback and carryforward of unused credits

§ 40 Alcohol, etc., used as fuel

§ 40A Biodiesel and renewable diesel used as fuel

§ 40B Sustainable aviation fuel credit

§ 41 Credit for increasing research activities

§ 42 Low-income housing credit

§ 43 Enhanced oil recovery credit

§ 44 Expenditures to provide access to disabled individuals

[§ 44A Renumbered § 21]

[§ 44B Repealed. Pub. L. 98–369, div. A, title IV, § 474(m)(1), July 18, 1984, 98 Stat. 833]

[§ 44C Renumbered § 23]

[§ 44D Renumbered § 29]

[§ 44E Renumbered § 40]

[§ 44F Renumbered § 30]

[§ 44G Renumbered § 41]

[§ 44H Renumbered § 45C]

§ 45 Electricity produced from certain renewable resources, etc.

§ 45A Indian employment credit

§ 45B Credit for portion of employer social security taxes paid with respect to employee cash tips

§ 45C Clinical testing expenses for certain drugs for rare diseases or conditions

§ 45D New markets tax credit

§ 45E Small employer pension plan startup costs

§ 45F Employer-provided child care credit

§ 45G Railroad track maintenance credit

§ 45H Credit for production of low sulfur diesel fuel

§ 45I Credit for producing oil and gas from marginal wells

§ 45J Credit for production from advanced nuclear power facilities

§ 45K Credit for producing fuel from a nonconventional source

§ 45L New energy efficient home credit

[§ 45M Repealed. Pub. L. 115–141, div. U, title IV, § 401(d)(2)(A), Mar. 23, 2018, 132 Stat. 1208]

§ 45N Mine rescue team training credit

§ 45O Agricultural chemicals security credit

§ 45P Employer wage credit for employees who are active duty members of the uniformed services

§ 45Q Credit for carbon oxide sequestration

§ 45R Employee health insurance expenses of small employers

§ 45S Employer credit for paid family and medical leave

§ 45T Auto-enrollment option for retirement savings options provided by small employers

§ 45U Zero-emission nuclear power production credit

§ 45V Credit for production of clean hydrogen

§ 45W Credit for qualified commercial clean vehicles

§ 45X Advanced manufacturing production credit